Arbitration between Croatia and Slovenia: Leaks, Wiretaps, Scandal (Part 2)

As we described in our first post of last week, the completion of the arbitration between Croatia and Slovenia has been thrown into doubt by the revelation of illicit contacts between the Slovenian arbitrator (‘Slovenia’s arbitrator’? Or ‘the arbitrator of Slovenian nationality’? More on this in our next post) and the Slovenian agent. On 24 July, Croatia applied to the Tribunal to ‘suspend the proceedings with immediate effect’ and invited ‘the remaining members of the Tribunal to review the totality of the materials presented, and reflect on the grave damage that has been done to the integrity of the entire proceedings’. On 28 July, the Tribunal published a press release in which it announced that a hearing on the Croatian application would be arranged ‘in the coming days’. On 30 July, the arbitrator of Croatian nationality, Professor Budislav Vukas (formerly Vice-President of the International Tribunal for the Law of the Sea), resigned from the arbitration, and on July 31 Croatia itself formally informed the Tribunal that it ‘cannot continue the process in good faith’ and that ‘in accordance with the relevant provisions of the Vienna Convention on the Law of Treaties’ it ‘informed the other Signatory to the Agreement of its intention to terminate’ the Arbitration. On 3 August, ICJ President Abraham resigned from the Tribunal, informing it that he had agreed to his appointment to ‘help restore confidence between the Parties and the Arbitral Tribunal and to allow the process to continue normally, with the consent of both Parties’ but that ‘the current situation cannot meet that expectation’ so that ‘it was no longer appropriate’ for him to serve as arbitrator.

At the end of our first post, we posed a number of preliminary questions that this scandal raises. In this post, we shall attempt, if not to provide definitive answers, at least to illustrate the context and consequences of these issues, with specific attention to the immediate repercussions for the arbitration. We shall follow this with a Part 3 post, on the wider implications for the international legal profession and the international judicial system.

The Repercussions for the Arbitration

Although the hearing on Croatia’s application to suspend the proceedings has yet to be held, the positions of the parties are relatively clear. Through its unilateral withdrawal from the arbitration Croatia has clearly signalled that it desires termination of the proceedings, though its position on the dispute settlement process is not yet clear.. Slovenia had opposed this and wished the proceedings to continue to their completion, viewing the replacement of ‘its’ arbitrator with a non-Slovenian national (Judge Abraham) as sufficient redress – in practical terms, this changed the ‘Slovenian vote’ on the panel into a ‘neutral’ one. The European Commission opposes the abandonment of the arbitration (though what its position on a ‘restart’ would be is not clear).

Article 6(4) of the Arbitration Agreement provides that ‘[t]he Arbitral Tribunal shall, after consultation of the Parties, decide expeditiously on all procedural matters by majority of its members.’ Following the denunciation of the Agreement prior to the planned hearing, the following appear to be the options open to them:

1. To continue the proceedings to completion, ignoring the denunciation of the Arbitration Agreement and perhaps making some form of punitive adjustment to the award for Slovenia’s procedural misconduct per Article 4(1)(b) of the Agreement;
2. To terminate the proceedings per Article 34(2) of the PCA Optional Rules for Arbitrating Disputes between Two States per Article 6(2) of the Arbitration Agreement.’

The first option is untenable for two reasons: 1) enforcement of the award would be highly challenging; and 2) even with some form of transparent (yet problematic) adjustment to the award to penalise Slovenia’s procedural misconduct, the award would be open to doubt irrespective of the outcome.

Arbitral tribunals under the PCA system rely upon the parties’ acceptance of their awards (see, e.g. – the chapter by Daly in Giorgetti (ed), The Rules, Practice, and Jurisprudence of International Courts and Tribunals (Martinus Nijhoff, 2012)). In the present circumstances, it is difficult to conceive of political pressure being brought upon Croatia – to accept the outcome of an arbitration that it had repudiated prior to its completion. The Treaty on the Accession of Croatia to the European Union 2011 seemingly does not oblige Croatia to execute the Award.

In the conversations between Dr Sekolec and Ms Drenik, the former had assured the latter that the Tribunal was planning to award at least two-thirds of the disputed maritime territory to Slovenia per its claim. Were the Tribunal to award anything like two-thirds to Slovenia, Croatia could claim that the outcome proves the veracity of Dr Sekolec’s assurance and thus the award is based upon clandestine argumentation by Slovenia. Were the Tribunal to award more in Croatia’s favour without making a penalising adjustment to the outcome, Slovenia could object that the Tribunal was not applying the law but rather making a political decision in light of the Sekolec-Drenik discussions.

Is Croatia’s denunciation valid, even if the Tribunal opts to continue the proceedings? Although we are aware of no precedent for Article 60(3)(b) VCLT being applied to an arbitration agreement, an analogous inter-state arbitration was the Buraimi Oasis Arbitration (Saudi Arabia v. United Kingdom) of 1955, which had to be abandoned after two of the three arbitrators resigned due to the Saudi arbitrator’s continuous communications with the Saudi legal team. However, this abandonment of the arbitration was triggered by the tribunal, not by denunciation by one of the parties.

Croatia’s denunciation is based on alleged violations by Slovenia of Article 6(5) of the Arbitration Agreement (on the confidentiality of the proceedings) and Article 9(1) of the rules of procedure of the arbitration. Whilst Article 6(5) can be construed to apply to the internal deliberations of the arbitral tribunal, the duty of confidentiality of deliberations is ordinarily prescribed not for the parties but for the judges or arbitrators. A duty of confidentiality for the parties is usually interpreted to cover the external confidentiality of the proceedings, i.e. – a duty not to disclose their substance to the outside world without express permission. Article 9(1) of the PCA Rules is a challenge procedure on the independence of the arbitrator: it likewise prescribes a continuing duty for the arbitrator to ‘disclose such circumstances [likely to give rise to justifiable doubts as to his/her impartiality or independence’ to the parties’. Thus, these provisions prescribe duties for the arbitrator (Dr Sekolec) but not for Slovenia – the consequence of breaches by the arbitrator is to disqualify him from service, which is not the object of Croatia’s denunciation.

Interestingly, Croatia does not cite Article 4(1)(b) of the Agreement, referring to achieving a ‘fair and just result’ in the proceedings. Croatia could have argued that ‘fairness’ and ‘justice’ here refer both to substantive fairness and justice and to procedural fairness and justice. Unusually, the Agreement employs the language of ‘fairness’ and ‘justice’ in qualifying the result. Whilst ‘fairness’ and ‘justice’ are not defined in the Agreement, this is implied by the terms of Article 15(1) of the PCA Optional Rules: ‘Subject to these Rules, the arbitral tribunal may conduct the arbitration in such manner as it considers appropriate, provided that the parties are treated with equality and that at any stage of the proceedings each party is given a full opportunity of presenting its case.’ Article 15(1) obliges, on the one hand, the Tribunal to afford the parties the right to be heard in full equality and obliges both the Tribunal and the parties, on the other hand, to refrain from any communication other than in an official manner with the knowledge of the other parties (e.g. – written communication to the registry) while the proceedings are sub judice. Although this principle is not embedded into the Rules of Procedure of either the ICJ or the ITLOS, it is nevertheless evident in the customs of both institutions and is implicit in their procedures (see, e.g. – Rosenne, The Law and Practice of the International Court: 1920-2005 (Martinus Nijhoff, 2006)(Vol. III), 1049, 1052). Thus, we suggest Articles 15(1) of the Optional Rules and 4(1)(b) of the Arbitration Agreement are breached by Slovenia which is necessary for Croatia to justify its denunciation on the ground that the replacement of Dr Sekolec with Judge Abraham is an inadequate remedy.

Nevertheless, is the breach severe enough to engage a right for Croatia to denounce the Agreement per Article 60(1) VCLT? It is open whether Article 60 entitles a party to suspend or terminate in response to any violation or only to qualified violations (see, e.g. – Simma and Tams in Corten and Klein (Eds), The Vienna Convention on the Law of Treaties: A Commentary (2011), 1351-1381). Despite the language of paragraph (3)(b) a ‘material breach’ does not refer to ‘the intensity, or gravity, of the breach in question, but requires that the provision breached must have been essential for the accomplishment of the treaty’s object and purpose; in other words, the focus of the provision in on the character of the treaty obligation.’ In practice, Croatia would likely need to justify its invocation by showing that there is no viable path for the Tribunal to render a ‘fair and just result’.

Could the Tribunal continue the proceedings while making a substantive adjustment to its award to penalise Slovenia for its procedural misconduct? Although we are unaware of precedents in inter-state cases, the Tribunal could justify it as an application of ‘equity’ (e.g. – River Meuse Case). There is two problems with this: 1) Croatia’s denunciation has committed it to non-participation in any hearing on procedural misconduct; and 2) Slovenia would wish to challenge the ‘clean hands’ of Croatia with respect to its alleged employment of covert surveillance.

Much likely depends on the parties’ tactical calculations. Although Dr Sekolec could have been mistaken in his belief that the Tribunal is planning to award most of the territory to Slovenia, since he and Ms Drenik were presumably unaware that they were being overheard, there is no reason to doubt that his belief was genuinely held. Croatia, therefore, will feel that it has little to lose in pressing for a restart or termination of the proceedings – a zero-sum result for Slovenia. Although Slovenia would seek to run a sort of tu quoque argument to resist any form of sanction, this is unlikely to be persuasive due to the absence of a causal link between Croatia’s alleged espionage and Slovenia’s illicit communications (e.g. – Gabčikovo-Nagymaros Case). If it is true that Croatian intelligence was overhearing the conversation, would the recordings been released to the press had Dr Sekolec believed that the Tribunal was planning to award most of the territory to Croatia?

We believe that the second option is the ‘cleaner’ one, namely, for the Tribunal to itself terminate the proceedings, citing grave procedural misconduct, and to encourage the parties to constitute a new arbitration agreement with a newly (and differently?) constituted panel or to submit the dispute to other fora (e.g. – the ICJ, ITLOS). Interestingly the Croatian daily Večernji list which, as we reported last week, first broke this story, is reporting that unnamed diplomatic sources out of the U.S. Embassy in Zagreb have signalled that the PCA Arbitration was not, in their view, the only solution to resolving the Croatia-Slovenia border dispute. It should be stressed however that this is not the official U.S. position and is only based on Večernji list reporting based on unverified / unnamed sources. Whilst this would take the dispute back to ‘square one’, in the circumstances it is the only way to repair the damage done by the procedural misconduct – critically, while the deliberations of the Tribunal are incomplete – and it is what the Tribunal in the Buraimi arbitration did on analogous facts. The Tribunal’s termination would supersede the denunciation and thereby avoid more undesirable outcomes, such as an unenforced and discredited award, fruitless debates between the parties over what to do next and/or a denunciation of the Agreement by Croatia.