Arbitration between Croatia and Slovenia: Leaks, Wiretaps, Scandal (Part 4)

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Some six months since the publication of the third post on the Croatia v. Slovenia arbitration, as Bernard Woolley might say, ‘there has been movement’. To recapitulate, following Croatia’s note verbale of 24 July 2015 informing Slovenia and the Tribunal of its intention to terminate the Arbitration Agreement, Slovenia tendered its objection dated 13 August. In the aftermath of the successive resignations of the arbitrator of Slovenian nationality (Dr Jernej Sekolec) on 23 July, the arbitrator of Croatian nationality (Professor Budislav Vukas) on 30 July, and the replacement arbitrator for Sekolec (President Ronny Abraham of the ICJ) on 3 August, the Tribunal invited the parties to appoint replacements for Vukas and Abraham. Croatia declined to name a replacement, whereas Slovenia wrote to the Tribunal that, ‘in order to preserve the integrity, independence and impartiality of the Arbitral Tribunal and the ongoing proceedings, it will refrain from appointing a member of the Tribunal to replace Judge Abraham’. Instead, Slovenia requested ‘the President of the Arbitration Tribunal, Judge Gilbert Guillaume, in exercise of his powers under Article 2, paragraph 2, of the Arbitration Agreement, to appoint a member of the Tribunal’. In a press release dated 25 September, the Tribunal announced:

Since neither Party made an appointment within 15 days after the resignation of Professor Vukas and Judge Abraham, it fell to the President to appoint the remaining two members of the Tribunal. [Professor Nicolas Michel, of Swiss nationality] was appointed to succeed Professor Vukas on the Tribunal, and [H.E. Ambassador Rolf Fife, of Norwegian nationality] was appointed to succeed Judge Abraham. The Tribunal now intends to consider the Parties’ positions carefully, including in respect of the effect of Croatia’s stated intention to terminate the Arbitration Agreement and in respect of the possible implications for the present proceedings of the events reportedly underlying Croatia’s decision. In this regard, the Tribunal may invite further submissions from the Parties on questions of fact and law as may be necessary.

It is noteworthy that, for the first time in the history of the arbitration, the panel is now ‘wholly neutral’ in that all of the arbitrators are nationals of neither party. Although this appears to have eventuated faute de mieux, it is attractive on a systemic level, as covered in our last post.  

On 2 December, the Tribunal fixed deadlines for further submissions on the aforementioned issues. On 14 March, the Tribunal announced that it had fixed 17 March as the date for hearings on the matter, to be held (understandably) in camera pursuant to Article 6(5) of the Arbitration Agreement with a summary of the Parties’ positions to be published via press release. On the ground, tensions have been escalated by the decision of Slovenia to run a barbed wire fence along part of the disputed territory (see here). Reactions in Croatia, likening these actions to the Nazi occupation of the area during the Second World War, have not helped to ease tensions (see here and here).

The Parties’ Positions

In its press release dated 18 March, the Tribunal stated that Croatia had neither filed written pleadings nor attended the hearing. Croatia’s position is set out in its July communiqués:

[t]here was no tool available for repairing the damage that ha[d] been occasioned on the proceedings and the Arbitration Agreement. Croatia further argued that the Arbitration Agreement did not contain any provision concerning the settlement of disputes in respect of the validity and effect of the Agreement. According to Croatia, the Tribunal was hence without competence to express any views as to the conditions for the termination of the Arbitration Agreement. Rather, the procedure to be followed in the event that Slovenia raised objections to the termination of the Agreement was set out in Article 65, paragraph 3 of the Vienna Convention [on the Law of Treaties], which stipulates that the treaty parties shall ‘seek a solution through the means indicated in Article 33 of the Charter of the United Nations.

Slovenia both filed written pleadings and made oral arguments at the hearing. It asserts:

[T]he Arbitral Tribunal should complete its mandate and render an award. The adoption of Croatia’s position in respect of the effect of its purported termination of the Arbitration Agreement would frustrate the essential “quid pro quo” of the Agreement, which sought to ensure the realization of the respective vital interests of both sides: These were Croatia’s accession to the European Union, which it had achieved after the Arbitration Agreement had entered into force, and the determination by the Tribunal of Slovenia’s “junction to the High Sea”, which was yet outstanding.

Slovenia further submitted that the Tribunal had competence to determine the legal ramifications of Croatia’s unilateral declaration to terminate the Arbitration Agreement, flowing both from the principle of Kompetenz-Kompetenz and the Arbitration Agreement itself.

On this basis, Slovenia asserted that there was no impediment preventing the Tribunal from fulfilling its duty, and that the Tribunal possessed the tools to remedy the effects of any wrongdoing that may have occurred, in order to attain the object and purpose of the Arbitration Agreement. In particular, Slovenia argued that the resignation of those involved in the events, the appointment of new arbitrators, and the critical inspection of the official record of the arbitration by the Tribunal constituted adequate means of redressing the purported breach of the Arbitration Agreement. If any additional reparation was sought, the appropriate remedy for such non-material damages under international law would be a declaration of the wrongfulness of Slovenia’s conduct by the Tribunal.

Lastly, Slovenia contended that no ‘material breach’ within the meaning of Article 60 of the Vienna Convention had occurred as the alleged misconduct did not call into question the object and purpose of the Arbitration Agreement. In any event, Slovenia argued that the Arbitration Agreement vested the Tribunal with the authority and the means to rectify any effects of such misconduct that may have occurred.

The Tribunal has commenced its deliberations concerning the procedural issues with any consideration of the merits of the underlying territorial and maritime dispute suspended.

The Croatian government has declared that the whole process has been tainted and that the Tribunal itself is ‘corrupt’ and ‘compromised’ and should therefore ‘abolish’ itself (see statement by the Croatian Minister of Foreign and European Affairs here and statement by the Croatian President here). Slovenia has retorted that the resolution of the border dispute was part of the referendum on which Slovenia agreed to lift is veto to Croatian accession to the EU and, as such, the arbitral process must be respected (see here). From a purely political standpoint, the election of a new Croatian government in November 2015, dominated by the nationalist Croatian Democratic Union Party (HDZ), has seemingly complicated matters: the HDZ has been forced by electoral arithmetic into an uncomfortable coalition with a new anti-corruption party (the Bridge of Independents Party (MOST)).

The Competence of the Tribunal

As outlined in the second post on this episode, there are two inter-related, yet distinct issues:

  • Croatia’s purported termination of the Arbitration Agreement (i.e. – the treaty upon which the arbitration is based); and
  • Termination of the arbitration (i.e. – the proceedings commenced in 2012).

Whereas the former entails the latter, the latter does not prompt the former.

The Parties are diametrically opposed on the question of the Tribunal’s competence to decide on the validity of Croatia’s purported termination of the Agreement. My view is that Croatia is correct on this point: whilst the Tribunal is empowered to decide procedural matters of the arbitration (Articles 3(4) and 6(4) of the Agreement) it is not empowered to decide the validity of termination of the Arbitration Agreement. As termination of the arbitral proceedings is a procedural matter, the Tribunal is therefore competent to decide on the termination of the arbitration per its general power.

Termination of the Arbitration Agreement

The validity of the purported Croatian termination of the Arbitration Agreement constitutes a new ‘dispute’ concerning the interpretation and application of Article 60 VCLT: to distinguish from the underlying (substantive) territorial and maritime dispute, let us designate this ‘the VCLT dispute’. The VCLT dispute engages the dispute settlement procedures in Articles 65(3), 66(b) and the Annex:

  • The parties shall seek a peaceful solution per Article 33 of the UN Charter;
  • If by 12 August 2016 (twelve months after the date of the Slovenian objection to Croatia’s termination) the parties have not resolved the VCLT dispute, either of them may ‘set in motion the procedure specified in the Annex to the Convention by submitting a request to that effect to the Secretary-General of the United Nations’;
  • A conciliation commission of five (incidentally, one of whom must be Croatian, one Slovenian) is then constituted by the Secretary-General under the terms of the Annex;
  • The commission transmits its report to the Secretary-General and to the parties, ‘including any conclusions stated therein regarding the facts or questions of law, [which] shall not be binding upon the parties and [shall] have no other character than that of the recommendations submitted for the consideration of the parties in order to facilitate an amicable settlement of the dispute.

An interesting point, on which the Convention is silent, is whether the report should be made public; it would appear to fall under the general power of the Commission under para. 3 to frame its own rules of procedure.

There has not been a single instance of the conciliation procedure being utilised in the thirty-six years since the Convention entered into force, a state of affairs discussed here, here and here. Should either of the parties (presumably Croatia) exercise its right to trigger the procedure, this in itself would be historic; neither of them has tendered a reservation to Article 66 on compulsory dispute settlement (unlike a number of other Parties). Ironically, one of the two Croatian conciliators on the list is none other than Professor Vukas; Slovenia has not made nominations.

Termination of the Arbitration

For the reasons set out in the second post, I suggest that it is legally and politically untenable for the arbitration to carry on, notwithstanding the regrettable loss of time. Enforcement of what would undoubtedly be a controversial award – whatever the Tribunal’s findings on substance – would require Croatia’s consent. Not only does PCA arbitration depend on the continuous consent of the parties in general but there is no obligation under Croatia’s EU accession treaty to execute the award. This precludes the European judicial system from being applied, whereas European pressure on Croatia to execute the award regardless would be, in these circumstances, embarrassing.

I earlier indicated that the distinction between termination of the Agreement and termination of the arbitration is critical: termination of the arbitration would not necessitate termination of the Agreement. The VCLT conciliation mechanism set out above is not binding, yet the conciliation commission (presumably composed of international lawyers) would be empowered to advise the Parties on the validity of the Croatian termination under Article 60 VCLT. It is thus politically and legally viable to salvage the Arbitration Agreement, if not this arbitration.

Although the law on Article 60 VCLT, as discussed in the second post, is not clear-cut, my instinct is that the Croatian termination is not valid. The Slovenian breach of the Agreement through the conduct of its agent clearly renders the present proceedings untenable, yet Slovenia is correct that does not evidently undermine a provision ‘essential to the accomplishment of the object and purpose of the [Agreement]’. It is perfectly possible for the arbitration to be started anew: this is (naturally) not expressly envisaged by the Agreement, yet it is implied by the context in which it was negotiated, which is Slovenia’s ‘quid pro quo’ point: Croatia cannot withdraw scot-free from its obligation to arbitrate the dispute according to the Agreement. Croatia would either have to accept a re-start of the arbitration (the default position) or it would have to agree with Slovenia on alternative means (e.g. – ICJ, ITLOS) to settle the dispute.

The law could, of course, be superseded by such a fresh agreement between the parties, yet the current political dynamic makes this outcome less than likely. Two milestones lie ahead: 1) the decision of the Tribunal, presumably to be rendered in the coming weeks; and 2) a putative application, circa 12 August of this year, to the UN Secretary-General to set in motion the VCLT conciliation procedure.

 The author would like to thank Dr. Rudy Baker for his valuable contribution to this post. 

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V.J.S says

May 4, 2016

Thank you for this great post, Arman!

As I do not have a VCLT commentary at hand right now, one question: Is it your point that, in the absence of a specific provision on jurisdiction for disputes concerning the validity of the arbitration agreement, the arbitral tribunal is blocked (per se or at least if the conciliation procedure is triggered) from deciding this point or at least consider itself competent to continue with the proceedings without deciding the issue?

If that is really the case, any party to an arbitration could raise (grossly unfounded) doubts about the validity of an arbitration agreement and thereby block the tribunal (if there is no express provision on validity disputes). If the arbitration agreement is interpreted in light of the principle of effectiveness, wouldn't that be an awkward outcome?


Arman Sarvarian says

May 5, 2016

Many thanks indeed for your interesting point. Article 21(2) of the PCA Optional Rules for Arbitrating Disputes between Two States provides:

'The arbitral tribunal shall have the power to rule on objections that it has no jurisdiction, including any objections with respect to the existence or validity of the arbitration clause or of the separate arbitration agreement.'

The Optional Rules supplement the Arbitration Agreement per Article 6(2) of the Agreement: 'Unless envisaged otherwise, the Arbitral Tribunal shall conduct the proceedings according to the Permanent Court of Arbitration Optional Rules for Arbitrating Disputes
between Two States.' This is the presumable hook by which the Tribunal could claim jurisdiction to decide on the validity of the purported Croatian termination of the Agreement.

There are two potential problems with this: 1) given that the validity of termination of the Agreement entails the interpretation and application of the VCLT, should the VCLT conciliation procedure be triggered, a jurisdictional conflict results; and 2) the phrasing of Article 21 throughout clearly envisages this as a preliminary objections procedure (i.e. - is there an agreement to arbitrate as a preliminary matter) rather than the scenario of termination of the agreement in medias res.

It is certainly not a black-or-white issue and I have the feeling that it is something like Pandora's Box: the more that the Tribunal tries to do in its decision, the more problems will result. It is noteworthy that, if I am wrong and the Tribunal does have the power to rule on the termination of the Agreement issue, it is a power, so the Tribunal could decline to exercise it in these circumstances. Given the practicalities of enforcement, pragmatism would seem to suggest that the Tribunal decline to rule on the termination of Arbitration Agreement issue, confining itself to its clear power to rule on the termination of the arbitration.

On the systemic level, you are quite right that there is a risk of parties raising dubious allegations in order to purport to tender flimsy termination as pretexts. This is one of the consequences of choosing the (broadly speaking) weaker mode of arbitration to settle the dispute, as opposed to adjudication; whereas the compétence de la compétence powers of the ICJ/ITLOS to decide on a purported termination of a Special Agreement (for example) or other jurisdictional matters connected to non-participation (save, perhaps, settlement) during proceedings are clear, in PCA arbitration there is greater flexibility for the parties to frame the rules, for good and ill.

On effectiveness, the inherent powers doctrine for arbitral tribunals to decide on matters not covered by the arbitration agreement yet integral to the arbitral proceedings is a live debate. Whereas I could see the doctrine being applied here to claim a power to decide on the termination of the arbitration, as an integral matter (here of course, there is no need, as there is an express power to do so) I do not see the power to rule on a termination of the Arbitration Agreement as being a sine qua non for the arbitration to function: the Tribunal can decide on the question of arbitration in isolation without any need to look at the question of the termination of the Arbitration Agreement.

So on a systemic level, there is a risk of spurious/flimsy terminations being raised during the course of a PCA arbitration, yet this risk can be addressed by the parties either inserting an express power for the Tribunal in the arbitration agreement or by submitting the dispute to the ICJ or ITLOS (in this case) instead.

VJS says

May 5, 2016

Again, thank you for taking the time and effort for this elaborate reply! The issue is much clearer to me now.