ADDRESS ISSUES CONNECTED WITH FOREIGN CURRENCY-BASED CONSUMER LOANS
3. Legislative Steps in 2014 with Regard to Foreign Currency Loans
3.4.2. Decision 33/2015 (03 December) of the Constitutional Court Assessing the Act on Conversion The Hungarian Constitutional Court received hundreds of submissions (constitutional
complaints) concerning the Act on Conversion into Forints. The Constitutional Court handled the submissions jointly. The resulting Decision 33/2015 (03 December) first and foremost examined whether the constitutional conditions for amending contracts through the Act on Conversion into Forints (i.e. by legislation) existed.
The Constitutional Court first established that the provisions of the Act laying down the provisions for mandatory conversion into forints of debts originating from contracts falling within the scope of the Act clearly constituted an intervention in the contractual freedom of the requesting parties (complainants). The contracts affected by the Act on conversion into forints were amended for reasons beyond the parties’ control, partly without any further legal action, partly through mandatory rules binding the parties. Consequently, the ex-post amendment of rights and obligations arising from concluded contracts with legislative measures, imposing the obligation to convert foreign currency debts into claims denominated in forints, was clearly an intervention in the contractual freedom of the parties. The Constitutional Court, however, did not deem the intervention to be necessarily incompatible with the Fundamental Law of Hungary.
The constitutional conditions for exceptional legislative intervention were developed by a series of the Constitutional Courts’ previous decisions in order to ensure the amendment by legislation of long-term contractual relationships. In this regard, in its key Decision 8/2014. AB (20 March) the Constitutional Court established that long-term private-laws contracts could be amended by legislative measures only when the requirements of the clausula rebus sic stantibus principle are met.
The primary objective of the legislation making the conversion of foreign and foreign currency-based loans mandatory was to eliminate the exchange rate risk for consumers (as debtors) for the future since this has put an unpredictable and heavy burden on them. In accordance with Section 45 of the recital Constitutional Court Decision (hereinafter CC Decision): „The unpredictability of possible future exchange rate fluctuations meant such uncertainty for debtors that in view of the large number of debtors threatened with the risk of significant financial and social loss for the entire society. The aim of avoiding such risk provides the legislature with constitutional grounds to intervene, primarily in the debtors’
interest (It should be noted that the mandatory conversion into Hungarian forints was performed primarily in the debtors’ interest as it eliminated future exchange rate risk). It must be emphasized that by ordering the mandatory conversion in Hungarian forints[…] the legislature did neither interfere with the outcome of ongoing individual court proceedings, nor did it take a decision on the validity/invalidity of individual contracts (or contractual clauses)”.
Besides the protection of debtors, the other aim of legislative intervention was to protect creditors. From the point of view of constitutionality, the key interest that the legislature had to take into account was to close the creditors’ open foreign currency positions. In fact, the creditors had to close their open foreign currency positions as soon as possible, which required the conversion of the largest possible number of foreign currency-based contracts to Hungarian forints. Thus, one of the objectives of conversion into Hungarian forints, beyond protecting consumers, was to reduce the exposure of creditors as much as practicable. Additionally, the protection of the creditors led to the protection of the depositors indirectly. In that respect the Constitutional Court stated: (Section 47 of the recital of the CC decision): „Failure to convert the foreign exchange debts into forints or delaying their conversion represents a systemic risk for Hungary because of the large number of foreign exchange loan contracts and the size of the outstanding debt. Without eliminating this situation, a significant weakening of the Hungarian forint could have been expected, which would have further ruined the financial situation of the debtors.”
As far as conversion into forints is concerned, it should be remembered that the Act had provided for „opting out”, that is it allowed debtors to request the dispensation of the forint conversion under certain conditions. In the case of existing contracts, nevertheless, this was not only subject to the consumer’s choice, but was tied to certain conditions in Section 12(3) of the Act. In the case of already terminated contracts, on the other hand, the Act provided for the dispensation of the forint conversion of debts arising from these contracts more widely. With respect to these contracts, Section 15 (3) of the Act provided for opting out from forint conversion without restriction.
The Constitutional Court stressed that in formulating the rules of conversion into forints, the legislature had to keep in mind the interests of not only debtors, but those of creditors and their depositors as well. Recital 54 of the CC Decision underlines: „The primary objective of intervention was to ensure the implementability of the contract, this was the reason for which the effect of exchange rate fluctuations on the payment obligation of debtors had to be eliminated, which serves the interests of all the subjects of the contractual relationship , and at the level of national economy, the interest of the financial sector. The high percentage of foreign currency or foreign currency-based loan contracts out of the total number of contracts also represented a risk for creditors and thereby for the stability of the financial system. The element of the legislation that provides affected consumers with only a limited dispensation of the process of conversion into forints in the case of existing contracts should be considered in this light. A review of the exceptions reveals that they only concern the particular cases in which conversion into forints would have actually been unreasonable and specifically unfavourable for the debtors. (the debtor receives his income in the foreign currency of the debt, he would be eligible for taking a foreign currency-based loan at the time of conversion into forints, the contract is for a short or medium term etc.). Such contracts represent only a smaller percentage compared to the total number of contracts, their non-conversion does not place the affected creditors at a disadvantage and therefore their continuation cannot represent a risk to the stability of the country’s financial intermediaries, either”
All in all, the Constitutional Court stated that the legislature decided to convert the debts affected by the Act into forints out of general social interest, due to a change in circumstances involving the overriding of compelling and legitimate interests in the wake of the conclusion of the contracts. In drafting the Act, the legislature took due account of both the contractual freedom of the consumers to be protected and of the interests of the other party, the creditors, affected by the legislative intervention in order to restore the economic equilibrium of the relevant contracts. In the view of the Constitutional Court the fact that the legislature did not provide consumers the opportunity for opting out of the process of conversion into forints without limitation and ensured it only to those who would have indeed been affected negatively, met the criterion of rationality.
Based on the above, the Constitutional Court rejected constitutional complaints seeking to establish the non-constitutionality and the nullity of the contested provisions (Section 10 and 15) of the Act on conversion into forints.