UNCITRAL tribunal dismisses allegations of Hungarian investor’s bribery and refuses to set aside contract with Croatia

The Republic of Croatia v. MOL Hungarian Oil and Gas Plc, PCA Case No 2014-15

A tribunal under the auspices of the Permanent Court of Arbitration (PCA), constituted under the Rules of Arbitration of the United Nations Commission on Trade Law (UNCITRAL), dismissed Croatia’s request to set aside certain agreements with MOL Hungarian Oil and Gas Plc (MOL), which Croatia argued had been obtained through bribery. The award was rendered on December 23, 2016.

Background and claims

The dispute arose from the privatization of INA Industrija Nafte d.d. (INA), a Croatian state-owned energy company. In 2003, upon Croatia’s initiative, MOL, the most significant oil and gas company in Hungary, entered into INA’s capital through a Shareholders Agreement (SHA). Around 2009, amendments to the SHA were being negotiated and entered into force on January 30, 2009.

The allegations of bribery pertain to this period. Croatia initiated the UNCITRAL arbitration in January 2014, alleging that its former prime minister, Dr. Sanader, had agreed to accept a bribe of EUR 10 million from MOL’s managing director, Mr. Zsolt Hernadi. According to Croatia, the bribe was intended to ease the passage of amendments to the SHA that were detrimental to Croatia but beneficial to MOL. As none of this money was ever received into any account in the name of Dr. Sanader, Croatia had to rely on inferences and the testimony of a witness whose account was strongly denied by MOL and Dr. Sanader. On the ground of bribery, Croatia sought to set aside the amendments concluded with MOL as null and void. In addition, it relied on alleged breaches of Croatian corporate law as a ground to set aside the amendments.

The tribunal was to decide whether the bribe was offered and accepted as alleged, by applying Croatian law. If it found that the bribe took place, it was to decide whether the amendments should be set aside and, if so satisfied, assess Croatia’s damages.

Corruption at the heart of ongoing ICSID case initiated by MOL against Croatia under the ECT

In respect of the same facts, on November 26, 2013 the investor had initiated a parallel ICSID arbitration under the Energy Charter Treaty (ECT), MOL Hungarian Oil and Gas Company Plc v. Republic of Croatia (ICSID Case No. ARB/13/32), which is still pending. MOL’s claims of indirect expropriation and violation of the umbrella clause under that arbitration arose out of the alleged failure by Croatia to improve the gas trading business of the company in which MOL had invested, as well as alleged delays and irregularities in granting licences and the criminal prosecution of MOL’s chief executive. According to MOL, Croatia’s actions breached Article 10(1) of the ECT, particularly, Croatia’s failure to fulfil certain obligations and undertakings with regard to MOL’s investments. The obligations in question were reflected in the amendments to the SHA and other agreements concluded in 2009.

The issue of corruption, which saw detailed discussion in the UNCITRAL award, lies at the heart of the ICSID arbitration as well. Croatia claimed that as the 2009 agreements were concluded through bribery, MOL never made a valid investment, so the tribunal lacked jurisdiction to hear the case. MOL objected, stating that no convictions to this effect had been achieved, and further alleged that the criminal investigation breached the ECT. The ICSID tribunal denied that MOL’s claims were “manifestly without legal merit” and thus dismissed Croatia’s preliminary objections under ICSID Arbitration Rule 41(5) on December 2, 2014. Even so, the tribunal ruled that Croatia was allowed to raise these arguments in the subsequent stages of the arbitration.

Standard of proof: “Reasonable certainty”

Croatia submitted that the UNCITRAL tribunal was not required to apply a high standard of certainty, especially in a case where the factual matrix was very complex. MOL, however, considered that under Croatian law, the tribunal was required to apply a high standard of certainty or probability, because of the seriousness of the allegations made in this case. MOL also argued that it was common practice in international arbitration to employ a high standard of proof for allegations of corruption.

The tribunal considered that the ideal standard ought to focus on something between the balance of probabilities and absolute certainty, while at the same time, recognizing that the latter is unobtainable. The tribunal chose, ultimately, to adopt the standard of “reasonable certainty,” which Croatia itself put forward.

Shifting the burden of proof to MOL

Croatia also asserted that the tribunal ought to shift the burden of proof to MOL in accordance with Metal-Tech Ltd. v. Uzbekistan. The tribunal disagreed and noted that the circumstances of the Metal-Tech case were markedly different from this case. The briber in Metal-Tech was actually the claimant, and the tribunal’s “reasonable certainty” was based on the testimony from the claimant’s CEO himself who admitted having paid USD 4 million to consultants at the time of the investment. Here, by contrast, Croatia’s allegations rested upon the testimony of Mr. Jezic, who was the alleged intermediary between MOL and Dr. Sanader. The tribunal had given Metal-Tech the opportunity to provide evidence of the services supposedly rendered in exchange for these monies, but none was produced. In the absence of an alternative explanation of the claimant’s own payment, the tribunal was persuaded of its unlawfulness. The tribunal found that the Metal-Tech case was a contextually specific instance of shifting the burden of proof.

Furthermore, the tribunal found no support for Croatia’s assertion that, under Croatian law, the tribunal could shift the burden of proof to MOL. The tribunal held that the burden of establishing this at all times remained with Croatia.

The tribunal ultimately came to the “confident conclusion” that Croatia had failed to establish that MOL did in fact bribe Dr. Sanader. Consequently, Croatia’s case that the amendments be rendered null and void due to the alleged bribery failed.

Violation of Croatian corporate law

As an alternative argument, Croatia contended that if the tribunal were to reject the bribery allegations, it should even so declare them null and void as a matter of Croatian corporate law.

According to Croatia, the structure created by the amendments strengthened MOL’s influence as a majority shareholder at three different levels, giving rise to a corporate governance structure that would breach Croatian corporate law. However, the tribunal was of the opinion that Croatia’s contention that it entered into a poor agreement with MOL would not suffice to conclude that the FASHA breached Croatian law. The tribunal noted that this issue was beyond its jurisdiction, which was limited to the FASHA and its attached schedules.

Decision and costs

The tribunal dismissed both of Croatia’s claims in relation to bribery and breach of domestic corporate law. The award ordered Croatia to bear the tribunal’s and administrative fees, as well as most of MOL’s legal and expert fees and other expenses.

Notes: The tribunal was composed of Neil Kaplan (presiding arbitrator, jointly appointed, British national), Jakša Barbić (claimants’ appointee, Croatian national) and Jan Paulsson (respondent’s appointee, Swedish national).

Trishna S. Menon is a final year undergraduate student of Law and Science at the Gujarat National Law University, India.