ECJ Schulte/Badenia: Reverberations of EC consumer legislation in national private law

The ECJ's Grand Chamber gave judgment last wednesday in the case of Schulte v. Deutsche Bausparkasse Badenia AG (case C-350/03). The case is of special interest for the way it highlights some of the difficulties that arrise when selective rules of EC legislation have to be 'embedded' in wider systems of national law.

The preliminary reference by the Landgericht (first instance court) in Bochum, Germany, concerned the application of the EC's Doorstep selling Directive (85/577/EEC of 20 December 1985). In general terms, this directive grants a right of cancellation to consumers for contracts concluded during a visit to their home by a trader, where this visit has not occurred following the consumers' own specific request. The Court had held earlier that this right - normally granted for 7 days - remains active until the consumer learns about the possiblity, in cases where he or she has not been duly notified by the trader. Importantly also, the Directive holds that the precise consequences of exercise of the right of cancellation are to be governed by national law. Finally, the contracts for the sale of immovable property are explicitly excluded from the scope of application of the directive.

The Schultes had entered into an investment scheme, sold to them in their home, involving both a purchase of real estate from an agent and the simultaneous conclusion of a credit facility with a bank to finance the purchase. They cancelled their credit arrangement some time after the conclusion of the contract only, as they had not been properly notified initially by the agent. The German law implementing this right of cancellation stipulates the basic rule that "in the event of cancellation, each contracting party shall return to the other whatever it has received". The Schulte's, however, were now confronted with (a) the impossiblity of cancelling the real estate purchase, due to the restricted scope of the directive, (b) a significant loss of value of the real estate in the intervening period and (c) a demand for immediate repayment of cancelled loan by the bank. Serious financial trouble loomed.

The Court held that, yes standard case law precludes directives imposing obligations on individuals, and yes, the directive explicitly leaves the consequences of cancellation to German law. However, in a situation where, had the seller (Bank) complied with its obligation to inform the consumer, this consumer would have been able to avoid certain risks inherent in investments, the directive still requires Member States to "ensure that their legislation protects consumers who have been unable to avoid exposure to such risks, by adopting suitable measures to allow them to avoid bearing the consequences of the materialisation of those risks."

The case illustrates the apparent impossiblity of inserting specific, foreign (EC) rules in national legal systems without having to expect wider, systemic reverberations. These effects are made more accute by the teleological nature of much of EC (consumer) legislation. Even those areas of law surrounding the inserted rights but still explicitly excluded from harmonisation, will, as the judgment shows, clearly be affected by the underlying reasons for legislation. Against the fundamental backgroundprinciple of maximum effectiveness for EC rules, it is not immediately obvious where these systemic reverberations will end.