Is this fair? The ECJ rules on prohibition of assignment and ex officio control of unfairness (C-173/23 Air Europa Líneas Aéreas)

Blogpost 26/2024

1. Introduction

Air carriers often use clauses which prohibit the assignment of passenger claims. Such clauses have a generic scope but were mainly introduced to deter the assignment of claims under Regulation 261/2004 on air passenger rights (Air Passenger Rights Regulation – APRR) to commercial companies. The fairness of such clauses under the Directive 93/13/EEC on Unfair Terms in Consumer Contracts (UCTD) has been disputed. In its judgment in C-173/23 Eventmedia Soluciones SL v Air Europa Líneas Aéreas SAU ECLI:EU:C:2024:295 (Judgment), the European Court of Justice (ECJ) ruled on some aspects of the duty of national courts to assess of their own motion the unfairness of contractual terms in the context of air carriage under the 1999 Montreal Convention on the liability of the international air carrier (MC99).

The MC99 establishes uniform rules on certain aspects of the liability of air carriers for international carriage by air. It is one of the most widespread international conventions and is also open for signature by Regional Economic Integration Organizations, such as the EU (Article 53(2)). The MC99 was signed by the (then) European Community on 9 December 1999 and entered into force on 28 June 2004. Ever since, the MC99 provisions have been an integral part of the EU legal order (C-344/04 IATA and ELFAA, para. 36), save for the provisions on cargo, for which competence rests with the EU Member States. Hence, the ECJ is competent for the interpretation of the MC99 provisions on passengers and luggage.

This post presents the judgment of the ECJ, including its legal background. Subsequently, comments are provided regarding (1) the ex officio assessment of unfairness of contractual terms under the UCTD and (2) the validity of clauses prohibiting assignment of passenger claims under the APRR, according to the case law of the ECJ and national courts. The conclusion of the post evaluates the importance of the judgment for the analysed topics.

2. Facts and legal background

2.1 Facts

An air passenger suffered a delay in the transport of his baggage on a flight from Madrid (Spain) to Cancún (Mexico). He assigned his claim for damages against Air Europa, an air carrier, to Eventmedia, a commercial company. Eventmedia brought an action against the air carrier before the referring court, i.e., Commercial Court No 1, Palma de Mallorca, Spain.

Air Europa disputed Eventmedia’s standing to bring proceedings, since a clause in the contract of air carriage provided that ‘the rights to which the passenger is entitled shall be strictly personal and the assignment of those rights shall not be permitted’.

The referring court specified that the liability of the air carrier is governed by Article 19 MC99 and deemed the dispute as contractual. Consequently, according to the referring court, the assignment of the claim for damages relating to such a delay fell within the prohibition of assignment established by the clause at issue. The national court, referring to the ECJ case law under the UCTD, was uncertain whether it could examine of its own motion the unfairness of the clause for two reasons. First, the applicant in the proceedings, Eventmedia, was neither a party to the contract of carriage nor did it have the status of a consumer under Article 2(b) UCTD as only natural persons may be ‘consumers’. Second, since the consumer was not a party to the proceedings, the court could not consider the consumer’s intention to rely, after having been informed by that court, on the unfair and non-binding nature of the clause at issue.

2.2 Legal background

According to the settled case law of the ECJ (e.g. C-567/13 Baczó and Vizsnyiczai, paras 40-42;  C-377/14Radlinger and Radlingerová, para. 48), in the absence of EU rules governing the matter, it is for the domestic legal system of each Member State, in accordance with the principle of procedural autonomy, to designate the courts and tribunals having jurisdiction and to lay down the detailed procedural rules governing actions for safeguarding rights which individuals derive from EU law. On that basis, the detailed procedural rules governing actions for safeguarding an individual’s rights under EU law must be no less favourable than those governing similar domestic actions (principle of equivalence) and must not render practically impossible or excessively difficult the exercise of rights conferred by EU law (principle of effectiveness).

Regarding the principle of effectiveness, the ECJ has combined it with the effective application of Art. 6(1) UCTD. Thus, the Court has repeatedly held that national courts are required to assess of their own motion whether a contractual term falling within the scope of the UCTD is unfair, to compensate for the imbalance which exists between the consumer and the seller/supplier, where the courts have available to them the legal and factual elements necessary to that end (C-243/08 Pannon GSM, paras 22-24, 32; C-377/14 Radlinger and Radlingerová, para. 52).

Nonetheless, the ECJ has also clarified that national courts, in carrying out that obligation, should inform the consumer of the consequences of the potential unfairness of the term, namely that the term is invalid and that such invalidity may affect the validity of the whole contract under Article 6(1) UCTD (C-269/19 Banca B., para. 29). In this regard, national courts should account for the possibility that the consumer may decide to not assert the unfair status of the term (C-243/08 Pannon GSM, para. 33).

3. Issues

Two questions were referred to the ECJ by the national court.

First, whether the national court was required to examine of its own motion the unfairness, under Articles 6(1) and 7(1) UCTD, of a clause that prohibits the assignment of passenger claims against the air carrier, where a claim has been brought against the latter by a commercial company as an assignee of that passenger’s claim.

Second, if the answer to the first question is affirmative, could the court disregard its duty to inform the passenger of the consequences of the unfairness, given that in the case at hand there was no ‘consumer’ litigating?

4. Judgment

4.1 Preliminary issue

As a preliminary issue, the ECJ clarified that the applicability of the UCTD to a dispute depends on the capacity of contractual parties, not on the capacity of the litigants. Hence, the fact that the litigation in question was between two commercial entities did not exclude the dispute from the scope of the UCTD, since the contract of carriage had been concluded between the air carrier and a natural person who was (seemingly) acting outside his professional capacity (paras 17-26).

4.2 On the first question

Proceeding to answer the first question referred to it, the ECJ observed that the UCTD aims at protecting consumers vis-à-vis sellers/suppliers on the premise the consumers are in an inferior position regarding their knowledge and bargaining power (para. 27). The UCTD aims at restoring such imbalance by rendering unfair contractual terms not binding on consumers (para. 28).

The Court then referred to its established case law on the duty of national courts to examine of their own motion the unfairness of contractual terms in consumer contracts. Such a duty is based on the effective application of Art. 6(1) UCTD (paras 28-29). Moreover, it is based on the principle of effectiveness in the context of the procedural autonomy of the EU Member States under Art. 7(1) UCTD, notwithstanding the principle of equivalence (paras 30-32).

Regarding the principle of equivalence, the ECJ reiterated that Article 6(1) UCTD ranks equally with domestic rules of public policy. Whether a national court has a duty to assess ex officio the unfairness of a term under the UCTD depends on whether that court, under national procedural rules, has discretion or an obligation to examine ex officiothe violation of national rules of public policy (paras 33-35). This is for the national court to ascertain (para. 36).

As to the principle of effectiveness, the ECJ observed that, in the case at hand, there was a dispute between two commercial entities. Thus, there was no imbalance of power and knowledge between them. As a result, there was no duty of the national court to examine of its own motion the potential unfairness of the clause in question (paras 38-39). In addition, the principle of effectiveness does not require an ex officio assessment of the unfairness of the term, if the legal entity as an assignee has or had, under the national procedural rules, a genuine opportunity to rely on the unfairness of the contractual clause (para. 40).

4.3 On the second question

The ECJ observed that the second question regarded the right of each litigant to a fair hearing. This entitles each party to the litigation to be informed of the issues that the court has raised of its own motion and provide its views thereon (paras 44-45). Thus, if the national court ex officio finds a contractual term to be unfair, it must notify the litigation parties thereof, and provide them with the opportunity to present their views and refute the views of the other party (para. 46). In this way, the national court also fulfils its duty to consider the potential consent of the assignee to the use of the term in question despite its unfairness (para. 47) – although this was obviously not the case in the present proceedings (para. 48). On the contrary, the national court did not have to inquire the consumer’s opinion since the consumer was not a party to the dispute (para. 49).

5. Comments

This judgment provides helpful guidance on the duty of the national court to assess ex officio the unfairness of a contractual term. Moreover, it is interesting to compare this judgment with the ECJ judgment in C-11/23 Eventmedia Soluciones regarding the validity of such clauses under the APRR.

5.1 Ex officio assessment of unfairness

The judgment reveals two aspects of the assessment of unfairness under the UCTD: a substantial and a procedural one. Both aspects are influenced by the imbalance between the consumer and the seller/supplier, which lies at the core of the UCTD and which national courts are required to restore by positive action (C-240/98 to C-244/98 Oceano Grupo and others, para. 25). At the substantial level, national courts must declare an unfair term non-binding to the consumer and, at the procedural level, they must assess of their own motion the unfairness of the terms relevant to the dispute. Hence, the substantial and procedural aspects are distinct, albeit interconnected (see Judgment, para. 24).

The substantial aspect relates to the scope of the UCTD and the criteria of unfairness. As a result, it is immaterial for the applicability of the UCTD whether the parties to the litigation are legal entities, as long as: (1) the contract has been concluded between a seller/supplier and a ‘consumer’ (Judgment, paras 17, 24-25); and (2) one party to the litigation is an assignee of a consumer or an organisation having a legitimate interest under national law in protecting consumers (UCTD, Article 7(2)).

The duty to an ex officio assessment is a procedural issue. It accounts for the fact that  consumers may be unaware of the potential unfairness of contractual terms or incapable of invoking them, because they deem their participation to the trial unworthy in view of the high litigation cost compared to the value of the dispute (C-240/98 to C-244/98 Oceano Grupo and Salvat Editores, para. 26). In principle, this duty of the national court arises only if the consumer participates in the litigation as a plaintiff or a defendant, because in such cases the substantial imbalance of the contractual parties is transferred to the litigation level. However, there are cases in which a legal entity is a litigant in the place of the consumer, by means of assignment from the consumer or because it has legitimate interests in protecting consumers. In such cases, the ECJ considers that there is no imbalance between the litigants as a procedural issue (C-413/12 Asociación de Consumidores Independientes de Castilla y León, paras 48-50;  Judgment, para. 38). The ECJ bases such view on purely formal criteria: ‘consumers’ are natural persons acting outside their trade or profession and are irrefutably deemed to have limited knowledge and experience (see C-110/14 Costea, paras 16-18, 20-21, 26-27); whereas a legal entity is irrefutably considered to be more sophisticated and does not need such a high level of protection.

Concerning the capacity of ‘consumer’, the ECJ seems to apply a kind of presumption in favour of such capacity, when a natural person contracts a commercial entity. In the absence of evidence to the contrary, natural persons are deemed to have acted outside their professional capacity (C-519/19 Delay Fix, para. 56; Judgment, para. 19). However, such evidence needs to be strong and not based on isolated factors (see C-774/19 Personal Exchange International, paras 49-50).

Nonetheless, in exceptional cases, the national court may be under a duty to assess ex officio the unfairness of a contractual clause, although no ‘consumer’ is party to the litigation. As the Court notes in para. 40 of its Judgment, such a duty exists also when the assignee, despite being a commercial entity, had no ‘genuine opportunity’ to raise the issue of unfairness. This refers to the rights of the assignee under national law. That might be the case, if e.g. under national law the assignment did not include the whole contract of air carriage, but only a part of it, and the clause prohibiting the assignment had not been part of the assignment (see C-519/19 Delay Fix, paras 47, 63). The reason for this exception likely lies in the close connection between the substantive and procedural aspects of the consumer rights under the UCTD.

5.2 Validity of clauses prohibiting assignment of passenger claims under the Air Passengers Rights Regulation

Many air carriers have introduced clauses prohibiting the assignment of passenger claims to third parties. Although such clauses usually have a generic scope, air carriers had in mind mainly claims based on the APRR when they introduced them. This Regulation, among others, provides for compensation to passengers in cases of cancellations of flights and denied boarding of passengers (Articles 4(3) and 5(1)(c) APRR). The ECJ has interpreted the Regulation as providing such a right also in cases of delays in arrival to the final destination exceeding three hours. The amount of compensation is standardised and depends on the distance of the flight to its final destination (Article 7 APRR). The standardised compensation amounts, combined with the very limited possibilities of exclusion of the carrier liability (Article 5(3) APRR), has led to the creation of commercial entities, to which passengers may assign their claims and which undertake to enforce passenger claims before national courts against a percentage from the compensation received (contingency fee, see here for an overview). This has resulted in a significant increase of passenger claims against air carriers, which has increased the cost of carriers regarding the amounts paid not only for compensation but also for judicial costs. Air carriers have reacted by introducing non-assignment clauses in their contracts with passengers.

Regarding passenger claims based on the APRR, national courts have assessed under the UCTD, on a number of occasions, the unfairness of clauses prohibiting assignment. The results have been mixed. The main issue in the proceedings has been whether the prohibition of assignment obstructs the passenger’s (or consumer’s) route to compensation, including access to courts. In England, the Court of Appeals affirmed the judgment of the trial judge, who found such clause to be fair (Bott and Co Solicitors Lyd v Ryanair DAC [2019] EWCA Civ 143, at [71]-[73], reviewed on other grounds [2022] UKSC 8). On the contrary, in Germany, such clauses have been found unfair in a long line of case law (e.g. LG Nürnberg-Fürth, 30.7.2018; LG Frankfurt am Main, 25.11.2021), including the Federal Court of Justice (BGH 1.8.2023, paras 8, 10, 14, affirming LG Memmingen, 28.9.2022, para. 14).

Earlier this year, the ECJ already clarified, in C-11/23 Eventmedia Soluciones (paras 39-46),  that clauses prohibiting assignment of claims based on the APRR are invalid under Article 15 of the Regulation, which prohibits any limitation of passenger rights. Hence, the discussion on the unfairness of such clauses under the UCTD has no practical importance to the APRR. The UCTD has practical importance, however, for claims under the MC99. Articles 29 and 33(4) MC99 clarify that issues of legal standing are governed by the domestic law of the contracting States, which, in the context of EU law, entails the applicability of the UCTD.

6. Conclusion

In conclusion, the present judgment is noteworthy, because it clarifies important aspects of the duty of national courts to assess of their own motion the unfairness of contractual clauses under the UCTD. Moreover, combined with case law of the ECJ and the national courts on the APRR, it sheds some light on the application of the UCTD to passenger claims under the MC99.