Romania: An Introduction to Dispute Resolution
The year 2021 in dispute resolution in Romania is expected to be extremely dynamic, characterised by an increase in cases, considering that the judicial system has fully resumed its activity, while it is constantly adapting to the new context.
In order to understand the evolution of dispute resolution in the upcoming year, we should make a brief examination of last year’s events. While the beginning of 2020 did not give any indication of any unparalleled incidents, the normal course of events was disrupted by a protest initiated by the magistrates, which led to a de facto suspension of most cases. Shortly afterwards, the authorities initiated the measures aimed to fight the spread of Covid-19, and the activity of the courts was again suspended for two months.
Altogether, the State has adopted a series of measures for supporting the economy, such as a moratorium on bank loans, fiscal facilities, state guaranteed loans for companies, facilities for small and medium-sized enterprises holding an emergency certificate, and state support for employers aimed at the application of social protection measures.
The measures were mainly instated through emergency ordinances and laws, mostly drafted more rapidly than usual, which have been repeatedly modified within a short period of time, thus resulting in a certain degree of unclarity or uncertainty.
The European Commission’s European Economic Forecast Winter 2021 anticipates that Romania’s GDP will grow by 3.8% in 2021, mainly based on private consumption and the construction sector, while the eurozone economy is also anticipated to grow by 3.8%. However, with respect to Romania, the contribution of net exports to growth is expected to remain negative over the forecast horizon and inflation is forecast to increase slightly. Meanwhile, the budget statement drafted by the Government is based on economic growth of 4-5% in 2021, depending on the development of the sanitary crisis.
Moreover, following the European Parliament's approval of the Recovery and Resilience Facility, Romania has obtained funding worth EUR30.5 billion, as follows: EUR13.8 billion in grants and EUR16.7 billion in loans, which are expected to bring a series of positive effects on the economy.
Thus, Romania is entering the year 2021 with multiple ongoing challenges, but with an overall optimistic perspective on the economic developments. However, the uncertainties that the economic sector is facing, and the occasionally ambiguous character of legislation, seem to be fuelling a new set of varied disputes, encompassing both private and public law matters.
Firstly, following an extensive debate, the Parliament has passed the law regarding the state budget for 2021, while the Government is preoccupied with ensuring the required funds following a year of increased public expenses. In this context, it is worth noting that the law regarding the state budget was passed without any amendments to the project submitted by the Government.
The pressure exerted on the public budget by the public expenses, by the delays in the collection of taxpayers’ incomes due to the extension of the tax liability period and by the fiscal facilities is expected to lead to more frequent and thorough fiscal inspections. Moreover, many of the facilities and support measures introduced by the State are provided on condition that fiscal inspections are to be performed with respect to the companies that access it.
From this perspective, we have also observed an increase in the fiscal inspections that generally cover the last five years of the activity of companies, and which usually result in significant additional amounts being owed to the public budget by those companies, given that the fiscal authorities have the power to examine a wide range of economic transactions from a tax standpoint. Naturally, most companies challenge the fiscal deeds issued by the fiscal authorities, asking the courts to suspend and annul the payment obligations.
A new change in tax legislation was implemented following the new Council Directive (EU) 2018/822 of 25 May 2018 amending Directive 2011/16/EU on the mandatory automatic exchange of information in the field of taxation on cross-border arrangements which are the subject of reporting. The directive, known as DAC6 – standing for Directive on Administrative Cooperation– is already taking effect in several countries, but Romania has decided to postpone the first reporting deadline in the context of the COVID-19 pandemic.
The main obligation instated with respect to a potential risk of tax avoidance consists in reporting cross-border arrangements which involve: tax benefits at the level of the participants or the group, conversion of income into capital or other categories of revenue which are taxed at a lower level or exempt from tax, and any other cross-border arrangements that meet at least one of the distinguishing marks listed in the Annex to the Directive.
The relevance of the matters arises from the fact that fines could be applied with respect to each entity involved in a certain transaction, and this multiplication can often be significant and can led to reputational issues for the companies involved. Therefore, considering the novelty of the regulatory act, we are expecting the first instances of fiscal litigation involving the matter.
Secondly, commercial disputes are also expected to increase, based on many factors. On the one hand, many companies have postponed the initiation of new litigation in 2020, based on the uncertainty of the economic and judicial circumstances. Therefore, dormant contractual disputes will most likely be brought in front of the courts or arbitral tribunals in 2021.
On the other hand, the economic difficulties and the lockdown measures instated by authorities have led to a multiplication of disputes arising from breaches of contract. Many of the companies that failed to comply with their contractual obligations consider that they are exempt from contractual liability due to the pandemic, which could represent a ground of force majeure.
Considering that force majeure does not have a strict definition under Romanian law and also the fact that certain new provisions regarding force majeure have been adopted in 2020, the applicability of this potential defence will depend on diverse factors, such as contract provisions, specific factual circumstances and evidence administered in front of the court. While the first court rulings on this matter are starting to be published, we expect that the jurisprudence will not develop unitarily at the moment.
For instance, following the government restrictions announced during 2020 as a result of COVID-19, there has been a significant increase in commercial tenancy disputes, particularly in the retail sector. Thus, both tenants and owners have already initiated lawsuits with respect to the payment of the lease owed during 2020, either during the lockdown phase or during the rest of the year, when commercial activity has been reduced.
Given the economic growth of the construction sector, a significant number of disputes have arisen in 2020 and their number is expected to grow in 2021 in this industry. The specific nature of the industry has led to a varied number of litigation matters, involving public procurement matters, litigation regarding the validity of building permits, and contractual disputes.
Currently, one of the most heated topics in this matter that is expected to create new disputes is represented by the Bucharest General Council's decision to suspend, for a period of 12 months, the Area Town Planning applicable for most of the city. Since the Bucharest General Council will create significant difficulties for developers to obtain building permits for new projects, it is very likely that many of the developers will challenge this decision in front of the courts of law and/or they will request damages from the authorities.
While many of the construction agreements include arbitration clauses, the most ‘popular’ alternative dispute resolution method chosen by Romanian parties is represented by arbitration under the rules of the Court of International Commercial Arbitration attached to the Chamber of Commerce and Industry of Romania or under the Rules of the International Chamber of Commerce. Thus, the entering into force of the new International Chamber of Commerce rules on 1 January 2021 is of great interest to many companies active in Romania, which have concluded contracts which have chosen the International Chamber of Commerce as the preferred dispute resolution method.
Thirdly, the pandemic has accelerated the digitalisation of all activities, including both the public and private sectors, from commerce to banking. In this context, there is high pressure on the security of online activity, while the Authority for Data Protection is closely analysing any potential data breaches. Consequently, we are expecting an increase in sanctions imposed on the grounds of the General Data Protection Regulation which could also lead to challenges initiated by the companies that consider they have been wrongly sanctioned.
Furthermore, the digitalisation of work has led, on the one hand, to the generalisation of teleworking (working from home). Employers were required to quickly adjust and regulate the new working regime and, in cases where companies with a large number of employees failed to establish internal regulations corresponding with the perspective of their employees and the legal requirements, the employers are also facing labour lawsuits with respect to the working conditions.
However, both the automation of activity and the interdictions imposed on many economic sectors (most importantly, travel companies, hotels, restaurants, entertainment companies, etc.) have led to restructuring and personnel downsizing, which are expected to grow. In many cases, former employees have already challenged and will also challenge in 2021 the termination of their work contracts, thus resulting in another category of litigation expected to grow this year. In this context, the current unemployment rate remains around 5%.
Therefore, we can also expect an increase in labour law disputes, arising from a wide range of measures such as payment cuts, suspensions or terminations of employment contracts that have not been performed in accordance with the requirements of the law.
Having in mind that 2021 will definitely bring new challenges and opportunities, considering that it could represent phase 1 of a new economic growth cycle, both attorneys and clients should seize them and use the dispute resolution methods as a means to attain their targets.