Category: Slovenia

Slovenian national air-carrier Adria Airways is one of many European airlines that filed for bankruptcy in 2019. While passengers with planned trips and prepaid tickets were left to their own ingenuity, the Slovenian Government worried about the effects of Adria Airways’ bankruptcy on Slovenia’s air traffic and important airline connections from Ljubljana Airport to other important cities and regions.

Two possible solutions have been suggested should the airline market fail to replace the lost routes. The more expensive and least likely option involves the founding of a new “national” airline. The second and more likely option involves the imposition of the Public Service Obligations routes (PSOs) under Regulation (EC) No 1008/2008 of the European Parliament and of the Council of the September 24th 2008 on common rules for the operation of air services in the Community (the “Regulation”).

While the Regulation clearly states the general principle of the freedom to provide air services within the EU, Articles 16–18 enable the Member States to impose PSOs connecting an airport in the Community and an airport serving peripheral or development region in its territory or on a thin route to any airport on its territory, if such routes are considered vital to the economic and social development of the region which the airport serves. Although the Regulation does not define “thinness,” it appears, based on the existing PSOs, that routes with more than 100,000 passengers a year will not qualify.

Currently, 179 PSOs have been established in the EU, with only seven routes linking airports located in two different Member States. All the other PSOs are domestic routes, ensuring the connectivity of a remote region to one or more main cities in a Member State.

Since the territory of Slovenia is relatively small, the Slovenian government would only be interested in establishing PSOs that would connect the airport in Ljubljana to airports in other countries. Adria Airways’ routes were particularly adapted to the needs of business people and ensured great connectivity to their key destinations. And while some airlines quickly took over some of Adria Airways’ previous connections to Ljubljana, the newly-established connections are often less useful for business people than Adria Airways’ connections had been. Furthermore, several connections previously flown by Adria Airways have still not been established (especially some important connections to other destinations in CEE). Several other internationally well-connected airports are available in relative proximity of the state border (i.e., a 3-to-5-hour drive from Ljubljana), but since Ljubljana is the heart of the business and governmental activity in Slovenia, which remains a heavily centralized country, the importance of having its central region well connected by air cannot be overlooked.

The Regulation emphasizes the importance of a free market, and as an exception, the PSOs should be subject to strict requirements and limitations. However, where the free market does not ensure an appropriate level of air transportation where needed, the Member States are provided with a certain margin of discretion to judge the vital importance of a route for the economic and social development of the region the airport serves. Nevertheless, according to InterVISTAS’ 2015 Economic Impact of European Airports study, a 10% increase in connectivity stimulates the GDP (per capita) by an additional 0.5% and the GDP growth rate by 1%, and it leads to an overall increase in labor productivity. Better connectivity, therefore, also strengthens the “four freedoms” within the EU (i.e.,  the free movement of goods, capital, services, and labor).

A coherent analysis of the consequences of Adria Airways’ bankruptcy to Slovenia’s economic and social development has not yet been made, so no factual assessment regarding the justification for establishing PSO routes according to the Regulation can be made at this point. Also, although the Regulation only applies to intra-EU airline routes, the Member States still have to follow State aid rules and EU competition law when subsidizing either intra- or extra-EU airline routes, so this aspect would have to be considered as well.

What can be generally concluded is that each Member State has a mechanism to protect its vital air routes (and national interests) by establishing PSOs when the market itself does not deliver an appropriate level of air transport services. However, there would have to be a well-reasoned justification for such a decision that would comply with EU law. A bankruptcy of a national air carrier that provided its services based on the needs of the domestic market, without any other objectives, is therefore not sufficient.

By Petra Plevnik, Partner, and Masa Kramar, Associate, Miro Senica & Attorneys

This Article was originally published in Issue 6.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

“We had an interesting turn of events last week as our Prime Minister stepped down,” says Mia Kalas, Partner at Selih & Partnerji in Slovenia. “Previously, we had an ambitious government which began the tax reform and also had ambitious plans for a healthcare reform, but now this will very much slow down.”

“The government had previously worked on tax reforms, part of which involved introducing certain amendments to existing legislation, but it didn’t lack controversy,” Kalas says. “There was some criticism in respect of easing the personal tax income ladder, and, as expected, much more of the increase of capital-based taxes. Also, the minimal gross salary changed, which is estimated to increase the cost of work by 1.8%.” In addition, she says, “proposed healthcare reform, which is always a major topic in Slovenia, hasn’t progressed for quite some time.”

“Anyway,” she sighs, “the major opposing parties are now trying to form a government and as it looks new elections may well be coming up. We’ll see how that goes.”

“The market is currently booming,” Kalas says, turning to a happier subject, “and the end of last year was incredibly active. The beginning of this one shows no change. M&A is the hottest field, as we have had a few large deals recently, including the sale of Abanka, which was – following the 2018 IPO of NLB bank – the largest state-owned bank in Slovenia. Also, 12 shopping centers have recently been sold in a single deal, and we still see a rising interest in hotels and logistic centers.” She adds that “the recent public procurement in the Slovenian largest infrastructure project for the second railway track from the port inland attracted several bidders from – not surprisingly – China.”

“The economy has recently been stable” Kalas says. “It is worth noting our growth hasn’t been as high as it was the previous couple of years, but it’s still solid – somewhere around 2.5%.” She reports speaking to a few manufacturing clients recently, who reported noticing “a bit of cooling,” but says that “in general, I think that the business climate is positive, and investors are happy.”

“It was interesting to find out that the main driver of economic growth is domestic demand,” Kalas concludes, “while at the same time the Bank of Slovenia recently implemented certain macro-prudential measures which – according to unofficial estimates of the banks – decreased consumer financing by almost 25%, and these two things don’t work well together. NLB bank just filed for a constitutional review of such measures and it will be very interesting also for us lawyers to see the result. I just hope that the market will remain as good as it is now in the future, even though we will have to work hard to make that happen.”

The recent upturn of the Slovenian real estate market has yielded a raft of new logistics projects and residential developments, as well as substantially increasing the scope and number of retail real estate transactions. A significant share of Slovenian retail properties changed hands, mostly as a consequence of the financial or organizational restructuring of the previous holders. This opened the market to both institutional and strategic investors.

Acquisition of a large real estate portfolio is complex, as it usually entails not only the asset transfer, but also significant negotiations with the financing parties and the holders of any existing security over the assets. Sometimes, the creation and/or termination of a trust structure or finance lease over the assets is required, and since Slovenia is a small market, usually at least one of the creditors is based abroad. Such deals typically involve many parties, each coming from diametrically different commercial and legal starting points.

These diverse starting positions require a considered legal approach to ensure the simultaneous fulfilment of each party’s obligations, including securing the transfer of the assets, paying the purchase price, providing fresh security over the assets to the banks financing the acquisition, and releasing any existing security. Such security can only be fully released once the purchase payment has been made, and the existing financing in turn repaid. 

In real estate asset deals, various rules and mechanisms provided by the land registry laws enable the aforementioned approach to work. Typically, buyers and their banks can rely on: (a) a first come – first registered principle, (b) the publication of unresolved filings by way of annotation, and (c) the possibility of pre-securing the rank of transfer. Combined with the escrow services of notaries, such mechanisms also provide comfort to the sellers and their banks that the deal can be structured and completed in a safe-yet-streamlined manner. 

Recently, however, a new challenge has arisen from some foreign financing banks. These banks have, in some cases, required that their primary security – the mortgage – be fully registered with the land registry as a condition precedent to drawing the loan. This deviates from past practice and from the current practice of Slovenian banks, where an annotation to the register evidencing that a filing has taken place is usually adequate. This new requirement results in a Catch-22 situation: if the seller will not transfer the title prior to receiving the purchase price, then the buyer will be unable to mortgage the asset, in which case the financing bank will not release the loan necessary for the buyer to make the purchase. 

Sometimes sellers are themselves willing to mortgage the assets prior to the title transfer. However, sellers are often reluctant to agree to such a structure or, if they do agree, may still demand an indemnity from the buyer or even the bank. In certain situations, this approach may have a negative impact on timing, where, for example, prior pending registrations delay the registration of the mortgage and, consequently, the title. 

Another alternative is to adopt a more traditional approach, placing the purchase price in notary escrow, and relying on annotations of filings to transfer title and the purchase price, while the buyer additionally procures an insurance policy in the form of “gap” coverage, insuring themselves and the financing bank until the completion of mandatory registrations. This solution is costlier and requires additional legal work and negotiation, but the availability of gap insurance products can be decisive in getting the deal through. 

In my personal experience, both of these solutions are effective. However, consideration should be given as to whether either is, in fact, required in any given transaction. This is especially so if the banks’ new requirements arise from mistrust of the counterparties or even of Slovenian courts and officials. While in certain deals this approach may pass a cost-benefit test and could provide some additional comfort, in my view parties most deals would be better served by showing more trust in the Slovenian legal system and its well-established market practice. An experienced and practical lawyer will provide both robust legal advice and the strong foundations for such trust.

By Blaz Ogorevc, Partner, Selih & Partnerji Law Firm

This Article was originally published in Issue 6.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

CEELM: Run us through your background, and how you ended up in your current role with Karanovic & Partners.

Alexander: Born in Belgium, I grew up travelling the world for my father’s work, typically moving from one country to another each three to five years. This gave me, before the age of 18, living and school experience on three continents and in some of the most amazing countries, including France, Germany, Australia, the USA, and Canada. With the desire to reconnect with my European/Belgian roots, I decided to return to Leuven to study law at the university which, alongside AB-Inbev and its Stella Artois, keeps Leuven’s world fame standing untouched. Needless to say, the international outlook and environment of the university contributed to my desire to return to Europe. The itch to move around, however, prevailed and I spent a fabulous Erasmus semester in Reykjavik, Iceland. Intrigued by Iceland and the high North, I returned to Reykjavik immediately for an LL.M. program after obtaining my initial LL.M. in Leuven. 

When the time was ripe to put theory into practice, I ended up in 2005 in Central Europe, joining Czech firm Peterka & Partners, which was in an expansion mode. After a short stay in Bratislava, I moved in 2006 to Kyiv to establish the firm’s Ukrainian office, which I soon afterwards led as Managing Partner until returning to HQ in Prague in 2013 to focus on the firm’s global international relations and strategic clients. In 2017 I left after 12 great years to join Karanovic & Partners. I was at that time well aware of Karanovic & Partners’ very solid reputation and unparalleled track record and awards, and I was delighted to learn that the firm’s ambitions were aligned with my own. Moreover, having worked in Central Europe and CIS previously, working in South Eastern Europe would be a fit addition to my Eastern European adventure. 

CEELM: What exactly is your role at Karanovic & Partners?

Alexander: Whereas I am truly an M&A lawyer by training, I have focused during the last six or seven years primarily on strategy, law firm development, and international relations-building and development. I greatly enjoy combining my legal skills and experience with traveling and relationship-building to further the growth of the firm, generate new clients, and represent the firm at international forums such as the IBA or on a B2B level. This, in a nutshell, is what I do within the already well-developed structure of Karanovic & Partners. Whereas Karanovic & Partners has worked very hard to become an established and highly reputable brand among top tier law firms and the general counsel community in key hubs such as London and Vienna, I aim at extending this worldwide. Concretely, I travel about half of my time, primarily within Europe, North America, the Far East, Australia, and South Africa to meet our key clients and prospective clients, law firms, private equity firms, banks, M&A advisors, and other contacts who would facilitate investments into South Eastern Europe. In addition, I spearhead several initiatives within the firm, such as our Nordic desk and French desk, and play an important role in defining and implanting the future growth strategy of the firm.

CEELM: You certainly have moved around the world in your studies and professional career. Was it always your goal to work abroad?         

Alexander: My upbringing was marked by moving around Europe and the world, so I have never known anything else. Cliché as it may sound, one often hears from people who have often moved from place to place and country to country that this becomes a way of life in itself, and I can fully corroborate that and I genuinely feel a physical restlessness when staying too long in one place. I would not say that working abroad was my goal, per se, but rather a drive to discover new countries and cultures and work in different places, while building an exciting career listening to my wanderlust. 

I always encourage youngsters, both the students I coach and young professionals, to experience living and working abroad. I am a staunch supporter of further extending international exchange programs such as Erasmus and making them accessible to everyone. 

CEELM: How would clients describe your style?   

Alexander: Alexander Poels – the truly international lawyer. Joking aside, there have been clients with whom I have had a certain chemistry and flare from the get-go, and other clients, with whom I have never established a deeper personal bond, apart from intense cooperation, countless hours of negotiations, and numerous glasses of a certain type of liquid that was not allowed in the US during the 1920’s. There have been cases where I developed close bonds with clients that I worked with on simple matters years ago, and other cases where I would slip into oblivion for the clients soon after closing. What is unanimous, though, is that the clients tend to describe me as a lawyer with a great eye for detail and cultural aspects who has excellent business practices and a broad mindset, and who is very diplomatic in his approach – a good candidate for a UN position basically. I like to believe that my clients perceive me as being considerate of their counterparties, even in the heat of negotiations, where I would never lose respect and compassion for the other lawyers or in-house counsel, while being persistent in achieving the client’s desired result at the same time. 

CEELM: There are obviously many differences between the Belgian and Slovenian/Balkan judicial systems and legal markets. What idiosyncrasies or differences stand out the most?    

Alexander: The Belgian legal system has gone through a long and steady evolution similar to most mature Western European legal markets; naturally, current Belgian legislation is greatly influenced by and engrained with EU law. Whereas the Slovenian legal system has also recently embedded EU law, it is clear that, given recent history, the evolution of the Slovenian (and, in general, the Balkan) legal system has happened in jumps rather than the gradual linear process that occurred over the last 250 years in Belgium (or what is today Belgium).

The Balkan legal systems (and certainly the Slovenian legal system) are rather closer to the German legal system, whereas the Belgian legal system is essentially based on the French one. This is reflected in an overly formalistic practice in Slovenia and the Balkan markets, whereas the Belgian practice is clearly less formalistic.

This being said, the concrete regulations in place are not that different. As laws in Slovenia and other Balkan countries are more or less aligned with EU laws, especially in terms of corporate and compliance rules, I do not see many differences, except sometimes as regards the interpretation of certain regulations.

The greatest difference I see is in respect to public law. Although a small country, Belgium is a federal state with three tiers (Federal, Regions and Communities) and seven different parliaments, currently showing signs of a clear transition into confederalism. Compared to the sheer complexity of governance in Belgium, the configuration of even Bosnia and Herzegovina is a children’s game.

CEELM: How about the cultures? What differences strike you as most resonant and significant?

Alexander: What strikes me most after spending close to two years in Slovenia is that Slovenes manage to strive for excellence and achievement beyond what larger Western European nations achieve and to let themselves slide into pitfalls and traps at the same time, which even far less developed nations tend to avoid. Good examples of the former are Slovenia’s excellence in terms of management of nature and green economy, its safety record (it’s the sixth safest country in the world), its excellent living standards and health conditions, its child-friendliness; examples of the latter are a succession of questionable governmental decisions and policies, a latent level of shady politically-motivated undertakings or at least the perception of corruption (the country is ranked only 32nd in the latest Corruption Perception Index), dodgy privatizations, and outright debacles (think of the recent bankruptcy filing of Adria Airways).

This dichotomy is somehow also transposed into Slovenian culture and results in extreme swings: when Slovenia became European basketball champions in 2017, it was perceived as if Slovenia had won the World Cup in football. In general, Slovenes take any achievement (in sports or in other fields) – even if it would not be worth mentioning in any Western nation – as if they had conquered the entire world. Slovenes sometimes are slightly inclined to believe that the whole world is watching and taking notes. Slovenes also seem to genetically lack a sense of humor. We Belgians on the other hand have a patented sense of self-humor and hardly ever take ourselves too seriously (though that might be a consequence of living so close to the Dutch); it is probably the reason why we were insouciantly able to give to the world inventions such as plastic, the saxophone, the contraceptive pill, the world wide web, asphalt, electric trams, and the stock exchange principle, as well as celebrities including Peter Paul Rubens, René Magritte, Audrey Hepburn, Tintin, and the Smurfs (the latter two can most certainly not be beaten by any Slovene!). Oh, and don’t forget that Belgium is the only country in the world producing beer worth naming …

CEELM: What particular value do you think a senior expatriate lawyer in your role adds – both to a firm and to its clients?

Alexander: I believe that my partners in the senior management of the firm would be better suited to answer this question. However, I believe that with my Western European and overseas upbringing and education and prior professional experience in CEE, I am able to bridge a cultural gap that sometimes may exist between Western clients and local Balkan lawyers, to translate the expectations that Western clients might have into a local context, to add a sense of nuance to local issues a Balkan firm faces on a day to day basis, to soften some of the most outspoken and often potentially-perceived-as-harsh characteristics of Balkan legal traditions, and to share patterns and developments that CEE went through ten years ago and that are now occurring in the Balkan region with my colleagues. By putting my Western European background and credibility in the equation when promoting our firm abroad, I believe that many prejudices which are still often connected to the Balkan region can be countered more easily. 

I also believe that the firm benefits by getting access to new and different types of clients by getting the firsthand experience of someone who has seen the transitions in CEE in the past that are currently occurring in the Balkan region, and by tapping into the personal network of global contacts I have established over the last 25 years of studying, researching, and working in different regions and settings.

CEELM: Do you have any plans to move back to Belgium?    

Alexander: Go back to Belgium with its mega-traffic jams (the other day I spent 2.5 hours on a 40 km stretch between a client in Antwerp and a client in Brussels), its constant political squabbling, its full urbanization, and its highest mountain at 694 meters? Thanks, but no thanks, for the time being. Although one can never exclude the possibility of it happening one day, I have spent only a small portion of my life in Belgium and I feel both emotionally and professionally much more attached to several other European and non-European countries. That being said, it is nice being Belgian. 

CEELM: Outside of the Balkans, which CEE country do you enjoy visiting the most, and why?   

Alexander: Just to be clear, as the question relates to countries other than the Balkan countries, I am barred from answering Slovenia or any other Balkan country. I have been fortunate to work in numerous CEE countries and to have travelled in all CEE countries very extensively. I greatly enjoyed spending five years in amazing Prague and have had the chance to get to know many unique places in Prague and the Czech Republic far off the beaten tourist tracks; I loved the vibe in Bratislava, a city which often struggled for its position amidst Prague, Vienna, and Budapest but managed to develop into a unique charming city; I always felt a great excitement when planning to visit or spend a prolonged time in Poland or Romania and have always been positively enchanted by Hungary and Russia, as well as the mysteriousness of Belarus. 

However, my heart was truly captured by Ukraine, a country of unparalleled natural beauty and potential, warm and hardworking people, exquisite cuisine, and a sense of relativity and down-to-earthiness that I have not found elsewhere in CEE. I worked in Ukraine during probably its most thriving years since its independence and continued to visit the country during its recent periods of difficulties and turmoil; the people I met and talked to have never failed to convey a very positive and solid impression and a genuine eagerness to build a proud and solid nation. I have traveled extensively throughout Ukraine, visited both its main hotspots and many small towns that hardly ever see foreigners strolling (or driving) by, seen true hardship and struggle, as well as the most exhilarating joy and happiness by people who have materially hardly anything. I make a point in returning to Ukraine at least twice each year and even though sometimes I spend merely 48 hours there, I always feel rejuvenated and reenergized when boarding a plane at Boryspil airport back to the West.

CEELM: What’s your favourite place to take visitors in Ljubljana?  

Alexander: I have taken a lot of pride in showing Ljubljana to my friends and family from abroad. The capital of Slovenia has a lot to offer as a small town with a long and fascinating history, and even more fascinating architecture and landmarks. 

Among my favorite places is the lesser-known Railway Museum. I genuinely enjoy this small, somewhat off-the-radar and underfinanced museum which is most of the time void of any other visitors. Another favorite to show foreign visitors to Ljubljana is the famous 32 km barbed wire walking path, which follows the barbed wire which the Italian occupying forces established in 1942 to ring-fence the city that was a stronghold of resistance fighters; the path is scattered with commemorating posts and is a great avenue of tranquility and connectedness with nature.

This Article was originally published in Issue 6.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The significance of medical devices is most certainly on the rise, considering not only its importance to patients, for whom medical devices represent life enhancing products, but also developments in innovation, economics, and in the regulatory and legal sphere. Issues such as data privacy in the field of medical devices were not noticeable until connectivity became a trend in medical devices and the GDPR was adopted. Similarly, the possibility of a cyber-attack on a medical device connected to the Internet became a possibility. Even though the question of product liability has always been present, recent decisions by the European Court of Justice provided new interpretations of existing legal terms and, importantly, introduced product batch liability. 

The most recent development which will have a strong impact on the Slovenian and the EU markets in the years to come is the adoption of Regulation (EU) 2017/745 on Medical Devices (the MDR) that entered into force on May 25, 2017 and will become effective shortly. By May 26, 2020, manufacturers, authorized representatives, importers, and distributors of medical devices will have to meet strict new requirements imposed by the MDR and involve the so-called “notified bodies” in the approval process. 

The European Commission’s aim in proposing the MDR was to ensure “a consistently high level of health and safety protection” when using medical devices, but also to provide for their free and fair trade throughout the EU. Medical devices account for EUR 110 billion in sales and 675,000 jobs in the EU, which is a net exporter in the sector. The MDR is also expected to have a significant impact on the market for medical devices in Slovenia, as the medical devices sector, along with medicine and cosmetics, accounted for EUR 1.3 billion in (retail) sales in 2018, a 31.1% rise in sales over 2017 – the greatest jump of any sector. 

Key Changes

The MDR brought several significant changes, including broadening the definition of medical devices (to include those medical devices not intended for a medical purpose), establishing and implementing a comprehensive EU database on medical devices and a Unique Device Identification (UDI) mechanism aimed at improved transparency, and requiring device manufacturers to reclassify medical devices according to their risk, contact duration, and invasiveness. The MDR also requires device manufacturers to identify a qualified person responsible for compliance with the MDR’s requirements and imposes stringent post-market surveillance authority by the notified bodies. Substantially, the MDR generally allows for no “grandfathering,” meaning that every medical device available on the EU market must comply with the MDR by its date of application. 

The most significant changes relate to the renewed conformity assessment procedure, which is becoming more complex due to an enhanced scrutiny mechanism. Manufacturers will be required to provide relevant clinical studies and a scientific appraisal will be carried out by a panel of experts, which will issue a declaration of conformity following positive decisions. Corrective actions may also be requested. A negative decision may lead to restriction or even prohibition. Considering that the potential grounds for liability have been expanded, additional internal reviews of procedures as well as the possibility of insurance should be considered. 

MDR Implementation in Slovenia 

Due to the direct applicability of regulations, no specific implementation measures are required. Nevertheless, the Decree on the Implementation of the MDR was adopted in Slovenia, empowering the Agency for Medicinal Products and Medical Devices of the Republic of Slovenia to implement certain aspects of the MDR that will be relevant for notified bodies in Slovenia as well.

By Marko Ketler, Attorney at Law, and Igor Angelovski, Attorney at Law

This Article was originally published in Issue 6.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Selih & Partnerji has advised Supernova on its EUR 220 million acquisition of seven shopping malls and five smaller shopping centers from Centrice Real Estate GmbH, a member of America’s Lone Star fund. The sellers were advised by Rojs, Peljhan, Prelesnik & Partnerji.

Selih & Partnerji’s team was led by Partner Blaz Ogorevc, assisted by Senior Associate Miha Stravs.

Rojs, Peljhan, Prelesnik & Partnerji’s team included Partner Sergej Omladic and Senior Associate Rok Kokalj.

The wide usage of benchmark rates and their key role in the financial system requires that they be reliable and defiant to any manipulation. To ensure this, the EU undertook to reform the benchmark rate determination process and improve market confidence in them, resulting in the adoption of the EU Benchmarks Regulation (the BMR).

The most widely-used European benchmark rates are EONIA and EURIBOR. The latter is widely used in Slovenia, while EONIA is not as popular. According to the data from the European Securities and Markets Authority and Bank of Slovenia, as of May 31, 2018, 99.7% of all contracts were tied to EURIBOR and only 0.3% of the contracts to EONIA. Both EONIA and EURIBOR are being reformed to meet the requirements of BMR. While EONIA will be replaced with the new benchmark €STR on October 2, 2019, a new (hybrid) calculation methodology will be implemented for EURIBOR, and it is not yet clear whether EURIBOR will be re-authorized under the BMR. 

The reference rate transition will be challenging for financial institutions as both time-consuming and costly. Slovenian financial institutions are already taking steps to include fallback clauses in both legacy and new contracts to secure an alternate base rate in the event of a permanent cessation of the relevant benchmark or pre-cessation trigger – i.e., when the relevant benchmark is no longer representative. Fallback clauses used in legacy agreements are generally triggered only by the temporary unavailability of benchmark rates due to temporary disruption and are thus an unsuitable solution for permanent cessation. When drafting a new fallback clause, local laws will have to be thoroughly analyzed and strictly respected to minimize litigation, regulatory, and reputational risks. 

The Slovenian Consumer Credit Act provides that the values of the reference interest rate in consumer loans have to be clear, accessible, objective, and verifiable at all times. Reference rates have to be published on the creditor’s website and visible in its business premises. The interest rate cannot be changed to the detriment of the consumer if the loan agreement does not stipulate the conditions under which the interest rate can be changed. Such provisions will have to be considered when drafting the fallback clause – which should not contain the possibility of unilateral changes by the bank in consumer loans, since such a clause may be considered an unfair contractual provision.

Because consumers benefit from stringent consumer protection regulations, even when an adequate fallback clause is drafted, its implementation in legacy loan agreements will likely be a cumbersome task. Since, in accordance with the Consumer Credit Act, the loan interest rate and the conditions for its applicability and amendment have to be explicitly stated in the loan agreement, the bank cannot change the loan interest rate unilaterally, and an amendment to the loan agreement must be concluded with the consumer. If the consumer does not agree to the proposed change, the bank has no leverage to unilaterally change the terms of the agreement, and the parties may have different interpretations as to which interest rate should be applied. 

The implementation of the fallback clause in legacy corporate loan contracts appears to be a tough nut to crack. While some legacy contracts provide for an obligation of the debtor to conclude an amendment to the loan agreement, giving the bank the right to accelerate the loan or temporarily terminate or cancel the debtor’s right to utilize the loan if the debtor does not conclude an amendment within the set deadline, the question of how to convince the debtor to conclude an amendment where the legacy contract does not include such an obligation remains to unanswered. 

Unilateral changes of the interest rates by the banks will likely result in litigation, with the outcome of the validity of the interest rate provision or the entire agreement likely to depend on the general contract law rules applied by the court.

Security documents should also be amended, and where required by law these changes should be entered in the relevant pledge registers. The question of who will bear the cost of such changes will depend on the existing contractual provisions, as the Consumer Credit Act provides that consumers shall not bear costs which are not clearly set out in the contract

Marko Ketler, Partner and Independent Attorney at Law, and Ermina Delic Kamencic, Independent Attorney, in cooperation with Karanovic & Partners

This Article was originally published in Issue 6.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

“Well, the legal market is pretty much stable – all firms stay firmly in their places, not a lot of tectonic shift …. all is quiet on the Western front,” smiles Robert Prelesnik, Senior Partner at Rojs, Peljhan, Prelesnik & Partners in Ljubljana. “Our economy has been rather stable too, even as we approach a period of slight stagnation – we are quite far away from a recession, which is a good thing in this day and age of Europe,” says Prelesnik.

Indeed, Prelesnik says, Slovenia is about to conclude its second straight year with a budget surplus. “The budget was voted on and adopted just last week, and we’re due to have a steady overflow of revenues over expenditure – EUR 400 million for 2020 and EUR 650 million for 2021.” This, Prelesnik says, in spite of the minority coalition government – a first in Slovenian history. “The government is – for a minority government – pretty stable,” he says, “and it is on course to remain as such, although one of the unofficial coalition partners, the left-wing, has just recently declared the withdrawal of the support to the government projects – but that won’t affect anything in an adverse fashion, at least not at the moment.”

Prelesnik says that business-friendly legislation may be passed soon. “Amendments to the Legal Protection in Public Procurement Procedures Act are currently in the legislative pipeline – this was a long time coming,” he says. These amendments are designed to make the process more efficient and provide for the possibility of the court review in the decision-making process, which is expected to create a more attractive investment climate. “The simplifications to the public procurement process should go a long way.”

Finally, talking about significant infrastructure developments, Prelesnik highlights the second railway track of the Divaca-Koper railway. “A couple of weeks ago a tender bid process was initiated for the second track of the railway, which should speed the entire undertaking up.“ He describes the railway as “the most valuable infrastructure project in the history of Slovenia,” with a lot of companies in the bidding. “We’ve got some 10 or 12 companies looking to get in on the action already,“ he says, “and the application deadline for the submission of the applications in the first qualification phase is December 20. There are a couple of Spanish and Turkish firms, three or four Chinese firms, French, Austrian …. a lot of foreign capital interest, as the project is too large for a single Slovenian company to undertake it.”