BizCLIR

Commercial contracts are governed by the Law of Contracts and Torts (the "Contract Law"), which is based on the Swiss Law of Obligations. As a general rule, the legal community, including judges and lawyers, and the business community are generally satisfied with the content and quality of the law. In fact, it is a point of pride, as well as the only significant body of economic legislation not currently slated for replacement or amendment.

The principle strength of the Contract Law is that it provides broad freedom as well as clear equality between contracting parties. Article 10 provides that contracting parties "shall be free, within the limits of compulsory legislation, public policy and good faith, to arrange their relations as they please." Indeed, the Law frequently provides the exception "unless the parties agree otherwise" to limit the mandatory nature of a number of specific provisions. Practitioners support this view.

Parties to the contract, according to Article 11, "shall be equal in terms of law." Most importantly, this includes government parties, who can contract on the same terms as natural and legal persons, and are subject to suit in the same courts. There have been problems in the recent past in application of this principle of equality due to political manipulation of the legal process, but the statutory groundwork is proper. Each party is also subject to an appropriate and individualized standard of care (Art. 18), allowing courts to take into account the experience and professional status of the parties in determining the propriety of their actions in disputes.

The Law also follows international best practices in applying trade custom and usage (Art. 21), thus allowing flexibility to the courts and parties in arranging suitable relationships according to commercial need rather than legislation. It also permits parties to define liquidated damages (Arts. 270-71) and generally supports the freedom of contract proclaimed at the outset.

Numerous forms of contract are explicitly recognized, though not always sufficiently defined. There are provisions on loans (Chap. X), leases (Chap. 11), supply of services (XII), construction (Chap. XIII), and many others. The flexibility also allows for creation of contracts not foreseen in the law, so that framework is more than adequate for the current needs.

There are, however, two weaknesses in the contract law, one explicit and the other systemic. First, the law permits judges to rewrite the damage provisions of a contract if it is determined to be too burdensome for the debtor. For example, Art. 139 give the court the right to nullify contracts based on unequal bargaining power. This is fine if it refers to contracts of adhesion, but is not limited in that way, so that it can be interpreted very broadly to permit nullification just because the "little guy" did not get the benefit expected. Likewise, Art. 141 on Usury permits the courts to reduce damages to a "just amount" when it is deemed that one party took advantage of another being need or poor material situation. In some countries, these laws might be seen as limited in scope, but Serbian courts have a reputation for siding with the debtors, and such provisions only support the tendency toward inappropriate judicial interference with contracts.

The second problem is systemic. As noted, legal professionals are satisfied with the law, noting that it is generally sound with the exception of minor amendments needed (such as the pro-debtor bias clauses). When asked how they would introduce those changes, there is silence. There is no mechanism for those most attuned to the needs of the business community to provide input on changes to the law. In more developed legal systems, various associations (including business and legal associations) will have standing committees that capture information regarding needed legislative changes then introduce the needs to the legislative body or responsible government ministry. Serbia and FRY do not have such groups yet, nor do they have a formal mechanism for stakeholders to participate in or initiate legislative reforms. As long as commercial legal development is a supply side obligation divorced from the practitioners and stakeholders, it will not adequately support the developing commercial sector. This must be addressed and remedied.