On 2 April 2019, the Serbian Supreme Court of Cassation (“Supreme Court”) took a stance that would surely open a number of issues in the coming period regarding a topic that has long provoked quite a bit of controversy in the professional and wider public – loan agreements with the currency clause denominated in Swiss francs. This position came after years of court disputes where the bank’s clients have tried to get the courts to decrease their loan debts, whereas the State refused to intervene.
The court practice has varied significantly over the years. The Supreme Court now tried to present a unified front, that appears to favor the bank’s clients more. Almost immediately after that, the State has passed the Law on the Conversion of Home Loans Indexed in Swiss Francs (lex specialis).
In its position, the Supreme Court decided the following:
- The currency clause can be agreed in order to preserve the equality of mutual obligations, i.e. to preserve the market value of the RSD amounts of disbursed and repaid funds, by indexing the exchange rate in EUR;
- The provision of the loan agreements on the indexation of RSD debt using the CHF exchange rate is null and void, unless substantiated by reliable written evidence that the bank has obtained disbursed RSD funds through its own debt in CHF currency and that it has informed its clients in writing of all risks and financial consequences that may occur by applying such a clause prior to signing the agreement;
- Loan agreements remain valid even after the CHF currency clause is determined null and void. Due to the invalidity of the currency clause, the agreement shall be performed by the conversion of the amount of the loan in Swiss francs into a EUR exchange rate on the day of the conclusion of the loan agreement;
- In civil proceedings regarding the validity of the currency clause stipulated in the loan agreement, upon the plaintiff’s request the court shall render an interim measure on banning the bank from collecting the collateral and the debtor from performing its contractual obligation;
- In case enforcement is initiated for collecting the collaterals from the loan agreements, the court or the public bailiff shall postpone the enforcement upon request by the enforcement debtor, without the need for the debtor to place any guarantee.
By taking this stance, the Supreme Court has de facto introduced a new logic for declaring a contract provision null and void. The concept of the nullity of contracts in Serbian law relies on the interpretation of the law rather than fact, and it is a surprise that the Supreme Court now finds that any piece of written evidence can make a contract valid, whereas in lack of certain evidence the contract becomes null and void. The Supreme Court introduces double standards in handling loan agreements – if the bank does not prove that it obtained funds by borrowing them in Swiss francs, and if the bank did not inform the client in writing of all risks associated with Swiss franc loans (or does not have written evidence concerning this), the loan agreement is null and void. Otherwise the loan agreement would be valid.
This is very controversial, given that the validity of a contract should primarily depend on the interpretation of the contractual provisions by the court and the assessment whether such a provision is in accordance with the mandatory rules of Serbian law. Existence of certain evidence and different factual backgrounds cannot make one contract valid and the other null and void (except in rare situations, but nevertheless the situations in which this is applicable cannot be generalized, but assessed on a case-to-case basis).
As a consequence of the invalidity of the currency clause, according to the position of the Supreme Court, a loan agreement shall be performed by the conversion of the amount of the loan in Swiss francs into the EUR exchange rate valid at the day of conclusion of the agreement. We are yet to see the financial impact of this stance on the banks, but we can immediately notice one thing: the stance of the Supreme court gives the authority to the courts to directly interfere with the legal relations between the parties and adapt the loan agreements.
However, the Supreme court has not specified what is the legislative basis for such a power for the court, and we can only presume the Supreme Court may have had in mind the authorities of the court to alter the contract under rebus sic stantibus institute. This vagueness may create further confusion and legal uncertainty within the lower courts. They will be the ones with the tough task of justifying the positions of the Supreme Court by finding the correct and suitable legal institutes, that might not even exist for some of these positions.
What provokes the most controversy is paragraphs 4 and 5 of the legal position of the Supreme court. These paragraphs represent an unprecedented instruction by the Supreme Court to the lower level courts to automatically issue interim measures on banning banks from enforcing collaterals if there is an ongoing litigation for determining the validity of the Swiss franc currency clause (and even more surprising on banning debtors from performing their obligations?).
Instead of the courts assessing, on a case-by-case basis, whether the conditions for granting interim measures provided in the Law on Enforcement and Security have been met, the court should now apply a presumption that the debtor filing a certain claim against the bank has indeed shown probability of its claim and risk that without such an interim measure satisfaction of that claim will be prevented or hindered (or that such measure is necessary to prevent irreparable harm), regardless of the substantiation of the claim and evidence presented. In other words, without assessing whether the conditions for an interim measure have been met in each particular case, it is sufficient for a loan debtor to file a certain type of claim and request an interim measure‚ and the court will automatically grant it, irrespective of the particularities of a given case.
Finally, the instruction of the Supreme Court to the court or public bailiffs to postpone enforcement significantly deviates from the Law on Enforcement and Security providing that the debtor can only request postponement once, requesting the debtor to prove justifiable cause for the postponement with a public document, or other legally certified document, and conditioning the postponement with depositing a guarantee by the debtor (if the creditor requests so). The new stance of the Supreme Court does not require evidence of a justifiable cause for postponement – the debtor should simply raise the postponement request which shall be granted without the debtor having to deposit any kind of security or guarantee for the potential damage the creditor might suffer. This begs two questions: has the Supreme Court undermined urgency as the basic principle of enforcement and does this solution favour debtors in enforcement proceedings, leaving the creditors without the possibility of being equally protected?
It also remains to be seen how the recently adopted lex specialis fits into all of this.
The new law imposes an obligation to the banks to offer their clients the conversion of outstanding amounts under Swiss franc loan agreements into EUR according to the current exchange rate and to reduce these converted amounts for 38%, and apply to the converted amounts an interest rate the bank offered for loans denominated in EUR on 31 March 2019. Upon the banks’ request the State should reimburse them for 15% of the converted amount.
According to the law, all court cases dealing with currency clauses will be suspended on the day this law enters into force. The clients are free to choose whether they will accept such a conversion – the ones who accept the offer of the banks will conclude agreements with the banks on conversion; for those who opt not to accept the offer, court proceedings will be continued.
The correlation between this law and the position of the Supreme Court is, however, still not entirely clear. It is clear that the law deals only with the part of the loans not yet repaid. It is unclear what happens with the loans already repaid (or with repaid portions of the Swiss franc loans) and with the court proceedings with a subject matter referring to the nullity of the currency clause and the reimbursement of repaid amounts if the clients opt to accept the conversion. Do they remain in dispute (and therefore the position of the Supreme Court applies) or do the clients waive the entirety of their claims by accepting the agreement?
The law is, in general, silent on what happens with the suspended claims after the client accepts the conversion and signs the agreement with the bank. In any event, practice will show in the coming period whether the lower-level courts will accept the Supreme Court’s stance, and ultimately what will be the volume of the financial repercussions for the banks.
The information in this document does not constitute legal advice on any particular matter and is provided for general informational purposes only.