In KH v Sparkasse Südholstein the European Court of Justice (“CJEU“) considered the application of Article 2(a) of the Distance Marketing Directive (2002/65/EC) (“DMD“) to agreements concluded at a distance that set new interest rates to loan agreements that were already in place.
After considering the two questions put before it, the CJEU ruled that Article 2(a) of the DMD must be interpreted as meaning that an agreed amendment to a loan agreement cannot be categorised as a “contract concerning financial services”, within the meaning of the DMD, where the amendment does no more than alter the originally agreed rate of interest, but does not extend the term of the loan or alter the amount of the loan.
Background and facts
KH entered into 3 loan agreements with the legal predecessor of a German savings bank, Sparkasse. KH and Sparkasse made follow-up interest rate agreements to agree on an interest rate that would apply to each of the 3 loans. KH and Sparkasse made exclusive use of means of distance communication when making these follow-up agreements, but Sparkasse did not inform KH of any right of withdrawal.
KH later withdrew from the 3 interest rate agreements, claiming that he had the right of withdrawal under the German implementation of the DMD on the basis that the interest rate agreements involved distance selling, and that Sparkasse was running an organised distance sales scheme. KH also claimed that the Distance Selling Directive would apply to the interest rate agreements, rather than the DMD.
The Landgericht Kiel (Regional Court of Kiel) decided to stay the proceedings and refer to the CJEU for a preliminary ruling on the following 2 questions:
- Did the circumstances in which the follow-up interest rate agreements were made amount to an “organised distance sales or service-provision scheme run by the supplier”, for the purposes of Article 2(a) of the DMD? That is, where a branch of a bank concludes loan agreements only at its commercial premises, but in ongoing business dealings concludes contracts to amend already agreed loan agreements by making exclusive use of means of distance communication.
- Does a “contract concerning financial services” within the meaning of Article 2(a) of the DMD include the amendment of an existing loan agreement if the amendment solely concerns the agreed interest rate (follow-up interest agreement), without extending the term of the loan or altering the amount of the loan?
The CJEU first considered the second question.
It concluded that in relation to the context of Article 2(a) of the DMD, in the case of contracts for financial services consisting of an “initial service agreement” followed by other operations, the provisions of the DMD apply only to the initial service agreement. Adding new elements to an initial agreement does not constitute an “operation”, but rather an additional agreement to which the DMD applies.
Setting, by means of an agreed amendment, a new rate of interest, in implementation of a renegotiation clause in the initial contract, which imposes a back-up clause establishing a variable rate of interest, constitutes neither an “operation” within the meaning of the first subparagraph of Article 1(2) of the DMD, nor the addition of elements to the initial agreement.
The CJEU held that it follows that a “contract concerning financial services” must be held to be a contract that provides for the supply of such services. That condition is not met in a situation where, as in this case, the only purpose of the agreed amendment is to adjust the rate of interest payable in relation to a service previously agreed.
Consequently, the CJEU held that the answer to the second question is that Article 2(a) of the DMD must be interpreted as meaning that an agreed amendment to a loan agreement cannot be categorised as a “contract concerning financial services”, within the meaning of the DMD, where the amendment does no more than alter the originally agreed rate of interest, but does not extend the term of the loan or alter its amount.
The CJEU found that, given this answer, there was no need to answer the first question.