Price Increases and the Introduction of the Euro, Case C-19/03 Verbraucher-Zentrale Hamburg eV v O2 (Germany) GmbH & Co OHG

Elizabeth Hall, LLM

Senior Lecturer in Law
Faculty of Business and Law
University of Lincoln 

Copyright © Elizabeth Hall 2005
First published in the Web Journal of Legal Issues

Summary

The recent decision in Case C-19/03 Verbraucher-Zentrale Hamburg eV v O2 (Germany) GmbH & Co OHG provided an opportunity for the European Court of Justice to confirm what many Europeans had suspected, that is, that the introduction of the euro had been used by traders to hide an increase in the existing price of goods and services to consumers.  This comment addresses the importance of the case and its relationship with the commitment to a high level of consumer protection enshrined in Article 153 EC Treaty.  The opinion of the Advocate General indicated that the particular interests of consumers were at issue.  The decision of the ECJ, however, in confirming the principle of continuity of contracts, merely hints at the specific needs of the consumer.  This comment, in making a comparison with other legislative instruments providing protection for the consumer, attempts to establish the crucial need for the rights of the consumer to be recognised.

Contents

Bibliography

Introduction

In Verbraucher-Zentrale Hamburg eV v O2 (Germany) GmbH & Co OHG, the ECJ refused to allow the interpretation of Council Regulation 1103/97 to permit the unilateral variation of contract terms by one economic agent as a party to a contract.  In making this pronouncement, the ECJ recognised the guarantee of legal certainty as a general principle of Community law, the importance of legal continuity of contracts enshrined in Article 3 of the Regulation and the particular position of the consumer as an economic agent.

The facts

The case concerns the introduction of the single currency into the eurozone on 1 January 2002.  In order to allay fears that businesses would not use the introduction of the new currency as an opportunity to increase prices, legislation prescribing the method of conversion was introduced to ensure continuity of contracts. 

According to the European Commission, the introduction of the euro “removed an important psychological barrier to consumers shopping in other member states”.  It also allowed them to compare prices (Commission 2002, para 2.3.1).  However, a Eurobarometer survey conducted for the European Commission in May 2002 (Gallup Europe 2002, p21) revealed that a significant percentage of Europeans (83%) considered that the conversion of their national currency to the euro was carried out to their disadvantage in that prices were more often rounded off to higher values.  This feeling was the most strongly expressed in Germany, the Netherlands and Ireland. 

Council Regulation (EC) No 1103/97 of 17 June 1997 on certain provisions relating to the introduction of the euro (“the Regulation”) sets out provisions for the conversion of national currencies into the euro.  The Regulation entered into force in all member states on 20 June 1997, its legal basis being Article 308 (ex 235).

Under Article 14 of Council Regulation (EC) No 974/98 of 3 May 1998 on the introduction of the euro, references to national currencies in legal instruments existing at the end of the transitional period(1) were to be read as references to the euro “according to the respective conversion rates”.

The following provisions of Regulation 1103/97 are relevant:

 Article 3:

The introduction of the euro shall not have the effect of altering any term of a legal instrument or of discharging or excusing performance under any legal instrument, nor give a party the right unilaterally to alter or terminate such an instrument.  This provision is subject to anything which parties may have agreed.

(my emphasis)

 By virtue of Article 1, “legal instruments” means inter alia “contracts” for the purposes of the Regulation.

Article 4 paragraphs 1 and 2 of the Regulations read as follows:

Monetary amounts to be paid or accounted for when a rounding takes place after a conversion into the euro unit pursuant to Article 4 shall be rounded up or down to the nearest cent. 

 By virtue of the last sentence of Article 5:

If the application of the conversion rate gives a result which is exactly half-way, the sum shall be rounded up.

O2, a mobile telephone network operator established in Munich, Federal Republic of Germany, converted their prices per minute tariff for phone calls from deutschmarks to euros in line with Article 1 of Council Regulation (EC) No 2866/98 of 31 December 1998, which fixed the conversion rate between the euro and the German mark at “1 euro = 1,95583 marks”.  The price per minute was to be used by consumers to compare mobile telephony operators’ prices(2).  O2 then rounded the amount to the nearest cent in accordance with Council Regulation (EC) No 1103/97 of 17 June 1997, Article 5, which permitted the rounding of “a monetary amount to be paid or accounted for”. 

Verbraucher-Zentrale Hamburg eV (“Verbraucher-Zentral”), a consumer association in Germany competent to take legal action in respect of breach of consumer protection laws, brought an action against O2 in the German courts, holding that customers could be subjected to a price increase as a result of this interpretation of the Regulation.  An example of the effect of this conversion was given  by the German court:  as a result of the conversion of the price per minute to the fixed-line network on the Genion Home tariff,  the price of a ten-minute telephone conversation would cost EUR 0.30 instead of the previous amount of DEM 0.50 (EUR 0.26).  The substance of the claim by Verbraucher-Zentrale claim was, inter alia, that this unilateral decision by O2 to adopt such a method of conversion contravened the principles of contractual continuity underlying Regulations 1103/97 and 2866/98 concerning the introduction of the euro.  It was contended that the purpose of Regulation 1103/97 was to protect consumers and the conversion and rounding up had had a negative effect on consumers.

In a reference for a preliminary ruling, the German court asked the ECJ the following questions.  First, whether in converting the national currency into the euro, the rounding of amounts to the nearest cent could only be done on the final amount of the bill, or could it be done on the contractually agreed price per minute tariff?  Furthermore, in determining whether a tariff is “a monetary amount to be paid or accounted for” within Article 5, was it decisive whether it related to a particular multiple (in this case six) of a unit on the basis of which the final amount of the invoice was calculated (in this case a 10-second unit), or whether it was the tariff as perceived by consumers that was the decisive unit for the purposes of the invoice?  The second question to be answered by the ECJ was whether the Regulation, in particular Article 5, provided an exhaustive list of circumstances when prices could be rounded to the nearest cent – “in other words, must they either continue to be displayed in the former national currency, or be quoted in the exact amount produced on conversion?”.

So far as the conversion and rounding of the per-minute prices were concerned, O2 argued that in the absence of an express prohibition of the rounding of amounts other than those in Article 5, such a rounding was compatible with Regulation No 1103/97.

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Advocate General’s Opinion

Advocate General Poiares Maduro delivered his opinion on 25 March 2004.  He considered that the questions raised in this case had the potential to affect a large number of contracts for the sale of goods or services such as electricity, fuel or telecommunications where the price is displayed as a per unit tariff and where the value of the smallest sub-unit of the national currency of a member state is lower than that of the euro (ie the cent).

According to Advocate General Maduro, the principle of continuity of contracts, pacta sunt servanda, constitutes a general principle of law.  He considered that the basic rule of continuity of legal instruments enshrined in Article 3 was “central to any assessment of the impact of the introduction of the euro on existing contracts”.   According to Advocate General Maduro, “(t)he guarantee of legal certainty recognised by the Court as a general principle of Community law is the basic principle underlying Regulation 1103/97” (para 20).  The extent of the principle embodied in Article 3, and confirmed in Recital 7, was such that it ensured that all terms in contracts would be unaffected by the introduction of the euro.  The result of a lack of continuity in euros of the value of amounts expressed in national currency could result in “dangerous price instability to the detriment of consumers”.   Furthermore, any national provision permitting unilateral variation of contract to the detriment of consumers would be precluded by Article 3(3).

Although there is no definition in the Regulations of “monetary amounts to be paid or accounted for”, both O2 and the Commission agreed that “monetary amounts to be paid” covers “all forms of debts of money”.     However, Advocate General Maduro was of the opinion that a per-minute price does not represent a debt of money.  Similarly, although there is no regulatory definition of “amounts to be …. accounted for”, the words do not include a per-minute price which is simply used for the intermediate computations necessary to establish the amounts to be paid and the amounts to be accounted for, or put another way, the final invoice amount and (for example) the price per telephone call.   Furthermore, in the case before the Court, the cost of a telephone call was calculated not on the basis of a per-minute price, but a per-unit price of ten seconds.  Thus the expression “monetary amounts to be paid or accounted for” did not cover all monetary amounts.

Advocate General Maduro therefore concluded that only the final amount of the invoice will necessarily be subject to rounding to the nearest cent, although a rounding in respect of the cost of a telephone call may be permissible for reasons of bookkeeping or if so agreed by the parties in the contract.  However, the effect of rounding up or down in these circumstances will have little effect on the final amount and the invoice amount will be virtually the same as if the individual amounts on the invoice were converted to a higher degree of accuracy.  A price-per minute, contractually agreed, is a term of the contract to which conversion to a higher degree of precision (than to the nearest cent) may be necessary to “ensure the continuity of the contractual term establishing the price” (para 54).  The argument put forward by O2 that in other cases the prices converted were rounded down, to the benefit of consumers, was rejected on the basis that the rule of contractual continuity is concerned with the impact of each contractual term, and not the contract as a whole. 

However, the concluding sentence of Article 3, in permitting the contracting parties to agree to the rounding of an amount such as a per-minute price, recognises the principle of contractual freedom.  According to Advocate General Maduro, Article 5 of the Regulation should not be seen as precluding such rounding, although an agreement to rounding will be rare.  There was no agreement in the case before the court.  The absence in the Regulation of an express prohibition of a unilateral decision to round a per-unit price used in intermediate calculations is confirmed by Recital 11(4). Nevertheless, a unilateral decision to round the per-minute prices, as essential terms of the contract, must be assessed in the light of the rule in Article 3 of the Regulation establishing the fundamental rule of the continuity of contractual terms. 

The Advocate General was of the opinion that the unilateral decision taken by O2 to round the per-minute tariff took place in a situation of informational asymmetry.  Such a situation was a good reason for preventing O2 from unilaterally varying the per-minute price with its potential to result in an increase and with no possibility of an assessment of the true scale of the increase by an outsider. Thus Article 3 must be interpreted as meaning that intermediate amounts may be rounded up provided that it does not result in an increase in “the amounts to be paid or accounted for”.  There is no violation of Article 3 in rounding down to the consumers’ advantage as there is “a tacit acceptance by every consumer of a reduction in prices”.  Other German telephone operators had rounded their per-minute prices to the third or fourth decimal place, but always down. 

Judgment of the Court (Grand Chamber), 14 September 2004

It was the view of the court that it was clear from the preamble and the provisions of Regulation 1103/97 that it was intended to ensure contractual obligations entered into by citizens and firms were not affected by the transition to the euro.  This is evidenced by reference to “legal certainty at an early stage” in Recital 4 and the general principle of continuity contracts stated in Recital 7, which goes on to state the objectives of legal certainty and transparency to economic agents, “in particular for consumers”.

The setting of only minimum rules in the Regulation, as evidenced by the reference in Recital 11 to national rounding rules, means that the national authorities may adopt or maintain provisions in respect of intermediate computations.  The court held that the actual wording of Recital 11 showed that the detailed rules on rounding provided in the Regulation were not intended to provide an exhaustive set of rules for intermediate computations.  However, there was no practical reason for an amount such as the per-minute price which was not actually invoiced to, or paid by, the consumer, to be rounded to the nearest cent. This is so even though this tariff is a decisive factor relating to the price of consumer goods or services.  According to the court, “Quoting a tariff with a degree of accuracy restricted to 2 decimal places is not necessarily the best way of ensuring that the consumer is fully informed” (para 43).

 The court concluded that a tariff such as the per-minute price in the present case did not constitute “a monetary amount to be paid or accounted for” within the first sentence of Article 5 of the Regulation and therefore was not to be rounded to the nearest cent.  Their finding was not affected by the fact that the tariff related to a particular multiple of the unit used to calculate the final amount of the invoice.

The response of the court to the question of whether the wording of the first sentence of Article 5 precluded the rounding of amounts other than those “to be paid or accounted for” was that although the Regulation does not provide a rule fixing the degree of accuracy for other rounding operations, this does not mean that the general principle of continuity of contracts does not apply.  The effect on other monetary amounts of the rules in the first and last sentence of Article 5 of the Regulation, taken together, involves a degree of inaccuracy which may result in a significant variation of the contractually-agreed prices and thus a breach of the requirements of continuity of contracts.  Even if such rounding is not precluded by national provisions, the rounding of such amounts cannot in each case meet the need for accuracy required by the requirement of continuity of contracts(5).  Furthermore, national authorities may not derogate from this requirement in spite of the statement in Recital 11 that the rounding rules in the Regulation do not affect national provisions on rounding.  Thus, although rounding to the nearest cent of monetary amounts other than those referred to in the first sentence of Article 5 is not precluded, “that rounding method must none the less not affect contractual obligations entered into by economic agents, including consumers, and must not have a real impact on the prices actually to be paid” (para 53).  Where rounding of a per-unit price or an intermediate amount is likely to have a “real impact on the price actually borne by consumers” (para 54) and it has not been previously agreed between the contractual parties, such a variation is contrary to the principle of continuity of contracts.  It was for the national court to decide whether the action of O2 had a real impact on the amount paid by consumers and whether there had been a breach by O2 of its contractual obligations to its customers. 

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Comment

To what extent were the needs of consumers recognised on the introduction of the euro? 

The Regulation, in its preamble, recognised the need for examination of other measures to ensure a “balanced changeover, in particular for consumers” on the introduction of the euro.  The need for the entry into force as soon as possible of the provisions on continuity was seen as necessary for them to fulfil their objective of “legal certainty and transparency to economic agents, in particular for consumers”.  According to Advocate General Maduro, the Regulation was consistent with the purpose of keeping to a minimum the changes required by the introduction of the euro in the interests of consumers.

Article 153 and the interests of consumers

Article 153, incorporated (as Article 129a) by the Maastricht Treaty, and amended by the Amsterdam Treaty, provides as follows:

 The court in O2 was concerned with the doctrine of no unilateral variation of contract terms, and that the contractual obligations entered into by “economic agents” should not be affected.  The term “economic agents” includes consumers (see paras 53, 57).  This approach is interesting in that it ignores the actual wording of Recitals 5 and 7 (which refers to the need for the wording of the Regulation to be examined to ensure a balanced changeover to the euro, in particular for consumers, and the objective to provide legal certainty and transparency to economic agents, in particular for consumers (my emphasis)) in that it does not distinguish the interests of consumers from those of other economic agents.

The fully informed consumer

According to the court (at para 41), the consumer is to be “fully informed”, and the quoting of a tariff to only 2 decimal places is “not necessarily the best way” of ensuring this.  The issue of transparency is mirrored in Directive 98/6 on Price Indications, adopted under Article 153, the preamble of which includes the objective that transparency of the system should be maintained on introduction of the euro (Recital 13).  This approach is consistent with that taken in many consumer protection directives(7) and indeed the right of consumers to information in Article 153(1) EC Treaty, described by Stuyck as “undoubtedly the most fundamental specific consumer right” (Stuyck 2000, p384).

The judgment recognises the need for the consumer to be able to make price comparisons between mobile telephony operators.  Indeed, in holding that the price per-minute was an intermediate amount used as the basis for calculating the price to be paid by the consumer, which was not to be rounded under the conditions set out in Article 5 of the Regulation, it acknowledged that the per-minute price for a telephone call is the key comparative factor.  The importance of a unit price in allowing the consumer to make an informed choice about the prices of products on a comparative basis is endorsed in Article 1 of the Price Indications Directive(8), with its stated aims of improving consumer information and facilitating comparison of prices.(9)  O2 had argued that to quote the per-minute price to several decimal places was contrary to principles of price clarity and accuracy set down in national legislation on price indications.

Inequality of bargaining power and contractual freedom

The approach taken by the Advocate General appeared to be far more about the balancing of the relative interests of the trader and the consumer.  He identified that the position of the consumer on the occasion of the unilateral decision taken by O2 to round the per-minute tariff took place in a situation of “informational asymmetry” (para 59).  This he described as being “where one party possesses knowledge that the other does not” and he considered that that there is a real risk of “opportunistic behaviour by the contracting party holding detailed information about its customers’ preferences, the most frequently used per-minute prices and the average duration of telephone calls on each rate, namely all the information about costs and benefits likely to flow from a decision to round such prices to the nearest cent.”(10).

The Advocate General recognised the principle of contractual freedom which he said was expressly recognised in Article 3.  He considered that freedom should not be restricted by refusal to allow the parties to agree to a rounding to the nearest cent in the conversion of intermediate calculations such as per minute prices, although he did concede that such agreement would be rare.  Such a restriction of contractual freedom is present in Directive 93/13 on Unfair Terms in Consumer Contracts, whereby, according to the preamble, “acquirers of goods and services should be protected against the abuse of power by the seller or supplier, in particular against one-sided standard contracts…”.  The Directive does not allow an assessment of the core terms of the contract, that is the main subject matter and the price (Article 4).  However, the exclusion from regulation of terms relating to price is subject to the requirement that such a term should be in plain intelligible language (Article 5).  The Annex to the Directive contains a list of indicative terms which may be regarded as unfair.  Included in this list is a term which enables the seller or supplier to unilaterally alter the terms of the contract where there is no valid reason specified in the contract (para (j)).  This of course mirrors the principle embodied in Article 3 of the Regulation.   

However, in deciding that any rounding of intermediate calculations allowed by the first sentence in Article 5 must not affect the contractual obligations of the parties, the ECJ gave no priority to the interests of the consumer as an “economic agent”, in spite of the reference in the preamble of the Regulation to the need for a balanced changeover and legal certainty “in particular for consumers”.

Legal certainty and legitimate expectations

In O2, the ECJ recognised the guarantee of legal certainty as a general principle of Community law.  In coming to its decision, the ECJ referred to the aims of the Regulation set out in its preamble, making reference in particular (at para 31) to the objective of continuity of contracts  “to provide legal certainty … in particular for consumers” in Recital 7.  According to Advocate General Maduro, the principle of continuity of contracts, pacta sunt servanda, constitutes a fundamental principle of any legal order(11), and is the basic principle underlying the Regulation.  He considered that the importance of legal certainty was endorsed by the fact that the Regulation, and in particular the rules relating to continuity of contracts, came into force before other Regulations (Regulations 974/98 and 2866/98) on conversion to the euro.(12) 

The concept of legal certainty has been considered by Craig and de Burca to be connected to the concept of legitimate expectations, although it may be distinguished (see Craig and de Burca 2003, p380).  In Firma A Racke v Hauptzollamt Mainz, Case 98/78, the court stated that although the principle of legal certainty was said to preclude the retroactive effect of a Community measure, “it may exceptionally be otherwise where the purpose to be achieved so demands and where the legitimate expectations of those concerned are duly respected” (para 20). 

Furthermore, in The Queen v Minister of Agriculture, Fisheries and Food and Secretary of State for Health, ex parte: Fedesa and others, Case C-331/88, the court rejected the argument of the applicants that a Directive frustrated the legitimate expectations of traders and was inconsistent with the principle of legal certainty.  The applicants had contended that the principle required that a Community measure should be founded on a rational and objective basis (at para 8).  In Land Rheinland-Pfalz v Alcan Deutschland GmbH, Case C-24/95, again the ECJ linked the concept of legal certainty to that of  legitimate expectations, this time concerning possible legitimate expectation on the part of the recipients of unlawful aid that the grant was lawful.

The concept of legitimate expectations can be said to require a balancing of the interests of traders and consumers, the requirement of what is “legitimate” to be decided by the court in assessing the burden to be placed on traders (Howells and Wilhelmsson 1997, p323).  The principle has been suggested as a starting point for legal reasoning (see Howells and Wilhelmsson 2003, p385).  The logical progression of this argument is to say that the requirement of legal certainty is to be determined by an assessment of whether consumers were entitled to expect that unilateral variation of contract terms by the trader would be prohibited by the Regulations.  This of course is what the ECJ agreed is precisely the object of Article 3 of the Regulations.  There is, however, one stumbling block to this argument, and that is that nowhere is the principle of the legitimate expectations of the consumer articulated in the EC Treaty.  The suggestion has been made that Article 153 could have been used to establish an objective such as the protection of consumers’ reasonable expectations (Dickie 2003).  Some consumer protection directives, such as Product Liability Directive 85/374 (as amended), refer to the legitimate expectations of consumers as the basis of liability resting on the trader (see Stuyck 2000, p394).  The failure to include the test in Directive 1999/44 on Consumer Sales and Guarantees has  been viewed with regret (see Twigg-Flesner and Bradgate 2000).  Is the consumer purchasing goods or services entitled to expect to feel protected by legislation or should he merely rely on general business morals (see Howells and Wilhelmsson 2003, p379)?  In the case in question, was the consumer entitled to expect that the trader would not use the Regulations as the basis on which to increase prices?

The legal basis:  consumer protection and other community policies and activities

Regard should be had to the obligation enshrined in Article 153(2) to take account of consumer protection requirements in the implementation of other Community activities and policies.  The specific identification of the need for measures to be examined to ensure a balanced changeover to the euro in Recital 5, and the need for legal certainty and transparency in Recital 7 of the Regulation appear to satisfy the obligation to state how the interests of consumers were taken into account (see Stuyck 2000, p386).  Moreover, according to Advocate General Maduro (at para 25), concerns for consumer protection were one reason why Article 3 was included in the Regulation(13).

Yet this Regulation has as its legal basis Article 308 (ex 235).  Although there is reference in the preamble to the need to provide legal certainty for citizens and firms “in the course of the operation of the common market” (Recital 4), and an early indication of the rules for conversion being necessary “in the course of the operation of the common market” (Recital 11), there is no reference to Article 95 (ex 100a) which is the internal market basis traditionally used for consumer protection directives(14).  Yet a broad reading of Article 95 can be seen from the fact that Regulation 2560/01 on cross-border payments in euros was adopted on the basis of Article 95 (see Weatherill 2004, p26), where confidence in the euro was seen to be necessary to ensure the proper functioning of the internal market (Recital 6).  It has to be questioned, however, whether Regulation 1103/97 has an internal market dimension, or whether it merely concerns the obligations of private parties(15).  Use of Article 95 would have enhanced the status of the consumer by virtue of Article 95(3) requiring the Commission to take as a base a high level of consumer protection in its proposals for internal market measures.

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Conclusions

Although offering differing arguments, both the Advocate General and the ECJ appear to have the interests of consumers in mind.  The arguments of the Advocate General address the issue of contractual freedom and inequality of bargaining power, with particular identification of the rights of the consumer.  The ECJ, in confirming the requirement of continuity of contracts acknowledged by the principle of legal certainty, appears, albeit implicitly, to have regard to the legitimate expectations of consumers.  The consumer can expect to be fully informed and that there will be no unilateral variation of terms by the other contracting parties (no price increase).  Or is this interpretation extending the ECJ’s application of the principle of legal certainty too far?  In including consumers in “economic agents”, the ECJ is merely acknowledging the position of the citizen as the other party to the contract.  However, in addressing the issue of competing rights, the ECJ appears to be at least tipping the balance in favour of the consumer.

Bibliography

Commission (2002) Consumer Policy Strategy 2002-2006, COM(2002) 208 final

Craig P and de Burca G (2003) EU Law Text, Cases and Materials 3rd edition (Oxford: Oxford University Press)

Dickie J (2003) The European Commission’s Consumer Policy Strategy 2002-2005: A Critique, <http://webjcli.ncl.ac.uk/2003/issue3/dickie3.html>

Gallup Europe Survey Flash EB 121/3 Attitudes on the euro (3) – EURO IN (10/05/2002-20/05/2002)

Howells G and Wilhelmsson T (1997) EC Consumer Law (Aldershot: Dartmouth)

Howells G and Wilhelmsson T (2003) EC consumer Law: has it come of age?, 28 ELRev 370

Rekaiti P and Van den Bergh R (2000) Cooling-Off Periods in the Consumer Laws of the EC Member States.  A Comparative Law and Economics Approach, Journal of Consumer Policy 23, 371-407

Stuyck J (2000) European Consumer Law after the Treaty of Amsterdam:  Consumer Policy in or Beyond the Internal Market? 37 CMLRev 367

Twigg-Flesner C and Bradgate R (2000) The EC Directive on Certain Aspects of the Sale of Consumer Goods and Associated Guarantees – All Talk and No Do?, <http://webjcli.ncl.ac.uk/2000/issue2/flesner2.html>

Weatherill S (2002) The Commission’s Options for Developing EC Consumer Protection and Contract Law:  Assessing the Constitutional Basis, EBLR 497

Weatherill S (2004) Taking the heat out of questions of competence, EBLR 23