Miljenko KOVAC v Croatia - 39739/06 [2009] ECHR 236 (15 January 2009)

BAILII is celebrating 24 years of free online access to the law! Would you consider making a contribution?
No donation is too small. If every visitor before 31 December gives just £1, it will have a significant impact on BAILII's ability to continue providing free access to the law.
Thank you very much for your support!

The European Court of Human Rights (First Section), sitting on 15 January 2009 as a Chamber composed of:

Christos Rozakis, President,
Nina Vajić,
Khanlar Hajiyev,
Dean Spielmann,
Sverre Erik Jebens,
Giorgio Malinverni,
George Nicolaou, judges,
and Søren Nielsen, Section Registrar,

Having regard to the observations submitted by the respondent Government and the observations in reply submitted by the applicant,

The applicant, Mr Miljenko Kovač, is a Croatian national who was born in 1938 and lives in Bjelovar. He was represented before the Court by Mr H. Kovač, an advocate practising in Bjelovar. The Croatian Government (“the Government”) were represented by their Agent, Mrs Š. StaZnik.

The facts of the case, as submitted by the parties, may be summarised as follows.

The applicant was a shareholder of the Croatia banka d.d., a joint-stock company incorporated under Croatian law with its registered office in Zagreb (“the bank”). The bank was entirely owned by private individuals and companies.

On 23 February 1999 the Croatian National Bank (Hrvatska narodna banka – “the CNB”) adopted a decision appointing a temporary administrator to the bank. Under section 84(2) of the Banks Act, from the date of service of such decision, all powers of the management board, the supervisory board and the shareholders’ general meeting were transferred to the temporary administrator. Subsequently, on 23 August 1999 the CNB extended the temporary administrator’s term of office for a further two months.

Meanwhile, on 18 June 1999 the CNB had proposed to the Government that the process of recovery and restructuring of the bank be commenced, as provided for by the domestic legislation.

In accordance with that proposal, on 23 September 1999 the Government adopted the Decision on Recovery and Restructuring of the Croatia banka d.d. (“the Decision”). From that date, all shares held by the bank’s shareholders were revoked and cancelled. Following the process of recovery, the bank was to issue new shares, all in the name of the State Agency for Securing Savings Deposits and Recovery of Banks (DrZavna agencija za osiguranja štednih uloga i sanaciju banaka).

In 1999 and 2000 five shareholders of the bank, but not the applicant, filed four separate petitions for review of the constitutionality and legality (prijedlog za ocjenu ustavnosti i zakonitosti) of the Government’s Decision of 23 September 1999. They complained that the Decision violated their constitutional rights as shareholders of the bank. They also claimed that the bank had been in good standing and that the Decision had therefore been unnecessary.

On 30 January 2003 the Constitutional Court (Ustavni sud Republike Hrvatske) discontinued the proceedings because the statute on which the Decision was based had in the meantime been repealed.

On 20 November 2001 the applicant brought a civil action for unjust enrichment (or enrichment without cause) in the Bjelovar Municipal Court (Općinski sud u Bjelovaru) against the bank, seeking repayment of 37,200 Croatian kunas (HRK). He relied on section 210(3) of the Civil Obligations Act. The applicant explained that on 28 November 1997 he had bought 186 of the bank’s ordinary shares for the above amount. However, on the basis of the Government’s Decision of 23 September 1999 he had been deprived of those shares. He argued that the Decision had actually annulled the contract under which the bank had sold him its shares. That contract, being the cause on the basis of which he had paid HRK 37,200 to the bank, had thus ceased to exist. It followed that the bank had enriched itself without cause, or more precisely, on the basis of a cause which had subsequently ceased to exist, and had therefore been bound to return to him the sum in question.

On 12 February 2002 the Municipal Court dismissed his action. It rejected the applicant’s argument that the Government’s Decision of 23 September 1999 had annulled the contract under which he had acquired the bank’s shares. Consequently, the court found that the cause on the basis of which he had paid HRK 37,200 to the bank had not ceased to exist and that the bank had not been bound to return the sum demanded.

Following an appeal by the applicant, on 27 May 2002 the Bjelovar County Court (Zupanijski sud u Bjelovaru) quashed the first-instance judgment on account of incomplete facts and remitted the case. It also instructed the lower court to verify whether the contract under which the applicant had bought the shares could be rescinded under section 133 of the Civil Obligations Act on account of the fundamental change in circumstances, having regard to the Government’s Decision of 23 September 1999.

In the resumed proceedings, on 19 November 2002 the Bjelovar Municipal Court ruled for the applicant, finding that the bank had indeed enriched itself without cause. The court again did not accept the applicant’s argument that the contract of sale on the basis of which he had bought the bank’s shares had been annulled by the Government’s Decision of 23 September 1999. It however held that, because of that Decision, the contract had lost one of the essential elements for the validity of every contract, namely its consideration, defined as the economic purpose of a transaction. Relying on section 52 of the Civil Obligations Act, the court further found that, owing to the absence of consideration, the contract was null and void. Accordingly, the nullity of the contract had resulted in the disappearance of the cause on the basis of which the applicant had paid the bank the sum sought and the bank had been obliged to return that sum to him.

Following an appeal by the respondent, on 27 February 2003 the Bjelovar County Court reversed the first-instance judgment and dismissed the applicant’s action. It found that the Government’s Decision of 23 September 1999 had not annulled the applicant’s contract with the bank relating to the purchase of the shares. Moreover, the Decision could not in any other way have affected the validity of that contract because the parties had performed, and thereby extinguished, their contractual obligations before the Decision had been adopted (the applicant by paying HRK 37,200 to the bank, and the bank by transferring 186 of its shares to him). It followed that at the relevant time (during its existence) the applicant’s contractual obligation had been performed for consideration which could not subsequently have been removed by an event that took place after that obligation had already been extinguished. The contract in question had thus been valid. As that contract had been the cause on the basis of which the applicant had paid HRK 37,200 to the bank, and had been valid, it could not be argued that this cause had ceased to exist and that the bank had been bound to repay him the amount sought. The conditions for rescission of the contract on the basis of a fundamental change in circumstances had not been met either, because under section 133(3) of the Civil Obligations Act such rescission could not have been sought by a party who had already performed his or her contractual obligations.

On 30 October 2003 the applicant lodged a constitutional complaint against the second-instance judgment, alleging breaches of Articles 48 (1), 49 and 50 of the Constitution.

On 16 March 2006 the Constitutional Court dismissed his constitutional complaint.

The relevant provisions of the Constitution of the Republic of Croatia (Ustav Republike Hrvatske, Official Gazette nos. 56/90, 135/97, 8/98 (consolidated text), 113/00, 124/00 (consolidated text), 28/01 and 41/01 (consolidated text), 55/01 (corrigendum)) provide as follows:

“The rights acquired through the investment of capital shall not be diminished by law, or by any other legal act.”

“1. Property [rights] may be restricted or taken in accordance with the law and in the interest of the Republic of Croatia upon payment of compensation equal to its market value.

2. The exercise...of property rights may exceptionally be restricted by law for the protection of the interests and security of the Republic of Croatia, nature, the environment or health.”

The relevant provisions of the Banks Act (Zakon o bankama, Official Gazette no. 161/98) read as follows:

“When the Croatian National Bank establishes that the potential losses of a bank ... are higher than that bank’s share capital and in cases where a bank is insolvent, it shall appoint a temporary administrator to that bank, or shall file a petition with the competent court with a view to opening bankruptcy proceedings against that bank.”

“From the date of service of the decision on the appointment of a temporary administrator, all powers of the management board, supervisory board and shareholders’ general meeting shall cease and shall at the same time be transferred to the temporary administrator.”

“On the proposal of the Croatian National Bank, the Government of the Republic of Croatia may decide to commence the process of recovery of a bank if it establishes that this is in the State’s special interest and if it finds that the other possibilities of preventing disturbance in the stability of the overall financial system of the State have been exhausted.”

The relevant provisions of the Act on Recovery and Restructuring of Banks (Zakon o sanaciji i restrukturiranju banaka, Official Gazette no. 44/94 – “the Recovery and Restructuring Act”) read as follows:

“The procedure of recovery and restructuring of a bank shall be initiated when a bank shows potential losses ... of more than 50% of the amount of its share capital, if the Croatian National Bank deems such procedure feasible and economically justifiable.”

“The decision on recovery and restructuring of a bank shall be given by the Government of the Republic of Croatia on the proposal of the Croatian National Bank.”

The Recovery and Restructuring Act was repealed on 23 May 2000 by the entry into force of the Act Repealing the Act on Recovery and Restructuring of Banks (Zakon o prestanku vaZenja zakona o sanaciji i restrukturiranju banaka, Official Gazette no. 52/2000 of 23 May 2000).

(c) The Government’s Decision on Recovery and Restructuring of the Croatia banka d.d.

The Decision on Recovery and Restructuring of the Croatia banka d.d. (Odluka o sanaciji i restrukturiranju Croatia banke d.d., Zagreb, Official Gazette nos. 98/1999 and 53/2000 – “the Decision”), in its relevant part, read as follows:

(a) risky investments and potential liabilities in the amount of 1,809 million kunas, including potential losses of 517 million kunas;

“On the day of the publication of this Decision all existing shares of the Bank shall be revoked and cancelled. The Bank shall issue new shares in the amount of 217 million kunas, which shall be entirely owned by the Agency.”

The relevant part of the Courts Act (Zakon o sudovima, Official Gazette nos. 3/94, 100/96, 131/97 and 129/00), as in force at the material time, read as follows:

2. Disputes concerning the establishment, operation and dissolution of commercial companies as well as disputes concerning disposition of membership and membership rights in such companies ...”

The relevant part of the Civil Obligations Act (Zakon obveznim odnosima, Official Gazette nos. 53/91, 73/91, 111/93, 3/94, 7/96, 91/96, 112/99 and 88/01), read as follows:

(2) Consideration shall be impermissible if it is contrary to the Constitution, peremptory rules or public morals.

(3) It shall be assumed that an obligation has consideration even if it is not expressly stated.”

“If consideration is inexistent or impermissible, the contract shall be null and void.”

III. RESCISSION OR AMENDMENT OF A CONTRACT OWING TO A FUNDAMENTAL CHANGE IN CIRCUMSTANCES

“(1) If, after a contract has been entered into, circumstances occur which make the performance of the obligations of one party more difficult, or if, owing to such circumstances the purpose of the contract cannot be attained, and in both cases to the extent that the contract obviously no longer corresponds to the expectations of the contracting parties and that, according to general opinion, it would be unfair to maintain the contract as it is, the party for which performance has been rendered more difficult or the party which, owing to the [fundamentally] changed circumstances, cannot attain the purpose of the contract, may request that the contract be rescinded.

(3) The party requesting the rescission of the contract cannot rely on [fundamentally] changed circumstances which have occurred after the expiry of the time-limit set forth for the performance of his or her obligation.

“(1) When a part of the property of one person passes, by any means, into the property of another person, and that transfer has no basis in a legal transaction or a statute [i.e. it is without cause], the beneficiary shall be bound to return that property. If restitution is not possible, he or she shall be bound to provide compensation for the value of the benefit received.

(3) The obligation to return the property or provide compensation for its value shall arise even when something is received on account of a cause which did not come into existence or which subsequently ceased to exist.”

On 21 December 2004 the High Commercial Court (Visoki trgovački sud Republike Hrvatske) delivered judgment no. PZ-6234/04-2 in a case where the plaintiff, a shareholder of the Croatia banka d.d., had sued the bank and the State Agency for Securing Savings Deposits and Recovery of Banks before the competent commercial court claiming that she had been deprived of her shares and the rights derived from them without any compensation. She sought a declaratory judgment that she was still a shareholder of the bank and asked the court to order the respondents to transfer her back 1,517 of her shares. In ruling for the plaintiff the High Commercial Court directly applied Articles 48 (1) and 49 (4) of the Constitution. It expressly stated that the Government’s Decision of 23 September 1999 was contrary to the latter Article and reasoned as follows:

“In particular, any restriction or deprivation of the rights deriving from shares would be contrary to that provision of the Constitution, as it would constitute diminution or deprivation of membership rights acquired through the investment of capital in a joint-stock company.”

The applicant complained that the Government’s Decision of 23 September 1999 had violated his property rights. In particular, he claimed that he had been deprived of his property by the State in that his shares had been revoked and cancelled without any justification or compensation. He relied on Article 1 of Protocol No. 1, which reads as follows:

“Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.”

The Government disputed the admissibility of this complaint, arguing that the applicant had failed to exhaust domestic remedies.

The Government first pointed out that before the domestic authorities, that is, in the above-mentioned civil proceedings, the applicant had sought repayment of the money he had invested in shares, because he had considered that the contract for the sale of shares entered into between him and the Croatia banka d.d. had been annulled, and that therefore the legal basis for payment of that amount had ceased to exist. However, the domestic courts had found that the contract had been performed upon the payment of the agreed price and the transfer of shares, and that a party who had performed his or her contractual obligation could not seek rescission of such a contract on account of a fundamental change in circumstances. The courts had also found that there had been no unjust enrichment on the part of the bank.

Before the Court, however, the applicant had complained about the cancellation of shares and the loss of rights deriving from them. The Government argued that in those circumstances the applicant should have brought such a claim – which involved a dispute regarding membership and shareholders’ rights in a commercial company – before the competent commercial court, as the commercial courts had jurisdiction in that type of dispute. In this connection they noted that already in the Batinović case (see Batinović and Point Trade d.o.o. v. Croatia (dec.), no. 30426/03, 10 July 2007), the Court had referred to a judgment of the High Commercial Court of 21 December 2004 in which that court had granted a claim by a shareholder of the Croatia banka d.d. whose shares had been cancelled by the disputed Government’s Decision of 23 September 1999. On the basis of that judgment the Court had concluded in the Batinović case that commercial courts had accepted jurisdiction in such matters and that the applicants and other shareholders who had been in an identical legal situation would have had reasonable prospects of success with their claim.

Accordingly, the Government concluded that the applicant in the present case had had an effective remedy at his disposal which he could have used to protect his shareholder’s rights. However, he had not done so.

The applicant replied that the Government had merely stated that he could have chosen another avenue of redress by requesting that the ownership of his shares be restored, but that this argument had not called into question the validity of his claim. He argued that the choice of remedy should have been left to his discretion and that compensation corresponding to the amount he had paid for the shares, of which he had been subsequently deprived, was exactly what he had considered he had been entitled to. What is more, by arguing as they did, the Government had actually confirmed that his claim was well-founded and had implied that an erroneous decision had been taken at the domestic level.

The Court notes at the outset that the present case is similar to that of Batinović and Point Trade d.o.o. v. Croatia ((dec.), no. 30426/03, 10 July 2007). In that case the applicants, also shareholders of the Croatia banka d.d., complained, like the applicant in the instant case, under Article 1 of Protocol No. 1 to the Convention that they had been deprived of their shares by the Government’s Decision of 23 September 1999 without any compensation. In declaring the case inadmissible for non-exhaustion of domestic remedies, the Court held as follows:

“However, the applicants did not present their arguments in this respect to any domestic court of full jurisdiction, which would be far better placed than the Court to examine the factual background of their case. ...

Given that commercial courts are generally competent in cases when a shareholder deems that his shareholder’s rights were violated, it is reasonable to assume that bringing an action in the competent commercial court would have had reasonable prospects of success. The Court recalls in this connection that a mere doubt as to the prospect of success of a remedy is not sufficient to exempt an applicant from submitting a complaint to the competent authority (see Elsanova v. Russia (dec.), no. 57952/00, 15 November 2005).

The foregoing conclusion is reinforced by the High Commercial Court’s judgment submitted by the Government, which shows that commercial courts accepted jurisdiction in the matter and even decided in favour of another shareholder of the Bank, who was in an identical legal situation to that of the applicants. ...

In these circumstances, the Court concludes that the applicants’ complaint under Article 1 of Protocol No. 1 to the Convention must be rejected under Article 35 §§ 1 and 4 of the Convention for non-exhaustion of domestic remedies.”

The Court notes that, unlike the applicants in the Batinović case, the applicant in the present case did bring an action in a domestic court of full jurisdiction. However, even though his dispute with the bank was clearly a dispute between a commercial company and its shareholder and thus falling into the category of commercial disputes envisaged in section 19 of the Courts Act as matters within the jurisdiction of commercial courts, he did not institute proceedings before the competent commercial court. Instead, he misconstrued the Government’s Decision of 23 September 1999 by advancing a rather implausible interpretation that the contract under which he had acquired the bank’s shares had been annulled by that Decision, and on that basis brought an action for unjust enrichment against the bank in an ordinary court, seeking to retrieve the sum he had paid for the shares in question.

In these circumstances, the Court cannot but accept the Government’s objection, supported by the judgment of the High Commercial Court of 21 December 2004, that by bringing a misconceived action for unjust enrichment in the ordinary courts, the applicant had failed properly to exhaust domestic remedies.

It follows that this complaint is inadmissible under Article 35 § 1 for non-exhaustion of domestic remedies and must be rejected pursuant to Article 35 § 4 of the Convention.

The applicant also complained under Article 6 § 1 of the Convention about the outcome of the above civil proceedings, and under Article 13 thereof about the lack of an effective remedy for his property complaint. Those Articles in their relevant part read as follows:

“In the determination of his civil rights and obligations ... everyone is entitled to a fair ... hearing ....”

“Everyone whose rights and freedoms as set forth in [the] Convention are violated shall have an effective remedy before a national authority notwithstanding that the violation has been committed by persons acting in an official capacity.”

As regards the complaint under Article 6 § 1 of the Convention, the Court notes that the applicant complained about the outcome of the proceedings, which, unless arbitrary, the Court is unable to examine under that Article. The applicant does not complain and there is no evidence to suggest that the domestic courts lacked impartiality or that the proceedings were otherwise unfair. In the light of all the material in its possession, the Court considers that in the impugned proceedings the applicant was able to submit his arguments before courts which offered the guarantees set forth in Article 6 § 1 of the Convention and which addressed those arguments in decisions that were duly reasoned and not arbitrary.

As regards the complaint under Article 13 of the Convention, the Court refers to its above findings according to which the applicant did not bring a civil action in the competent commercial court and thereby failed properly to exhaust available domestic remedies.

It follows that these complaints are inadmissible under Article 35 § 3 as manifestly ill-founded and must be rejected pursuant to Article 35 § 4 of the Convention.

	[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]
	European Court of Human Rights
You are here: BAILII >> Databases >> European Court of Human Rights >> Miljenko KOVAC v Croatia - 39739/06 [2009] ECHR 236 (15 January 2009) URL: http://www.bailii.org/eu/cases/ECHR/2009/236.html Cite as: [2009] ECHR 236