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analysis 31 Oct 17

International Lawsuits Pile up Against Croatia

Croatia faces numerous international arbitration processes over borders, important companies or stopped construction projects – with potentially expensive outcomes.

Sven Milekic
Disputed waters in the Piran Gulf. Photo: Wikimedia Commons/AnonMoos

The announcement of new arbitration suits against Croatia highlights the growing number of lawsuits that the state faces - and has already lost in some cases – in disputes over important companies, stopped investment projects or territorial waters.

While Croatia already lost two of such cases in the last few months, new arbitration procedures are on the horizon – which may result in further serious financial losses.

On Monday, the state management of the troubled private giant Agrokor announced that it would try to prevent a 1.1-billion-euro lawsuit being mounted by the Russian state-owned bank, Sberbank.

After Agrokor fell into deep financial problems at the beginning of the year, parliament in April adopted a Law on Procedures for Extraordinary Management in Companies of Systematic Significance.

Under the terms of the law, although still owned by businessman Ivica Todoric, the state took over control of the company.

It is now leading the process of reconstruction and of repayment of debts in coordination with a creditors’ council, comprising Russian and other banks, bond owners and Agrokor’s suppliers.

Having loaned Agrokor 1.1 billion euros before the law was passed, Sberbank has announced it is suing Croatia for the money before the Court of International Arbitration in London.

Agrokor's state management wishes to avoid the process by convincing British courts to acknowledge the process of state extraordinary management, which would hopefully prompt the LCIA to reject the lawsuit.

Sberbank has issued similar multi-million lawsuits against Agrokor’s subsidiaries before courts in Slovenia, Bosnia and Serbia.

Even Agrokor’s own owner and founder, Todoric, has announced a lawsuit against Croatia before the LCIA, claiming that the state unlawfully took away his company.

The government last Friday meanwhile said that the Swiss Supreme Court had turned down Croatia’s request to stop an arbitration procedure concerning the Hungarian energy company MOL.

The Swiss court refused to annul the December ruling of the tribunal of the UN Commission on International Trade Law, UNCITRAL, which backed MOL in a dispute on management rights over Croatian energy company INA.

The Croatian state holds 44.84 and MOL 49.1 per cent of shares in INA.

Croatia launched the proceedings before UNCITRAL in January 2014, claiming that a 2009 Croatia-MOL contract on buying INA’s stocks was a result of criminal activities between former Croatian Prime Minister Ivo Sanader and MOL's management.

Croatia's Supreme Court jailed Sanader for eight-and-a-half years for corruption in June 2014. The country's Constitutional Court quashed the verdict in July 2015, however, citing procedural errors.

The Swiss court also ruled that Croatia must pay some 387,000 euros of court fees and costs for MOL’s defence team.

Additionally, Croatia’s own defence team costs are likely to come to around 215,000 euros, while MOL will get compensated with some 30 million euros of tax-payers money.

Before the Croatian lawsuit before UNCITRAL, MOL had launched a lawsuit at the Washington-based International Centre for Settlement of Investment Disputes, ICSID, in November 2013.

MOL claims that the Croatian state caused major damage to the company by not honouring a 2009 agreement – which Croatia also claimed was a result of corrupt dealings. The process before the ICSID is still pending.

The daily Vecernji list meanwhile reported on Thursday about another case against Croatia before the ICSID.

Croatian-based company Razvoj golf, owned by Maja Brinar with the financial support of her husband, Israeli businessman Aaron Frenkel, is suing Croatia for 500 million euros for a halted golf course project above the coastal city of Dubrovnik.

The company claims the state has blocked realisation of the massive construction project for ten years, during which time they say they invested 130 million euros.

In another arbitration process, the Permanent Court of Arbitration in The Hague ruled in June in favour of Slovenia following a territorial dispute over the waters of the Piran Gulf.

The Croatian government maintained the position of its predecessors, which was to claim to arbitration process had been compromised.

In July 2015, Croatia revealed recordings of unauthorised phone conversations between Jernej Sekolec, the Slovenian judge on the court, and Simona Drenik, the representative of the Slovenian government.

Although Croatia will not have to pay financial fees for losing this ruling, its decision not to respect the court's decision has prompted Slovenia to veto Croatia’s accession to the Organisation for Economic Co-operation and Development, OECD, which was one of the government’s key strategic aims.

According to media reports, Croatia is preparing to undergo a similar arbitration process with neighbouring Montenegro over the border dispute over the Prevlaka peninsula.

A report published by the Croatian state attorney office, DORH, in May, said the total cost of ten arbitrations procedures either pending or potentially opening before the ICSID is around 1.4 billion euros.

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