On 26 July 2018, an ICSID arbitral tribunal issued an award in favour of Austrian investors, Georg Gavrilović and Gavrilović D.O.O., claimant in a dispute with the Republic of Croatia (“Respondent”).
The dispute arose out of the State’s refusal, when the Croatian War of Independence ended, to recognize a purchase of the family enterprise by Mr Gavrilović (“First Claimant”) and the State’s related measures. The Gavrilović Enterprise was set up in 1690 and transformed through the adoption of various corporate structures but retaining the family name. After the Second World War, the First Claimant obtained Austrian nationality and renounced its Yugoslavian citizenship. Companies such as the Gavrilović Enterprise, according to laws of the Federal People’s Republic of Yugoslavia, were transformed into social ownership. As a result, that company became a holding and nine companies were established. When Croatia declared independence on 25 June 1991, socially-owned companies were returned to their previous owners. The State’s Agency – Croatian Agency for Restructuring and Development (“Croatian Agency”) – assisted such companies in their transition to the market economy, including the former Gavrilović Enterprise. In July 1991, the Croatian Agency installed an emergency board and five of its companies (“Five Companies”) filed for bankruptcy. The Regional Commercial Court in Zagreb (“Bankruptcy Court”) authorized their sale through a public tender. First Claimant submitted a bid, which was accepted by the Bankruptcy Court. The Liquidator and the First Claimant then entered into the Purchase Agreement, which confirmed the rights owned by that investor and was further approved by the Croatian Ministry of Foreign Affairs. The Bankruptcy Court found it valid and ended the proceedings. The Five Companies formed the Gavrilović d.o.o. (“Second Claimant”).
Claimants alleged that almost immediately after the Croatian War of Independence, the Croatian authorities began to deny the legitimacy of the First Claimant’s purchase. Before the arbitral tribunal, it challenged seven measures allegedly adopted by Respondent: (1) the annulment of the Purchase Agreement sought and finally abandoned by the State’s authorities (on the grounds of the irregularities during the bankruptcy proceedings); (2) the criminal proceedings against the First Claimant for inducing the Liquidator to exceed its powers; (3) a State’s public campaign launched to deny the legitimacy of the First Claimant’s investment; (4) the failure of the local police to protect shops and factories of Gavrilović d.o.o. against private criminal actions; (5) the blocking of the registration of the company’s property; (6) the sale of the Apartments, used for employee housing under the social ownership and (7) the impossibility to obtain additional potential financing. On these facts, Claimants advanced that the State violated the following BIT’s standards of protection: prohibition of unlawful expropriation, the fair and equitable treatment, the national treatment and its obligations under the umbrella clause.
The arbitral tribunal examines the issues of jurisdiction (i), admissibility (ii), applicable law (iii), merits (iv), quantum (v) and costs (vi).
First, it upholds jurisdiction by accepting that Claimants are investors that have made an investment and by rejecting that these investments are tainted with illegality. Even if the bankruptcy proceeding exhibited some irregularities, the arbitral tribunal finds that it was the State that orchestrated a scheme to return his father’s business to him. Since different State entities of that period were involved in the allegedly illegal return scheme, it is estopped from raising the illegality objection.
Second, the arbitral tribunal deals again with an illegality objection on the grounds of admissibility. It concurs with Respondent that under the ICSID Convention, objections to the admissibility of the case are permissible. However, since Respondent has failed to discharge the burden of proof, this objection also fails.
Third, the arbitral tribunal notes that the Parties agree that the applicable law depends on the issue at stake. It concludes that both international and Croatian law are applicable on an issue-by-issue basis and that in case of conflict of these laws, the former prevails over the latter.
Fourth, on the merits, the arbitral tribunal first decides on some general matters. In particular, bearing in mind its preceding conclusions, it considers that the Purchase Agreement is not unenforceable due to one or more alleged illegalities. Then, it examines the scope of the ownership conferred by the Purchase Agreement over certain land, buildings or parts thereof, and apartments. Last but not least, it rules on the question of attribution, recalling as a general matter that the “principles of attribution do not operate to attach responsibility for ‘non-wrongful acts’ for which the State is assumed to have knowledge”.
With regard to the allegedly violated treaty standards, the arbitral tribunal partially accepts that Respondent expropriated the Claimants’ investment. It finds a direct expropriation in each case where Respondent has registered itself as owner over a plot of land which the Tribunal has found was owned by the Second Claimant and rejects the allegations of an indirect expropriation. All of other claims on the allegedly violated BIT standards are dismissed.
Fifth, the arbitral tribunal awards Claimants direct damages and refuses to award indirect damages due to the lack of causality. The combined value of the directly expropriated assets amounts to 1,658,960 euros. Respondent shall also pay pre-award and post-award interest.
Finally, Respondent supports 30% of the Claimants’ legal and other costs, as well as 30% of their cost of arbitration.