Slovenia v. Croatia: The First EU Inter-State Case before the ECtHR

On 15 September 2016 the Government of Slovenia lodged an inter-State application against the Republic of Croatia before the European Court of Human Rights (ECtHR), related to the claims of Ljubljanska banka towards Croatian companies. Pursuant to Article 33 of the European Convention on Human Rights and Fundamental Freedoms (ECHR), the Republic of Slovenia informed the Court that the Republic of Croatia had violated the provisions of the Convention when the latter’s judicial and executive authorities systematically undertook actions to unlawfully deny Ljubljanska banka the right to property. For a period of 25 years the bank has not been able to recover its claims from Croatian companies. The application states that this has allowed the debtors of Ljubljanska banka in Croatia to avoid repaying their debt – currently estimated to be 360 million Euro. This amount is very similar to the one Slovenian taxpayers were requested to pay after the Grand Chamber delivered its decision in Ališić two years ago, one of the largest cases in ECtHR’s history considering its massive financial implications for Slovenia’s two million population. Although one might say that the Slovenian government timed its application so as for the recent Croatian elections to pass, the date of the application was in fact more closely related to the latest decision of the Croatian Constitutional Court on the subject-matter which was adopted in March this year.

A wider legal audience, which may otherwise not be interested in Yugoslav succession issues, might nevertheless show an interest in the present case since it presents the first inter-State case before the ECtHR between two EU Member States, and also because it raises the question of potential concurrence of jurisdiction between the ECtHR and the CJEU (a topic much debated under the EU’s accession to the ECHR negotiations). Although current EU Member States have in the past been involved in mutual disputes before the ECtHR,  both contracting parties have never been EU Member States at the time of those proceedings (application by Austria v. Italy was lodged in 1960 (No. 788/60); Denmark and Sweden filed an application against Greece in 1967 (No. 3321/67 and 3323/67); while two cases of Ireland v. UK date back to 1971 and 1972 (No. 5310/71 and 5451/72)).

The application of Slovenia’s Government against Croatia is also of importance as it is an unusual case in the sense that Article 33 ECHR is being applied for the protection of interests of a legal, rather than a natural, person (e.g. the case of Georgia v. Russia (I) (No. 13255/07) concerned the alleged collective expulsion of Georgian nationals from the Russian Federation). The general public of Slovenia has for this reason responded to the news of the application with doubts as to whether legal persons could in fact be considered to have “human” rights. However, despite the fact that only Article 1 of the First Protocol to the ECHR on the protection of property expressly recognizes legal persons as recipients of fundamental rights, several other human rights in the ECHR are also granted to them. Apart from the recent application of Ukraine v. Russia, which partly attempts to protect the rights of legal persons, all other inter-State actions before the ECtHR have concerned natural persons.

As the long journey towards ECtHR’s decision in the case at hand has only just begun, this post shortly describes the background of the case.

1. Dissolution of the former Yugoslavia and the problem of Ljubljanska banka

The substantive dimension of the case relates to the chaotic circumstances in Yugoslav public finances and banking before and after the dissolution of the former State. With the dissolution of the SFRY, the recovery of credits owed by local companies and individuals awarded by banks having their head office in other successor States became hindered, both by the war and by restrictive State regulations and administrative practices. The problem primarily impacted the Slovenian based Ljubljanska banka (hereinafter LB), an associated bank with subsidiaries (and in the last year branches) across the entire SFRY, which held the largest part of foreign-currency deposits in the territory of the SFRY. After dissolution of the SFRY, Slovenia adopted the territoriality principle for the recovery of these deposits without discrimination – guaranteeing not only for Slovenian banks on domestic territory but also for foreign banks which operated on the territory of the SFRY and had their branches in Slovenia (predominantly Serbian and Croatian banks). Consequently, Slovenia refused to recover foreign currency deposits in branches and subsidiaries on the territory of other successor States. The core of the issue was that Slovenian authorities considered LB debts and claims arising from the time before the dissolution of Yugoslavia, as a single issue – when/if LB would successfully enforce its claims against National Bank of Yugoslavia (NBY) and the other borrowers on the territory of other successor States, these assets would then in turn be able to be used to compensate foreign-exchange depositors on the territory of these States. Other successor States, however, considered the claims and liabilities of LB on their territories as two separate issues.

2. Ališić case (GC decision of 2014)

The issue of claims for outstanding foreign currency deposits against LB in Croatia (and in Bosnia and Herzegovina (B&H)) has been rounded up by the 2014 judgment by the Grand Chamber of the ECtHR in case Ališić and others. In contrast to the Kovačić  case in which the Grand Chamber of the ECtHR subscribed to the view of the Parliamentary Assembly in Resolution 1410 (2004), that the matter of compensation for so many thousands of individuals had to be resolved by an agreement between the successor States and called on the States concerned to proceed with these negotiations as a matter of urgency, in Ališić and others, a case which was brought against all five successor States of the former SFRY, the ECtHR held that there had been a violation of Article 1 of Protocol No. 1 and a violation of Article 13 of the ECHR by Serbia and Slovenia. No violation by the other States had been found. Slovenia was therefore liable for old foreign currency deposits (OFCDs) in LB’s Sarajevo branch and Serbia for OFCDs in Investbanka’s Tuzla branch. On the other hand Judge Nußberger noted in her partly dissenting opinion that this solution:

“is based on an over-simplification of the complex historical developments and leaves out some important aspects. While it might be tempting to find a clear-cut and “easy” solution, a more differentiated approach should have been adopted.”

For this reason, Nußberger suggested that Croatia and B&H should also have been found liable, for all those States failed to settle the matter for a long period of time under the succession negotiations.

As found by Judge Ziemele in her concurring opinion, “given the limited scope of the present case, the Court does not (…) enter full speed into the question of equitable apportionment of debts as such.” In this respect Judge Ziemele points out that the Grand Chamber judgment “does not reflect on the unjust enrichment principle, which (…) might also be relevant to the facts of the case”. This point was further elaborated by Judge Nußberger, emphasising that:

“as it is undisputed that not all money “ended up” in Slovenia and Serbia (…), it is inadequate to request full repayment of the “old” foreign deposits by Slovenia and Serbia alone”.

The Grand Chamber held that the applicants’ savings did not belong in the category of local debts, although Nußberger found that it was not contested that re-depositing payments were made to the NBY in Belgrade. As already concluded by Jurgens, Nußberger also found that “it is highly likely that most of the money was already lost in “Yugoslav times”.”

In line with the obligations imposed upon Slovenia by the ECtHR in Ališić, the Slovenian National Assembly adopted its Act on the Method of Execution of the European Court of Human Rights Judgement in case No. 60642/08 on 22 June 2015. The Government of Slovenia, who proposed the adoption of the Act, estimated the financial consequences of the Act will amount to 385 million EUR. Given that Slovenia has a population of less than two million, the financial consequences of the judgment are enormous.

3. Individual application: Ljubljanska banka v Croatia (decision of 2015)

As a result of the open outstanding foreign currency deposits that originated from the times of former SFRY issues, Croatian authorities have, on the other hand, been hindering the business activities of LB on its territory since 1991. In that year, the Governor of the Croatian National Bank (NBH) issued a notice declaring that LB, present on the territory of Croatia, may not have branches, and disallowing its transformation into a separate branch of the bank as its legal successor. Other measures were also taken by NBH with the aim of (negatively) affecting the operations of LB Zagreb in relation to its savers, including blocking its account in 1996 and finally its closure in 2000, terminating LB Zagreb’s business altogether. Against this background, and due to the fact that LB was unable to recover its debts from Croatian companies, a number of problematic, lengthy, time-consuming and largely unsuccessful proceedings were held in Croatia. In April 2014, the Croatian Constitutional Court rejected three appeals of LB related to this issue. Further appeals were rejected at the end of March 2016. The Court took the stance that due to the transfer of the rights and obligations of LB to New Ljubljana Bank in 1994, the former does not have active locus standi for the recovery of claims towards Croatian companies. On the other hand, Croatian courts consistently recognised the passive legal standing of LB in cases where the question of LB’s debts towards savers was concerned.

The political dimension of unsuccessful court procedures for the recovery of debts by LB Zagreb in Croatia was expressly confirmed by the former Vice President of the Croatian Government Linić, who admitted to influencing the courts’ decisions in this context. The Slovenian Government’s stance on the position, however, is that, if it was possible for LB Zagreb to repay the loans to entities on the territory of Croatia, LB could also settle its liabilities to foreign depositors, as was already done in a couple of cases in the past. For this reason LB initiated legal proceedings against Croatia before the ECtHR in 2007 due to non-enforcement of two writs of execution in its favour, arising from a debt of a Croatian sugar factory towards the Slovenian based LB.

On 4 June 2015 the ECtHR unanimously declared the application inadmissible. The ECtHR concluded that the application “is incompatible ratione personae with the provisions of the Convention within the meaning of Article 35 § 3” (para. 56). The ECtHR reiterated its rule that Governmental bodies or public companies under the strict control of a State are not entitled to bring individual applications before it. Referring to its findings in Ališić, the Court found that although LB was a separate legal entity, it did not have sufficient institutional and operational independence from the State and therefore had to be regarded as a Governmental organisation. As such, the bank had no standing to lodge an individual application before the ECtHR. Consequently, the Court did not address the merits of the issue and did not resolve whether Croatia breached the ECHR by its treatment of LB.

4. Inter-State Application: Slovenia v. Croatia (lodged on 15 September 2016)

In this situation, where Slovenia was held liable for repayment of deposits in foreign currency in LB subsidiaries on the territory of other republics before the dissolution of SFRY (deposits in local currency “Dinar” were effectively lost due to hyperinflation in the final years before dissolution), LB was effectively prevented from enforcing its claims towards Croatian companies and other borrowers. The Slovenian Government adopted a decision to refer the case to the ECtHR under Article 33 ECHR. which provides that any contracting party to the ECHR “may refer to the Court any alleged breach of the provisions of the Convention and the Protocols thereto by another High Contracting Party” (Cf Georgia v Russia (I), No. 13255/07, 30 June 2009, para 34; Denmark v Turkey, No. 34382/97, 8 June 1999). Using the terms of the European Commission on Human Rights:

“the High Contracting Parties have empowered any one of their number to bring before the Commission any alleged breach of the Convention, regardless of whether the victims of the alleged breaches are nationals of the applicant State of whether the alleged breach otherwise particularly affects the interests of the applicant State; whereas it follows that a High Contracting Party, when it refers an alleged breach of the Convention to the Commission under (former) Article 24, is not to be regarded as exercising a right of action for the purpose of enforcing its own rights, but rather as bringing before the Commission an alleged violation of the public order of Europe” (Austria v Italy, No. 788/60, 7 Report, 23).

It follows from the foregoing that independently of the decision of the ECtHR in Ljubljanska banka v Croatia in 2015 “the general interest attaching to the observance of the Convention renders admissible an inter-State application” (Karner v Austria, No. 40016/98, para. 24). Consequently, the Republic of Slovenia claims that the actions carried out by the Republic of Croatia constitute a breach of Article 6 of the Convention (the right to a fair trial) in relation to the Article 13 of the Convention (the right to an effective remedy). It is claimed that the said actions violated the principles of impartiality of the trial, independence of the judiciary, equality before law, the right to trial within a reasonable time, right to a fair trial due to manifestly arbitrary interpretation of the law, the right to execute final judgements and effective remedy etc. Additionally, the application puts forth that the Republic of Croatia violated Article 1 of Protocol I to the Convention (protection of property) in relation to the Article 14 of the Convention (prohibition of discrimination).

In the Slovenian Government press reports announcing the application, it was pointed out that the Croatian companies failed to repay their overdue liabilities, mainly from credit loans and guarantees approved after 1980, and therefore between 1991 and 1996, Ljubljanska banka and its branch office in Zagreb initiated the proceedings to recover their claims before the Croatian courts. Throughout this period, Ljubljanska banka was subjected to arbitrary decisions by Croatian judicial and administrative authorities, forced prevention of its operations in Croatia, systematically protracted litigations, and even prevention of enforcement of final and executable judgements, including as a result of interference by the executive authorities.

The inter-state application consists of 26 litigations pending before Croatian courts regarding the Ljubljanska banka claims. It is thus estimated that the cumulative debt of these companies towards Ljubljanska banka, including interest, amounts to approximately 360 million Euro.

The Slovenian Government also emphasises that for years, the outstanding issue of Ljubljanska banka in Croatia has remained one of the most pressing problems in the relations between Slovenia and Croatia. After the ECtHR judgment in Ališić, Slovenia found itself in an unjust position, where on the one hand it needs to pay out the savers of Ljubljanska banka, while on the other Croatia did everything in its power to prevent the repayment of Ljubljanska banka claims by Croatian companies. It is emphasised that political and judicial manoeuvres blocking the repayment of loans of Ljubljanska banka in Croatia, are improper. Following the lengthy yet fruitless negotiations and discussions with the Republic of Croatia on the Ljubljanska banka issue, as well as the fact that Croatia has not honoured previously agreed obligations, the only possible solution to this dispute appears to be to seek legal remedy at the international level. After exhausting all legal remedies in the Republic of Croatia, the Republic of Slovenia decided to lodge an inter-state application. After the judgement on the right to property of the foreign currency savers, the Republic of Slovenia expects the ECHR to also find a just solution in the case of violation of rights of Ljubljanska banka concerning its claims towards Croatian companies.

5. Monopoly of the ECtHR for deciding the dispute

Article 344 TFEU states that “Member States undertake not to submit a dispute concerning the interpretation or application of the Treaties to any method of settlement other than those provided for therein.” According to the case law of the CJEU, this provision establishes the exclusive jurisdiction of the CJEU over any dispute between EU Member States concerning the interpretation and application of EU law. In its Opinion 2/2013, the CJEU expressly established that “as the EU has not acceded to the ECHR, the latter does not constitute a legal instrument which has been formally incorporated into the legal order of the EU”. Until the EU becomes a party to the ECHR, Article 344 TFEU therefore does not apply to disputes concerning the interpretation or the application of the ECHR and does not constitute a barrier to an inter-State application before the ECtHR of one EU Member State against another pursuant to Article 33 ECHR (see more on this here and here). This is also in line with Article 55 ECHR that establishes “the monopoly of the Convention institutions for deciding disputes arising out of the interpretation and application of the Convention.” (Cyprus v Turkey, No. 25781/94, 1996, 86-A DR 104). However, considering the facts of the case, the CJEU would be exclusively competent to rule on whether the Croatian judicial and executive practice against LB has led to the breach of EU legal principles guaranteeing free movement of capital and services, as guaranteed by Articles 63 and 56 TFEU.

6. Conclusion

The new inter-State procedure between Slovenia and Croatia is – similarly to Ališić – the result of the impossibility of performing succession negotiations between the successor States. Considering that the case brings difficult issues arising from the dissolution of the SFRY to the ECtHR, as well as that it imposes a heavy burden on political relations in general (keeping in mind also the challenging arbitration procedure for determining the maritime border, which is still pending), it is difficult to assess whether the new court procedure will improve or worsen the relations between the two States. At the time of writing, the Croatian Government had not yet published its response to the application. It seems unlikely, however, that Croatia will try to settle the case – in contrast to what has been indicated in another banking claim against Croatia (i.e. Unicredit’s lawsuit against Croatia for the conversion of CHF-denominated loans), lodged on the same day as the case at hand. In any case, an attempt to settle open issues before an international court is certainly better than leaving them open for the next generation, thereby prolonging instability in the region.