The European Court of Justice (ECJ) was requested by a Croatian court to examine the compatibility of the Croatian Law on the invalidity of credit agreements featuring international elements (“Invalidity Law”) with EU law and to deal with the questions referred to the ECJ by the Croatian court. Pursuant to the Invalidity Law adopted in Croatia on 14 July 2017, it is possible for credit agreements with foreign lenders who do not hold the authorisation required for the provision of credit services in Croatia to be declared invalid, with retroactive effect for up to 17 years, by way of an action.

The backdrop for resorting to the ECJ after adoption of the Croatian Invalidity Law was a credit agreement concluded by a Croatian borrower with an Austrian bank in 2007. This credit agreement had been concluded with the help of a Croatian intermediary, and it includes a provision setting out that either the Austrian or the Croatian courts shall have jurisdiction. As security for the repayment of the credit, the Croatian borrower gave a notarial guarantee based on which a mortgage on her real property located in Croatia was entered in the Croatian land register.

In 2015, the Croatian borrower brought an action against the Austrian bank, in Croatia, for invalidity of the credit agreement, of the notarial guarantee, and for removal of the mortgage from the Croatian land register.

The decision of the European Court of Justice

The Croatian court objected to the jurisdiction of the ECJ claiming that Union law was not applicable to the agreement at issue because it had been concluded before the accession of Croatia to the European Union. The ECJ declared itself to be the competent court, however, as the credit agreement continued to have effects also after Croatia’s accession to the European Union (“EU”).

Pursuant to the Croatian Invalidity Law of 14 July 2017 and the Croatian Law on consumer credit of 30 September 2015, credit agreements concluded with non-authorised lenders are null and void. For this reason, the ECJ arrived at the conclusion that the Croatian legal order which provided for the invalidity of credit agreements with foreign lenders (lacking authorisation in Croatia) directly discriminated against creditors established outside Croatia (and lacking authorisation in Croatia) as credit agreements with all other lenders were not affected by the invalidity.

Concerning the substance of the matter, the ECJ found that the Croatian Law on the invalidity of credit agreements featuring international elements affects the access to financial services on the Croatian market of economic operators established in other Member States and particularly affects the freedom to provide services.

The business of a credit institution, consisting of granting credit, constitutes a service within the meaning of Article 56 TFEU (Services). Article 56 TFEU requires the elimination of all discrimination based on nationality against service providers established in other Member States and the abolition of any restriction.

Regarding the jurisdiction of the courts, the ECJ declared that in the event of disputes concerning credit agreements featuring international elements borrowers are allowed to bring an action against non-authorised lenders either before the courts of the State on the territory of which the respective lender has its registered office, or before the courts of the place where the borrowers have their domicile (or registered office). However, the lenders may sue the borrowers only before the courts of the State on the territory of which the borrowers have their domicile (or registered office).

For the cancellation of the registration of a mortgage in the land register, only the courts of the Member State where the encumbered property is situated have jurisdiction as mortgages are rights in rem and thus have effect erga omnes.

Summing up: In the case at hand, the ECJ held that:

• there is direct discrimination by reason of the freedom to provide services;
• the Croatian Invalidity Law restricts the freedom to provide services;
•  the application seeking the removal from the land register of a mortgage falls under the exclusive jurisdiction of the courts of the Member State in which the property is situated; and
•  the Croatian Invalidity Law goes against European Union law.

Inconsistencies between European Union law and national law

EU law applies autonomously alongside state law. Given that national courts and public authorities have to apply Union law also directly, conflicts between both legal orders may arise.

In a large number of decisions, the ECJ has ruled that courts are obligated to apply European Union law without restrictions and to protect the rights it affords to individuals. The courts should ensure this by not applying conflicting provisions of national law, if any, irrespective of whether they were adopted before or after the respective piece of European Union legislation.

Effects of the decision of the European Court of Justice

Union law takes precedence over national law. This means that courts shall not apply any national law conflicting with Union law. The conflicting national law remains part of the legal order, however. In the case at hand, the Croatian Invalidity Law conflicts with Union law. Therefore, the Croatian Invalidity Law shall not be applied by the courts although it remains part of the Croatian legal order.