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The European, Middle Eastern and African Arbitration Review 2016

Croatia

Croatia gained its independence from Yugoslavia in 1991 and became a full member of the European Union on 1 July 2013. Although Croatia has a long history of arbitration dating back to the 19th century, and had a rather robust arbitration docket at the Croatian Chamber of Economy in the early 20th century, private dispute resolution mechanisms were abolished after World War II when Croatia was part of communist Yugoslavia. During its communist era, Croatia had a limited domestic arbitration practice and no forum for international arbitration disputes. After becoming an independent country in 1991, Croatia’s Permanent Arbitration Court at the Croatian Chamber of Economy established itself as an arbitration institution for both domestic and international arbitration. Since 2005, more than 300 new actions have been brought, 40 per cent of which have been international disputes involving parties from 25 different countries.1

Principle sources of arbitration in Croatia

With the fall of communism, the introduction of a market economy and the free flow of capital, significant changes were required to allow for the growth of arbitration in Croatia. In 2001, the Croatian Parliament passed the Law on Arbitration (LOA), which governs all issues of arbitration in Croatia. The LOA is dedicated exclusively to arbitration and is modelled after the 1985 UNCITRAL Model Law on International Commercial Arbitration.2 The LOA applies to domestic and international arbitration, and to commercial and non-commercial disputes. However, the definition of international and national disputes pursuant to the LOA is different than that of UNCITRAL, and instead follows the principle of the seat/residency of the parties.3 Moreover, the LOA does not include provisions for alternative dispute resolution. Consequently, a separate Law on Conciliation exits which is modelled after the UNCITRAL Model Law on International Commercial Conciliation.

Croatia is a party to the 1961 European Convention on International Commercial Arbitration; the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention); and the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the Washington Convention). Croatia is also a party to dozens of other bilateral investment and arbitration treaties, including the Energy Charter Treaty.

Leading arbitration institutions and their Rules

After independence in 1991, Croatia’s one permanent arbitration court, the Permanent Arbitration Court (PAC) at the Croatian Chamber of Economy, took on greater prominence. PAC accepted domestic and international arbitration matters and, because it had a monopoly on domestic arbitration until 2001, became the most important arbitration institution in Croatia.4

Although the LOA allows for other arbitration courts to be established, the PAC is the only relevant and prominent arbitration court in Croatia. The PAC on average handles less than 50 cases annually, including contract, construction and privatisation disputes. International disputes usually involve parties from Croatia’s primary trade partners: Germany, Austria, Italy and the ex-Yugoslav states.5 The PAC has its own rules of arbitration that apply in disputes with or without an international element, known as the Zagreb Rules.6

The arbitration agreement

Any person or legal entity may be party to an arbitration agreement, as can the state, state agencies, and regional and local units of government. For any arbitration that takes place in Croatia, virtually any subject matter may be arbitrated. However, an international arbitration that takes place abroad may not include any subject matter for which the courts of Croatia retain exclusive jurisdiction.7

The LOA confirms that an arbitration clause in an agreement is severable from the rest of the contract. Article 15(1) of the LOA states: ‘an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract’. Consequently, a decision to declare the agreement null and void shall not necessarily invalidate the arbitration clause in the contract.8

Article 6(1) of the LOA, following the UNCITRAL Model Law of 1985, allows for arbitration when an arbitration clause calls for arbitration of future disputes and when a submission agreement calls for referral of an existing dispute to arbitration. The LOA allows the parties to select the place of arbitration.

Article 6 of the LOA outlines the basic requirements of any arbitration agreement. The agreement must be in writing in order to be valid. The definition of ‘in writing’ is broad, and includes the exchange of letters and facsimiles, as well as of electronic communications, such as e-mails. Article 6 goes even further, allowing for oral agreements to arbitrate provided one party subsequently confirms in writing to the other party the existence of the oral agreement. The failure of the other party to make a timely objection may be considered acceptance. Pursuant to article 6(4):

The reference in a contract to a document containing an arbitration clause (general terms of a contract, text of other agreement or similar) constitutes an arbitration agreement provided that the reference is such as to make that clause part of the contract.

In contrast, article 6(6) provides that arbitration clauses in consumer contracts are interpreted narrowly:

the arbitration agreement must be contained in a separate document signed by both parties. In such a document no agreements may be contained other than those referring to the arbitral proceedings, except if the document was drawn up by a notary public.

The law applicable to the interpretation of arbitral agreements is the law that governs the arbitration agreement itself.

Selection of arbitrators and party representatives

Any adult person of sound mind can serve as an arbitrator in Croatia, regardless of legal training or nationality. The only exception is that active Croatian judges may not serve as party-appointed arbitrators. Moreover, all arbitrators are required to be independent and impartial. Parties are free to select their own procedure for appointment of arbitrators, but article 10 of the LOA provides a default procedure in the event that an agreement is not possible.

An arbitrator has a duty to disclose ‘any circumstances likely to give rise to justifiable doubts as to his independence or impartiality’.9 This duty applies before the arbitrator is appointed and remains throughout the proceedings. A party may challenge the arbitrator only if circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or if the arbitrator does not posses qualifications agreed to by the parties, or if he fails to fulfill his duties as defined by law.

Article 12(7) of the Croatian Arbitration Act provides the procedure to be followed in the event a challenge is rejected. The party challenging the appointment of the arbitrator may, either within 30 days from the date the challenge is rejected or the expiry of the 30 day period during which the arbitral tribunal failed to decide upon the challenge, request the national court to decide on the challenge. A pending request with the court does not stay the arbitral proceedings and the issuance of the award.

A party need not be represented by an attorney in an arbitration proceeding. There are no restrictions on who may represent a party in arbitration, provided that a proper power of attorney is presented. Article 47 of the Law on Attorneys allows for non-EU lawyers to represent parties in international arbitral proceedings in Croatia.

Conduct of proceedings and application for interim protective measures

Parties are free to select which rules shall apply to the arbitration, and this freedom is limited only in a few respects. Specifically, the rules must guarantee equal treatment of parties, impartiality of arbitrators, and fair notice to parties. As long as these conditions are satisfied, parties are free to choose the Zagreb Rules, UNCITRAL Rules or any other to govern the arbitration. If a place of arbitration outside of Croatia is chosen, the LOA will not apply as a source of rules because the scope of the LOA is limited to arbitrations in Croatia.10

The parties may, by agreement, forego an oral hearing and require the arbitral tribunal to issue a ruling based on written pleadings alone. Absent such an agreement, the arbitral tribunal may decide on its own whether to schedule an oral hearing. However, if one party insists on a hearing, the tribunal is obligated to schedule it.11

Under Croatian law, the arbitral tribunal has full authority to decide on issues of admissibility of evidence, weight and relevance. No rules exist on how witnesses shall be heard. The arbitrators may decide that the arbitrators alone will question witnesses, or they may allow the parties themselves to pose questions. Article 25(2) of the LOA authorises the tribunal to request that witnesses answer questions in writing. This allows for the admissibility of witness statements, should the tribunal so permit.

An arbitral tribunal does not have the power to compel witnesses to appear. However, article 45 of the LOA provides that an arbitral tribunal may request (or allow the parties to request) a competent court to order a witness to appear before that court so that the court may pose questions to the witness.

Croatian law does not provide for discovery or disclosure of documents in arbitration, and an arbitral tribunal has no compulsory power to issue such an order. Nevertheless, a party’s failure to disclose or produce documents may result in a negative inference by the arbitral tribunal against the party in question.12

Certain limited requirements exist concerning the written pleadings of parties. Specifically, the statement of claim must identify the facts in support of the claim, the matters at issue and the relief or remedy sought.13

The LOA provides that an arbitral tribunal may issue interim protective measures. Article 16(1) states:

Unless otherwise agreed by the parties, the arbitral tribunal may, at the request of a party, order any party to take such interim measures of protection as the arbitral tribunal may consider necessary with respect to the subject-matter of the dispute. The arbitral tribunal may require any party to provide appropriate security in connection with such measure.

However, a party is also free to seek interim relief from a competent court. Article 44 of the LOA provides that:

A party to arbitral proceedings may apply to the court to grant interim measures for protection of a claim. It is not incompatible with an arbitration agreement for a party to request from a court, before or during arbitral proceedings, an interim measure for protection of a claim and for a court to grant such a measure.

An arbitration award must be in writing, made at the place of arbitration and dated. It must also state the reasons upon which it is based, unless the parties have agreed that no reasons are to be given. All arbitrators must sign it, but the failure by one to sign will not invalidate the award, provided that the majority of arbitrators signed it and noted that the remaining arbitrators did not sign.14 Parties are not allowed to exclude rules on the challenge of the award and generally cannot change the grounds for setting aside an award.15

Enforcement of arbitral awards

Parties looking to enforce a foreign arbitral award should look to articles 40 and 43 of the LOA. Article 40 provides:

(1)   A foreign award shall be recognized as binding and shall be enforced in the Republic of Croatia unless the court establishes, upon a request by the opposing party, the existence of a ground referred to in Article 36, paragraph 2, subparagraph 1 of this Law, or if it finds that the award has not yet become binding on the parties or has been set aside or suspended by a court of the country in which, or under the law of which, that award was made.

(2)   Recognition and enforcement of a foreign award shall be refused if the court finds that:

     a)   the subject-matter of the dispute is not capable of settlement by arbitration under the law of the Republic of Croatia.

     b)  the recognition or enforcement of the award would be contrary to the public policy of the Republic of Croatia. 

Arbitral awards within the ratione causae competence of the commercial courts shall be enforced before the Commercial Court in Zagreb.16 Otherwise, the award shall be enforced before the County Court in Zagreb. When enforcement is sought under the provisions of an international convention, the provisions of the convention shall prevail over the provisions of domestic law. In the case of a foreign arbitral award, the court will limit its intervention to the requirements provided in the respective international instrument.17

 Key developments in Croatia arbitration in 2015

Slovenia-Croatia ad hoc arbitration

At the time of writing, two prominent cases affected Croatian arbitration in 2015. The most prominent is the boundary dispute between Croatia and Slovenia, which was administered by the Permanent Court of Arbitration in The Hague (PCA). Since the dissolution of Yugoslavia, the two ex-Yugoslav countries disagreed on the delimitation of their land and maritime boundaries. On 4 November 2009, both countries signed an arbitration agreement, pledging to resolve the dispute before an ad hoc arbitral tribunal comprised of five members, two of whom were to be party-appointed.

Croatia appointed Professor Budislav Vukas, former vice president of the International Tribunal for the Law of the Sea and a Croatian national; Slovenia appointed Dr Jernej Sekolec, a Slovene arbitrator with extensive experience in international arbitration. Other members of the arbitral tribunal include Judge Gilbert Guillaume (France), former president of the International Court of Justice who served as chair of the ad hoc tribunal; Vaughan Lowe (United Kingdom); and Judge Bruno Simma (Germany). The hearing in the case was held in June 2014 in The Hague. After months of deliberations, the tribunal announced that it would deliver the award in December 2015.

In July 2015, however, a scandal erupted when media published secret audio recordings of tapped telephone conversations between Dr Sekolec (Slovenia’s party-appointed arbitrator), and Slovenia’s agent in the case, Simona Drenik (head of the International Law Department in Slovenia’s Ministry of Foreign Affairs). The recordings evidence improper conversations between Sekolec and Drenik about the likely outcome of the case. More troubling for Croatia, however, were conversations in which Drenik and Sekolec proposed to surreptitiously introduce new evidence in front of the arbitrators on an ex-parte basis and outside the official record by having Sekolec introduce new facts into the deliberations (favourable to Slovenia of course) as if they were Sekolec’s own.

Croatia’s reaction to the scandal was swift. Croatia’s parliament unanimously voted to terminate the arbitration agreement on the grounds that Slovenia had committed a material breach and failed to act in good faith. Croatia then withdrew from the arbitration, invoking the termination provisions contained in article 60 of the Vienna Convention on the Law of Treaties. Sekolec and Drenik both tendered their resignations. Croatia-appointed arbitrator Vukas soon followed, in solidarity with his parliament’s decision to withdraw from the proceedings.

Slovenia argued that the proceedings should continue with new arbitrators appointed by the chair, Judge Guillaume, claiming that this situation was no different than other cases where judges were disqualified due to appearance of partiality. Croatia argued that the scandal was far graver than Slovenia was willing to admit. It involved not only a partial judge, but also proof that one of the parties in the proceeding had actively sought to corrupt the deliberations of the tribunal in an unlawful and unethical manner, in collusion with one of the arbitrators. Croatia argued that the proceedings were tainted because Croatia could no longer determine what evidence and arguments were improperly put before the entire tribunal through the collusive efforts of Sekolec and Drenik.

The case brings a spotlight to the issue of party-appointed arbitrators and the risk of corruption of proceedings. While it is almost expected that party-appointed arbitrators will be sympathetic to the party that appointed them, the Sekolec/Drenik case provides a unique example where a party has been caught corrupting the work of the arbitral tribunal.

At the time of writing, the PCA and the arbitral tribunal have not yet decided whether to proceed with the arbitration despite Croatia’s withdrawal. Whatever the outcome, it will set an important precedent in international arbitration not only on the effects of arbitrator partiality on the integrity of arbitral proceedings, but also for the consequences of a party’s bad faith efforts to corrupt the independence of the tribunal.

Constitutional court decision overturning Sanader conviction

The second important case affecting international arbitration concerns the case of former Croatian Prime Minister Ivo Sanader, who was convicted in 2012 for, inter alia, receiving a bribe from MOL Hungarian Oil and Gas PLC in exchange for securing two agreements for MOL. The Croatian Supreme Court affirmed the conviction in 2014. In November 2013, MOL filed a claim before ICSID pursuant to the Energy Charter Treaty, seeking enforcement of one of the two agreements and claiming, inter alia, that Croatia’s allegations of bribery involving MOL constituted unfounded harassment of MOL officials. In January 2014, Croatia filed its own claim pursuant to the UNCITRAL rules seeking nullification of the two agreements because they were allegedly procured through bribery.

After losing his appeal to the Croatian Supreme Court, Sanader filed a claim before the Constitutional Court of Croatia, contending that his constitutional rights had been violated. On 24 July 2015, the Constitutional Court quashed Sanader’s conviction on procedural grounds without addressing the merits of the bribery allegations.

For arbitration practitioners, the Constitutional Court’s decision contains two important findings. First, the Constitutional Court asserted that domestic court decisions do not have res judicata effect in international arbitration proceedings:

Decisions by national courts, including those by the Constitutional Court, cannot in general have an impact on arbitration proceedings initiated or conducted by the Republic of Croatia in the field of international commercial law. It is a general principle that arbitral tribunals are not bound by final judgments of national courts, or decisions issued by national constitutional courts, because such judgments and decisions are regarded as facts by arbitral tribunals. Such tribunals examine matters in the case before them on their own.

The second important aspect of the Constitutional Court’s decision affects the potential for nullification of contracts obtained through corruption of state officials. While the Constitutional Court did not address this question specifically, it found that any contracts procured through corruption were per se contrary to state interests and public policy:

The very fact that a person performing the office of prime minister offers or accepts a bribe to influence the conclusion of a legal transaction within the competence of the Government – within the limits of his authority – makes the legal transaction concerned corruptive a priori in the substantive sense, and its very corruption is proven prima facie. Therefore, each such transaction is per definitionem contrary to the interests of the Republic of Croatia, regardless of whether by its effects or dominant political assessments it was (more or less) advantageous or disadvantageous for, or extremely prejudicial to the Republic of Croatia.18

The question arises as to the enforceability of contracts that are procured through actions (like bribery) that are ‘contrary to the interests of the Republic of Croatia’. Article 322 of the Croatian Obligations Act provides:

Acontract that is contrary to the Constitution, the mandatory laws or the morals of the society shall be null unless the objective of the infringed rule refers to some other legal effect or the law provides otherwise for such particular case.19

With the Constitutional Court ruling that such contracts procured through corruption are per definitionem contrary to the interests of the Republic of Croatia, courts and arbitral tribunals likely will soon be asked to resolve the issue of whether contracts procured through corruption are null under Croatian law.

Notes

  1. The total value of claims in this period exceeds €500 million. This testifies to the economic importance and trust that the Permanent Arbitration Court has earned in solving complex commercial disputes. See: www.en.hgk.hr/about/permanent-arbitration-court.
  2. Bardek, Hrvoje, CMS Guide to Arbitration, Vol. 1, Arbitration in Croatia, p. 241.
  3. Uzelac, Alan, Int’l Handbook on Comm. Arb. Supp. 57, Croatia, at p. 3 (December 2009).
  4. Id., p. 5.
  5. Uzelac, supra n. 3, p. 5.
  6. The Rules of Arbitration of the Permanent Arbitration Court at the Croatian Chamber of Economy, published in Narodne novine (the Official Gazette of the Republic of Croatia), No. 150/2002 of 17 December 2002.
  7. Article 3(2) of the Law on Arbitration.
  8. Article 15(1) of the Law on Arbitration.
  9. Article 12(1) of the Law on Arbitration.
  10. Uzelac, supra n.3, p. 25.
  11. Article 23(2) of the Law on Arbitration.
  12. Uzelac, supra n.3, p. 29.
  13. Article 22(1) of the Law on Arbitration.
  14. See article 30(2) to article 30(5) of the Law on Arbitration.
  15. See article 36 of the Law on Arbitration.
  16. See article 43 of the Law on Arbitration.
  17. Uzelac, supra n.3, p. 46.
  18. Decision of the Constitutional Court of the Republic of Croatia, No. U-III-4149/2014 of 24 July 2015, Summary of Decision, at p. 10.
  19. Id, at 8-9.