In October 2018 we have elaborated on the controversial “Act on Nullity of Loans with an International Element Concluded in the Republic of Croatia”, which was passed by the Croatian Parliament and entered into force on 29 July 2017 (“Act”).
The Act has been adopted via an urgent parliamentary procedure, without undergoing expert consultation procedure that usually precedes the procedure of passing the law with such a sensitive effect as it would be the interference with the acquired rights as a consequence of retroactive application of its provisions.
The Act applies to loan agreements with an international element concluded in Croatia by debtors and unauthorised creditors. It extends the application to other legal transactions concluded in Croatia between debtors and unauthorised creditors arising as a consequence of, or based on such a loan agreement, such as mortgage agreements, for example. Under the Act, such loan agreements shall be deemed null and void as of the date of conclusion, unless fully performed by the parties.
The Act defines a loan agreement with an international element as a loan or other agreement by which an unauthorised creditor (a foreign entity which at the time the loan was granted did not meet the special requirements for granting of loans in Croatia, such as passporting rights, or did not hold the required banking licences or approvals to be issued by Croatian authorities) granted a debtor (a natural or legal person who was granted a loan based on a loan agreement with an international element including persons who participated in a transaction as a co-debtor, a pledgor, a guarantor or a co-pledgor) a certain amount of money and the debtor undertook to pay back the contractual interest and the money used at an agreed time and in an agreed manner.
Once the loan agreement is declared null and void by the court, each party will be obliged to return what it has received under the loan agreement. Under the Act, the debtor has been put in a privileged position as it will not be obliged to repay contractual interest, only the principal amount, and the creditor will not be able to enforce its claim as security documents would be declared null and void.
In order for a loan agreement to fall under the scope of application of the Act, two conditions must be met: (i) a loan agreement had to be concluded in Croatia; and (ii) at the time of the conclusion of a loan agreement an international lender was not eligible to offer loans to Croatian borrowers, for example the borrower had not obtained a licence or applied for passporting rights.
Not long after adoption of the Act, we have expressed concerns over the constitutionality of the Act and its compliance with the EU law, pointing out to vague, ambiguous and often too broad wording in an unclear context.
In particular we raised the doubt that the Act is not compliant with the provisions of Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations and the Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.
The next controversy surrounding the Act is that it applies retroactively to loan agreements concluded before it came into force which is directly contrary to the Croatian Constitution prescribing that laws cannot have a retroactive effect but only individual provisions thereof, provided that there is a justified cause for such a retroactive application.
Besides we raised doubt that the Act introduced a number of other controversial provisions granting an advantage to debtors, such as: (i) effects on enforcement proceedings – all pending and future enforcement proceedings will be suspended during the litigation for determining the nullity of loans and dismissed if the underlying agreement is declared null and void; (ii) special inequitable rules on jurisdiction – lenders may initiate litigation proceedings in relation to these loans only before the courts of the borrower’s residence, while the borrowers may initiate litigation before the courts of the borrower’s residence and of the lender’s registered office; (iii) mandatory application of Croatian law – disputes relating to loan agreements falling under the scope of the Act shall be decided by the exclusive application of Croatian law, irrespective of the agreed governing law and rules governing conflict of laws.
With regard to the fact that since the application of the Act a number of contradictory court rulings have already been rendered, causing legal uncertainty, the Municipal Court in Rijeka (“Croatian court”) requested a preliminary ruling from the Court of Justice of the European Union (“ECJ”), raising questions concerning the compatibility of the Act with the EU law in particular concerning the interpretation of Articles 56 TFEU and 63 TFEU, Article 4(1), Article 17, Article 24, point 1 and Article 25 of Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.
Accordingly, the Croatian court is doubtful, firstly, as to the compatibility of the Act with Articles 56 and 63 TFEU, in so far as that legislation is liable to prejudice the freedom of an “Austrian bank” to provide financial services. That Croatian court doubts whether the objectives put forward by the Croatian Government in support of the retroactive application of that law could justify such a prejudice.
Secondly, the Croatian court has doubts as to various aspects connected with its international jurisdiction to hear the main proceedings, in the light of Regulation No 1215/2012 in particular as to the compatibility of Article 8 of the Act with the rules of jurisdiction laid down in Regulation No 1215/2012. It is also unsure as to whether, having regard to the established case-law of the ECJ, the agreement at issue could be classified as a “consumer contract” and whether the dispute in the main proceedings falls within the rules of exclusive jurisdiction for actions in rem, under Article 24, point 1, of that regulation.
In those circumstances, the Croatian court referred the following questions to the ECJ for a preliminary ruling:
(i) Must Articles 56 and 63 [TFEU] be interpreted as precluding the provisions of the Act, in particular the provisions of Article 10 of that law, which provides for the invalidity of credit agreements and other legal acts that are consequential upon the credit agreement concluded between a debtor (within the meaning of Article 1 and the first indent of Article 2 of that law) and an non-authorised lender (within the meaning of the second indent of Article 2 of that law) or are based on such an agreement, even if they were concluded before the entry into force of that law, that invalidity taking effect from the moment the contract was entered into, with the result that each of the contracting parties is obliged to return to the other party everything received by it on the basis of the void contract and, when that is impossible or when the nature of the action taken is incompatible with restoration, adequate pecuniary compensation must be paid, based on the prices in force on the date of delivery of the judicial decision. In essence, the Croatian court raised question whether Article 56 TFEU and Article 63 TFEU must be interpreted as precluding legislation of a Member State, such as that at issue in the main proceedings, which has the effect, inter alia, that credit agreements and legal acts based on such agreements concluded in that Member State between debtors and creditors established in another Member State, who do not hold a licence issued by the competent authorities of the first Member State to operate in that State, are null and void from the date on which they were concluded, even if they were concluded before the entry into force of that legislation.;
(ii) must [Regulation No 1215/2012], in particular Articles 4(1) and 25 thereof, be interpreted as precluding the provisions of Article 8(1) and (2) of the Act, in which it is laid down that, in disputes relating to credit agreements featuring international elements within the meaning of that law, the debtor may sue a non-authorised lender either before the courts of the State in which the latter has its registered office or, irrespective of where the non-authorised lender has its registered office, before the courts of the place where the debtor is domiciled or has his registered office, whereas an non-authorised lender, within the meaning of that law, may commence proceedings against the debtor only in the courts of the State in which the latter is domiciled or has his registered office;
(iii) is it a consumer contract within the meaning of Article 17(1) of Regulation No 1215/2012 and of the legal acquis of the European Union if the recipient of the loan is a natural person who has concluded a credit agreement in order to invest in holiday apartments with the aim of carrying on the business of offering tourists private board and lodging in his property;
(iv) must Article 24(1) of Regulation No 1215/2012 be interpreted as meaning that jurisdiction is enjoyed by the courts of the Republic of Croatia to hear and determine proceedings seeking a declaration of invalidity of a credit agreement and of the corresponding memoranda of guarantee, together with cancellation of the registration of a mortgage in the Land Registry, when, in order to guarantee performance of the obligations under the credit agreement, that mortgage was secured upon immovable property of the debtor situated within the Republic of Croatia. In other words the Croatian court asked whether the first subparagraph of point 1 of Article 24 of Regulation No 1215/2012 must be interpreted as meaning that an action “relating to rights in rem in immovable property” within the meaning of that provision, constitutes an action for a declaration of the invalidity of a credit agreement and of the notarised deed relating to the creation of a mortgage taken out as a guarantee for the debt arising out of that agreement and for the removal from the land register of the mortgage on a building.
On 19 February 2019 the ECJ passed the Judgement determining that:
(Ad. i) the Treaty on the Functioning of the European Union and the Treaty establishing the European Atomic Energy Community, the provisions of the original Treaties, in particular Articles 56 TFEU and 63 TFEU, are binding on the Republic of Croatia from the date of its accession, with the result that they apply to the future effects of situations arising prior to its accession. The ECJ further explained that although the agreement at issue which forms the subject matter of the main proceedings was concluded before the accession of the Republic of Croatia to the European Union, the fact remains that that question relates, in the present case, to a question of interpretation of EU law the answer to which is capable of calling into question the compatibility with EU law of national legislation adopted by that Member State after that date, which also has legal effects on that agreement after that accession. The ECJ took a standpoint that the Act provides for the invalidity of any agreement concluded in Croatia by an non-authorised lender whose registered office is outside that Member State and that such a legal regime affects the access to financial services on the Croatian market of economic operators established in other Member States which do not satisfy the conditions required by that legislation and particularly affects the freedom to provide services. The ECJ further argued that the freedom to provide services under Article 56 TFEU requires not only the elimination of all discrimination on grounds of nationality against providers of services established in other Member States, but also the abolition of any restriction — even if it applies without distinction to national providers of services and to those from other Member States — which is liable to prohibit, impede or render less attractive the activities of a provider of services established in another Member State where he lawfully provides similar services. The concept of restriction covers measures taken by a Member State which, although applicable without distinction, affect access to the market for economic operators from other Member States. The ECJ concluded that the Act makes access to the Croatian financial services market for creditors based outside Croatia subject to their obtaining an authorisation issued by the Croatian Central Bank and thus makes the access to that market less attractive, so that it undermines the freedom guaranteed by Article 56 TFEU.
The ECJ held that no objectives have been met such as overriding reasons of public interest, public order, public security or public health such as to affect one of the fundamental interests of society and that would justify a derogation from Article 52 TFEU and adoption of the Act containing directly discriminatory provisions.
(Ad. ii) The Article 8(1) and (2) of the Act gives the debtor the right to choose between the courts of the State in which the non-authorised lender has its registered office and those of his own domicile, while the creditor must apply to the courts of the debtor’s domicile whereas the Act applies to such agreements concluded in Croatia between debtors and non-authorised lenders, without taking account of the status of the debtor, whether he is a consumer or a professional. As Article 8(1) and (2) of the Act also apply to disputes between professionals, the ECJ noted that the Act departs from the general rule of jurisdiction laid down in Article 4(1) of Regulation No 1215/2012 (the defendant’s domicile), in that it extends the scope of more protective jurisdictional rules, laid down as an exception in Article 18(1) of that regulation in favour only of consumers, to all debtors.
The ECJ recalled that in the scheme of Regulation No 1215/2012, the jurisdiction of the courts of the Member State within the territory of which the defendant is domiciled is the general principle and that it is only by way of derogation from that principle that that regulation provides for an exhaustive list of cases in which the defendant may or must be sued before the courts of another Member State. Accordingly, the fact that a Member State provides in its national legislation for rules of jurisdiction which derogate from that general principle, which are not provided for in another provision of that regulation, runs counter to the system instituted by that regulation and, more particularly, by Article 4 thereof. Therefore the ECJ concluded that Article 4(1) and Article 25 of Regulation No 1215/2012 preclude legislation of a Member State, which, in the context of disputes concerning credit agreements featuring international elements which fall within the scope of that regulation, allows debtors to bring an action against non-authorised lenders either before the courts of the State in which they have their registered office or before the courts of the place where the debtors have their domicile or head office and restricts jurisdiction to hear actions brought by creditors against their debtors only to courts of the State on the territory of which those debtors have their domicile, whether they are consumers or professionals.
(Ad. iii) The ECJ concluded that notion of a “consumer” for the purposes of Articles 17 and 18 of Regulation No 1215/2012 must be strictly construed, reference being made to the position of the person concerned in a particular contract, having regard to the nature and objective of that contract and not to the subjective situation of the person concerned, since the same person may be regarded as a consumer in relation to certain transactions and as an economic operator in relation to others.
In consequence, only contracts concluded outside and independently of any trade or professional activity or purpose, solely for the purpose of satisfying an individual’s own needs in terms of private consumption, are covered by the special rules laid down by the regulation to protect the consumer as the party deemed to be the weaker party. Such protection is, however, unwarranted in the case of contracts for the purpose of a trade or professional activity. It follows that the special rules of jurisdiction in Articles 17 to 19 of Regulation No 1215/2012 apply, in principle, only where the contract is concluded between the parties for the purpose of a use other than a trade or professional one of the relevant goods or services. The Court held that a person who concludes a contract for a dual purpose, partly for use in his professional activity and partly for private matters, may rely on those provisions only if the link between the contract and the trade or profession of the person concerned is so slight as to be marginal and, therefore, has only a negligible role in the context of the transaction in respect of which the contract was concluded, considered in its entirety.
The ECJ held that Article 17(1) of Regulation No 1215/2012 must be interpreted as meaning that a debtor who has entered into a credit agreement in order to have renovation work carried out in an immovable property which is his domicile with the intention, in particular, of providing tourist accommodation services cannot be regarded as a “consumer” within the meaning of that provision, unless, in the light of the context of the transaction, regarded as a whole, for which the contract has been concluded, that contract has such a tenuous link to that professional activity that it appears clear that the contract is essentially for private purposes, which is a matter for the referring court to ascertain.
(Ad. iv) The ECJ’s standpoint is that the exclusive jurisdiction of the courts of the Contracting State in which the property is situated does not encompass all actions concerning rights in rem in immovable property, but only those which both come within the scope of that regulation and are actions which seek to determine the extent, content, ownership or possession of immovable property or the existence of other rights in rem therein and to provide the holders of those rights with protection for the powers which attach to their interest. The difference between a right in rem and a right in personam lies in the fact that the former, existing in corporeal property, has effect erga omnes, whereas the latter can be claimed only against the debtor
The ECJ further argues that with regard to the claims seeking a declaration of the invalidity of the agreement at issue and of the notarised deed related to the creation of a mortgage, it is clear that they are based on a right in personam which can be claimed only against the defendant. Therefore, those claims do not fall within the scope of the exclusive jurisdiction rule contained in Article 24, point 1, of Regulation No 1215/2012.
Different regime applies with regard to the request for removal from the land register of the registration of a mortgage, where it must be noted that the mortgage, once duly constituted in accordance with the procedural and substantive rules laid down by the relevant national legislation, is a right in rem which has effects erga omnes. Such an application, seeking the enforcement of powers arising from a right in rem, falls under the exclusive jurisdiction of the courts of the Member State in which the property is situated, pursuant to the first subparagraph of point 1 of Article 24 of Regulation No 1215/2012. In the light of that exclusive jurisdiction of the court of the Member State in which the immovable property is situated to the request for removal from the land register for the registration of mortgages, that court also has a non-exclusive jurisdiction based on related actions, pursuant to Article 8(4) of Regulation No 1215/2012, to hear claims seeking annulment of the credit agreement and the notarised deed related to the creation of that mortgage, to the extent that these claims are brought against the same defendant and are capable, as is apparent from the material in the file available to the court, of being joined.
Hrvoje Vidan is partner in Vidan Law Office, Zagreb, Croatia. For further information on this topic, please contact Hrvoje Vidan, firstname.lastname@example.org, tel. + 3851 4854 070.