Georg Gavrilović and Gavrilović D.O.O. v. Republic of Croatia,Case. No. ARB/12/39
In an award dated July 26, 2018, an ICSID tribunal considered claims brought against Croatia by Georg Gavrilović, an Austrian national, and Gavrilović d.o.o., a company established under Croatian law. The tribunal upheld the direct expropriation claim under the Austria–Croatia, awarding the claimants roughly EUR 3 million in compensation, but denied the remaining claims.
Background and claims
When the communist republic of Yugoslavia was created after World War II, the meat business owned by the family of Georg Gavrilović came under social ownership. Between the collapse of Yugoslavia in 1989 and the Croatian war of independence in 1991, the business transitioned to a privately-owned company, comprising a holding company and nine limited liability companies.
Five of the nine companies were placed into bankruptcy. The bankruptcy court authorized the sale of the five bankrupt companies via public tender, and Mr. Gavrilović submitted the only bid in November 1991. The liquidator and Mr. Gavrilović entered into a purchase agreement that provided for the purchase of the five companies along with their assets, but did not specify what exactly the assets were.
According to the claimants, the purchase agreement confirmed Mr. Gavrilović’s rights as owner of the five companies (collectively, Gavrilović d.o.o., the other claimant in the arbitration). Croatia, however, contended that Mr. Gavrilović had taken part in a fraudulent scheme to place the companies into bankruptcy and secure his ownership.
Defending the legitimacy of the purchase, the claimants argued that Croatia had undermined, failed to protect and promote, and ultimately expropriated Mr. Gavrilović’s investment.
Tribunal has jurisdiction over dispute; claims found admissible
Croatia argued that the tribunal did not have jurisdiction over the claims, because Croatia had not consented to the arbitration in light of Mr. Gavrilović’s “orchestration” of the bankruptcy in violation of Croatian law. The tribunal, however, found that in fact the bankruptcy court—an organ of the state—had orchestrated the bankruptcy as part of a quid pro quo for Mr. Gavrilović’s assistance in smuggling currency out of the country in support of the Croatian war for independence.
Croatia also argued that the investment was made unlawfully, rendering the claims inadmissible. However, the tribunal found that Croatia had failed to prove the alleged illegalities. Additionally, the tribunal found that, although the purchase agreement gave the Regional Commercial Court in Zagreb jurisdiction over disputes arising from such agreement, the umbrella clause in the BIT made the claims admissible.
Croatia in breach of direct expropriation obligations
The claimants alleged that Croatia had directly and unlawfully expropriated the real property of Gavrilović d.o.o. by registering the state as its owner, in breach of BIT Article 4(1). The plots of land were registered by the state under Article 362(3) of the Ownership Act, which gave Croatia ownership rights to all property under social ownership in Croatia, where the ownership of such property had not been determined; anyone asserting otherwise had the burden of proof. The tribunal found this provision of the Ownership Act to be expropriatory insofar as Croatia’s assertion of ownership could not be reversed without further action by the claimants, for example, through domestic courts.
The claimants further argued that Croatia had indirectly expropriated Gavrilović d.o.o’s property by preventing Gavrilović d.o.o. from registering ownership of that property. The tribunal, however, found that the claimants had never attempted to register the property and thus could not effectively allege that they had been prevented from registering it. The tribunal also rejected the claimants’ argument that Croatia had expropriated Mr. Gavrilović’s contractual rights under the purchase agreement since there were no relevant contractual rights capable of expropriation.
The remainder of the tribunal’s analysis addresses the remaining plots of land for which the claimants had not yet shown a violation of the BIT. In its analysis, the tribunal, citing Tecmed v. Mexico and El Paso v. Argentina, found that a breach of a legitimate and reasonable expectation by an investor may result in a violation of the FET standard. The tribunal further found that there can be no legitimate expectation with respect to property to which the claimants have no property or contractual rights.
Next, the tribunal considered whether the claimants had a legitimate expectation that Gavrilović d.o.o. would be able to register ownership over the properties. Croatia argued that neither the purchase agreement (which failed to specify which assets were to be sold with the companies) nor any other documents or statements provided the claimants with a legitimate expectation regarding the title or ability to register the claimed properties.
The tribunal ultimately found that, since the claimants had not established that Croatia had made any representations or warranties that the claimants were to purchase a registerable right to all of the claimed property, Mr. Gavrilović could not have legitimately or reasonably believed that he would be able to register ownership over all of it. The tribunal did find, however, that Mr. Gavrilović had a reasonable and legitimate expectation that he had registerable title to the property to which he could establish ownership.
The claimants argued that an annulment action by the state seeking to annul the purchase agreement, a criminal investigation into Mr. Gavrilović’s actions and the consequent public campaign launched against him would have made it likely that they could not sell or mortgage real estate in the absence of additional documentation from Croatia, in breach of the claimants’ legitimate expectations. They also argued that they were prevented from registering and improving the properties and that Croatia had sold the claimants’ property based upon reliance on the pending annulment action. The tribunal, however, found that the damages alleged were too hypothetical and that there was no causal link between the investigation and the claimants’ inability to register ownership or obtain financing.
The tribunal considered additional FET claims, but ultimately found no breach. It also indicated that the claimants had not argued or shown that Croatia had violated domestic law, domestic procedure or domestic notions of due process as part of their FET claims.
Tribunal denies umbrella clause and national treatment claims
The claimants contended that, under the umbrella clause of the BIT, Croatia was bound by the terms of the purchase agreement and had breached such clause by failing to honour its terms. The tribunal, however, found that the purchase agreement was concluded between Mr. Gavrilović and the five companies represented in bankruptcy by the liquidator; Croatia was not a party to the purchase agreement and was thus not responsible to the claimants for any obligations thereunder (para. 1159).
Additionally, under the national treatment clause of BIT Article 3(1), the claimants alleged that they were treated less favourably than a Croatian national, Davor Imprić, who had purchased and registered a plot of land from the bankruptcy estate of one of the nine Gavrilović companies. The tribunal ultimately dismissed the claim. It considered that the claimants and Mr. Imprić were not in like circumstances, because Mr. Imprić had purchased and sought ownership of just one plot of land from the nine companies, while the claimants sought ownership over many plots of land; the terms of the respective purchase agreements differed; the claimants had not established registrable title to all claimed properties; and the claimants failed to establish ownership rights over the plots. For these reasons, the tribunal dismissed the claim of national treatment violation.
Having found that Croatia directly expropriated the taken plots, in breach of BIT Article 4(1), the tribunal awarded Gavrilović d.o.o. HRK 9,699,463.73 and EUR 1,658,960.49 in damages plus compounded interest. Croatia was also ordered to pay 30 per cent of the claimants’ legal and other costs and 30 per cent of arbitration costs, plus interest on the two amounts.
Notes: The tribunal was composed of Michael Pryles (president appointed by the parties, Australian national), Stanimir Alexandrov (claimants’ appointee, Bulgarian national) and J. Christopher Thomas (respondent’s appointee, Canadian national). The award is available at https://www.italaw.com/sites/default/files/case-documents/italaw9887.pdf
Kirrin Hough is a U.S. attorney based in Washington, D.C., United States.