Bulgarian law draws a hard line when it comes to consumer disputes: they are not arbitrable. Article 19(1) of the Bulgarian Civil Procedure Code expressly excludes disputes involving consumers from arbitration, and arbitral awards rendered in non-arbitrable matters are null and void. For arbitration practitioners, therefore, the qualification of a party as a “consumer” is often not merely a matter of substantive consumer protection – it may determine the validity of the entire arbitral process.

In recent years, the Bulgarian Supreme Court of Cassation (“SCC”) has increasingly relied on the case law of the Court of Justice of the European Union (“CJEU”) when assessing whether a natural person acting in connection with a commercial loan transaction should be treated as a consumer. The central criterion emerging from both the European and Bulgarian jurisprudence is whether the person acted outside their professional or commercial activity and, more specifically, whether there exists a sufficiently close “functional link” with the trader benefiting from the financing.

While the general test appears settled, recent SCC decisions demonstrate that its application remains far from straightforward.

The starting point is the SCC’s 2017 judgment in Case No. 1934/2015, delivered following the CJEU’s guidance in Case C-74/15 and Case C-419/11. The SCC accepted that a natural person securing or co-signing a commercial loan may still qualify as a consumer if they acted outside any commercial or professional purpose. At the same time, the Court clarified that consumer status is excluded where the person maintains “close professional or functional links” with the company receiving the financing – for example, through management powers or majority ownership.

The interesting part of the judgment, however, lies elsewhere. The SCC distinguished between two individuals involved in the same financing structure. One of them was the sole owner and manager of the borrower company and therefore was found not to be a consumer. The other – despite being the spouse of the company owner – was treated as a consumer because no functional or professional connection with the company itself had been established. According to the Court, a mere family relationship was insufficient.

This approach appeared relatively predictable: consumer status depended not on personal proximity to the debtor, but on actual economic or managerial involvement in the commercial activity.

That predictability became less certain in a recent 2025 SCC decision concerning the validity of an arbitral award rendered under a loan agreement involving several corporate borrowers and individual co-debtors. The SCC again reiterated the established principle that disputes involving consumers are non-arbitrable. Yet this time the Court adopted a significantly broader understanding of “functional link”.

The Court found that the individual co-debtors were not consumers because the loan served a common commercial purpose and because a functional connection existed between the individuals and the corporate borrowers. Importantly, the SCC relied not only on formal corporate roles, but also on family relations between the individuals involved. One of the co-debtors was the father of two individuals managing the debtor companies, while the others occupied managerial positions within the corporate structure. The SCC treated these circumstances collectively as sufficient to exclude consumer status.

The decision is notable because it arguably expands the concept of functional connection beyond the more traditional indicators identified in earlier case law, such as shareholding, management, or direct professional involvement. While the Court did not state that kinship alone is sufficient, the reasoning suggests that family relationships may now carry substantially greater weight when assessed together with the overall economic context of the transaction.

Another recent SCC judgment from 2026 adds a further layer to the discussion. The case involved a sole trader under Bulgarian law (“ET” – a natural person registered to conduct commercial activity without separate legal personality) who challenged an arbitral award rendered under a “business loan” agreement.

The creditor argued that the dispute was arbitrable because the borrower had concluded the agreement in her capacity as a registered trader. The claimant, however, maintained that the loan had in fact been used for entirely personal purposes – refinancing personal debt and renovating her home – rather than for commercial activity.

Although Bulgarian law traditionally treats sole traders as merchants, the SCC focused primarily on the actual economic purpose of the transaction rather than the formal legal status of the borrower. The court declared the arbitral award null and void, based on analysis of all relevant circumstances surrounding the borrower, including their registration as sole trader only a few days before conclusion of the loan agreement and the lack of any actual business activity.

The case illustrates an increasingly substance-oriented approach: the decisive factor is not simply whether a person formally participates in commerce, but whether the specific transaction genuinely serves a business purpose.

Taken together, these decisions show that Bulgarian courts continue to move toward a highly fact-sensitive assessment of consumer status, closely influenced by EU consumer protection principles. At the same time, they also reveal a degree of uncertainty in the practical application of the “functional link” test.

From an arbitration perspective, the stakes are significant. Under Bulgarian law, if a party is subsequently found to qualify as a consumer, the arbitration agreement becomes ineffective, and the arbitral award itself may be declared null and void. As a result, questions that may initially appear peripheral – the borrower’s actual role in the transaction, the use of the loan proceeds, the existence of managerial involvement, or even the broader economic relationship between family members and corporate debtors – may ultimately determine whether the dispute was arbitrable at all.

These decisions demonstrate that Bulgarian courts continue to apply a highly fact-sensitive test when determining whether a person qualifies as a consumer.

At the same time, the SCC’s recent practice also shows that the concept of a “functional link” remains somewhat fluid. The boundaries between commercial involvement and personal participation are not always clear, particularly in closely held businesses and family financing structures. For arbitration practitioners and transactional lawyers, this creates an important practical risk.

A dispute initially perceived as commercial may later be classified as a consumer dispute, rendering the arbitration agreement ineffective and the arbitral award null and void.

The recent SCC jurisprudence therefore serves as a reminder that parties should approach the drafting of arbitration clauses and financing agreements with particular care. Where individuals participate in commercial financing structures, it is advisable to clearly define their capacity and role within the transaction, the commercial purpose of the financing, and the relationship between the parties involved. Most importantly, parties should not assume that formal labels such as “business loan”, “co-debtor”, or even “registered trader” will be decisive. Bulgarian courts appear increasingly willing to look beyond formal designations and assess the underlying economic reality of the transaction when determining arbitrability.

Author: Asen Stefanov, Kristiana Nikolova