P IT EE 153 5 Bud apes t Pf . 8 30 .

Thorbjrn Jagland Secretary General

Council of EuropeAvenue de l'EuropeF-67075 Strasbourg Cedex

Fax +33 (0)3 88 41 20 00

Budapest, 2 February 2016

Hungarian Constitutional Court is depriving consumers of their human rights

Decision 33/2015

Dear Mr Jagland,

In addition to my letter of 30 November 2015 I am also sending you an English translation of Decision 33/2015 from the Hungarian Constitutional Court(s. attachment). On its face, it appears to be supporting the human rights of consumers. However, when you dig a little deeper into the substance of the decision, you will discover that the human rights of consumers are being violated in a most egregious way.

To understand how, we have to look at prior case law. The Hungarian Supreme Court (Kria) delivered a decision on 4 July 2013 (Gfv.VII.30.078/2013/14.), in which it held an FX consumer loan contract void, because the lender attached a hidden costelement to it. This decision encouraged more than 12,000 FX loan debtors to initiate court proceedings against their lenders in order to have their loan contracts also declared void. The essence of the Hungarian Supreme Courts holding was one of unconscionability.

Now according to the Hungarian National Bank there were approximately 650,000 FX consumer loan contracts in effect as of September 2014. In a measure of panic by the

Page 2 of 5

Hungarian Parliament they enacted a law providing for the mandatory conversion of existing foreign currency (FX) consumer debts into Hungarian forints at the date of enactment (Sections 3, 10 and 15 of Act LXXVII of 2014). Hence, circumventing any claims any FX loan debtors would have had against their oppressive lenders. In doing so, ultimately violating the Hungarian Constitution and the European Convention on Human Rights (Convention).

The significance of this is the fact that the law amends only existing private party contractual loan agreements ex post without the provision of any substantive or procedural due process. It does not even attempt to disguise itself as an act that affects the future rights of parties.

The Hungarian Parliament has overstepped its legislative bounds under the purview of the Convention; not so under the Hungarian Constitution, at least according to the decision of the Hungarian Constitutional Court. The Court rejected more than 700 applications in connection with the Act that ordered a mandatory conversion of foreign currency (FX) consumer debts into Hungarian forints at the date of enactment.

The applicants argued that the Act violates Article XXVIII of the Constitution [Right to a Fair Trial] and Art. 6 of the European Convention on Human Rights because the Hungarian Parliament is not entitled to amend private-law contracts with legislative measures and, by doing so, determine civil rights and obligations. This is outside the scope of their powers.

The Constitutional Court, however, came to a different conclusion. In the Courts view private-law contracts may be amended by legislative measures. Decision 33/2015 reiterates the reasoning of previous decisions (8/2014, 3168/2015 and 3147/2015). These decisions demonstrate that the justices do not respect the values of the European Convention on Human Rights. The Court appears not to understand the concept of separation of powers.

Solving the FX consumer debt crisis in line with the Governments interests

The Hungarian authorities have been warned many times by their European partners not to allow consumers to take out FX loans, because such instruments are very risky

Page 3 of 5

and have the propensity to financially ruin debtors, which in turn will have a negative impact on the national economy. The FX consumer debt crisis is caused by the complete failure of the Hungarian Financial Supervisory Authority to perform its obligations and the Banks to perform adequate risk assessments. A large number of victories by FX loan debtors in court against their lenders would harm the Governments financial-interests as more and more loan agreements are held void.

In a cunning display of legislative initiative Parliament passed Act LXXVII of 2014 protecting consumers from further FX risk clearly in violation of the Hungarian Constitution and the Convention, not to mention absolutely needless as the Hungarian Supreme Court had already handed down a decision that took consumer protection rights into account. The enclosed decision has further upheld this Act, even though the Courts reasoning is seriously flawed.

The Hungarian Constitutional Court has developed the concept of amending private-law contracts by legislative measures. This concept allows the Government to impose new rules on existing FX consumer loan contracts. Several laws were adopted during 2014 and 2015, which are based on this concept (Act XXXVIII of 2014, Act XL of 2014, Act LXXVII of 2014, Act CXLV of 2015). These laws ensure that the FX consumer debt crisis is solved in a way that best suits the Governments interests regardless of the existing legal framework.

The concept of amending private-law contracts by legislative measures has a number of advantages for the Government. In particular the Government does not need to bother with the debtors legal arguments against the validity of their contracts, because the legislative process does not afford debtors the right to speak or appeal.

Violation of Art 6 of the Convention

The concept of "amending private-law contracts by legislative measures" clearly affects the determination of civil rights and obligations stipulated in Art. 6 of the Convention and further manifestly violates the [entitlement] to a fair and public hearing by an independent and impartial tribunal established by law as set forth in Art. 6 of the Convention. Not only does the Hungarian Parliament not qualify as an

Page 4 of 5

impartial body, but it also has an explicit vested interest in the outcome. Furthermore even if Parliament did qualify as an impartial tribunal which it does not - it has not afforded any debtor any meaningful substantive or procedural due process within the legislative process.

It is quite understandable that such a parliamentary body cannot afford debtors these rights, because constitutionally it is not established to do so, which makes the rationale behind Art. 6 of the Convention even more substantial and prevalent. Art. 6 of the Convention clearly specifies, that only impartial tribunals are entitled to determine civil rights and obligations, and it also clearly defines the institutional and procedural requirements for such tribunals. The Hungarian Constitutional Courtignores all of these requirements.

For more detail, please refer to the Section F (Statement of alleged violation(s) of the Convention and/or Protocols and relevant arguments) of the ECtHR cases 27514/15 and 36981/2015 and to the Guide on Article 6 "Right to a Fair Trial (civil limb)" of Council of Europe/European Court of Human Rights, 2013.

Alternatively even if the Courts holding was considered to have merit, i.e. that a legislative body has the power to alter civil rights and obligations ex post, the Courts reasoning is nonetheless flawed by its own standards.

The Constitutional Court does admit that at the time the Act becomes effective, it does effectively intervene in the contractual freedom of the parties, because of its draconian nature, but fails to find this unconstitutional (Decision 33/2015 Sec. [35]-[37]) as long as measures undertaken by Parliament are undertaken upon the same conditions that must be observed by courts when amending private-law agreements (Decision 33/2015 Sec. [39]-[41]).

The Court focuses on two elements: 1. The equitable interests of both parties, and 2. A balance of interests in the light of new circumstances. The Court identifies the weakening of the Hungarian forint as a circumstance, which has changed since the conclusion of the FX loan contracts (Decision 33/2015 Sec. [43]), and this change in circumstances provides the grounds for the application of clausula rebus sic stantibus (Decision 33/2015 Sec. [44]). However, what the Court fails to do, probably for

ATTACHMENTPage 1 of 7

P IT EE 153 5 Bud apes t Pf . 8 30 .

Thorbjrn Jagland Secretary General

Council of EuropeAvenue de l'EuropeF-67075 Strasbourg Cedex

Fax +33 (0)3 88 41 20 00

Budapest, 2 February 2016

ATTACHMENT

TRANSLATION

HUNGARIAN CONSTITUTIONAL COURT

Number of the decision: CC (Constitutional Court) Decision 33/2015 (XII. 3.)

Date of the decision: Budapest, 01.12.2015

Excerpt:

IV.

[33] The constitutional complaints are unfounded.

[34] 1. The Constitutional Court first examined whether the conditions for amendingprivate-law contracts by legislative measures had been met [see Sections 10, and 15(1) of the Act].

[35] First of all, the Constitutional Court found that the challenged provisions of the Act violate the complainants right to contractual freedom as protected by the constitution.

[]

ATTACHMENTPage 2 of 7

[36] Contractual freedom as an expression of private autonomy and free will includes the freedom to enter into contracts, i.e. the parties freedom to decide whether or not they want to enter into the contract and if they do, with whom (freedom to choose counterparty), in what form (freedom to choose contract type) and with what scope (principle of optionality). Additionally, the parties freedom also includes their right to decide on amending the contract or terminating the contractual relationship.

[37] However, as far as the challenged provisions of the Act are concerned, the affected private-law contracts are amended, regardless of the parties will, at the time the Act enters into force, and the content of the amendment is imposed on the parties on a mandatory basis [see Sections 3(1), 10, and 15(1) of the Act]. Such ex-post amendment of the rights and obligations arising from private-law contracts by legislative measures is clearly an intervention in the contractual freedom of the parties. This intervention, however, is not necessarily unconstitutional.

[38] The Constitutional Court refers to its previous decision, in which it established that "every contract that is not performed on the spot contains a certain degree of risk for the parties. Circumstances may change between the signing of the contract and the performance of the contract. Such changes can completely upset the economic balance or at the very least cause significant disproportionality between the parties.If the parties are unable to adopt their contractual relationship to the new circumstances either by a new contract or by an amendment of their existing contract then an intervention into the private-law contract might become necessary. The courts, the legislature and the Government are entitled to intervene in private-law contracts. It is within the competence of the court to rectify the economic imbalance in the individual contractual relationships on a case-by-case basis. However, court procedures are incapable of restoring the economic balance between parties on a case-by-case basis if a large number of contracts are affected and the imbalance is caused by changes on a social scale that equally affect the relevant contracts. In such cases the intervention by legislative measures is justified with the aim of a unified solution." [CC Decision 32/1991 (VI. 6.), ABH 1991, 146, 152153.]

[39] Acting with due consideration of the applicable provisions of the Hungarian Civil Code (Act IV of 1959), the Constitutional Court developed the principle of ex-post amendment of private-law contracts by legislative measures for the purpose of

ATTACHMENTPage 3 of 7

amending long-term contractual relationships with legislation. In the operative part of CC Decision 8/2014 (III. 20.) the Constitutional Court established that "Article II [Human dignity is inviolable], Article B(1) [the principle of legal certainty] and Article M(2) [consumer protection] of the Constitution provide sufficient legal grounds for the State to amend private-law contracts by legislative measures, but only when the requirements of the clausula rebus sic stantibus principle are met". This means the constitution allows the amendment of private-law contracts by legislative measures under the same conditions that must be observed when a private-law contract is amended by a court. The Constitutional Court emphasized that the protection of constitutional values such as "legal certainty, contractual freedom and trust in the fulfilment of private-law contracts requires the legislature, when applying legislative measures to amend a large number of private-law contracts, to strictly observe the conditions that apply when private-law contracts are amended by a court. Long-term private-law contracts may be amended by legislative measures if the requirements of the clausula rebus sic stantibus doctrine are met. Amendment of private-law contracts by a court is an adequate measure to rectify any imbalance between the parties diverging interests if the court takes all the circumstances of the case into consideration. An amendment of private-law contracts by legislative measures must likewise take the equitable interests of both parties into consideration, which means that any such legislative amendment must seek a balance of interests in the light of the new circumstances." {CC Decision 8/2014 (III.20), Reasoning [91]}

The Hungarian Parliament does not qualify as an impartial tribunal

[40] Under the current legal framework a court may amend private-law contracts if in a long-term contractual relationship a change in circumstances makes it likely that performing the contract under the existing terms would harm any partys material

ATTACHMENTPage 4 of 7

legitimate interests and (a) the change in circumstances was not foreseen by the parties at the time the contract was concluded, (b) the parties did not cause the change in circumstances and (c) the change in circumstances cannot be regarded as a normal business risk (Act V of 2013 on the Hungarian Civil Code, Section 6:192). The conditions for amending private-law contracts by courts are fundamentally the same as the conditions established by the Constitutional Court in previous rulings in relation to the amendment of private-law contracts by legislative measures.According to CC Decision 66/1995 (XI. 24), the conditions for legislative intervention into private-law contracts are met if "a change in circumstances has occurred after conclusion of the contract, performing the contract under the existing terms would violate a material legitimate interest of a party, the change in circumstances could not have been reasonably foreseen by the parties and, furthermore, if the change exceeds the risk of normal changes. Another condition for legislative intervention into private-law contracts is that the change in circumstances must occur on a social scale. This means the change must affect a large number of contracts." (CC Decision1995, 333, 339)

[41] "Restriction of the freedom to contract [...] violates constitutional values if there are no justified reasons for it and it is not reasonable" {CC Decision 3298/2014 (XI. 11), Reasoning [29]}. However, if these conditions are met, the restriction is justified hence it cannot be considered arbitrary and therefore does not violate the constitution.

[42] 2. In this case, the Constitutional Court established the following in relation to the amendment of private-law contracts by legislative measures.

[43] The challenged provisions of the Act convert payment obligations denominated in foreign currencies into Hungarian forints. The primary objective of the legislative intervention is to eliminate the exchange rate risk for consumers (as debtors) for the future since this has put an unpredictable and heavy burden on them. Exchange rate fluctuations (deterioration of the Hungarian forint) are a result of economic processes. Economic processes develop independently of the parties but have an effect on their long-term contractual relationship. The scope of the exchange rate fluctuations is a change in circumstances that clearly exceeds the risk of reasonably foreseeable and normal changes. The parties could not influence the exchange rate fluctuation. The parties must have taken the risk of exchange rate fluctuation into

ATTACHMENTPage 5 of 7

consideration, but they could not reasonably have foreseen that the fluctuation would reach the current level and remain there for a long period of time. (As the Curias Uniformity Decision 6/2013 PJE, Article 3 stated: "[the] financial institutions legal obligation to inform the consumers had to include the possibility of exchange rate fluctuation and its impact on the instalments. The obligation to inform the consumers could not have included the potential extent of exchange rate fluctuations." This is obviously because "there is no foreseeable and predictable extent or limit of exchange rate deteriorations or improvements, especially in view of long time periods.") However, the exchange rate fluctuations unquestionably put a significant financial burden on the debtors.

[44] It is important to note that while the value of the financed properties has remained unchanged, the weakening of the Hungarian forint has resulted in an unforeseeably great increase in the debtors payment obligations. It is settled case-law of the courts developed on the basis of case-by-case litigations that "the debtors of foreign currency (FX) loan contracts paid a lower interest rate but had to bear the exchange rate risk. This contractual arrangement does not render the FX loan contracts unlawful, obviously immoral or usurious. It does not make repayment of the debt impossible, and FX loan contracts cannot be regarded as sham transactions.Furthermore FX loan contracts do not become void due to an unforeseeable one-way shift in contractual burdens [...]". Finally "FX loan debtors must bear the impacts of the exchange rate fluctuations because they paid a lower interest rate on their loans than other debtors who acquired their debt in Hungarian forints. The weakening of the Hungarian forint increases the debtors financial burden, while a strengthening of the Hungarian forint reduces the financial burden." (Uniformity Decision 6/2013 PJE)The settled case-law described above establishes the general legal principle that debtors must bear the exchange rate risk. {Obviously courts may arrive at different conclusions in individual case-by-case litigations. The Curia noted in its Uniformity Decision 2/2014 PJE that "if the financial institution did not provide sufficient information to the debtor about the exchange rate risk, as a result of which the debtor believed the exchange rate risk is not real or has only a limited effect, the contractual clause pertaining to the exchange rate risk is unfair, which leads to the full or partial invalidity of the contract."}

[45] Exchange rate fluctuations are not predictable. Exchange rate fluctuation is a risk that can cause significant financial loss for the debtors and also, in view of the large

ATTACHMENTPage 6 of 7

number of debtors, for the entire society. The aim of mitigating such risk provides the legislature with the legal grounds to intervene into private-law contracts and, by doing so, to protect consumer interests. (It should be noted that the mandatory conversion of foreign currency debts into Hungarian forints was performed primarily in the debtors interest because the conversion eliminated the exchange rate risk).The complainants in these proceedings argue that the challenged provisions of the Act would violate the right to fair trial. It must be emphasized that these arguments are not valid, because the challenged provisions of the Act do not interfere with ongoing court proceedings. The mandatory conversion of the debts has no effect on the outcome of individual court proceedings with regard to the validity/invalidity of loan contracts (or certain contractual clauses) (see also Uniformity Decision 2/2014 PJE cited above).

[46] According to the Minister of Justice, an additional objective of the challenged legislation is the protection of the lenders. The aim of closing the lenders open foreign currency positions provides the legal grounds for the legislature to intervene into private-law contracts. The lenders interest was to close their open foreign currency positions as soon as possible. This interest required the mandatory conversion of the FX consumer debts to the greatest degree possible. Thus, a main objective of the mandatory conversion of the FX debts besides consumer protection was to reduce the lenders FX exposure to as much as possible. Additionally, the protection of the lenders interests leads indirectly to the protection of the interests of the depositors.

[47] Failure to convert the FX debts or delaying their conversion represented a systemic risk for Hungary because of the large number of FX loan contracts and the size of the outstanding FX debt. If the exchange rate risk had not been mitigated, a significant weakening of the Hungarian forint could have been expected, and this would have further ruined the financial situation of the debtors.

[]

[57] 4. Finally, the Constitutional Court examined the complainants arguments regarding violation of Article XXVIII [Right to Fair Trial] of the Constitution. In the view of the Constitutional Court, there is no connection at all between the challenged provisions of the Act and the right to fair trial. The challenged provisions of the Act do not

ATTACHMENTPage 7 of 7

interfere with ongoing court proceedings. Complainants are usually asking the courts to declare FX loan contracts void. The challenged provisions of the Act eliminate the exchange rate risk for the future. It is obvious that the challenged provisions of the Act have no influence on the outcome of the individual court proceedings. The Constitutional Court therefore considers the complaints in this regard unfounded and rejected them.

Original Decision in Hungarian language:http://public.mkab.hu/dev/dontesek.nsf/0/00FCFFEC8DA25134C1257EC000586314?OpenDocument

Translation prepared by PITEE, 02.02.2016.www.pitee.org/english