On 29 July 2017 the Act on Nullity of Loans with an International Element Concluded in the Republic of Croatia (the Act on Nullity) entered into force (Official Gazette 72/2017). The act applies to loan agreements with international elements that are concluded in Croatia between debtors and unauthorised creditors:
- whose registered office is situated outside Croatia as at the date of the agreement; and
- which offer or provide loan-related services in Croatia without the required approval of the Croatian National Bank.
The Act on Nullity prescribes that such loan agreements and legal transactions based thereon are null and void from the time of their conclusion (ie, with retroactive effect). However, if the loan agreement has been performed in full, the nullity cannot be claimed (Article 3(2) of the Act on Nullity).
The Act on Nullity aims to minimise the consequences for citizens who entered into such loan agreements between 2000 and 2010 (ie, before Croatia joined the European Union), a period when certain foreign credit unions (which were not licensed in Croatia) continually granted loans to Croatian borrowers. As a result, some consumer organisations pushed to have such loans annulled in order to stop the ongoing enforcement procedures over Croatian borrowers' assets.
However, since its adoption, the Act on Nullity has caused controversy and been publicly criticised. Some Croatian scholars and judges have expressed their concern about (for example) the act's constitutionality and contravention of EU law. While most judicial decisions made after the act's enactment have declared loan agreements which fall within the act's scope null and void, some Croatia courts have interpreted the act differently due to its ambiguity.
On 6 November 2017 the Municipal Court of Rijeka (Permanent Division in Rab) sought further clarity in this regard and referred a request for a preliminary ruling to the European Court of Justice (ECJ) concerning the Act on Nullity's compatibility with EU law.
On 23 April 2015 Ms Milivojevic brought a claim before the Municipal Court of Rijeka (Permanent Division in Rab) against foreign credit union Raiffeisenbank St Stefan-Jagerberg-Wolfsberg eGen. Milivojevic sought:
- the declaration of nullity of a loan agreement concluded on 5 January 2007;
- the declaration of nullity of a notarised act relating to the creation of a mortgage as a guarantee for the debt arising from the respective loan agreement; and
- the removal of that security from the land register.
The referring court considered that the respective loan agreement could be null and void if it could be established that it had been concluded in Croatia. However, it did not decide on the matter and instead referred four questions to the ECJ for a preliminary ruling. The ECJ consequently adopted Decision C-630/17 of 14 February 2019.
Out of the four questions referred to the ECJ, three were relevant for the interpretation of the recast EU Brussels Regulation (1215/2012), while the fourth related to the Act on Nullity and questioned whether the act precludes Articles 56 and 63 of the Treaty on the Functioning of the European Union (TFEU).
According to Article 56 of the TFEU, restrictions on the freedom to provide services within the European Union are prohibited in respect of EU member state nationals who are established in a member state other than that of the person for whom the services are intended.
According to Article 63 of the TFEU, all restrictions on capital movement between EU member states, as well as between member states and third countries, are prohibited.
Notably, the Croatian government argued that the ECJ had no jurisdiction to consider the respective matter because Milivojevic's loan agreement had been concluded before Croatia's accession to the European Union.
However, the ECJ noted that although the respective agreement had been concluded before Croatia's accession to the European Union, the referred question actually related to the interpretation of EU law. Further, the answer to this question might cast doubt on the compatibility of Croatia's post-accession legislation with EU law, which would also have legal effects on the respective agreement after accession.
The ECJ further noted that the EU founding treaties have been binding on Croatia since its accession and therefore apply to the future effects of the situation before accession. The ECJ was thus competent to decide on the matter (Case C-630/17, Paragraphs 39 to 43).
In relation to the first referred question and the applicability of Articles 56 and 63 of the TFEU, the ECJ held that where a national measure relates to both the freedom to provide services and the free movement of capital, it is necessary to consider to what extent the exercise of those fundamental freedoms is affected and whether one of them prevails over the other.
The ECJ will, in principle, examine a measure in dispute in relation to only one of those two freedoms if the circumstances of the case suggest that one of them is entirely secondary in relation to the other and may be considered together therewith.
In the case at hand, the ECJ considered that the Act on Nullity affects:
- the access to financial services on the Croatian market of economic operators established in other EU member states which do not satisfy the conditions required by that legislation; and
- the freedom to provide services, as the restriction on the free movement of capital is only a consequence of the restriction on the freedom to provide services.
Therefore, the ECJ concluded that the referred question should be considered only in terms of restricting the freedom to provide services (ie, in light of Article 56 of the TFEU).
According to ECJ case law, the free provision of services requires eliminating:
- any discrimination against a service provider established in another EU member state on the grounds of their nationality; and
- any restriction which prohibits or makes difficult or less attractive the activities of a service provider that legally provides the same services in another EU member state.(1)
The ECJ noted that in Croatian legal order, the nullity of loan agreements concluded with an unauthorised creditor is also provided by the Act on Consumer Credit (Official Gazette 75/2009, 112/2012, 143/2013, 147/2013, 9/2015, 78/2015, 102/2015 and 52/2016). Besides the fact that it applies only to consumers, the main difference between the Act on Nullity and the Act on Consumer Credit is that the latter contains no provisions on retroactivity. Therefore, the nullity of loan agreements concluded between the date of Croatia's accession to the European Union and the entry into force of the Act on Consumer Credit amendment of 30 September 2015, which introduced the nullity of such agreements, can be made only based on the Act on Nullity. Further, the Act on Nullity applies only to creditors with a registered office outside Croatia, meaning that until 30 September 2015, direct discrimination had been conducted against these creditors (Paragraphs 59 to 63 of Case C-630/17).
The ECJ did not consider relevant the government's reference to the concept of public order as this allegation had not been substantiated by the relevant evidence.(2) As such, the ECJ established that retroactive, general and automatic rules cannot provide the described nullity and that the Act on Nullity contravened Article 56 of the TFEU because foreign creditors entering the Croatian financial services market must obtain approval from the Croatian National Bank, making access to that market less attractive (Paragraphs 66-75 of Case C-630/17).
The ECJ concluded that Article 56 of the TFEU must be interpreted as precluding the Act on Nullity, as precluding legislation of an EU member state which form the basis of credit agreements and legal acts based on those agreements – which are concluded in that member state between debtors and creditors established in another member state without operational authorisation from the competent authorities of the first member state are invalid from the date on which they were concluded, even if they were concluded before the entry into force of the precluding legislation.
The ECJ has no competence to decide specific disputes before the national courts of EU member states; rather, it is competent to answer merely questions on the interpretation of the acquis communautaire which are referred to it for preliminary ruling. Therefore, it remains to be seen how the referring court will decide Milivojevic's case.
Following Case C-630/17, Croatian national court judgments on the nullity of loan agreements which fall within the scope of the Act on Nullity have started to reflect the ECJ's decision.
After Case C-630/17, a number of judgments continued to declare loan agreements which fell within the scope of the Act on Nullity null and void. For example, in an almost identical case to that of Milivojevic – in which Raiffeisenbank St. Stefan-Jagerberg-Wolfsberg eGen was once again the defendant – the Municipal Court in Kutina:
- declared a loan agreement between the parties null and void, effectively based on the Act on Nullity; and
- completely disregarded ECJ Decision C-630/17 for not being an integral part of the Croatian legal system.(3)
The defendant filed an appeal on 14 March 2019 and it remains to be seen what the second-instance court will decide.
Pursuant to ECJ case law, ECJ decisions have erga omnes effect (ie, towards all parties) and are binding for all EU member states' national courts. Any member state decision which does not follow ECJ interpretations could lead to that member state being held responsible for breaching EU law. For that reason, it is reasonable to expect that future Croatian national court decisions will not contravene the ECJ's decision in Case C-630/17.
In recent months, the Croatian national courts have recognised the binding effect of ECJ decisions. In April and May 2019, numerous Croatian national court decisions declined lawsuits on the nullity of loan agreements which fell within the scope of the Act on Nullity where the courts based their reasoning on Case C-630/17.(4)
Two weeks before the ECJ's decision in Case C-630/17, the Constitutional Court rejected a proposal to review the constitutionality of Articles 3(2) and 7 of the Act on Nullity. The proposal was rejected because the proponent did not state constitutionally relevant reasons why the procedure for reviewing constitutional compatibility should be initiated. Notably, this happened even though pursuant to Article 38(2) of the Constitutional Act on the Constitutional Court of the Republic of Croatia (Official Gazette 99/1999 and 29/2002) (the Constitutional Act), the Constitutional Court can also initiate proceedings to review the constitutionality of an act by official duty.
Under ECJ case law, the principle of primacy of EU law means that in cases where EU law applies, the national courts must exempt from application the provisions of national law which conflict with EU law and apply EU law directly. However, national courts need not exempt such provisions in cases where EU law does not apply (ie, where the parties have a relevant connection with non-EU countries).
Therefore, given the fact that the Croatian national courts can still apply the Act on Nullity in cases regarding the nullity of loan agreements granted by unauthorised creditors whose registered offices are situated outside EU member states – and taking into consideration the controversy and obvious unconstitutionality of the Act on Nullity – the Constitutional Court should use its power under Article 38(2) of the Constitutional Act to initiate a procedure to review the Act on Nullity's constitutionality.
(2) In terms of Article 52 in conjunction with Article 62 of the TFEU, according to which the provisions on the freedom of establishment and the provision of services and measures taken to achieve them do not prejudice the applicability of provisions set out by law, regulation or administrative action providing for special treatment for foreign nationals on grounds of public policy, public security or public health.
(4) See Municipal Court of Cakovec Judgment P-244/18 of 17 April 2019; Municipal Court of Novi Zagreb (Permanent Division in Zapresic) Judgment P-4526/2015 of 6 May 2019; and Municipal Court of Zagreb Judgment P-3031/18-16 of 28 May 2019.
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