BOSNIA &

HERZEGOVINA

1.LEGAL SYSTEM

2.LITIGATION

3.BUSINESS CRIME

4.INSOLVENCY

5.ARBITRATION

6.ENFORCEMENT

7.PRACTICE TIPS

8.CONTACT

1. LEGAL SYSTEM

The state of Bosnia and Herzegovina (BiH) consists of two entities – the Federation of Bosnia and Herzegovina (FBiH) and the Republika Srpska (RS), and a special autonomous district under the direct sovereignty of the state – the Brčko District (BD). The entities have their own set of relatively distinct laws, but some matters are regulated by national laws which apply to both entities.

Court organization, jurisdiction, financing of courts and other related issues in BiH are regulated at the entity level, in FBiH by the Law on Courts in FBiH (Zakon o sudovima u Federaciji Bosne i Hercegovine) and in RS by the Law on Courts of RS (Zakon o sudovima Republike Srpske).

In 1998, BiH began with a reform of its judicial system which is still ongoing. Although significant progress has been made since then, the reform process and implementation of the new laws has been generally slow and inconsistent, mainly due to the high number of unresolved cases and inadequate training and education of judges in the new procedural legislation. Consequently, court practices and procedures tend to vary significantly from court to court and judge to judge.

The FBiH court structure consists of Municipal Courts (Općinski sudovi), Cantonal Courts (Kantonalni sudovi) and the FBiH Supreme Court (Vrhovni sud FBiH). All civil and commercial disputes, as well as bankruptcy proceedings, enforcement proceedings and the registration of companies, including all related issues, are within the competence of the Municipal Courts. However, it should be noted that commercial disputes can only be brought before Municipal Courts which have a commercial division. Under the Law on Courts in FBiH, a commercial dispute is considered to be any dispute between business companies and/or entrepreneurs related to the trade of goods, services, securities, real estate etc., disputes related to ships and sailing (except passenger transport), aircrafts and air traffic (except passenger transport), industrial property and copyrights, trusts and commercial offences.

Appeals against judgments of the Municipal Courts may be filed with the competent Cantonal Court. Aside from appeals, Cantonal Courts are first instance courts in criminal matters related to major crimes. In addition, the Cantonal Courts have exclusive competence to resolve jurisdictional conflicts between the Municipal Courts and are the courts of first instance for the recognition of foreign judgments. The FBiH Supreme Court is the highest appeals court and has exclusive competence to hear appeals from judgments of the Cantonal Courts. The FBiH Supreme Court also resolves jurisdictional conflicts between lower courts from different Cantons in FBiH.

The commercial courts in RS are competent to resolve disputes and matters in civil and extra-ordinary proceedings, which relate to issues arising out of contracts concluded between legal entities regarding legal transactions involving goods, services, securities, ownership and other rights as well as for disputes and matters related to bankruptcy, ships, planes, copyrights, foreign investments, establishment of legal entities, etc. The commercial courts are established at two levels: six first instance District Commercial Courts and one second instance Higher Commercial Court, with its seat in Banja Luka, which decides on appeals against decisions of the District Commercial Courts as well as on competency issues and the establishment of legal standards for the uniform application of laws.

The RS court structure consists of: (a) 28 Basic Courts (Osnovni sudovi) which have authority in criminal, civil and enforcement proceedings under conditions set out in the Law on Courts in RS; (b) six District Courts (Okružni sudovi); (c) six District Commercial Courts (Okružni privredni sudovi); (d) the Higher Commercial Court (Viši privredni sud); and (e) the Supreme Court of RS (Vrhovni sud RS). Appeals against awards of the Basic Courts may be filed with the competent District Courts. Aside from appeals, District Courts are also first instance courts for major crimes, administrative disputes and the recognition of foreign court judgments/arbitral awards. The highest appeals court in RS is the Supreme Court, with essentially the same competences as the FBiH Supreme Court.

Both entities have Constitutional Courts, the competency of which is to uphold the respective entity constitutions.

The BiH judicial system consists of the following state-level judicial institutions: the Court of BiH (Sud BiH) and the Constitutional Court of BiH (Ustavni sud BiH). The Court of BiH has three divisions: Criminal Division, Administrative Division and Appellate Division, and is, inter alia, competent for the prosecution of war crimes, organized crime, commercial crime, corruption and violations of election laws. The Constitutional Court of BiH is competent to support and protect the Constitution of BiH, which includes cases when a violation of human rights is alleged due to a judgment or decision of any judicial institution in BiH. The Constitutional Court is not a part of the legislative, executive or regular judicial authorities but is positioned under the BiH Constitution as a special and independent authority which operates, based on the Constitution, as the correction factor for all three segments of the authority.

The FBiH Civil Procedure Act (Zakon o parničnom postupku FBiH) and RS Civil Procedure Act (Zakon o parničnom postupku RS), were enacted in 2003 to accelerate and simplify civil litigation proceedings and enhance the efficiency of the BiH courts. The Acts, to a large extent, correspond to each other, but in practice the courts may slightly differ in the manner in which the various provisions are applied. The litigation process begins by delivering the lawsuit to the defendant. The defending party has the right to respond to allegations set forth in the lawsuit. All communications between the parties are generally made through the court in a written form, apart from direct oral communications during court hearings.

Generally, the litigation process entails two hearings: a preparatory hearing (pripremno ročište), and a main hearing (glavna rasprava), after which the court renders its judgment. An unsatisfied party may file an appeal against the award of the court of first instance to the competent Cantonal Court in FBiH or District Court/Higher Commercial Court in RS, but only for one of the reasons provided for in the relevant code of civil procedure. Decisions issued by the second instance court may be challenged before the relevant Supreme Court for a limited number of reasons set forth in the respective civil procedure codes and only if the amount in dispute exceeds BAM 30,000 (approximately EUR 15,000) or BAM 50,000 (approximately EUR 25,000) for commercial disputes in FBiH and RS.

Although the FBiH Civil Procedure Act and RS Civil Procedure Act provide for relatively expedited court proceedings, in practice litigation may last several years, due to the backlog of cases before the courts throughout BiH.

Litigation costs typically include court fees, attorneys’ fees, remuneration for experts and witnesses, translation expenses, etc., which may in the aggregate be substantial, depending on the amount in dispute. The losing party is obligated to reimburse all costs of the proceedings to the successful party at the conclusion of the proceedings.

Criminal acts are generally regulated by criminal codes (krivični zakon) adopted at both entity and state levels, as well as at the level of BD, while rules of criminal procedure are provided in the criminal procedure codes (zakon o krivičnom postupku) also adopted at entity, state and BD level. Due to the process of harmonization of criminal procedure codes within BiH which started in 2003, all these legal acts in principle provide for substantively the same rules of criminal procedure.

The criminal codes of BiH, FBiH, RS and BD provide for a set of criminal acts which can be classified as business crimes, i.e., criminal acts against commerce, business and security of money transfers. In addition, the relevant codes also define criminal acts of bribery (corruption), as well as tax-related criminal acts. This group of crimes includes acts, inter alia, causing bankruptcy, damaging creditors, creating a monopoly position on the market, revealing business secrets, counterfeiting money or securities, money laundering, illicit trade and production, etc.

In addition to the liability of natural persons, the relevant criminal codes also regulate the criminal liability of legal entities, which can be penalized with monetary fines, seizure of property or liquidation of the legal entity. In general, a legal entity is liable for criminal acts committed on the territory of BiH. In general, a legal entity can be liable for criminal acts that its legal representative committed in the name and for the account of such legal entity, in situations defined by the respective criminal code.

As previously outlined, the criminal procedure in BiH is governed by the criminal codes of BiH, FBiH, RS and BD. In general, the criminal procedure consists of three stages: investigation, denunciation and the main hearing. The procedure is initiated by the prosecutor who is authorized to issue an order for an investigation, if it finds that there are reasons to doubt (osnovi sumnje) that a criminal act has been committed. Providing that the investigation results in sufficient material (e.g. supporting evidence) confirming that there is reasonable doubt (osnovana sumnja) that a criminal act has been committed and who the offender is, the prosecutor will commence the denunciation phase of the procedure by raising an indictment.

The indictment is submitted to the competent court in writing. Upon receipt of the indictment, the court passes a decision confirming or rejecting all or certain allegations of the submitted indictment. If the court confirms the indictment entirely or partially, it schedules a main hearing where the prosecutor and the defendant may present their cases, by submitting documents, examining fact and expert witnesses, etc., and through closing arguments. The first instance procedure is terminated after the court renders the judgment.

The judgment is based on the facts and evidence presented by the parties during the main hearing. An unsatisfied party may file an appeal to the competent Cantonal Court in FBiH or District Court in RS, for the reasons provided in the relevant codes of criminal procedure. Judgments of the appellate courts may further be challenged before the relevant Supreme Courts of FBiH and RS for a limited number of reasons. In BD, an unsatisfied party may file an appeal to the BD Appellate Court, while an appeal against decisions of the BiH Court can be filed with the Appellate Council of the BiH Court.

Generally, the prosecutor plays the key role in criminal proceedings as the criminal procedure can be initiated and conducted only on the basis of a prosecutor's request. In the course of the procedure, the prosecutor undertakes actions for which it is authorized by law. An illustrative example is the prosecutor's role in the investigation procedure. In particular, a prosecutor is authorized to undertake all investigation activities, including questioning the suspect and hearing the injured party, performing inspections and reconstructions of events, undertaking special measures which ensure the safety of the witnesses and information, and ordering the necessary expertise, in accordance with the rules stipulated in the relevant criminal procedure codes.

In any case, the prosecutor can undertake actions either alone or through persons who are legally obliged to act on the basis of the prosecutor's orders. In that respect, the prosecutor supervises the work of the authorized officers (e.g. police officers), i.e. persons who have adequate authorization within, inter alia, the police bodies of BiH, including the State Agency for Investigation and Protection, State Border Agency, and the police bodies of the competent ministries of internal affairs. Moreover, the prosecutor is authorized to request information from the state authorities, business companies, legal entities and natural persons, all of whom are obliged to notify the prosecutor of any actions undertaken and to act on the basis of its orders.

Generally, under the relevant laws, an injured person – i.e., a person whose personal or proprietary rights have been violated or jeopardized by the committed criminal act - is typically considered as a victim and as such, has certain rights and obligations in the course of the criminal procedure.

In principle, the damaged person is entitled to be notified if the investigation will not be conducted or if the investigation has been suspended in order to be able to file an objection to the relevant decisions; to be examined as a witness (which is usually the case); to be present during the hearing of fact and expert witnesses; to file an appeal against the court's judgment with regard to the costs of the criminal procedure and its property-related claim, etc. In any case, one of the important rights of the injured party is the right to file a property-related claim for example for compensation for damages, return of goods or the annulment of certain legal transactions.

If the court passes a decision finding the accused guilty, it can adjudicate the property-related claim entirely or partially. In case the court passes a decision finding the accused not guilty, it will further refer the injured party to claim its property-related claims in the course of civil litigation proceedings. In any case, the court may propose that the involved parties settle the claim in a mediation procedure. In practice, courts in BiH rarely decide on property-related claims filed in criminal proceedings stating that deciding on this issue would unnecessarily prolong the criminal procedure. Therefore, the injured party is usually referred to civil proceedings to claim damages.

In principle, evidence used in criminal proceedings may be used in the civil procedure as well. Under the relevant codes on civil procedure, the court is, with regard to the existence of a criminal act and the criminal liability of the offender, bound by the final decision of the court finding the accused person guilty.

Although the BiH, FBiH, RS and BD criminal procedure codes provide for relatively expedited court proceedings, depending on the backlog of pending cases before the relevant courts and the circumstances of the given case, in practice criminal proceedings last for at least 1 (one) year, with the exception of certain aspects of the criminal procedure, such as the issuance of the warrant for pronouncement of sentence (kazneni nalog), or the procedure for admission of guilt and plea bargaining which is quite often used in practice.

The costs of the criminal procedure typically include attorneys’ fees, detention costs, remuneration for experts and witnesses, translation expenses, etc. The court determines and sets the amount of court fees in the court judgment for each individual case.

If the accused is found guilty, it will bear all costs of the procedure. On the other hand, if the accused is found not guilty, the costs of the procedure are borne by the state/entity/district budget.

In BiH, bankruptcy proceedings are regulated by the FBiH Bankruptcy Act (Zakon o stečajnom postupku FBiH), and the RS Bankruptcy Act (Zakon o stečaju RS). The Acts are generally consistent and provide for a rather creditor-friendly insolvency system. Also, the new RS Bankruptcy Act regulates the new institutes for debt restructuring and sale of the debtor as a legal entity.

Under the BiH bankruptcy system, a company is deemed insolvent and is obligated to enter into a bankruptcy procedure if the company is unable to meet all of its outstanding debts, within the period defined in the bankruptcy acts. Consequently, this may mean that a company that is capable of paying some of its debts, but not all, may be considered to be insolvent. In FBiH, a company must enter into bankruptcy proceedings if it has been incapable of paying its debts (i.e. legally insolvent) for a period of 30 (thirty) days. In RS, the insolvency period is 60 (sixty) days. In addition, both the FBiH and RS bankruptcy acts require compulsory filing for bankruptcy in certain defined cases.

The bankruptcy procedure is under the jurisdiction of the Municipal Courts in FBiH, and the District Commercial Courts in RS. Bankruptcy proceedings are controlled by a single bankruptcy judge (stečajni sudija). The bankruptcy procedure is initiated with the filing of a petition by the company or any of its creditors. In FBiH, a company engaged in the production of weapons and military equipment can be "pushed" into bankruptcy only upon the approval of the FBiH Ministry of Energy, Mining and Industry. The approval shall be deemed granted if the competent ministry is silent for more than 30 (thirty) days. If the ministry denies its approval, the FBiH will jointly and severally be liable with the company for the company’s debts. In RS, to initiate a bankruptcy procedure against a company in which the state owns the majority of the share capital, the approval of the RS Government is required if (a) the company is in the process of restructuring by the RS Direction for Privatization; or (b) until a privatization sale process, that has already been initiated, is completed and all deadlines for fulfilment of the buyer’s contractual obligations have expired. The approval shall be deemed granted if the RS Government is silent for more than 30 (thirty) days.

The new RS Law on Bankruptcy entered into force on 10 March 2016. The most significant novelties introduced by the law are

-the possibility of restructuring the debtor – as a legal entity – without having to initiate bankruptcy proceedings; and

-the possibility of selling the bankruptcy debtor as a whole in the course of the bankruptcy proceedings.

The restructuring enables an insolvent debtor to consolidate and continue with its business operations in accordance with an operational and financial restructuring plan approved by the creditors who participate in the restructuring proceedings. Furthermore, the sale of the insolvency debtor as a whole in the course of the bankruptcy proceedings also provides for the possibility that the bankruptcy debtor survives bankruptcy proceedings. Namely, in case of such sale, the bankruptcy proceedings shall be terminated in respect of the bankruptcy debtor and the bankruptcy debtor keeps its assets. The proceeds of the sale become part of the bankruptcy estate and are shared among the bankruptcy creditors.

In addition to the above, the new RS Law on Bankruptcy provides a higher level of protection of the rights of employees comparing to the previous law, since employee claims - up to the amount of 12 gross minimum salaries - are classified as the high priority claims.

After the petition for bankruptcy has been filed with the court, the bankruptcy judge will initiate the preliminary bankruptcy procedure and appoint a preliminary bankruptcy administrator (privremeni stečajni upravnik) who will audit the company's business records and determine if the basis for bankruptcy exist. In the event the preliminary bankruptcy administrator determines the company is insolvent and should enter into bankruptcy proceedings, the bankruptcy judge will commence the bankruptcy procedure, appoint a bankruptcy administrator, and set out dates for the notification of claims and court hearings. All creditors must announce their claims within the period of time that is stipulated.

After the bankruptcy judge initiates the proceedings, all rights and responsibilities of the company’s management are transferred to the bankruptcy administrator by law. All court and arbitration proceedings related to the company’s property and assets are suspended thereafter, and can be continued only in certain cases as set out in the bankruptcy laws. The court registers must be notified of the opening of the bankruptcy procedure and the words "in bankruptcy" (u stečaju) will be added to the company’s name. In RS, a decision to commence bankruptcy proceedings will also be delivered to the relevant stock exchange if the company is listed.

After appointment, the bankruptcy administrator is obliged to draft lists of the company’s assets and its creditors. Pursuant to the claims of the creditors, the administrator then classifies the claims into payment orders or ranks (isplatni redovi). A competent assessor must assess the company’s assets. In practice, the assessed value is always lower than the real market value which is why it is rarely possible to repay and satisfy the full amount of a company's debts through bankruptcy proceedings.

Under the BiH bankruptcy system, creditors are entitled to decide on the settlement of their claims, i.e., if they will undergo asset sale and liquidation or if they will opt for the reorganization of the company. The reorganization of a company is an important novelty in the BiH bankruptcy system and has provided for better long-term settlement of claims. At the same time, the insolvent company gets an opportunity to continue its business activities and overcome its difficulties.

Upon the request of creditors, a reorganization plan may be drafted and submitted to the bankruptcy court by the insolvent company before the commencement of the bankruptcy procedure or the appointment of a bankruptcy administrator. If the creditors and the insolvent company adopt the plan, the bankruptcy proceedings will be suspended and the company will continue its business under the supervision of the bankruptcy administrator, creditors and bankruptcy judge.

Petitioners for a bankruptcy are usually required to deposit, in advance, a certain amount of money to cover the costs of the bankruptcy procedure (the amount of deposit varies). The deposit will be remunerated later out of the bankruptcy estate including all other expenses of the procedure. The bankruptcy procedure for banks is somewhat different from the general bankruptcy procedure and is regulated by the FBiH and RS Laws on Banks. The procedure is administered and supervised by the FBiH and RS banking regulators.

The rules regulating arbitration are contained in the entity laws on civil proceedings i.e. Articles 434 - 453 of the FBiH Code of Civil Procedure and in Articles 434 – 453 of the RS Code of Civil Procedure.  Both acts are valid for both domestic and international arbitration proceedings; however, for arbitration proceedings to be classed as international, a foreign element must exist. However, in practice this method of dispute settlement is rarely used in BiH.

Arbitration may be initiated only on the basis of a written agreement signed by both parties. Any written proof, such as fax, email or postal correspondence is considered sufficient. Furthermore, an arbitration agreement is considered valid if the respondent does not contest the existence of such an agreement. An arbitration agreement may be part of a contract or contained in a separate document, i.e., in general terms and conditions which apply to the legal relationship between the parties. There are no specific content requirements for an arbitration agreement. However, the agreement should state the parties to the agreement and the subject-matter of the agreement, plus indicate clearly that a single dispute or all disputes that may arise from a certain contractual legal relationship will be subject to arbitration.

Generally disputes concerning all commercial transactions may be submitted to arbitration. Claims involving family law and claims under administrative proceedings that cannot be brought before the courts but are decided by state agencies are not arbitrable. The parties are free to decide on the language of arbitration and on the applicable procedural rules that will govern the proceedings and may also decide on the number and method for selecting the arbitrators. There may only be an odd number of arbitrators. Provided that a foreign element exists, the parties are free to agree on any substantive law.

The applicable legislation does not provide for any specific rules on interim measures in relation to arbitration proceedings.

An arbitral award has the same legal validity and force as a court judgment and is therefore binding and enforceable. It can be challenged only in certain situations prescribed by law. These include:

-the invalidity or ineffectiveness of the arbitration agreement or no arbitration agreement existed;

-the conduct of the proceedings or the rendering of the award were not in accordance with the parties’ agreement;

-the award does not contain reasoning or was not signed;

-the award was made in a dispute not falling within the terms of the statement of claim or contains decisions beyond the statement of claim;

-the reasoning in the award is inadequate or contradicts the findings of the arbitral tribunal; or

-an infringement of BiH public order.

In addition, the Arbitration Court with the BiH Foreign Trade Chamber is established as of 2003 and administers both domestic commercial disputes, i.e., disputes which involve parties only residing in BiH, and commercial disputes between a party residing in BiH and a party with a foreign residence.

A foreign court judgment can be enforced in BiH only after it has been recognized by the competent BiH courts. BiH courts will recognize a foreign judgment if the following conditions are satisfied:

-the foreign judgment is legally valid and enforceable in the foreign state where the judgment was rendered;

-the party against which the judgment was rendered had the right to participate in the proceedings;

-the competent court in BiH has not already decided on the subject matter of the foreign judgment and/or it has not already recognized a foreign judgment for the same subject matter;

-there is reciprocity of recognition between BiH and the foreign state that rendered the judgment; and

-the subject matter of the foreign judgment is not under the exclusive competence of the BiH courts.

The existence of reciprocity is presumed, until proven otherwise, but in the event of doubt, the court will request clarification from the Ministry of Justice (it is common under the current court practice that factual reciprocity is required, rather than legal). Also, the foreign award must not contradict the BiH Constitution, the FBiH Constitution or RS Constitution and/or public order.

A foreign arbitral award must also be recognized by the competent BiH courts before it can be enforced in BiH. The following preconditions must be met for recognition:

-the subject matter of the foreign arbitral award is not exempt from arbitration according to BiH law;

-the subject matter of the foreign arbitral award is not under the exclusive jurisdiction of the BiH courts or other authorities;

-the foreign arbitral award does not contradict principles set forth in the BiH Constitution, the FBiH Constitution or RS Constitution and/or public order;

-reciprocity of recognition exists between BiH and the country of origin of the foreign arbitral award;

-the relevant parties have concluded a written arbitration agreement and such agreement is valid and binding;

-the party against which the arbitral award has been rendered was duly informed of the appointment of the arbitral tribunal and of the arbitration proceedings and there were no obstacles for such party to participate in the arbitration proceedings;

-the composition of the arbitral tribunal and the arbitration proceedings were in accordance with the provisions of the arbitration agreement and the arbitration rules;

-the arbitral tribunal has not exceeded its authority determined by the arbitration agreement;

-the foreign arbitral award is final and enforceable; and

-the foreign arbitral award is not ambiguous or contradictory.

BiH is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, with the reservations that the Convention will only be applied to the recognition and enforcement of awards made in the territory of another contracting state, will only be applied to differences arising out of legal relationships, whether contractual or not, that are considered commercial under the national law and will only be applied to those arbitral awards which were adopted after the entry into effect of the Convention. In addition, BiH is a party to the 1961 European Convention on International Commercial Arbitration.

BiH is also a party to bilateral agreements with various countries that regulate the mutual relationships of BiH and the respective country in relation to the provision of legal aid, civil and criminal proceedings, etc.

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3. BUSINESS CRIME

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4. INSOLVENCY

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5. ARBITRATION

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6. ENFORCEMENT OF FOREIGN JUDGMENTS AND ARBITRAL AWARDS

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7. PRACTICE TIPS

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CONTACT

OFFICE

Zmaja od Bosne 7

BiH-71 000 Sarajevo

+387 33 953 444

sarajevo@wolftheiss.com

www.wolftheiss.com/offices/bosnia-herzegovina

Naida Čustović

Partner

Law Office Custovic - Independent Attorney at Law in Cooperation with Wolf Theiss

+ 387 33 953 444

naida.custovic@lawoffice-custovic.com

Ilma Kasumagić

Associate

Law Office Custovic

+ 387 33 953 444

ilma.kasumagic@lawoffice-custovic.com