LEGAL December 2011
THE NEW CIVIL CODE www.business-review.ro
Contents 2 Editor Anda Sebesi explores the likely impact of the New Civil Code 5 Summary of the main changes brought by the new code 6 Interview: Minister of Justice Catalin Predoiu shares his vision of this landmark legislation 10 D&B’s Rares Voda on the code’s effect on contracts 12 Bogdan Bibicu of Kinstellar considers the implications on contractual balance 14 Mazars lawyers address the issue of the Company Law 16 Reff & Associates’ Simina Mut on the ramifications for bank loans 19 Schonherr lawyers discuss lease agreements in light of the law change 22 Elena Iacob of Zamfirescu Racoţi Predoiu on security agreements
The New Civil Code | Overview
The New Civil Code: a giant The New Civil Code is one of the most significant events for Romanian society in recent times, and should lay the groundwork for the healthy development of the country’s economy. But the influence of the New Civil Code on the local business environment will only become visible over time, say experts. Anda Sebesi The adoption of the New Civil Code on October 1 has been one of the hottest topics among the media and industry insiders in the past few weeks. The new landmark piece of legislation will clearly have a great impact both on the Romanian economy and local society as a whole. According to specialists, the adoption of the New Civil Code was necessary to fit the legislation to the current context. “The fact that the old Civil Code was adopted in the days of Alexandru Ioan Cuza says it all and makes it immediately clear why this normative act had to be replaced. Apart from the value of such a law and the importance of tradition, the legislation must be adapted to the social realities it governs. As a consequence, at a certain time, the efforts towards continuous adjustment, change and improvement are no longer enough, and the enactment of a new law is required,” says Cosmin Vasile, partner at Zamfirescu Racoti Predoiu. He adds that the Mechanism for Cooperation and Verification required Romania to modernize its legislation, including the Civil Code. 2 | BR LEGAL
Romanian society has changed in myriad ways since the enactment of the previous Civil Code in the 1860s. Due to the growing globalization of both civil and commercial relations, as well as the influence of international, more modern legislation, especially after the fall of the Communist regime at the end of 1989, the socio-economic environment in Romania has undergone significant changes, all of which required the existing legislation to be updated. “The New Civil Code aims at further modernizing the Romanian legislation and bringing a more structured and unified approach. It has given foreign investors instruments with which they are already familiar from their home or other jurisdictions, thus easing their entrance and operations in Romania,” says Bogdan Bibicu, partner at Kinstellar. According to specialists, the need for a new code became apparent on several levels. “First, the legal concepts introduced more than 140 years ago had to be updated to reflect the profound evolution of Romanian society and the economy, especially since 1990. Some of the legal norms applicable to private legal relations were either significantly altered prior to 1990 or artificially separated in different enactments Moreover, the abundant and scattered enactments that were adopted after 1990 needed to be harmonized and unified so as to ensure a uniform approach and implementation,” says Ancuta Leach, partner at Wolf Theiss.
The New Civil Code | Overview
nt leap forward “The New Civil Code is an update of the legislation governing civil and commercial relations rather than a drastic change of this legislation. Some of the provisions of the new code reiterate previous regulations or consecrate as law certain existing practices or doctrine developed by legal scholars,” says Simina Mut, managing associate at Reff&Asociatii. What does the New Civil Code bring? Generally, the New Civil Code brings together all the regulations of civil law institutions, adding those covering professional relations, family law matters and private international law issues. “Major changes include the introduction of new institutions into Romanian law – for example, trust and marriage conventions. The New Civil Code also offers a fresh perspective on existing institutions or matters (for example the constitutive effect and registration of rights in the Land Registry),” says Vasile of ZRP. In addition, the new legislation takes a monist approach to civil and commercial relations, as well as delivering a unitary regulatory treatment. “As a result, the provisions are better structured and coordinated, while the newly introduced legal concepts are swiftly integrated into the existing Romanian legal background. The ease of applying the new legislation exists, inter alia, in the codification, ‘under one roof’, of all important legal provisions such as civil, commercial,
insurance and conflict of laws,” says Bibicu. According to Radu Rizoiu, senior partner at Stoica & Asociatii, Romania didn’t need a legislative “revolution” that would disrupt the workings of justice. “Instead, what was needed was an ‘evolution’ that would allow Romania to enter the 21th century from the legislative perspective,” says Rizoiu. He adds that the New Civil Code is a modern set of regulations that fits in with local legal traditions and the latest solutions from countries like France, Italy, Switzerland and the Quebec region of Canada. “Some concepts developed under the aegis of the European Union have also been integrated in an attempt to unify European judicial traditions,” says Rizoiu. As for other new aspects, certain concepts recognized by other European legal systems have been included in the New Civil Code with the aim of aligning this fundamental enactment with relevant European and international legal principles.“The New Civil Code defines concepts that were either never regulated in Romanian law ( fiducia, which, although it resembles the Anglo-Saxon concept of trust, was actually based on the concept developed in the French Civil Code) or were only addressed by scholars or case law (hardship clause),” says Leach. She adds that brand new rules have been put in the New Civil Code covering the assignment of contract and of debt, while first-time regulations for letters of BR LEGAL | 3
The New Civil Code | Overview
comfort and of guarantee have also been included. Boosting the local economy “The New Civil Code should be an incentive for the healthy development of the Romanian economy. Its directives encourage the signing and execution of contracts in good faith while the judge is called upon to check that the contractual balance is not disrupted by external factors that are not related to the will of the involved parties, such as the economic downturn,” says Rizoiu. He warns that the influence of the New Civil Code will become visible in the local economy over time, when players will see new opportunities and lawyers will develop a concrete vision of the laws. According to Vasile of ZRP, the New Civil Code will not directly affect the Romanian economy. “The rules change, but the game and the players remain the same,” he says. Vasile adds that the new regulations, their principles and the purpose pursued by legislators with the new and modern laws, will be the drivers of economic development and security on the civil circuit. “The financial and economic crisis are elements that, on the short term, will have a much greater impact on the economy than this legislation, which, even if it were perfect, could only create theoretical premises for economic development,” argues Vasile. It is obvious, say players, that the influence of the New Civil Code will be positive, which should boost the Romanian economy on the long term. This will be thanks to the greater flexibility of institutions, which were previously bound by precedent. “To this end, many matters discussed in the legal doctrine and recognized in the 4 | BR LEGAL
previous jurisprudence have been incorporated into the newly adopted provisions under the New Civil Code. This represents a more practical approach, bringing greater certainty to both commercial and civil relations,” says Bibicu. According to him, the introduction into the Romanian legislation of concepts that have long existed in other countries (e.g. trust) gives way to the possibility of more efficient, personalized and practical structures. “Furthermore, given the economic climate at an international level in the last few years, the New Civil Code provisions have been thought out to take into account the legal aspects of the consequence of such economic issues,” he adds. Under the new legislation business relations will benefit from a higher degree of flexibility with players able to choose the most suitable legal solution. Certainty or predictability has been also increased thanks to a uniform approach to legal concepts, as more elements are now specifically addressed in the law. “On the other hand, the business community will need to tackle their contractual relations more carefully, paying due consideration to the legal consequences of certain behaviors. Such an increased level of responsibility will prove to be beneficial to business ethics in the long run and will create a sound basis for business relationships,” says Leach. She adds that by introducing concepts familiar to foreign investors, the New Civil Code is expected to improve their perception of the local legal environment. “A uniform, comprehensive and coherent Civil Code will be viewed by investors as a better legal tool for doing business in Romania,” adds Leach.
The New Civil Code | Overview
Main amendments brought by the New Civil Code
The period prior to the conclusion of an agreement has been regulated in a clearer manner. Special provisions regarding negotiation in good faith and the confidentiality obligation throughout the negotiation period have been implemented.
The assignment of a contract is among the newly incorporated institutions. Under the previous regulation, one may assign his own rights under a contract, but not his obligations.
A different system of transferring ownership of immovable assets has been established, by way of registration in the Land Book and not through conclusion of a sale-purchase agreement, as provided under the former legislation; this new system is not yet in force due to the cadastral works not having been completed. The same type of effect has been provided with respect to mortgages of immovable assets, which is created upon registration with the Land Book, as opposed to the moment of signing, as was previously the case. Please note that this provision is not applied yet, as the cadastral works are not yet finished.
The security interest over movable assets has been renamed “mortgage over movable assets” and, under the New Civil Code, has a series of common provisions with the mortgage on immovable assets. Furthermore, the movable security over bank accounts may be concluded by taking control of the respective account. This presents advantages to creditors in the event of an enforcement procedure.
An additional manner of enforcing a mortgage on movable assets by way of administering/ managing” the respective assets has been established. The provisions regarding the management of another person’s assets are applicable in this respect.
The concept of trust has been introduced for the first time in Romanian legislation, drawing on the provisions established in the French Civil Code.
Regarding the banking domain, a number of institutions have been regulated in a general manner, by including general principles without detailed procedural aspects: revolving facility, savings account agreement, bank letter of guarantee and comfort letter.
Under the New Civil Code there are several provisions that allow debtors an increased level of protection. One instance is more detailed provisions on situations that affect the consent of a party entering into a contract. In this respect, lesion (Romanian: leziune) may now be invoked by people of legal age, not just minors, as was previously the case.
The concept of unforeseeable events (Romanian: impreviziune), previously established in the legal doctrine and in jurisprudence, especially as a result of its frequent invocation by debtors in the context of the economic crisis, was expressly regulated in article 1271 of the New Civil Code. Source: Kinstellar BR LEGAL | 5
The New Civil Code | Interview
New Civil Code provides framework for modern business world Catalin Predoiu, the Minister of Justice, tells Business Review about the importance of the New Civil Code, both for the economic environment and the wider Romanian society, and outlines the main objectives of this landmark piece of legislation. Anda Sebesi What does the New Civil Code mean for Romania and what new aspects does it bring? The Civil Code is, for any modern nation, a system of vital regulations for society, for members of the public and their relations with each other. It is a system of rules governing legal relations in a way that allows individual development, respects individual rights and fosters harmonious relations within society. Civil law is the one thing ensuring a dynamic legal and economic environment, providing guarantees for the stability of legal relations, protecting good faith, and preventing and sanctioning unethical behavior in society and contractual relations. Firstly, the New Civil Code establishes the same principles as the basis of all matters. 6 | BR LEGAL
The freedom to dispose of oneâ€™s assets, good faith and sanctioning any abuse of law are relevant in matters of family, property and obligations. General rules on obligations are extended to special contracts, mortgages, etc. Secondly, obligational relations have been treated unitarily, with certain differences of regime between professionals and nonprofessionals. Rules that were previously specific to commercial law have been extended to all relations, for instance, rules on publicity or contract pricing. At the same time, protection rules, traditional in civil law, now have a general application, for example the extension of the principle of notification of the debtor as to the expiry of the deadline for executing his or her obligations. The rule of the patrimony of appropriation divisibility is expressly settled, the intra-patrimonial transfer act is expressly qualified as not being an act of alienation, unlike the inter-patrimonial transfer. Pre-contractual liability was established for the breaking off of negotiations
The New Civil Code | Interview
without valid reason, for unexpectedly causing the other party significant damage, which can be considered akin to minimizing the will and valuing the promise. Flexible regulation has been established, allowing the parties to manifest their will: contractual mechanisms used to terminate a contract – the unilateral declaration of the contract’s rescission, agreement of the contract’s nullity without court intervention – is relevant here. Operations with a significant impact on the dynamics of relations between economic operators and on the possibility of negotiating debts are taken from
recently reformed civil legislations. It is worth mentioning the rules in the field of pre-contractual negotiations, regulation of standard clauses and of conditions under which contracts can be adapted (injury, hardship clause). New tools for transmitting obligations (debt cession) or transferring the entire obligational relations (contract cession), already known instruments, but recently adapted to the newest European standards – debt cession, novation, subrogation – will offer new chances for contract negotiation under efficiency principles, by observing the interests of the contractual parties. BR LEGAL | 7
The New Civil Code | Interview
New guarantees for the execution of contracts, specific to the business environment – the letter of guarantee, letter of comfort and clear rules on the making public of guarantees – will substantially contribute to securing legal relations. The New Civil Code confers increased protection on debtors. In the event of default, the sale of the mortgaged real estate by the creditor may take place only with the court’s approval. The debtor may challenge the sale and the term during which the debtor can challenge the execution is now longer – 15 days, as compared to 5 days in the past. For the same purpose, the New Civil Code extends the rule of notification of the debtor regarding the expiry of the deadline for executing his/her obligations to relations between entrepreneurs, starting from the premise that in civil and commercial relations it is preferable to give the debtor an additional period, aiming at persuading him/her to voluntarily carry out his/her obligation, instead of encouraging the immediate initiation of legal proceedings. The New Civil Code protects the contract’s weak party. Removing the legal effects and abusive clause in mortgage contracts, sanctioning the abuse of the stronger contractual party, establishing post-contractual negotiation rules are significant examples in this regard. How will the New Civil Code influence the Romanian economy? Businesspeople now have access to new mechanisms to achieve and protect their interests. These new mechanisms were 8 | BR LEGAL
designed to endure the swiftness, fluidity and lack of formality needed to run a successful company. Because the business environment is the key to developing Romania on the medium and long term, especially the private business environment, we have included in the New Civil Code viable and useful instruments for this environment. It is worth mentioning the trust (fiducia), the management of other people’s assets, rules on concluding contracts and the execution of obligations, plus new contracts – report, current account, commission, insurance, transport, agency and others. The minimal regulation of banking contracts was also adopted, a tool which, drawing on the new and most advanced solutions in European legislation, imposes a new rhythm on this special legislation. Economic relations are now carried out either under a new normative framework, adapted to the new economic needs, or according to rules that do not innovate, but provide traditional doctrine and jurisprudential solutions. Both methods combine to form a unitary jurisprudence. The new legislation can only have a positive impact on our economy because we have built a legal framework providing more safety for businesspeople, protection for consumers and new mechanisms for building business, which are attractive for foreign investments. What are the main objectives of the implementation of the code? The greater the economic difficulties, the more we have to strengthen the rule of law and justice. They are fundamental values of the European Union and
The New Civil Code | Interview
European living standards. We can speak of a European lifestyle with less welfare, but we cannot speak of a European model without values such as justice, law, competition, transparency, human rights and integrity. The New Civil Code, alongside the other three Codes, will contribute to the integration of these values into Romanian society, to educating citizens in the spirit of compliance with a law which, in return, respects their free will, multiplying their choices and encouraging their development, both as individuals and in their relations with each other. The implementation process of the code, given the extent of the legislative construction, is a priority for the Ministry of Justice. The main objective is the assimilation of the new legal framework by the judiciary, both with regard to legal professions and informing citizens, to whom these provisions apply. The assimilation of the New Civil Code is a challenge for the judiciary, a challenge that can be overcome, given the resources for professional training available both within the National Institute of Magistracy and other similar institutions representing the legal professions. The code has been a main focus of the Romanian legal community of late and an impressive number of conferences, seminars and debates have been organized both by professional training bodies and by public institutions, for example the Ministry of Justice and the Romanian National Bank, as well as major legal firms. Public information is, as I was saying, extremely important, and the Ministry of Justice has assumed the role of
coordinator of a project to provide online information, entitled “the New Civil Code as a common understanding for everybody”, with its partners: the Romanian National Bars Association, the National Bailiffs’ Association and the Mediation Council. Along with the Ministry of Justice, representatives of the legal professions have understood the noble side of the mission of “translating” the code and making it accessible to people. We believe that the grounds have been laid for a successful implementation through the institutional and legislative efforts of the government, Parliament and through the willingness of those who have to apply the new law. The objective of the code will be achieved when the benefits of the provisions are reflected in the economic figures, court statistics and an attractive and sustainable market for Romanian and foreign investors. How important is the implementation of the New Civil Code for Romanian society as a whole? The code will directly influence the structure of legal relations and indirectly the resolution of trials emerging from these relations. “The new codes … are an important opportunity for a thorough reform of the Romanian judicial system.” says the European Commission report of July 2010. If the code proves anything, more that any comparable project, is the institutional capacity of the three powers of the Romanian state in taking on a project, developing it, carrying it out for years, step by step, reaching completion and applying it. BR LEGAL | 9
The New Civil Code | Analysis
New Civil Code provisions on contracts Rares Voda
Managing Associate leader of Timisoara office D&B David şi Baias The contract, due to its frequency and impact on our daily life, could not escape the regulation modernization process brought by the New Civil Code (NCC). Below we set out some of the new provisions, relevant to what is usually called the “general theory of contract”. As already said, the general theory of contract is a sort of master law, by virtue of which we can execute any contract.We notice, from the very beginning, the provisions of art. 1.183 paragraph (4) NCC : “A party who negotiates, continues or breaks off negotiations, contrary to good faith, shall be liable for any damage caused to the other party. In order to set the level of damages, expenses incurred for negotiations purposes, the other party’s renunciation of other offers and any similar circumstances shall be taken into account.” The practical consequence of this article is that the a negotiating the execution of a contract or terminating negotiations in bad faith may be obligated to pay damages 10 | BR LEGAL
to the other party. Such damages may also cover the loss of a business opportunity by the partner that acted in good faith. Art. 1.186 paragraph (1) NCC is especially important. By this text, Romanian lawmakers stipulate, with reference to the contracts between parties who are not present at the same place at the contract’s execution, that the contract is deemed executed on the date and at the place where the offeror receives the acceptance of its offer, even though at that time the latter is not aware of the receipt of such acceptance, due to reasons outside its control (e.g., the acceptance letter is left in its mail box, or the acceptance message is received via the offeror’s fax machine). It is also worth mentioning the provisions of art. 1202 through 1203 NCC, which acknowledge legal effects on certain standard clauses proposed by a party to the other, provided that the other party has specifically accepted them in writing. A great improvement on the inadequate stipulations of the old Civil Code are the provisions regulating “Defects of Consent”. For example, art. 1.218: “A contract executed by a party under a state of necessity may only be cancelled if the other party has taken advantage of this circumstance” regulates the so-called “economic violence”. Another on the previous provisions is art. 1.221 NCC, whereby the lesion (the manifest difference between the considerations of the parties to a contract is imposed by
The New Civil Code | Analysis
either party to the other pursuant to a state of need, lack of experience or knowledge of the other) becomes a real defect of consent (nullifying the contract), also applicable to the contractual contracts, not only to those concluded with minors, as provided for by art. 25 paragraphs (1) and (2) of the Decree 32/1954, now repealed. Art. 1.227 NCC is also very interesting, setting forth that: “The contract is valid even if upon its execution either party was unable to perform is obligation (...)”, which concretely enforces one of the principles consecrated by the Romanian lawmakers as regards contract matters, namely to retain the contract rather than cancel it. The same rationale can also be found, for example, in art. 1.182 NCC, wherefrom we retain that the contract execution occurs as soon as the parties agree even merely on its essential elements, regardless of the fact that certain secondary elements would be subsequently agreed upon. Not accidentally, as opposed to the above idea, modern lawmakers have regulated in minute detail aspects concerning the nullity of a contract, in art. 1246 through 1265 NCC. We especially notice, inter alia, the text of art. 1.252 NCC, which institutes a presumption of relative nullity. Thus, where the nature of the nullity is not determined under a given text, or does not manifestly stem from the law, then the presumption will be applied, that is to say that the inherent nullity in that case is a relative one (which has a more restrictive regime than absolute nullity). Further on, art. 1.271 NCC regulates, for the first time in Romanian law, the concept of hardship (in Romanian: impreviziune), meaning the court’s option to adapt a contract to new performance conditions or terminate it, where the performance of the contract has become excessively
burdensome for a party, not through that party’s own fault, and where the party could not have foreseen the conditions that have brought about the hardship in performing the contract. Also valuable is art. 1.277 NCC, which will allow the unilateral termination of a contract concluded indefinitely, provided that a reasonable notice period is observed, and in practice without any court proceedings. Moreover, any clause contrary to this real unilateral termination right will be deemed unwritten, that is to say, unenforceable. This text is justified, inter alia, as against, for example, the case where a contract has been executed which provides for its successive automatic renewal over time, if the parties do not specifically decide on is termination. We regard as useful the provisions of art. 1295 through 1314 NCC, which answer an obvious practical interest, as long as multifarious contracts are concluded by a representative, whether such representation power stems from the law, from a juridical act or a judgment. We find here “answers” to controversial issues, and which were not regulated in the old code, for example conflict of interest, the contract with itself, and double representation. Furthermore, contract assignment is another new element introduced by Romanian lawmakers. Art. 1.316 NCC rightfully allows contract assignment for the first time in the Romanian law. Thus, the substitution of a party by a third party in relations created by a contract may only be achieved with the acceptance of the assigned contracting party. In conclusion, notwithstanding a few inconsistencies, maybe inherent to an approach of such broad scope, the NCC is superior to the previous code, at least with reference to the texts which may be incorporated into the general theory of contract. BR LEGAL | 11
The New Civil Code | Analysis
A new perspective on cont matters to be considered b
Bogdan Bibicu Partner, Head of Banking & Finance Kinstellar Bucharest The New Civil Code, which entered into force on 1 October, includes a series of changes related to the contractual balance, by introducing certain provisions which offer greater protection to the debtor, as opposed to the former legal provisions. However, such protection may be limited or derogated from through contractual clauses. Thus, greater caution in the drafting and negotiating of contracts is recommended. Please find below, by way of example, a few of the matters which should be considered by diligent creditors. Art. 1203 of the New Civil Code introduces the term of ‘non-standard clauses’ 12 | BR LEGAL
(Romanian: clauze neuzuale), which must be expressly accepted in writing. The majority of these non-standard clauses (e.g. arbitration clause, unilateral termination, applicable law) in practice were included in an annex of the contract listing the general terms and conditions, which was only referred to within the contract. In other instances, the general terms and conditions were signed at the beginning and only referred to when signing a new contract. This course of action is no longer recommended. Creditors should ensure now that the respective non-standard clauses are expressly accepted in writing each time a new contract is signed. Another change bringing greater protection for the debtor is the impossibility to perform obligations without debtor’s fault (Art. 1634 – Romanian: imposibilitate fortuită). Unlike the old Civil Code, which provided that this was valid only where an asset had perished or been withdrawn from commercial use, the New Civil Code opts for a broader view. Moreover, aside from the force majeure and the cas fortuit, any other similar events (an imprecise provision and susceptible to interpretation) have also been stipulated as impossibility to perform obligations without debtor’s
The New Civil Code | Analysis
ntractual balance: d by diligent creditors fault. The creditors may also minimize the applicability of these clauses, either by description, definition, enumeration of the situations of impossibility to perform obligations without debtor’s fault or by the debtor taking on the risk associated with these situations.
performance of these obligations becomes excessively onerous for one of the parties due to the intervention of an unpredictable and exceptional cause.
Another important issue to consider is the term of “reasonable period” during which the debtor has to notify the creditor of the existence of the event which prevents the execution of its contractual obligation. Given that this term is not defined by the New Civil Code, in order to prevent an excessive extension of it during which penalties cannot be applied, the creditors should define, in a precise manner, the “reasonable period” at the moment of signing.
Taking into consideration the use throughout the New Civil Code of certain relative criteria (e.g. “excessively onerous”, “obviously unfair”, “equitable”, “reasonable”), it is recommended that creditors insert a contractual clause by which the debtor takes on the risk of the occurrence of unforeseeable events and, implicitly, waives the right to invoke it. If the debtor does not agree to do so, the creditor may, for example, negotiate the provision of clear and express situations in which the debtor may invoke the unforeseeable events provisions.
Last but not least, the term of unforeseeable events (Romanian: impreviziune), previously established in the legal doctrine and in jurisprudence, especially as a result of its frequent invocation by debtors in the context of the economic crisis, was expressly regulated in article 1271 of the New Civil Code. In short, the unforeseeable events allow the court to modify the contract with the aim of re-balancing the obligations it sets out, whenever the
Through these provisions, alongside other similar ones, such as the regulation of the contract transfer, the application under certain conditions of the lesion for individuals of full age, or the clear structuring of the termination clauses, the New Civil Code gives rise, for cautious and professional creditors, to a need to review and adapt the generally used contractual clauses, in order to achieve a practical and more efficient protection. BR LEGAL | 13
The New Civil Code | Analysis
The Company Law and the
Adriana Duncea Senior Associate Lawyer Head of Legal Services Adriana Duncea is a member of the Bucharest Bar Association, with over 15 years’ experience of advising local and international clients on various complex issues governed by Romanian law. Main areas of expertise: Corporate & Commercial, Mergers & Acquisitions, Real Estate, Litigation and Arbitration.
SCA DUNCEA, STEFANESCU & Associates Cosmin Stefanescu Senior Associate Lawyer Cosmin Stefanescu is a member of the Bucharest Bar Association, with over 13 years’ experience of providing legal services. Main areas of expertise: Corporate & Commercial, Mergers & Acquisitions, Labour Law, Real Estate Transactions (including Due Diligence), Banking and Competition. 14 | BR LEGAL
Law No.31/1990 regarding companies (hereinafter referred to as the Company Law) has been considered jus commune in everything that concerns companies acting in commercial areas, at least until 1 October 2011 when the New Civil Code entered into force. The Company Law is divided into general rules that regulate all kinds of companies and special rules that apply only to some of them. For companies acting in different activities special laws have been adopted, such as those regulating banking/financial activity, insurance, leasing, etc. Since the Commercial Code as well as other laws governing acts and facts in the commercial area have been expressly abrogated by the New Civil Code (e.g. Decree No. 31/1954 regarding individuals and companies, Decree No. 167/1958 regarding statute of limitations), the New Civil Code includes many provisions of the abolished laws in similar or amended versions. The scope of adopting a New Civil Code has been and still is to unify and harmonize the rules of Romanian private law under the umbrella of a unique law which is to be the jus commune in both civil and commercial matters. However, the process of unification and harmonization of private law’s general rules under the New Civil Code is far from finished; therefore we should expect serious problems in identifying the general/ specific rules to appear and to apply to different cases in legal practice in the near
The New Civil Code | Analysis
he New Civil Code future. If we consider only the last phrase of the article enumerating the laws abolished by the New Civil Code (Law No.71 on the enforcement of the New Civil Code), which points out that any other provisions contrary to the ones provided by the New Civil Code are considered abolished, even if they have been stipulated in special laws, we anticipate some problems will further apply the principle of interpreting legal provisions i.e. specialia generalibus derogant (special departures from the general), which means that some laws will need to be amended in the future. As regards the companies and the general rules regarding their corporate governance e.g. conventional rules negotiated and stipulated by the shareholders in the Articles of Association, the liability of their authorized representatives and/or of the individuals/legal entities nominated to administer their activity/assets, from 1 October 2011 we have to take into account not only the provisions of the Company Law (i.e. the general rules concerning all categories of companies), but also the provisions of the New Civil Code (Chapter VII – Partnership Agreement) which is now the jus commune in matters of any kind regarding associations/partnerships, irrespective of the creation or not of a separate legal entity. In this respect, the New Civil Code outlines the categories of associations/partnerships that can be used by companies or individuals to develop some projects/
business for a set/undetermined period of time, such as simple partnership (societate simplă), joint venture/consortium (societate în participaţie), general partnership (societate în nume colectiv), limited partnership (societate în comandită simplă), limited liability company (societate cu răspundere limitată), joint-stock company (societate pe acţiuni), limited partnership with shares (societăţi în comandită pe acţiuni), cooperatives (cooperative) and other kind of associations provided by law. It is important to know that the New Civil Code describes only two types of partnerships: i.e. the simple partnership and the joint venture/consortium. The Company Law expressly stipulates rules for the other partnerships. In addition, you should be aware that, as stated by the New Civil Code, companies that do not succeed in their registration process with the trade registry, as well as de facto partnerships, shall be treated as simple partnership, meaning that the specific provisions of the New Civil Code shall apply to them. As a conclusion, you must take into account the provisions of the New Civil Code from now on when you refer to the Company Law. There is no doubt that the doctrine and practice will try to solve the inadvertences identified from time to time between the legal provisions, but you should not expect it to happen too soon. BR LEGAL | 15
The New Civil Code | Analysis
Impact of the New Civil Co We are looking into the changes brought by the New Civil Code to bank accounts, facility agreements, syndicated lending and new developments in terms of financing and security structures.
Simina Mut Managing Associate firstname.lastname@example.org Reff & Associates is the correspondent law firm of Deloitte Romania, integrated with the Deloitte multi-disciplinary advisory practice and affiliated to a network of law firms and legal departments working with Deloitte all over the world. As in other areas of the law, the changes brought about by the New Civil Code in bank lending are a mix of welcome clarifications but also uncertainties triggered by sometimes incomplete and unclear regulations. Overall, in our view the New Civil Code is able to provide a solid basis for the future development of banking practices although, at least in the short term, there will be increased complexity in the documentation and scope for future clarifications and amendments to be brought by the lawmaker. 16 | BR LEGAL
Bank accounts A welcomed clarification brought by the New Civil Code is the explicit regulation of set-offs between the bank and its customer in the event of multiple contractual relationships and accounts (even accounts in different currencies) â€“ Article 2185. While this aspect used to be regulated expressly in the documentation, under the New Civil Code, the set-off will apply by law unless the parties expressly agree otherwise â€“ something to be carefully considered by the borrowers. There is also an unclear provision, with a potentially damaging impact, namely that giving the account holder freedom to use the sums in his or her current account (including where such sums are from a loan disbursement) subject only to prior notice requirements (Article 2184). Depending on the interpretation that will be given by courts and practitioners to this text, there is a risk that it may be viewed as an imperative provision overriding contractual provisions requiring a particular use of the amounts borrowed or as granting legal arguments to a borrower
The New Civil Code | Analysis
Code on bank loans who would refuse to observe the restrictions agreed with the lender on using the sum borrowed. We would view such an interpretation as being in high disregard of business realities and we believe that this provision should be without prejudice to the lender’s and borrower’s right to agree otherwise in their contract.
Credit institutions lending in Romania on the basis of the European Passport (or otherwise without an established presence) will never be able to meet the criteria for the first case of having control (and will probably put in place tri-partite agreements in order to acquire control); The New Civil Code does not specify the order of preference of the three cases of “control” described above.
Another novelty in the New Civil Code impacting both lenders and borrowers is the concept of control over bank accounts. This is an alternative mean to ensure the publicity of a security over an account and may be achieved in three ways: The secured creditor is the bank where the account is open; or The debtor, the secured creditor and the bank where the account is open enter into an agreement whereby the bank undertakes to follow the instructions received from the creditor to dispose of the sums in the accounts, without need for the prior consent of the debtor; or The secured creditor becomes owner or co-owner of the bank account.
Of course, contractual arrangements may be created to limit the uncertainties and potentially detrimental impact of these new provisions; however, this would add complexity to the documentation, which is generally not good news for either lenders or borrowers. In addition, this concept is likely to raise additional issues for syndicated lending, negotiation of cash routing obligations, transparency and access to information regarding borrowers’ accounts and may also have competition law implications (in terms of tying practices).
Importantly, under the New Civil Code, the mortgage of a creditor who has control over the account is preferred over the mortgage of the creditor who does not have control over it (Article 2426). This concept raises a few concerns, mainly:
Facility agreements Articles 2193-2195 of the New Civil Code regulate, for the first time under Romanian law, the facility agreement. However, the provisions are quite unclear and raise significant question marks.
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The New Civil Code | Analysis
The New Civil Code defines the facility agreement as a contract under which an authorized entity undertakes to keep a certain sum of money available for its customer for a determined or undetermined period of time. Further on Article 2194 states that, unless agreed otherwise, the customer may access the loan in several tranches and, by successive reimbursements, renew the available sum. Finally, Article 2195 provides that, except if agreed otherwise, the lender cannot unilaterally terminate the contract prior to maturity, other than on significant grounds, related to the borrower. The first uncertainty in these provisions is their scope of application: i.e. whether they apply to any loan granted by an authorized entity or only to revolving loans (as some of the terminology used may suggest). Depending on the clarification of the first issue above, another relevant aspect is the scope of application of the provisions on “unilateral termination”. It is not clear where the unilateral termination stands among the actions available to a lender in a loan agreement, whether it is an additional right of the lender to withdraw from the agreement at any time (“on demand” facilities) and what (if any) are the areas of overlap between the unilateral termination as per Article 2195 and acceleration due to occurrence of an event of default. In our view Article 2195 creates a risk of interpretation, especially where the financier asks for early repayment and eventually proceeds to enforcement, not on the basis of a standard case of non-fulfillment of obligations by the borrower (such as 18 | BR LEGAL
non-payment) but a less straightforward one, such as a material adverse change. New developments for syndicated lending and transaction structuring Besides such uncertainties, there is also some good news for lenders brought by the new regulations, such as: The law now expressly allows a security agent to be appointed by a group of creditors. This ensures the same rank for all such creditors. The agent may exercise all rights of the secured creditors and ensure perfection of the security. Unfortunately, the provision currently applies only to security over movable assets – therefore, syndicates cannot currently use this option for mortgages over immovable assets; Elimination of the interpretation risks related to default interest and compound interest, which now enjoy clear legal consecration;
New instruments: the regulation of trusts under the institution of fiducia and the possibility for credit institutions to act as trustees sets the legal framework for innovative structures in terms of security and restructuring/ work out operations; Express regulation of the assignment and change of ranking for secured creditors will be beneficial for loan trading and will give a firmer legal substance to subordination undertakings.
You can find out more about the risks and opportunities the New Civil Code brings to the lending market at www.codcivil2011.ro.
The New Civil Code | Analysis
Main novelties brought by the New Civil Code to lease agreements The New Civil Code1 entered into force on 1 October 2011, and has as its main objective the creation of a modern instrument which regulates current social relations, which are developing rapidly. The matter of contracts, including lease agreements, has been of interest to legislators, who brought significant amendments to this matter. The following article is limited to the main novelties introduced by the New Civil Code as regards the lease agreement as a genre, without dealing individually with rent agreement or farming lease, as forms of the lease agreement. A. The lease agreement under the New Civil Code. The New Civil Code regulates the lease agreement under Chapter V, Articles 1,777 – 1,850. It includes the provisions of the former Civil Code2 on lease agreements, as well as the principles stated by doctrine, but also supplements the matter with a series of significant aspects, which we will try to summarize below. I. Different forms of lease agreements Under the New Civil Code, as was the case also with the former Civil Code, a lease agreement can take two forms: (i)
Av. Dr. Simona Chirică Bucharest Bar SCA Schoenherr şi Asociaţii lease agreement whose object are movable or immovable assets, and (b) farming lease agreement, whose object are farming goods. However, the New Civil Code introduces a third category of agreements, namely lease agreements for spaces where professional activities are carried out. Considering the contents of Article 3 of the New Civil Code’s Preliminary Title, the provisions on lease agreements for such spaces shall apply to lease agreements concluded with lessees – persons who exploit an undertaking, including traders, industrial operators, economic operators, as well BR LEGAL | 19
The New Civil Code | Analysis
lessee under the New Civil Code, even though similar to those provided under the former Civil Code and doctrine, have been expanded.
Av. Mădălina Mitan Bucharest Bar SCA Schoenherr şi Asociaţii as other persons authorized to conduct economic or professional activities. II. Duration of the lease agreement A novelty introduced by the New Civil Code regarding lease agreements is the limitation of the agreement’s duration to 49 years, where the automatic reduction of a longer term agreed by the parties applies accordingly. The New Civil Code also provides a set of rules that will apply where the parties have not stipulated the duration of the lease agreement and have not agreed upon an undetermined period. Thus, in the absence of usages (Rom. uzanţe), the lease agreement shall be deemed concluded: (i) for unfurnished dwellings or spaces dedicated to professional activities, for a term of one year; (ii) for movable assets or furnished rooms or apartments, for a duration corresponding to the time for which the rent has been calculated; (iii) for movable assets at the disposal of the lessee for use in a property, for the duration of the lease agreement for the property. III. Parties’ obligations The obligations of the lessor and of the 20 | BR LEGAL
Several new aspects have been introduced in relation to the lessor’s guarantee obligation, such that the lessor can be held liable for apparent defects only when these defects damage the life, health or bodily integrity of the lessee. Also, the lessor guarantees against defects that hinder the use of the leased good, even if those defects have arisen after the conclusion of the agreement and even if the lessor had no knowledge of them, as well as against effective interference caused by third parties, yet only if this interference commenced before the good was handed over and prevented the lessee from taking over the good. Under the New Civil Code, the lessee’s main obligation remains the payment of rent. Thus, unless stipulated otherwise, the lessee is obliged to pay the rent at the due dates set according to customary usage. If there is no usage, and unless stipulated otherwise in the contract, the lessee will pay the rent as follows: (i) in advance for the entire duration of the lease agreement, if it does not exceed one month; (ii) on the first working day of each month, if the duration of the agreement exceeds one month, however limited to one year; (iii) on the first working day of each quarter, if the duration of the lease agreement is of at least one year. IV. The lease agreement – writ of execution (Rom. titlu executoriu) Pursuant to the New Civil Code, the lease agreement is considered writ of execution
The New Civil Code | Analysis
in relation to the lessee’s obligation to pay the rent and to hand over the good upon the agreed term, subject to certain formal requirements. Thus, (i) lease agreements under private signature and registered with the relevant fiscal authorities, thus obtaining certified date (Rom. dată certă), as well as (ii) the notarized lease agreements, will be considered writs of execution for the payment of the rent. Aside from the formal requirements provided above, in order for a lease agreement to be considered writ of execution for the restitution of the leased good, it must be concluded for a determined period. V. Sublease Unlike the previous regulations, the New Civil Code provides for direct action of the lessor against the sub-lessee. Thus, in the event of non-payment of rent due under the lease agreement, the lessor may claim against the sub-lessee the amounts owed to the main lessee, limited to the rent due by the latter.3 VI. Automatic prolongation (Rom. tacita relocaţiune) Under the former Civil Code, automatic prolongation operated when the lessee continued using the leased good and the lessor put up no resistance, thus giving its implied consent to the automatic
prolongation. The New Civil Code adds a third condition to the two previous conditions required for automatic prolongation, namely for the lessee to fulfil its obligations arising from the lease agreement, such as the payment of rent, making the necessary repairs, etc. Moreover, according to the New Civil Code the new lease is concluded under the same terms and conditions as the previous lease agreement, including the guarantees. The New Civil Code substantially modifies the former regulation in the sense that all guarantees, either stricto sensu guarantees (e.g. pledge, mortgage, corporal security, retention right, bank guarantees, etc.) and lato sensu guarantees (e.g. joint liability, penalty clause) which accompanied the former lease agreement shall be transmitted automatically to the new lease agreement.4 B. New Civil Code’s applicability in relation to lease agreements Lease agreements concluded prior to the enforcement of the New Civil Code shall remain subject to the provisions of the law in force at the time of their conclusion with regards to conclusion, interpretation, effects, execution and termination. However, any amendments of the lease agreements made after 1 October 2011 shall be governed by the New Civil Code.
1 Adopted through Law no. 287/2009 regarding the Civil Code, published in the Romanian Oficial Gazzette, Part I, no. 511 dated 24 July 2009, as modified through Law no. 71/2011, on the enforcement of Law no. 287/2009 regarding the Civil Code. 2 Published in the Romanian Official Gazzette no. 271 dated 4 December 1864, subsequently amended and completed. 3 According to art. 128 of the Law regarding the enforcement of the New Civil Code, the provisions of the New Civil Code regarding the direct action of the lessor against the sublessee are applicable to the sublease agreements concluded after the enforcement of the New Civil Code, even where the main lease agreement was concluded prior to this date. 4 According to art. 129 of the Law regarding the enforcement of the New Civil code, provisions on the automatic prolongation of the agreement are applicable to all lease agreements that expire after 1 October 2011.
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The New Civil Code | Analysis
Security agreements unde – brief 0verview The New Civil Code brings substantial changes as regards security interests and guarantees, which deserve full consideration by lenders and borrowers and require the revision of loan and security documentation.
Elena Iacob Managing Associate ZRP
Types of security and guarantees The performance of an obligation may be secured by the debtor or by another person (the guarantor) by creation of a personal guarantee or of security interests over movable or immovable assets in favor of the creditor. The personal guarantees may be in the form of suretyship or of autonomous guarantees. The regulation of the autonomous guarantees – letters of guarantee and comfort letters – is introduced for the first time into Romanian legislation via the New Civil Code, although bank letters of guarantee and, to some extent, comfort letters were used before. Security over property may take the form of mortgages or pledges. The terminology in respect of security without dispossession has been unified, security over immovable property (previously called
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The New Civil Code | Analysis
der the New Civil Code “mortgage”) and security without dispossession over movable assets (previously called “security interests in movable assets” or “movable security”) being hereafter called immovable mortgages, respectively movable mortgages. The pledge is a security created over tangible movable assets or materialized titles where the creditor takes possession of the pledged assets. Where the mortgage is created by a third person guarantor, he/she shall have the rights and obligations of a mortgagor and not be subject to the legal regime of personal guarantees. Other causes of preference among creditors are general privileges (as determined in the future civil procedure code) or special privileges (of the seller of a movable asset for the price not paid by the individual buyer and of the persons with retention rights). Form of agreements The written form of the security and guarantee agreements becomes a validity condition for such agreements, with the exception of the pledge agreement which is executed validly by the remittance of the tangible asset that is the object of the
pledge or by the endorsement of the title, as the case may be. A mortgage on immovable property is created by registration of the mortgage in the Land Book Registry. However, this rule shall only apply from the moment the cadastral works are completed for each administrative-territorial unit and the land books for the real estate property opened. Until such date, immovable mortgages are validly created by agreement signed in authenticated form and registration with the Land Book Registry has only the effect of opposability against third parties. Particular rules on mortgages A mortgage on the universality of assets can be created by agreement but only on the assets used in the activity of an enterprise (Romanian afectate activităţii unei întreprinderi). Once an asset comprised in the universality is sold or otherwise transferred, it becomes free of any mortgages. The transfer of, or the creation of liens over, a mortgaged asset shall be valid, even if such action is forbidden under the mortgage agreement. Moreover, the BR LEGAL | 23
The New Civil Code | Analysis
clauses imposing on the debtor the obligation to pay the debt in advance or to settle any other obligation if another encumbrance has been created on the asset already mortgaged is considered null. Such rules are applicable for both immovable and movable mortgages and purport to exclude, by operation of law, a number of restrictions frequently imposed by the lenders in the finance documentation. In the case of movable mortgages, the mortgage may be created in favor of the creditor or of a third person designated by the creditor; also, the movable mortgage may be created in favor of a single beneficiary or of more beneficiaries at the same time. Where there are more beneficiaries, they may appoint an agent who shall exercise the rights of all the creditors appointing him or her. Registration of security interests with the Electronic Archive shall no longer be sufficient for the creditors to ensure the efficiency of mortgages over movable assets towards third parties. Thus, the concept of “perfection of movable mortgages” has been introduced by the New Civil Code. In the meaning of the New Civil Code, a mortgage is perfected when, cumulatively, it produces full legal effects between the parties and the publicity formalities set forth by law have been fulfilled. A perfected mortgage (as opposed to a non-perfected one) is enforceable towards other creditors of the mortgagor, towards third persons that subsequently acquire rights over the mortgaged assets and towards any other third parties. In respect of mortgages over bank accounts, the concept of “control”, which 24 | BR LEGAL
confers priority to the controlling creditor ahead of other creditors with mortgages over same account, has been introduced. Control may be gained by the bank where the account is opened, by agreement between the mortgagor, the secured creditor and the bank, or by the secured creditor becoming (co-)holder of the account. Impact on existing security agreements As regards the application of the new rules, these shall govern only the security agreements entered into after 1 October 2011. The creation, content, validity conditions and opposability towards third parties of the security interests created by agreements concluded before this date are governed by the legal provisions in force at the time of their creation. Publicity formalities are governed by the legal provisions in force on the date when such formalities are performed, while the registration of movable security interests existing at the date of the entry into force of the New Civil Code continues to produce effects. The security interests maintain the ranking obtained in accordance with the law in force at the time when the publicity formalities were performed. The amendments to existing security agreements shall be subject to the New Civil Code, although the provisions of the agreements unaltered by such amendments shall remain governed by the previous Civil Code. Enforcement of the security started after 1 October 2011 shall, in accordance with the principle of immediate application of the new law, be governed by the rules of the New Civil Code.