Arbitration, consumer contracts and public policy: Case C-168/05

The Court has dealt a blow to arbitration in consumer disputes.

In Case C-168/05 Mostaza Claro v. Centro Móvil the Court of Justice held that a national court seised of an action for the annulment of an arbitration award must determine whether the arbitration agreement is void and annul the award where the arbitration agreement contains an unfair term even when the consumer has not raised the issue of unfairness in the arbitration proceedings but only in the action for annulment.

What happened was this. Ms. Mostaza Claro subscribed to a mobile phone plan with an operator called Centro Móvil. The contract contained an arbitration clause under which any disputes arising from the contract were to be referred for arbitration. The contract also stipulated a minimum subscription period. But Ms. Mostaza Claro didn't comply with that minimum period so Centro Móvil started arbitration proceedings against her (before the AEADE in Spain). She did not claim the arbitration agreement was void and she lost on the substance. Then Ms. Mostaza Claro contested the arbitral award before a Spanish court submitting that the unfair nature of the arbitration clause meant that the arbitration agreement was null and void.

The problem is that Article 3(1) of Council Directive 93/13/EEC of April 5th, 1993 on unfair terms in consumer contracts provides:

‘A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.’

The annex to the Directive contains an indicative list of unfair terms. Among them, point 1(q) of that annex refers to terms which have the object or effect of ‘excluding or hindering the consumer’s right to take legal action or exercise any other legal remedy, particularly by requiring the consumer to take disputes exclusively to arbitration not covered by legal provisions, unduly restricting the evidence available to him or imposing on him a burden of proof which, according to the applicable law, should lie with another party to the contract.’ If a term is unfair, it shall not be binding on the consumer.

So was Ms. Mostaza Claro bound by the arbitration agreement ? No. The Court held that the non binding nature of the unfair clause was mandatory, provided that the national court determined itself that the clause was actually unfair (Case C-237/02 Freiburger Kommunalbauten GmbH Baugesellschaft & Co. KG v. Ludger Hofstetter and Ulrike Hofstetter, paragraph 25). But she did not contest the validity of the arbitration agreement during the course of the arbitration. Was she then precluded from raising the invalidity of the arbitration clause in subsequent judicial proceedings she brought to annul the arbitral award ? Again, the Court answered no. It found that Spanish law did not require the consumer to contest the arbitration proceedings during those proceedings in order to have the award set aside for being contrary to public policy. The Court recalled that where its domestic rules of procedure require a national court to grant an application for annulment of an arbitration award where such an application is founded on failure to observe national rules of public policy, national law must also grant such an application where it is founded on failure to comply with Community rules of this type (see Case C-126/97 Eco Swiss, paragraph 37).

The Court concluded that the nature and importance of the public interest underlying the protection which Directive 93/13/EEC confers on consumers justify the national court being required to assess of its own motion whether a contractual term is unfair, compensating in this way for the imbalance which exists between the consumer and the seller or supplier.

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