In its recent interpretative ruling, the Court of Justice of the European Union ("CJEU") concluded that a national law cannot retroactively invalidate loan agreements concluded on the territory of an EU Member State with lenders from another Member State. This is an expected outcome of the controversial legislative interventions in Croatia.

The Act on Nullity of Loan Agreements with International Elements Concluded in the Republic of Croatia with Unauthorized Lenders ("Act") came into force in July 2017. Under the Act, all loan agreements concluded on Croatian territory with foreign lenders not holding the necessary authorization to perform lending activities in Croatia became automatically null and void. The nullity covered other legal documents concluded on the basis of those facilities, such as mortgage agreements and sureties. The main issue with the Act was that it triggered nullity of all such loan agreements irrespective of the moment they were executed, i.e., prior or subsequent to the Act.

Encouraged by the adoption of this controversial legislation, some Croatian borrowers brought legal actions before Croatian courts, seeking declaration of nullity of such loan agreements. In one such judicial proceedings, the Croatian court submitted a request for a preliminary ruling to the CJEU, in order to ascertain whether the Act is compliant with EU law.

The CJEU stated that the Act directly discriminated lenders established in another EU Member State, since the Act applied only to foreign lenders, and not to lenders which had been established in Croatia and also operating throughout the same period without the necessary authorizations. Hence, the CJEU concluded that the Act precludes the freedom to provide services, as one of the four main freedoms in the EU internal market. Although the Croatian Government argued that the Act had been adopted in order to protect Croatian citizens and proper functioning of the financial sector, the CJEU held that the Croatian Government had failed to provide convincing arguments to justify those assertions, as well as that there were other less aggravating measures that could have been adopted.

The CJEU's interpretative ruling has a declaratory effect and applies to all legal relations, including those established before its adoption. Therefore, the Croatian courts will have to recognize it in their considerations on the validity of loan agreements. According to media reports, around 200 judgments declaring the nullity of loan agreements have already been passed by first instance courts. Moreover, a number of these judgements have been upheld by appellate courts, rendering them final and binding.

Alongside the proceedings conducted before the CJEU, the constitutionality of the Act is also being scrutinized before the Constitutional Court of the Republic of Croatia and the Court is expected to issue its ruling shortly.

In any event, there are several scenarios that may play out given the CJEU's ruling and further developments will be of particular importance. Under Croatian law, any person challenging the constitutionality of legislation before the Constitutional Court can seek reconsideration of the original ruling based on the legislation quashed by the Constitutional Court. Therefore, the viewpoint taken by the Constitutional Court may become important for those lenders with respect to which the courts have already rendered final and binding decisions. Secondly, the Croatian legislator may also react and amend the Act in line with the CJEU's findings before the Constitutional Court makes its ruling. However, in such a scenario, the Constitutional Court would still have to rule on the constitutionality of the controversial provisions of the Act that have been amended in the meantime, opening the path for lenders to seek a reconsideration of individual decisions which have become final and binding. Further developments in this controversial matter are expected shortly.

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