Category: Serbia

On 26 October 2018 the Law on the Amendments and Supplements to the Air Transport Law (“Official Gazette of the Republic of Serbia”, no. 83/2018) (hereinafter: the “Law”) was adopted and entered into force on 6 November 2018.

The Law enables further harmonization with international standards and recommended practices of the International Civil Aviation Organization (ICAO), as well as the European regulations in this field. The main novelties introduced by the Law are related to the provisions concerning planning and construction of the airports, environmental protection and in particular, the transport of dangerous goods, which constitutes a completely new chapter by which domestic legislation implements the standards of the International Civil Aviation Organization (ICAO), that will be elaborated in the text below. 

In addition to the aforementioned, we would like to highlight the novelties regarding the designation of a route in the public interest as well as performing of the international public air transport with the Republic of Serbia.

When it comes to the transportation on a public interest route, the Law extends the authority of the Government to declare, in form of a decision, the air transport on a route as public interest. These changes relate to the situations where the need for performing regular air transport is determined by a specific bilateral or multilateral agreement. In addition to this amendment, the six-month deadline by the expiry of which the ministry responsible for traffic affairs could initiate a public procurement procedure for determining the air carrier was deleted. The Law now prescribes that the competent ministry can do this in case no air carrier starts or does not show that it can start scheduled air services in “short term”.

In the part relating to the performance of the international public air transport with the Republic of Serbia, now it is the Law which prescribes the conditions that an air carrier must fulfill in order to obtain the approval for conducting international public air transport with the Republic of Serbia.

These conditions include, inter alia, obtaining of prescribed authorizations for conducting requested public air transport, the fulfillment of international standards in the field of safety and security in aviation by the state whose competent authority has issued the aforementioned authorization and the state of aircraft registration, possession of the appropriate liability insurance for damages of the foreign air carrier etc.

In addition to the above, the Law also introduces an exception to obtaining the approval of the Civil Aviation Directorate of the Republic of Serbia (hereinafter: the “Directorate”) on the flight plan submitted by the foreign air carrier carrying out international public air transport with the Republic of Serbia to the air navigation service provider. Namely, the Law excludes the obligation to obtain the approval of the Directorate on the flight plan, when ratified international agreement stipulates that the approval is not necessary.

One of the major novelties of the Law represents the introduction of completely new chapter that regulates in detail the transport of dangerous goods by air. The Law here governs, inter alia, the conditions under which a foreign air carrier can transport dangerous goods to the territory and from the territory of the Republic of Serbia, which conditions are prescribed by the Directorate, in respect of which objects and materials the air transport is prohibited, as well as the obligations of the shipper of dangerous goods before transport and the obligations of the aircraft operator. Foreign air carrier who intends to transport dangerous goods to the territory of the Republic of Serbia or from the territory of the Republic of Serbia needs to obtain the approval issued by the Directorate at the latest 30 days prior to the planned transport.

By Anja Sakan, Senior Associate JPM Jankovic Popovic Mitic

The Serbian Parliament adopted the Law on Financial Collaterals on 8 June 2018, which will become effective as of 1 January 2019. To implement the solutions from the Law on Financial Collaterals, the Serbian Parliament also adopted amendments to the Bankruptcy Law, which will enter into force on 1 January 2019.

The Law on Financial Collaterals introduces entirely new institutes and procedures in the Serbian legal system as opposed to solutions contained in the Law on Obligations, Law on Enforcement and Security, Law on Registered Pledge, etc. The authorities wanted systematically to regulate provision and enforcement of financial collaterals, as well as to enhance mainly the repo and financial derivatives market, with or without foreign elements. The Law on Financial Collaterals is in line with the Directive 2002/47/EC of the European Parliament and of the Council on financial collateral arrangements. The newly adopted law will be applicable to qualified investors only (see further clarification below). 

Some of the novelties introduced by the Law on Financial Collaterals are as follows:

• The agreements on financial collaterals by which a pledge is created or ownership over the collateral is transferred for the purpose of securing receivables of investors at the financial market. Accordingly, the law creates two modalities for the provision of the financial collateral. It is either (i) establishment of the pledge, or (ii) transfer of the ownership over cash, financial instruments and credit claim;
• The qualified investors are, inter alia, the Republic of Serbia, the European Union, EU member states, third countries, the European Central Bank, the International Monetary Fund, the European Investment Bank, the National Bank of Serbia, banks, insurance companies, broker-dealer firms, company for management of investment fund, investment fund, other financial institutions, and legal persons representing these entities. The National Bank of Serbia, as the proposer of the law to the Parliament, suggested that general legal and natural persons could not be a party to the agreement on financial collateral pursuant to the Law on Financial Collaterals due to underdeveloped domestic financial market and weaker position of those persons;
• The financial collaterals are deemed (i) cash, (ii) financial instruments, and (iii) credit claims;
• The extra-judicial enforcement. The Law on Financial Collaterals introduces the extra-judicial enforcement without prior written notice to the provider of collateral, without consent or decision of the court, public authority or any other person, without public auction, and without any deadline to pass between the event of default and actual activation of the collateral, unless the parties agreed differently in line with the Law on Financial Collaterals. The parties are free to define the event of default. Further, the parties are free to choose modality of enforcement of the pledged collaterals. The pledged cash would be set-off against the financial obligation, whereas the financial instrument and credit claim could be sold or taken into ownership of the receiver;
• The application of close-out netting principle to the financial collaterals agreement. The parties may agree that upon event of default, automatically or upon request of a party the close-out netting is applied – (i) mutual obligations under one or more agreements on financial collaterals are deemed due or terminated and replaced with new monetary obligations, and/or (ii) mutual obligations under one or more agreements on financial collaterals are netted, such that the party which owes the higher amount should pay the difference;
• Opening a bankruptcy, liquidation or reorganization shall not affect the provided financial collaterals if they were provided before opening of these proceedings. If the financial collaterals were provided, acquired, or altered on the date of opening of any of these proceedings, they will remain valid if the receiver shows that it was not aware and should have not been aware of opening of these proceedings.

The Law on Financial Collaterals and related amendments to the Bankruptcy Law are expected to bring more usage of the financial collaterals at the financial market, to reduce the market risk and increase the market liquidity. Still, it is yet to be seen how the market would react and whether the legislator would further support development of the domestic financial market by appropriate legislative measures.

By Nikola Poznanovic, Partner JPM Jankovic Popovic Mitic

The new element introduced by this Bill relates to the establishment of a Games of Chance Administration, and defining the tasks and competences of this Administration; no changes or amendments of the present Law with regard to material regulations are envisaged.

Historically speaking, the establishment of this Administration is not a novel concept, given that such an Administration has previously existed, from 2004 to October 2012, when it was discontinued, and its competences transferred to a sector attached to the Tax Administration. This Bill once again establishes the Administration as a separate body within the Ministry.

The Administration will take on all matters currently within the competence of the Tax Administration pertaining to games of chance, objects, employees, information system, archive, and will also monitor compliance with the law and perform duties relating to prevention of money laundering and financing of terrorism. The Director of the Administration will be nominated by the Minister of Finance and appointed by the Government.

The Bill regulates office and on-site inspections carried out by the Administration. Moreover, the Administration’s inspector will be authorized to render an immediate decision on temporary closure of facilities and seizure of equipment and objects used in the organizing of games of chance if he/she finds that games of chance are being organized without authorization or in contravention of the law.

Preventing the inspector from carrying out an on-site inspection or from examining premises, business books, reports and records, software and other data of relevance for the lawfulness of business operations constitutes an offence punishable by a fine ranging from RSD 100,000 to RSD 2.000.000.

As specified in the Bill, the law is scheduled to be applied as from March 1, 2019.

By Jelena Stankovic Lukic, PartnerJPM Jankovic Popovic Mitic

It is not uncommon for post-communist societies to wrestle with the idea of competition enforcement. Executives of a more old-school bent are often confounded by having something which once was common market practice, sometimes even mandated by the state, now scrutinized and considered a serious infringement of law. This is why competition advocacy is a crucial tool for relatively inexperienced competition authorities – it would hardly be fair to beat upon market players legitimately unaware of changes to the modus operandi.

But advocacy can only get you so far. For less scrupulous actors, or when the market has had sufficient opportunity to become acquainted with the legal framework, strong enforcement is necessary. It is small wonder that, when considering the setup of an enforcement system, policy-makers usually focus on the amount of fines. Having a high-profile company under investigation and facing multimillion euro penalties does tend to grab headlines.

However, credibility represents an important issue that tends to be neglected in discussions about effective deterrence. There needs to be a credible threat of consequences for those who would be willing to commit an infringement. The more practice the authority has, and the more serious the actual risk of punishment is, the more common antitrust awareness becomes, making infringements taboo. This phenomenon is quite evident among some jurisdictions in the Western Balkans. In our experience, the business community struggled to take competition law seriously when facing authorities hesitant to take on difficult cases or imposing predominantly cautionary fines. In contrast, authorities which initiated high-profile investigations against major market players and imposed significant fines contributed much more effectively to an overall compliant culture. They may have made mistakes along the way and suffered failure in some of these cases, but the end result tended to be greater awareness of the legal framework and a significant reduction in the most serious infringements.

Therefore, it is not enough to have competition fines on the books – there needs to be a reasonable chance that an infringer would actually suffer them in case of a breach. An authority reluctant to use the tools at its disposal tends to erode respect for the legal framework in place. “Sure, the rules are there,” a crafty manager might think, “but my bonus depends on this arrangement, we will never get caught – and even if we are caught, they’re going to let us off with a warning.” 

Another important aspect involves efforts by the authority: a constantly developing practice as well as presence and visibility on the market, are critical. The authorities have a wide array of tools, such as leniency or dawn raids, to establish credible deterrence and make the companies aware that non-compliance carries a significant risk of sanction. Credibility also implies efficiency: if proceedings last a good many years and can be manipulated, short-term thinking kicks in and people stop caring about what will, most likely, turn out to be the next CEO’s problem.

Another question concerns the predictability and equality of outcomes. Competition rules are often broad, allowing enforcers significant discretion and requiring undertakings to closely follow the evolving practice. The authorities need to commit to a consistent application of the rules, so that companies are able to adapt their business accordingly. This is also a safeguard for the equal treatment of parties to the proceedings and directly depends on the overall state of the rule of law in a given jurisdiction. Discriminatory or selective enforcement can be devastating for an authority’s credibility. If it is possible to bend the rules or decide differently without clear reasoning or explanation, this incentivizes companies to focus not on compliance, but on regulatory capture and establishing a relationship with the authority when a problem arises. This is also why competition enforcers need to be aware of the wider legal framework, instead of focusing on their relatively narrow scope of authority: often enough, would-be infringers are simply trying to adapt to governmental policies drafted with scant regard for market competition. Furthermore, efficiency should never come at the expense of due process, as integrity demands procedural fairness. 

Stakeholders would do well to bear in mind the importance of credibility in institutional design. Without it, enforcement can be twisted into harming competition, instead of fostering it. Great power must be accompanied by great responsibility. 

By Bojan Vuckovic, Partner, and Veljko Smiljanic, Senior Associate, Independent Attorneys at Law in coop. with Karanovic & Partners

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.

The Serbian Commission for Protection of Competition (the “Commission”) is taking steps to encourage the birth rate in Serbia, one of the country’s primary political objectives. Its contribution to achieve that objective is current antitrust investigation on the baby care product market, which could ultimately lead to a price decrease and reduction of costs of raising a child in Serbia. Almost 200 undertakings are under investigation for applying resale price maintenance (“RPM”), making this investigation the biggest in the history of Serbian antitrust enforcement. This case was initiated ex-officio in April 2018, when the Commission raided Keprom d.o.o. and Yuglob d.o.o, two importers and distributors, and several retailers of baby care products. Following the dawn raid, the Commission opened four more investigations against the same distributors and their retailers (four cases in July) and, finally, on 22 September 2018, the Commission proudly announced that it had initiated investigations against 172 undertakings (the “Baby Products Investigation”).

The most recent antitrust infringement decision also refers to the illegal practice of RPM. It relates to the automotive sector and the practice of Auto Čačak d.o.o, the importer and distributor of Škoda in Serbia, and its authorised dealers and repairers to respect the minimum prices when participating in public procurement for Škoda brand spare parts and maintenance service (the “Škoda Decision”). Finally, one of the Commission’s most important decisions is last year’s decision against N sport and 14 sports shoes retailers, sanctioning them for applying vertical price fixing (the “N sport Decision”).

1. What is RPM? 

Under the Law on Protection of Competition and the Regulation on the Exemption of Vertical Restraints, it is illegal to restrict the buyer’s ability to determine its sale price. RPM exists when the buyer is obliged to respect a fixed/minimum resale price or a fixed/minimum price level.

The RPM clauses are “blacklisted” and cannot benefit from block exemption and de minimis rules, while it is less likely that it could benefit from individual exemption as well. So no matter how big or small the undertaking, it can always be sanctioned for applying RPM.

1.1 Direct and indirect RPM

There are two types of RPM: direct and indirect.

The most obvious example of direct RPM is a contractual provision by which the buyers are obliged to respect the resale prices determined by the supplier. The indirect way to impose RPM is when the supplier fixes the distribution margin or maximum discount that the buyer can offer its buyers.

The Commission dealt with both types of RPM, but in almost all cases, the predominant evidence consisted of explicit contractual provisions that prevented retailers from applying prices below those determined by the supplier. This is clear-cut evidence of RPM, so it looks like the Commission should be able to easily prove the existence of wrongdoing in Serbia.

Importantly, in the cited decisions, the Commission stated that if the agreement contains an RPM clause, it is irrelevant whether the parties actually applied it. RPM is illegal by object and the Commission will not examine its actual effects.

1.2 Maximum and recommended prices

In principle, maximum and recommended prices are permitted, but are legal only if they do not amount to a fixed or minimum sale price as a result of incentives or pressure from the supplier. This means that these clauses are not blacklisted, but the undertakings should be careful when drafting the contracts and applying these clauses, since they can also be a subject of an antitrust investigation.

2. Why RPM is frequently scrutinised by the Commission

The fight against RPM is at the top of the Commission’s enforcement priorities. It seems that RPM is ubiquitous on the Serbian market and proof is easy to obtain, making it an easy catch for the Commission. These cases also help the Commission build its enforcement record and promote competition culture in Serbia. The cited cases attracted huge public attention, especially the N sport Decision and the Baby Products Investigation. With the dearth of cartel investigations, they helped the Commission create a positive image in the eyes of consumers, and we should expect more RPM cases in the future.

Another reason why the practice of RPM has expanded in Serbia is the lack of awareness of competition law rules. Particularly small retailers (apparently 90 % of the undertakings under investigation) are not sufficiently informed and knowledgeable to identify and assess restrictive clauses. They also do not have the economic strength to influence the content of the agreements offered by big suppliers.

3. Sanctions for RPM in Serbia – retailers also have to pay fines

The Commission took a very lenient approach to fines. In the N sport Decision, the Commission imposed a fine of 0.62 % of the total annual turnover of N sport, the supplier which instigated the RPM. In the Škoda Decision, the Commission penalised the instigator of the RPM in the car distribution sector with a fine of only 0.22 % of the annual turnover. These fines are surprisingly low, considering that under the Serbian guidelines on setting fines in antitrust cases, RPM is qualified as the most severe restriction of competition.

Unlike in most EU jurisdictions, in Serbian RPM cases small retailers that are economically dependent on their relationships with suppliers are also fined by the Commission. In the Commission’s interpretation of the law, if it establishes that the agreement is restrictive, then each party to that agreement should have to be sanctioned for breaching the Competition Act.

We will see if the Baby Products Investigation changes this strict approach and retailers escape the fines.

4. Comment

As RPM is the focal point of the Commission’s enforcement, undertakings of all sizes and market power should comply with strict rules and practice stating that RPM is per se illegal. If the Commission finds contracts that contain RPM clauses, it is almost impossible to avoid liability and fines. Therefore, undertakings should carefully draft their agreements, annexes and commercial policies. Recommended or maximum prices are not blacklisted, but they also do not guarantee that the contract is fully compliant.

The fines are now low, but the Commission will likely increase fines for instigators, since the current lenient policy could also be considered an “incentive” for RPM in Serbia.

By Srdjana Petronijević, Partner, Zoran Šoljaga, Attorney at Law Schoenherr