OCTOBER 2015
COMMENTARY
International Remedies for Foreign Investors in Croatia
and Poland: Mortgage and Consumer Loan Conversion
Legislation
As a result of new mortgage and consumer loan
Croatian national bank, the value of these loans is 23.1
conversion legislation in Croatia and Poland, foreign
billion kuna, which is the equivalent of US$3.38 billion. 3
investors in the financial sectors of those countries
CHF-denominated mortgages account for 38 percent
may soon suffer substantial losses. Many of those
of all mortgages in Croatia. 4 Likewise, between 2007
affected investors, however, may be entitled to com-
and 2008, more than 500,000 Poles took out home
pensation under Croatia’s and Poland’s numerous
loans denominated in CHF, hoping to benefit from low
bilateral investment treaties (“BITs”). This Commentary
interest rates.
provides an overview of the proposed legislative
changes in Croatia and Poland, and describes the
In January of this year, however, Switzerland elimi-
international remedies that may be available to inves-
nated its cap on the CHF; consequently, that currency
tors seeking shelter from their effects.
quickly began to surge. As a result, debtors holding
CHF-denominated loans in Croatia and Poland have
Overview of the New Legislation
Since the early 2000s, some Eastern European coun-
seen a drastic increase in the amount of local currency they need to pay to their creditors in order to
satisfy their CHF-denominated loans.
tries, including Croatia and Poland, have permitted
banks and other financial institutions to issue mort-
The governments of Croatia and Poland have pro-
gages and consumer loans denominated in Swiss
posed legislation to address this developing situation.
francs (“CHF”) as an alternative to doing so in local
The Croatian government enacted a special law freez-
currency. CHF-denominated loans were attractive
ing the exchange rate for these loans, for a year, at
because they offered lower rates than those issued
6.39 kuna per CHF, which is below the current mar-
currency.1
Croatia has approximately 55,000
ket rate of 6.88 kuna per CHF yet still higher than the
CHF-denominated loans outstanding. Most of these
prevailing rates when most loans were taken out. 5 In
loans were taken in the early 2000s for mortgages or
September 2015, the Croatian government proposed
in local
purchases of commercial
© 2015 Jones Day. All rights reserved.
property. 2
According to the
a change to consumer credit laws in order to enforce
conversion of CHF-denominated loans into euros. The law
2015.6
portfolios worth nearly 144 billion zlotys, which is equivalent to
Under
8 percent of the country’s GDP. The National Bank of Poland
this conversion law, banks will absorb the full cost of con-
estimated the losses incurred by banks due to the Polish bill
version, although they may be partly compensated through
at 21 billion zlotys (US$5.6 billion). Consequently, in the best
became effective at the end of September
deductions.7
Croatia’s conversion law likely will have a
case scenario, assuming that Poland’s final bill provides for
retroactive effect. According to the European Central Bank
half of a restructured CHF loan to be written off by banks and
(“ECB”), “the purpose of the law is to place borrowers of CHF
the other half to be repaid by borrowers, the cost to banks
loans in the position that they would have been in had their
would amount to nearly 10 billion zlotys (US$2.25 billion). But,
Kuna].”8
if the final bill holds banks responsible for 90 percent of the
Additionally, the ECB is of the view that “the retroactive effect
conversion costs, the estimated cost to banks would be 20
of the law is not in line with the general aim and principle of
billion zlotys, or nearly US$5.5 billion.
tax
loans, from inception, been denominated in Euros [or
Directive 2014/17/EU,”9 which “allows Member States to further
regulate foreign currency loans, on the condition that such
effect.”10
Whether the banks are asked to assume 50 percent, 90 per-
The ECB
cent, or 100 percent of the loan conversion cost, the legislative
therefore noted that if the draft law is introduced with retroac-
changes would still have a negative impact on the profitability
tive effect, it would “undermine legal certainty.”11
and value of their investments in Croatia’s and Poland’s bank-
regulation is not applied with retroactive
ing sector. Past experience in investor–state arbitration shows
In Poland, the lower house of Parliament passed a draft law
that foreign investors negatively affected by currency conver-
that would convert all CHF-denominated mortgage loans to
sion policies may have recourse under international law. For
zlotys with the exchange rate of the CHF recorded on the day
example, Argentina’s policy of “pesification” of its financial lia-
of the conversion. The bill provided that banks would take on
bilities, through the termination of the currency board that had
90 percent of the costs of such conversions. On September 8,
pegged the peso to the U.S. dollar, negatively affected the value
2015, however, the upper house of Parliament voted to amend
of investments owned by foreign investors, and resulted in more
the bill on conversion of CHF-denominated mortgages into
than 40 arbitrations against Argentina.14 Several of these arbitra-
zlotys so that the costs would be shared 50–50 by banks and
tions have culminated in awards in favor of the foreign inves-
mortgage holders. As a result, the bill has been sent back to
tors.15 Accordingly, foreign investors in Croatia and Poland likely
the lower house for further discussion and a vote. Regardless
will have recourse to international remedies through investor–
of whether the bill that is ultimately passed includes a 50 per-
state arbitration as provided by the available BITs.
cent or a 90 percent cost burden on financial institutions, the
effect on banks will be substantial.
What Are the International Remedies?
Investor–state arbitration is an attractive option for aggrieved
The Financial Impact of the Legislative Changes
investors. This regime provides a specialized and neutral
The banking sector in both Croatia and Poland is composed
forum in which to bring disputes against a state for its sover-
mostly of foreign banks that own local banks or have a
eign acts. It is often not necessary to exhaust local remedies
local branch. For example, more than 90 percent of all local
or to commence any domestic litigation before bringing an
banks in Croatia are owned by parent banks in the European
investor–state arbitration. However, an investor’s ability to
Union.12
bring a claim may depend upon the ownership structure of
Similarly, around 60 percent of Poland’s banking sec-
tor is owned by foreign groups.
the affected investment vehicle.
Foreign-owned Croatian banks hold a large portion of the
Some investors will have recourse through BITs. Poland has
55,000 CHF-denominated loans outstanding in Croatia.
60 BITs in force and Croatia has 47, notably with capital-
According to Croatia’s central bank, the cost of the conver-
exporting states such as the Netherlands, Austria, Germany,
sion to these banks will be “tangibly higher” than the originally
Spain, the United States, and Italy.16 BITs are designed to
assessed US$895
million.13
Polish banks hold Swiss franc
promote and protect investments by investors of the other
2
Jones Day Commentary
state party to the treaty. Most BITs protect a broad range of
protection against illegal expropriation. Most BITs require
investments, which encompass all assets. Foreign groups
that the expropriation of foreign-owned property must be:
operating banks in Poland and Croatia typically hold shares
(i) for a public purpose; (ii) nondiscriminatory; (iii) in accor-
in a locally incorporated branch or have acquired a local pre-
dance with due process; and (iv) accompanied by prompt,
existing bank17—such investments are likely to fall within the
adequate, and effective compensation equivalent to the
protection of investment treaties. Foreign financial institutions
fair market value of the expropriated investment before the
that have issued CHF-denominated mortgages in Poland or
expropriation became known. A government measure that
other loans in Croatia, but that do not have a physical pres-
did not comport with these requirements would constitute
ence in those countries, might also benefit from investment
an expropriation if it effectuated a permanent loss of the
treaty protections if the relevant treaty includes loans and
economic value of an investment.
claims to money as covered
investments.18
Host governments also are required, under international law,
Access to arbitration under a particular treaty will depend
to provide full protection and security to the foreign investor
upon an investor’s nationality in one of the signatory states. In
and/or its investment. Traditionally, these protections referred
this context, nationality is typically determined by the claim-
mostly to the physical protection of an investment against
ant’s place of citizenship and/or incorporation. Many BITs
interference by the use of force. This interpretation, however,
permit investors to make claims for directly or indirectly held
has evolved to include the legal protection of the invest-
investments as well as minority shareholdings. Thus, parent
ment as well. 21 Changes in the legal framework likewise may
companies or individual shareholders are often able to assert
breach the full protection and security protection if they dras-
rights relating to an investment held through a subsidiary
tically alter the legal framework for the investments resulting
company. Some treaties also provide that juridical persons
in the destabilizing of the investment. Some BITs may also
incorporated in the host state but controlled by nationals of
contain an umbrella clause that guarantees the observance
the other contracting state may be treated as foreign nation-
of obligations assumed by the host state vis-à-vis the inves-
als for the purpose of making an investment arbitration claim.
tor or his investment.
There are a number of substantive protections provided under
There are many advantages to investor–state arbitration.
BITs as well. The fair and equitable treatment standard is the
Successful claimants are typically awarded monetary com-
most frequently invoked standard in investment disputes and is
pensation, which in some cases not only includes the amount
likely to be the strongest claim in the type of dispute explained
invested (plus interest, costs, and expenses) but also lost
above. The standard is fact-specific and may be breached by
future profits. Arbitral awards are binding on the parties and
a state’s actions or omissions that violate the investor’s legit-
create an obligation to comply with them. Most states comply
imate expectations relied upon by the investor to make the
with international arbitration awards voluntarily. In the event a
investment.19
The investor’s legitimate expectations can be
party fails to comply with an award, one of the major advan-
based on the host state’s legal framework, contractual under-
tages of arbitration (as opposed to litigation) is the inter-
takings, and any undertakings and representations made
national enforceability of arbitral awards as compared with
explicitly or implicitly by the host state; changes in the legal
foreign court judgments.
framework may also be considered breaches if they represented a reversal of assurances made by the host state to the
It is also worth noting that the European Commission (“EC”)
foreign investor. For example, the retroactive effect of Croatia’s
has sought to intervene in an increasing number of inves-
draft law would, at least according to an opinion by the ECB,
tor–state claims brought by EU nationals against member
offend the principle of legitimate expectations and likely sup-
states. Indeed, the EC has voiced opposition to intra-EU BITs,
port any fair and equitable treatment
claim. 20
i.e., BITs between EU member states, and, recently, went as
far as initiating infringement proceedings against Austria,
Investors who have seen their entire investment wiped out,
the Netherlands, Romania, Slovakia, and Sweden, requesting
or almost entirely wiped out, might also have recourse to the
them to terminate their intra-EU BITs. 22
3
Jones Day Commentary
Lawyer Contacts
In one case, the EC even issued an injunction barring a
member state—Romania—from paying the award in the
Micula v. Romania ICSID case 23 on the ground that such
Jones Day lawyers have decades of experience in bring-
payment would constitute illegal state aid under EU law. 24
ing and defending investor–state claims, including specific
That injunction is likely to remain in place until the EC rules
experience in the financial sector in Eastern Europe. We
on the ultimate compatibility of that aid with the European
would be happy to discuss options with any current or pro-
market. 25
While the final outcome of the EC’s inter-
spective clients who have suffered losses to their renewable
vention remains hard to predict and would certainly com-
portfolio. For further information, please contact your prin-
plicate an arbitration, it is by no means a bar to bringing a
cipal Firm representative or one of the lawyers listed below.
claim. In 2014, 16 percent of all investor–state arbitrations
General email messages may be sent using our “Contact Us”
single
brought globally were intra-EU in
nature, 26
and, in any event,
form, which can be found at www.jonesday.com/contactus/.
measures such as those taken by the EU are of limited
practical concern because most BITs contain termination
Baiju S. Vasani
Sylvia Tonova
clauses confirming that their terms will continue in effect for
London
London
a number of years following termination.
+44.20.7039.5121
+44.20.7039.5218
Washington
[email protected]
This remains a rapidly evolving and contentious area, although
+1.202.879.3888
there is little doubt that many investors in the financial sec-
[email protected]
tor will be adversely affected by the new conversion bills in
James Egerton-Vernon
Washington
Poland and Croatia. Investor–state arbitration is a possible
Melissa S. Gorsline
+1.202.879.3610
avenue to address these likely losses.
Washington
[email protected]
+1.202.879.5421
[email protected]
Maria I. Pradilla Picas
Washington
Charles T. Kotuby
+1.202.879.4640
Washington
[email protected]
+1.202.879.5409
[email protected]
Johannes P. Willheim
Frankfurt
+69.9726.3985
[email protected]
4
Jones Day Commentary
Endnotes
1
Jasmina Kuzmanovic, “Banks Prepare to Sue Croatia Over Swiss
Franc Loans Law,” Bloomberg Business, Sept. 14, 2015.
2“Croatia Plans to Convert Swiss Franc Loans into Euros,” Reuters,
Sept. 10, 2015.
3
Jasmina Kuzmanovic, “Banks Prepare to Sue Croatia Over Swiss
Franc Loans Law,” Bloomberg Business, Sept. 14, 2015. Exchange
rate as of Sept. 21, 2015 (1 kuna = US$0.15).
4
Id.
5
Id.
6“Croatia Plans to Convert Swiss Franc Loans into Euros,” Reuters,
Sept. 10, 2015. According to reports by Bloomberg Business and
Reuters, the new changes to the Croatian law became effective
on Sept. 30, 2015. See Jasmina Kuzmanovic, “Croatia Bolsters
Bank Funds, Aids Kuna before Franc-Loans Switch,” Bloomberg
Business, Sept. 30, 2015; “Croatia Central Bank Provides Liquidity
for Swiss Franc Loan Swap,” Reuters, Sept. 30, 2015. As of date of
publication of this Commentary, the Croatian authorities had yet to
confirm whether this was, in fact, the case.
7
Id.
8
Opinion of the European Central Bank of 18 September 2015 on the
conversion of Swiss franc loans (CON/2015/32), at § 1.2.
9
Id.
10 Id.
11
18 See Fedax N.V. v. Republic of Venezuela, ICSID Case No. ARB/96/3,
Decision of the Tribunal on Objections to Jurisdiction, July 11,
1997, ¶¶ 31-37 (applying a broad interpretation to the term “investment” and finding that, under the applicable BIT, loans and other
credit facilities constitute covered investments); but see Salini
Construttori S.p.A. and Italstrade A.p.A. v. Hashemite Kingdom of
Jordan, ICSID Case No. ARB/02/13, Decision on Jurisdiction, Nov.
29, 2004, ¶¶ 52-54 (enumerating a list of characteristics that an
investment must possess in order to be considered a covered
investment, mainly: “contributions, certain duration of performance
of the contract and a participation in the risks of the transaction”);
Romak S.A. v. Republic of Uzbekistan, PCA Case No. AA280, Award,
Nov. 26, 2009, ¶ 207 (the tribunal agreed with the Salini tribunal
and applied a narrow interpretation of the term “investment” even
where the definition of “investment” included “claims to money”).
19 The FET standard may also be breached by (i) conduct that is not
transparent or consistent and creates an unstable or unpredictable legal framework or business environment for the investment;
(ii) conduct that violates due process or results in a denial of justice; (iii) discriminatory action; (iv) interference with a contract; (v)
bad faith; or (vi) harassment or coercion.
20 See Opinion of the European Central Bank of Sept. 18, 2015 on the
conversion of Swiss franc loans (CON/2015/32), at § 3.2.2.
21 See Azurix Corp. v. Argentine Republic, ICSID Case No. ARB/01/12,
Award, July 14, 2006, ¶ 408 (where “protection and security” is qualified by “full,” the standard extends beyond physical security).
22 See European Commission Press Release, “Commission asks
Member States to terminate their intra-EU bilateral investment treaties,” June 18, 2015.
Id.
12“Croatia Plans to Convert Swiss Franc Loans into Euros,” Reuters,
Sept. 10, 2015.
13 Id.
14 See generally William W. Burke-White, “The Argentine Financial
Crisis: State Liability Under BITs and the Legitimacy of the ICSID
System,” Penn Law: Legal Scholarship Repository, Jan. 24, 2008.
23 Ioan Micula, Viorel Micula, S.C. European Food S.A, S.C. Starmill
S.R.L. and S.C. Multipack S.R.L. v. Romania, ICSID Case No.
ARB/05/20, Final Award, Dec. 11, 2013.
24 See Luke Eric Peterson, “European Commission Enjoins Romania
from Paying ICSID Award, Thus Throwing a Wrench into Enforcement
of Intra-EU BIT Ruling,” IAReporter, Aug. 7, 2014.
25 Id.
15 See, e.g., CMS Gas Transmission Co. v. Argentine Republic, ICSID
Case No. ARB/01/8, Award, May 12, 2005; LG&E Energy Corp. v.
Argentine Republic, ICSID Case No. Arb/02/1, Decision on Liability,
Oct. 3, 2006; Enron Corp. Ponderosa Asset, L.P. v. Argentine
Republic, ICSID Case No. Arb/01/3, Award, May 22, 2007; Sempra
Energy Int’l v. Argentine Republic, ICSID Case No. Arb/02/16, Award,
Sept. 28, 2007.
16 See UNCTAD, Investment Policy Hub. Notably, the Croatia–Italy BIT
was terminated in 2013. However, Article 13 of the BIT provides that
it continues in force for 10 years from the date of termination. In this
case, the BIT would remain in force until June 11, 2023.
17 Sylvester Kozak, “Consolidation within the Single European
Financial System in 2003-2013,” NBP Working Paper No. 166, at
37-38.
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