There are numerous types of financial intervention in modern economy, with the Republic of Serbia being dominated by banking sector loans as main instruments in such intervention. This is hardly surprising considering the low developmental level of different financial institutions and a low personal savings rate. Loan agreements are of particular significance for the functioning of the baking sector.
The loan agreement is governed by the Law of Contracts and Torts, but the provisions of other laws are also applied to that agreement. Article 1065 of the Law of Contracts and Torts provides that the loan agreement by which the bank obliges to place specific funds at the loan client’s disposal, for a definite or an indefinite period, for a specific purpose or with no set purpose, with the loan clients obliging to pay the agreed interest to the bank, and to repay the acquired amount of cash on time and in a manner prescribed by the agreement.
The loan agreement is concluded in writing and is required to include the amount, the conditions of granting, using, and repaying the loan. Conclusion of the loan agreement in writing is justified since the agreement in question represents a contract of successive performance which can sometimes be performed by the debtor over a long number of years, and it is therefore necessary to determine the obligation of both contracting parties, and their associated rights.
The Law on the Protection of Financial Service Consumers provides that the bank loan provider is obligated, in the process of agreement negotiation and conclusion, to inform the loan client beforehand and warn them in an unambiguous manner of the risks which the client shall assume through the conclusion of such agreement, as well as the economic consequences which may appear enabling the client to get acquainted with the conditions under which the loan is being granted, and eliminates the likelihood of the client being unrealistic regarding the conditions under which the agreement is being concluded and the risks which he has agreed to bear once the agreement has been concluded. Such obligation on the bank’s behalf is grounded in the main principles of the law of obligations such as the principle of conscientiousness and honesty, the principle of prohibition of abuse of rights, the principle of equality and mutual benefits, the principle of prohibition of causing damage
The Law of Contracts and Torts also directs that the bank can terminate the loan agreement before the expiration of the agreed term if the loan has been used contrary to its purpose, and in the event of the client’s insolvency even in cases when this has not been established by a decision of the court. The bank may also terminate the loan agreement in the event of termination of the legal entity or death of the client if such events would place the loan provider into a substantially unfavourable position. The loan client may terminate the agreement if they have not started using the loan and may return the loan before the deadline set for loan repayment, but is obligated to inform the bank in advance, and to compensate the bank for the losses that it has endured in both instances.
However, due to the circumstances caused by the rise of the Swiss franc, the Republic of Serbia was faced with a dilemma of whether a loan agreement can be terminated with the application of the institute of changed circumstances. As Serbian legislation has failed to provide for the possibility of termination due to changed circumstances, various aspects have emerged in the Serbian legal theory concerning the time when the occurrence of changed circumstances should be considered and the time when the agreement is believed to be terminated. According to one angle, contract termination due to changed circumstances takes place with the adoption date of the final decision terminating the agreement and the effects of the termination will hereafter be valid, while according to the other angle the agreement is terminated retroactively, i.e., as if it had never been concluded. Subsequently, the time of informing the other contracting party of the intention to terminate due to the occurrence of changed circumstances can be viewed as the time of termination of contract.
Seeing as how a loan agreement represents an agreement with a permanent successive performance reflected in the payment of a share of the principal amount and interest in specified time intervals, the termination of such agreement would produce effect only hereafter. Guided by the rules of the law of obligations, the termination of the loan agreement as an agreement with a permanent successive performance should in fact produce effect in the future. The items from the loan agreement which the contracting parties have fulfilled up until the moment of termination due to changed circumstances is valid considering that it is based on legal grounds which the agreement had been concluded on. The monetary amount which the bank had placed at the disposal of the client under the loan agreement has transferred into the loan client’s property with legal grounds, and therefore cannot be considered as legally unjust enrichment. For that monetary amount, the client is obligated to pay the agreed interest and not the default interest as prescribed by the provisions on unjust enrichment. In addition, all contractual obligations due before the termination of contract bind the contracting parties after the termination which implies that they must be fulfilled in accordance with the agreement even though it would have been terminated due to changed circumstances.
At the time of contract termination, i.e., led by the theory that the agreement has been terminated with the onset of judgement finality, the agreement ceases to produce legal effect which deprives the bank and the debtor of their rights and relieves them of their obligations which had been provided by the terminated agreement. This deprives the client of the right of use regarding the monetary amount which had been placed at their disposal and generates an obligation for the client towards the bank regarding the payment of the total amount owed based on the principal amount, and interest for the period from the termination of agreement until the payment of the remainder of amount owed.
Should the client, deeming that changed circumstances have occurred, cease with the performance of their obligations, they risk the unpaid instalments becoming due and the bank, for the purpose of recovering the due amounts, activating a mortgage if it has been determined as collateral. Therefore, the client is obligated, until the finality of the judgement, to perform their obligations which performance has become aggravated. However, should the client continue to perform obligations throughout the duration of the procedure before the court even though the performance has become aggravated, it might be considered that the performance has not been aggravated in a sufficient manner, and all that has been done in the name of fulfilment of obligations has been fulfilled with legal grounds and a decision by the court, should it produce a termination of contract due to changed circumstances, cannot include what has already been fulfilled. From the time of the finality of judgement terminating the contract due to changed circumstances, the client shall owe the bank the remainder of the principal amount. Likewise, the interest shall be calculated until the moment of complete payment of the remainder of debt.
The real question is why this model would be applied at all if the law provides for the option of loan repayment before the deadline and without the possibility of the bank calculating interest from the time of early loan repayment until the time when the loan would have been paid in accordance with the contract deadline. The reason for this could be reflected in the following: both of these options provide compensation for damages to the bank, and if the institute of changed circumstances is applied the bank and the debtor bear equal damages since neither the bank nor the debtor are responsible for the occurrence of changed circumstances, while with early loan repayment the debtor is obligated to bear the entirety of damages which the bank had potentially endured.
The position that the effects of contract termination due to changed circumstances should be applied retroactively leads to the annulment of contract from its conclusion and is therefore considered that the agreement had not been concluded. However, what’s disputable in this instance is whether it is justifiable to terminate retroactively a contract with a successive performance, that has been valid and has been producing its effect, as if it had not been valid from the moment of conclusion. The consequences of such loan agreement termination would be the following: the amount which the bank had placed at the client’s disposal in the name of the loan and all the amounts paid by the client to the bank in the name of loan repayment would be viewed as legally unjust enrichment, and the bank would be entitled to request the repayment thereof, just like the client.
It would appear that loan agreement termination with the application of institute of changed circumstances, regardless of producing effects hereafter or retroactively, carries substantial consequences which the contracting parties may not have necessarily counted on and which make the application of this institute to loan agreements questionable. Hence, it is left to the legislator to direct the institute of changed circumstances in such manner that would provide for the consequences of application of this institution to contract terminations, contributing to contractual security.
