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Class Action in the USA and Its Prospects in Serbia – Part II

Class Action in the USA and Its Prospects in Serbia – Part II

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In the previous article, we became familiar with the class action. This legal institute originated from Anglo-Saxon law, and many countries use it, primarily the USA.  In this article, we will consider the introduction of a similar institute into the legal system of the Republic of Serbia from the perspective of de lege ferenda.

Purpose and Use

Through its centuries-long application, class action has proven to be a significant legal mechanism essential to every modern societal system.  Indeed, in situations where an event threatens the interests of a more significant number of individuals, there is no better way to provide comprehensive legal protection than through a class action.  It achieves at least three objectives:

  • Legal protection for individuals who lack sufficient financial or other resources to initiate individual legal proceedings,
  • Overall societal efficiency – instead of numerous identical proceedings, there is a single process that determines the protection of all interested parties,
  • Prevention of harmful behavior – raising the awareness of potential wrongdoers regarding the possibility of addressing the consequences of their actions about every affected individual should lead to more cautious behavior, compared to a situation where only individual lawsuits are available to the aggrieved parties.

Mass Lawsuits and Attempts to Regulate Class Action in Serbia

Mass lawsuits are a phenomenon that has significantly burdened the functioning of domestic courts.  The so-called “masovke” first appeared in the mid-2000s.  Notable cases emerging from them include shifts and night work, meal and holiday allowances for employees, discrimination of war veterans, amounts of daily childcare compensation, nullity of provisions on the costs of processing loan agreements, as well as the latest cases relating to auxiliary school staff and their right to meal allowance.  Mass lawsuits have profound legal and economic implications, which has prompted efforts to reintroduce class action into Serbian law.

There have been previous attempts, which were not very successful.  The legal community acknowledges that the Civil Procedure Act of 2011 regulated a specific legal procedure to protect collective rights and citizens’ interests.  According to the provisions of the then-act, associations, unions, and other organizations had the right to file a class action if their registered or legally prescribed activities provide for such protection, if the purpose of the association or act relates to the common interests and rights of a more significant number of citizens, and if the actions of the respondent have harmed or seriously endangered them.  However, after just one attempt to file a “class action,” the Constitutional Court of Serbia declared this procedure unconstitutional in its Decision of May 23, 2013.  It excluded the possibility of its further application.  The rationale was that it was unclear which rights could be subject to a class action.

It has been proven in our domestic practice that establishing a legislative framework for the implementation of class action in Serbia represents a challenge, and it seems that a direct transplantation of the American model is not feasible.  Thus, it is to be expected that the Serbian legislator will strive to implement Directive (EU) 2020/1828 on representative actions for the protection of the interests of consumers (“Directive“).  Considering that the Directive establishes minimum standards, the Directive text alone does not sufficiently guide the creation of legislative provisions.  Therefore, if future legislators aim to develop a practical framework, they must delve into the institute’s core and understand its underlying logic.

Free Rider Problem

In pursuit of the proper legislative regulation of class action in Serbia, it is essential to always bear in mind that a class action is inherently a representative action – the class representative is the leading figure who represents the interests of the class and all its members.

For this reason, one of the valuable approaches could involve drawing upon the experience of another pre-existing form of representative lawsuit within the Serbian legal system, namely the derivative suit.  This type of lawsuit was introduced into Serbian law in 1996 but has not gained traction in practice.  One of the critical reasons for this state of affairs is believed to be the rules concerning procedural costs.  Consequently, it is thought that the derivative action suffers from the “Free Rider Problem,” wherein each member of a business entity expects that another member will undertake such risk, resulting in a scenario where the lawsuit might not be filed at all.

The same issue would undeniably manifest in the context of a class action.  Hence, the primary task of the Serbian legislator should involve evaluating the preparedness to depart from traditional rules concerning procedural costs.  If prepared, organizations, i.e., qualified entities, as prescribed by Article 4 of the Directive, and individuals or their groups should have the right of action.  To illustrate, one of the conditions for filing a lawsuit could involve its submission by a group of 10 consumers or by those whose cumulative compensatory claims exceed a certain amount.

Role of the Court

The court’s role when deciding on a class action is paramount.  In light of this, it prompts the question: To what extent should the court assume a more comprehensive role than the standard litigation process?  Serbian courts already possess specific expanded roles akin to those recognized in American law, such as approving court settlements.  However, in Serbian law, the court should refrain from assessing the appropriateness of the class action during the admissibility evaluation phase.  Instead, the court should examine the formal conditions prescribed for class actions.  This is in line with the experience of derivative actions.  Unlike the American legal system, where the court grants permission to proceed with a derivative action only if it deems the lawsuit is in the interest of a company (appropriateness assessment), the Serbian jurisdiction has not adopted this practice.  Therefore, the recommendation is to avoid provisions that would empower the court to evaluate the appropriateness of this lawsuit even in the preliminary phase of a class action, specifically when assessing the existence of procedural prerequisites for the proceedings’ continuation.

Effects of the Judgment

The effects of the judgment intend to achieve two objectives: firstly, to prevent a re-examination of factual and legal matters that were subjects of the class action proceedings, and secondly, to establish direct legal protection based on the judgment.

For this reason, during the regulation of class action, rules about the subjective boundaries of the judgment are of utmost significance, ensuring that individuals who were not parties to the proceedings benefit from the decision.  In this context, the pivotal consideration revolves around whether the Serbian legislator would endorse an inclusionary or exclusionary system within the proceedings (opt-in or opt-out).

  • (i) The inclusionary system – an individual must request to be included in the proceedings to acquire party status, to have the effects of the judgment apply to them;
  • (ii) The exclusionary system – a party is automatically included in the proceedings, yet they retain the option to request exclusion to avoid being subject to the effects of the judgment

The exclusionary system aligns more harmoniously with the nature of class action due to its improved treatment of parties.  Namely, the judgment should have legal effect even on absent class members, regardless of their involvement in the proceedings.  Such an approach would align with the provisions of the Civil Procedure Act, which, in Article 360, among other things, prescribes that a judgment shall also hold its effect upon the third parties by reasons of the nature of a disputed right or legal relation.

Other Relevant Aspects for Regulating Class Action

In addition to conceptual considerations, procedural facets require attention.  In this context, it is vital to address the procedure and method of informing class members about the filed lawsuit, conditions for amending the case, specific procedural rules, and the burden of proof, as well as the possibility for class members or even third parties to join the proceedings as parties or interveners.  Special conditions for undertaking dispositive actions related to the claim should also be prescribed, encompassing not only settlement agreements but also withdrawal of the lawsuit or waiver of the claim.  Rules governing the public nature of the proceedings, special conditions for the existence of lists pendentia, and the joinder or severance of proceedings should also be articulated.

Class Action in Western Balkans

Class action has recently found its place within the traditionally continental legal systems in the EU member states and Western Balkans countries.  The possibility of exercising collective legal protection in court proceedings is now considered a vital aspect of the right to a fair trial by Article 6 of the European Convention on Human Rights.

In Albania, there is no official way for a group to initiate a proceeding through a class action jointly.  Instead, consumers can form associations to initiate civil proceedings against legal entities.  In Bosnia and Herzegovina, there is no formal process for class action.  Instead, a special procedure allows multiple individuals to join their legal interests in protecting their rights, similar to the Serbian approach of 2011.  Furthermore, in North Macedonia, the law does not regulate class action.  Finally, Montenegro only allows class action in consumer protection.  However, the Montenegrin Civil Procedure Act does not recognize class action, which raises several practical questions about its application.

By Jovana Velickovic, Partner and Head of Dispute Resolution, and Vasilije Boskovic and Nikola Ivkovic, Associates, Gecic Law

Serbia Knowledge Partner

SOG in cooperation with Kinstellar is a full-service business law firm in Serbia that provides foreign and domestic clients with premium-quality legal advice and assistance across a wide range of key areas of corporate law. The firm was founded in 2015 by a group of seasoned, internationally-trained lawyers. SOG has developed a distinctively dynamic culture, bringing together top talent, fostering entrepreneurship, and maintaining exceptional relationships with its clients.

SOG has achieved consistent growth in the volume of its business, accompanied by an exponential increase in the number of hired associate lawyers and the firm’s network of business contacts. SOG has a robust client base of multinationals, investment and private equity firms, and financial institutions. Clients praise SOG for being commercially minded, very responsive and knowledgeable.

Establishing permanent cooperation with Kinstellar is part of realising SOG's long-term development strategy to be the leading provider of legal services in the Western Balkans market.

Firm's website: https://www.kinstellar.com/

 

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