Category: Croatia

The The rules on collective redress were first introduced in Croatia’s legal system by two special acts – the 2003 Consumer Protection Act and the 2009 Act on Prevention of Discrimination. It was only later, in 2011, that the Civil Procedure Act provided the general legal framework for collective redress actions, named “actions for the protection of collective interests and rights.”

The Civil Procedure Act provides a non-exhaustive list of protected interests – including environmental, moral, ethnic, consumer, and anti-discrimination. The threshold for the admissibility of an action is that the defendant’s conduct severely violates or seriously threatens one or more of the protected interests. 

Those entitled to bring collective redress proceedings before the court include associations, bodies, institutions, or other organizations whose activities involve the protection of the collective interests, provided that a special act explicitly provides for such authorization. For example, according to Croatia’s Consumer Protection Act, the Croatian Government is empowered to designate those entities which can bring collective redress proceedings for the protection of consumer interests before the court. 

The main objective of collective redress in Croatia (similar to other European countries) is to determine violations of collective interests (in the form of illegal conduct by the defendants) and prohibit such behavior in the future. This is one of the primary differences between collective redress proceedings and class actions in the USA, where the compensatory character of class actions determines many of its characteristics (such as the opt-out mechanism, lawyers’ contingency fees, and so on). In addition, under Croatian law, and unlike in the USA, the court cannot award punitive damages. Only real damage can be compensated, meaning that the compensation should not serve as a punishment to the person liable for the damage. 

A collective action cannot be used to directly claim damages from the defendant; instead, it serves as an abstract protection of collective interests. A defendant may bring a counter-claim and request that the court determine that there was no violation of collective interests.

If a court finds that there has been a violation of a collective interest, the judgment would not contain an award of damages to a designated group. The judgment serves to determine if certain conduct (e.g., unfair provisions in terms and conditions) violated a collective interest (e.g,. the consumer interest). 

Individual actions for damages caused by such illegal conduct can of course be brought separately (and regardless of the collective redress action). This represents a sort of opt-in mechanism in which the persons whose interests or rights have been declared as violated or threatened in the collective redress proceedings can initiate individual compensation claims if they wish. Those persons do not have to give their consent for filing the collective redress action in advance. 

The legal findings of a judgment in which the claim for collective redress is accepted are binding on the courts considering related individual actions. Consequently, most claimants may wish to initiate individual claims only after a favorable judgment in a collective redress proceeding. This could turn out to be cost-efficient as the court would be focused mostly on determining an appropriate amount of compensation in a subsequent individual action. Court practice recently confirmed that individual actions concern damages as well as restitution claims for unjust enrichment. This was previously an issue as the law mentions only individual actions “for compensation of damage.”

In March 2018, the Croatian Supreme Court clarified another issue: that filing a collective redress action interrupts the limitation period for an individual (restitution) claim. The limitation period starts running again from the date of the final and binding decision in the collective redress proceedings. If the collective redress action is unsuccessful, the limitation period is deemed not to be interrupted. This is not applicable if an individual claim was time-barred before the collective redress action was even filed.

The question of the limitation period was raised in the context of an individual restitution claim that followed from the most famous collective redress action in Croatia, which was filed by the Potrosac (English: Consumer) association against eight Croatian banks. In the Potrosac case, the court determined that the interest rates of the CHF-denominated loans were altered by the banks’ unilateral decisions without previously negotiated parameters and that this practice violated collective interests of the consumers. 

The Potrosac case triggered a rapid development of court practice regarding collective redress in the last five years. It has yet to be seen if collective redress will be a popular tool for protection of interests beyond those of consumers.  

By Sandra Lisac, Partner, and Ivana Kikerec, Attorney-at-Law, Bardek, Lisac, Musec, Skoko in cooperation with CMS 

This Article was originally published in Issue 5.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

At the EU level, long-term discussions on unfair trading practices in the food supply chain have resulted in the Proposal for a Directive that is currently in process. The Republic of Croatia has already adopted a law with a similar subject matter – the Act on Tackling Unfair Trading Practices in the Food Supply Chain (the “Act”) – which entered into force at the end of 2017. The Act concerns business-to-business relations and aims to protect suppliers (including primary producers) in their relations with resellers, buyers, and processors with significant negotiating power. The authority in charge of implementing the Act is the Croatian Competition Agency (the “Agency”), which the legislator considers the most competent to handle these matters due to its experience in abuse of dominance cases in competition law.

Whether someone has significant negotiating power or not is determined on the basis of the aggregate turnover realized by the respective undertaking (turnovers of affiliated companies are included in the calculation) in the Republic of Croatia. For resellers, the aggregate turnover has to exceed HRK 100 million (approximately EUR 13.4 million), while the threshold is set at HRK 50 million (approximately EUR 6.7 million) for buyers and processors. According to the legislative preparatory acts, these thresholds should cover approximately 95% of traders in Croatia. 

The Act aims to prevent and penalize the exploitation of significant negotiation power; i.e., the imposition of unfair trading practices (UTPs). It lists different examples of UTPs, such as contracts and general terms which are not in accordance with the Act; payments which are not clearly indicated on the invoice (including the specification of discounts or rebates); possibility of unilateral termination of contract without justified reason; obligations imposed on suppliers which go beyond the contracted ones; disproportionate contractual penalties; imposing various payment obligations which should not be the burden of suppliers (e.g., listing fees, fees payable for the purpose of stocking of products after delivery, fees payable due to reseller’s decreased sales); etc. 

Undertakings were obligated to ensure compliance with Act’s provisions – i.e., revise their contracts, invoices, and business practices as necessary – by the end of March 2018, as contracts made before the entry of the Act ceased to be valid as of April 1, 2018. Apart from facing the potential nullification of contracts in certain cases (e.g., if the contract is not made in a written form or if it does not contain mandatory provisions prescribed by the Act), undertakings are exposed to high fines for breaches (as high as HRK 3.5 million (approximately EUR 0.4 million) – or even HRK 5 million (approximately EUR 0.7 million) for the most severe breaches).

A few months after the Act became fully applicable (i.e., after April 1, 2018), the Agency conducted market research by requesting that more than 30 undertakings deliver more than 100 contracts made with national and international undertakings in the food supply chain. According to publicly available information, more than 20 proceedings were initiated on the basis of this market research, including several against bigger retail chains. 

It will be important to keep track of further developments and of the decisions of the Agency, which have yet to be adopted, especially because initial interpretations of the Act (provided in the form of “frequently asked questions” (FAQ)) were subject to significant changes (e.g., it was stated first that the assortment rebate approved by the supplier to the reseller always constitutes a UTP, while the subsequent amendments to the FAQ stated that such rebates are permissible under certain conditions). A line will have to be drawn in practice as to what is and what is not a UTP. If the related EU Directive is adopted, the situation might become even more complex, as the provisions and interpretations of the Act will have to comply with the EU Directive, and current practices might need to be further adjusted.  

By Hrvoje Bardek, Partner, and Marija Zrno, Attorney-at-Law, CMS Zagreb

This Article was originally published in Issue 5.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Companies in financial difficulties are regularly faced with challenges in seeking fresh financing – an injection necessary for financial consolidation and to overcome financial difficulties. Such challenges become even greater when a company formally enters pre-bankruptcy or bankruptcy proceedings. In a large number of cases, the companies are in such difficult and irreversible circumstances that potential creditors are usually discouraged from providing new financing, which is sought by the companies unable to provide any indication of success. However, there are situations in which creditors may be willing to provide fresh capital despite the debtor’s difficult situation – most commonly, because they already have an outstanding exposure against the debtor. Existing creditors considering new financing may see an opportunity to exit the existing creditor-debtor relationship less “harmed.” In such cases, the main questions involve the position the creditors can obtain by granting fresh financing and whether the legislative framework regulating pre-bankruptcy proceedings is sufficiently sensitized to their specific position.

In the past year, the Croatian legislator has recognized this issue and taken a step forward in addressing it by amending the Croatian Bankruptcy Act to introduce new borrowing options for financing in pre-bankruptcy proceedings. The amendment, which entered into force on November 2, 2017, provides, among other things, a new concept of financing as one of the significant innovations in the Croatian bankruptcy system. This new concept of financing is well known in some foreign jurisdictions as debtor-in-possession financing (“DIP Financing”), and it is used by insolvent companies faced with financial difficulties. Such financing is tailored to the situation of the debtor and usually gives priority status over old(er) debts of a company.

It seems that this latest amendment to the Bankruptcy Act was inspired by the Act on the Special Administration Proceeding in Companies of Systemic Importance for the Republic of Croatia, enacted in Croatia in April 2017. This regulation, commonly referred to as “Lex Agrokor,” was the first to explicitly introduce the possibility of DIP Financing in Croatian legislation. The intention of Lex Agrokor was to create a special administrative proceeding – an alternative to the existing bankruptcy proceedings – which would address the potential bankruptcies of companies large enough to significantly impact the Croatian economy.

In general, under the new amendment, the Bankruptcy Act allows a company in pre-bankruptcy proceedings to enter into new financing only with the prior written consent of the creditors who hold two thirds of acknowledged claims in those proceedings. The purpose of such new financing is defined as “the continuation of business operations,” without any other details. Such new financing, in case of a later bankruptcy proceeding involving a debtor, is given seniority status in the settlement of claims, with the exception of the first higher-ranking creditors.

However, although inspired by the Lex Agrokor, there are differences in how new financing is treated under the most recent amendment to the Bankruptcy Act, and a different priority ranking exists in the settlement of claims. Unlike in Lex Agrokor’s special administration proceedings, the financing provided in the pre-bankruptcy proceedings has a slightly lower ranking in settlement in later (potential) bankruptcy proceedings. The creditors of the new financing granted in the pre-bankruptcy proceedings will not be considered creditors of the bankruptcy estate, and the creditors of the first higher ranking will hold seniority status over them in the settlement of claims. 

It should be noted that the pre-bankruptcy proceedings were introduced in the Croatian legal framework in 2012 to fast-track a company’s return to solvency through restructuring, as well as by allowing creditors to settle their claims more favorably than in bankruptcy proceedings. The introduction of the new DIP Financing option seems to be the logical continuation of that general purpose. However, we note that this option has still not been implemented in the bankruptcy proceedings.

This legislative amendment provides companies with an additional means of revival in pre-bankruptcy proceedings. A legislative framework has been created which provides parameters for the new financing and its destiny in the bankruptcy proceeding. Practice will show whether the past legislative framework was the core issue and whether the concept of new financing in the pre-bankruptcy proceeding is here to stay.

By Jelena Nushol, Partner, and Matija Grabar, Attorney-at-Law, CMS Zagreb

This Article was originally published in Issue 5.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.