FIFTH SECTION

Application no. 6038/11 BRODOGRADILIÅ TE KRALJEVICA D.D. against Slovenia lodged on 13 January 2011

STATEMENT OF FACTS

The applicant company Brodogradilište Kraljevica , D.D., is a public limited company under Croatian law whose registered office is in Kraljevica (Croatia). It is represented before the Court by Mr A. Grilc , a lawyer practising in Ljubljana.

A. The circumstances of the case

The facts of the case, as submitted by the applicant company, may be summarised as follows.

In 1996 the applicant company concluded a service and repair contract with company V.S. containing an arbitration clause according to which disputes were to be settled before the Permanent Arbitration Tribunal of the Croatian Chamber of Economy ( Stalno arbitražno sudište pri Hrvatskoj gospodarskoj komori ; hereinafter referred to as “the Arbitration Tribunal”) in Zagreb in accordance with Croatian law.

In 1997, the two companies concluded an Annex which was signed also by company C. Article 5 of the Annex reads as follows:

“ For the payment of the work carried out are jointly and severally liable the principal [T.S.C.], Panama, and [company C] who, as guarantor, is secondary liable for the payment in full of the sum owed.

All other terms and conditions remain unchanged. ”

1. Proceedings before the Croatian authorities

Unable to obtain payment from the principal debtor the applicant company instituted proceedings against company C. before the Rijeka Commercial Court ( Trgovački sud u Rijeci ).

On 14 June 2001 the Rijeka Commercial Court declared of its own motion that it was not competent to hear the case due to the existence of the arbitration clause. It held that the Annex was not an independent agreement and that company C. accepted both to become secondarily liable for debt as guarantor and, under the second paragraph of Article 5 of the Annex, to assume the obligations arising from the principal contract containing the arbitration clause.

The applicant company lodged an appeal arguing that the arbitration clause did not apply to company C.

On 8 January 2002 the High Commercial Court ( Visoki trgovački sud Republike Hrvatske ) dismissed the appeal and upheld the first-instance judgment. It confirmed the Rijeka Commercial Court ’ s reasoning that the Annex and the principal contract are connected in terms of the obligations arising from the principal contract and the contracting parties which implies that the Annex is not an independent agreement because under the second paragraph of Article 5 of the Annex all other terms and conditions remain unchanged and company C. had accepted to be bound by all of the terms of the principal contract.

The applicant company therefore brought an action before the Arbitration Tribunal. Company C. lodged an objection to the jurisdiction of the Arbitration Tribunal .

On 7 April 2003 the Arbitration Tribunal rejected company C ’ s objection and ordered it to pay 233,265.00 US dollars (USD) to the applicant company. It noted that the principal contract and the Annex were closely interrelated from a substantive and functional point of view since the Annex referred to the principal contract in its title and in the second paragraph of Article 5. As to the question of jurisdiction the Arbitration Tribunal noted that this issue had partly been resolved by the High Commercial Court ’ s final decision on the lack of jurisdiction of the Croatian ordinary courts and, consequently, company C. could no longer contest the Arbitration Tribunal ’ s jurisdiction. Finally, when deciding on the merits of the case the Arbitration Tribunal applied Croatian law in accordance with Article 5 of the Annex and Article 19 of the principal contract.

Company C. made a motion to the Zagreb Commercial Court ( Trgovački sud u Zagrebu ) to vacate the award.

On 22 March 2005 the Zagreb Commercial Court confirmed the award and company C. lodged an appeal against this decision.

On 7 May 2008 the appeal was rejected by the High Commercial Court, which in its reasoning pointed out that company C. ’ s plea of lack of jurisdiction had already been rejected in the final decision of 8 January 2002. In this respect, the court noted that if company C. had not wished to be bound by the arbitration clause it should have agreed upon another form of disputes settlement and since it accepted that all other terms and conditions remain unchanged it expressed its agreement to the arbitration clause.

2. Proceedings before the Slovenian courts

The applicant company requested the recognition and enforcement of the arbitral award in Slovenia. On 17 November 2008 the Koper District Court recognized the arbitral award.

Company C. made an objection concerning the validity of the arbitration agreement.

On 26 February 2009 the District Court upheld the applicant company ’ s objection and reversed its previous decision by refusing to recognise and enforce the arbitral award. Under Article V § 1 (a) of the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (hereinafter: the NYC) the District Court held that no agreement had been concluded between the parties as to dispute settlement. It took the view that the Annex consisted of two separate contracts, one concerning the amendments to the principal contract and the other concerning the guarantor ’ s statement. According to the court, which based its reasoning on Section 101 of the Croatian Obligations Act ( Zakon o obligacionim odnosima ), the clause “All other terms and conditions remain unchanged” referred to the first contract concluded between the applicant company and company V.S., the principal debtor. Given the standardised terminology used it could not be concluded that company C. had accepted to be bound by the terms of the principal contract, by way of general terms of business. Therefore, the District Court held that under Croatian law no arbitration agreement had been validly concluded and that this was the ground for refusal of the recognition and enforcement of the award.

The applicant company lodged an appeal before the Supreme Court.

On 16 December 2009 the appeal was rejected. The Supreme Court held that although company C. had failed to submit any evidence challenging the validity of the arbitration agreement as required by Article V of the NYC, the existence of a specific written arbitration agreement was necessary for the recognition of the arbitral award pursuant to the argumentum a minori ad maius resulting from Articles II, IV §1 (b) and V §1 (a) of the NYC. It also noted that both the NYC and domestic law defined the applicable law as to the existence of the arbitration agreement, which was to be assessed under the law to which the parties have subjected it (in the present case Croatian law pursuant to Article V of the NYC) and under domestic law (pursuant to Article II of the NYC). The Supreme Court thus applied both the Croatian and the Slovenian law to decide on the issue of the existence of an arbitration agreement. It noted that the relevant question was not what had been decided by the Croatian courts but what had been the guarantor ’ s intention. The Supreme Court upheld the reasoning of the first-instance court that company C. had not become a party to the principal contract since it had signed the Annex only as a guarantor. According to the Supreme Court, the fact that company C. had been acquainted with the terms of the principal contract did not satisfy the requirement that the arbitration agreement should be concluded in writing.

The applicant company lodged a constitutional appeal.

On 13 July 2010 the Constitutional Court rejected the constitutional appeal.

B. Relevant domestic law

1. Croatia

Section 471 of the Croatian Civil Procedure Act reads as follows:

“ A contract on chosen court shall deem to be concluded if an arbitration clause forms a part of the general conditions governing the legal transaction. ”

The relevant provisions of the Obligations Act ( Zakon o obligacionim odnosima ) which was in force also in Slovenia until 2001 read as follows:

Section 82

“ (1) The provisions of a contract shall be applied as they read.

(2) In the interpretation of disputed provisions it shall not be necessary to adhere to the literal meaning of the expressions used, but shall be necessary to identify the contracting parties ’ common intentions and interpret the provision so as to comply with the principles of obligational law set out in the present code.

... ”

Section 101

“ It shall be necessary to interpret unclear provisions in a gratuitous contract in terms of the meaning that is less of a burden for the debtor.

... ”

Section 120

“ (1) The general terms and conditions set out by one contracting party, whether contained in a formulaic contract or referred to by the contract, shall supplement the special agreements between the contracting parties in the same contract and shall as a rule be equally binding.

... ”

Section 148

“ (1) A contract shall generate rights and obligations for the contracting parties. ”

2. Slovenia

Section 8 of the Constitution provides as follows:

“ Laws and regulations must comply with generally accepted principles of international law and with treaties that are binding on Slovenia. Ratified and published treaties shall be applied directly. ”

The relevant provisions of the Arbitration Act ( Zakon o arbitraži ) read as follows:

Section 9 (Jurisdiction and procedure)

“ (1) The Ljubljana District Court shall adjudicate on the following matters:

1. Admissibility or inadmissibility of the arbitration proceedings ... ,

...

7. Recognition of ... foreign arbitral awards ...

...

(2) The court shall apply the rules governing non-contentious proceedings, in cases referred to at points 1, 5 and 6 of the previous paragraph it shall apply the rules governing contentious proceedings. Before issuing a decision the court shall give the other party an opportunity to be heard. ...

...

Section 10 (Definition and form of the arbitration agreement)

“ (1) An arbitration agreement is an agreement between the parties to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. An arbitration agreement may be in the form of an arbitral clause in a contract or an arbitration agreement in its own right.

(2) The arbitration agreement shall be concluded in writing. The agreement is concluded in writing if included in a document signed by the parties, if concluded by exchange of letters, faxes, telegrams, electronic emails or other means of communication or storage of data that provide an available and, for later use, adequate record of the arbitration agreement.

(3) An arbitration agreement shall be deemed to be concluded in writing also if included in a document sent by one party to the other party or sent to both parties by a third person and which content is, under the commercial practices, regarded as the content of the agreement provided that a party does not promptly object.

(4) If a contract refers to another document containing the arbitration clause (general terms of business, the wording of another agreement and similar) the arbitration agreement is valid provided that the contract is concluded in accordance with the second and third paragraph of this Section and that as a result of the reference the arbitration clause had become part of the contract.

...

(6) An arbitration agreement is validly concluded also in case the plaintiff brings an action before the arbitration and the defendant does not object the jurisdiction of the arbitration in his defence plea at the latest. ”

Section 42 (Foreign arbitral awards)

“ (1) An arbitration award made by a foreign arbitration ... shall have effect when recognized by the court referred to in Section 9 of this Act.

(2) The [New York Convention] shall apply to the recognition and enforcement of foreign arbitral awards.

(3) An arbitration agreement shall be deemed to be concluded in due form in accordance with the Convention ... if it meets the conditions laid down in Section 10 of this Act.

(4) For the recognition of the arbitral award under the second paragraph of this section it is sufficient that the party seeking recognition submits the original of that award or a copy of it. At the request of the court the party shall submit also the original arbitration agreement or a duly certified copy or it. ”

Section 461 of the Civil Procedure Act ( Zakon o pravdnem postopku ) reads as follows:

“ An arbitration agreement may be concluded with respect to a particular dispute as well as with respect to future disputes which might arise out of a particular legal transaction.

An arbitration agreement shall be valid only if concluded in writing.

An arbitration agreement shall deem to have been concluded in writing even if it has been effected by the exchange of letters, cables, telex messages or other means of telecommunications capable of producing a written proof on the concluded agreement.

An arbitration agreement shall deem to have been concluded in writing also if it has been effected by the exchange of the action alleging the existence of such agreement and the defense plea not objecting to such allegation. ”

B. Relevant international law and practice

The relevant provisions of the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards may be summarized as follows:

Article II

“ 1. Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.

2. The term "agreement in writing" shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.

3. The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.

... ”

Article V

“ 1. Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that:

(a) The parties to the agreement referred to in article II were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; ...”

COMPLAINTS

The applicant company complains under Articles 6 § 1 and 13 of the Convention that its request for recognition and enforcement of the foreign arbitral award constituted a “civil” claim within the meaning of Article 6. In its view, the Slovenian courts acted arbitrarily in so far as they assessed the merits of the final award. The first-instance court failed to properly reason its decision as it failed to state the applicable Croatian legal provisions, and the Supreme Court decided to apply Slovenian law without any valid reasoning and contrary to the provisions of Article V § 1 (a) of the NYC which called for the application of the Croatian law. The applicant company proved the validity of the arbitration agreement by submitting the Croatian decisions. However, the Slovenian courts failed to recognise the Croatian decisions and adopted an interpretation that was contrary to the aim of the NYC.

Consequently, the applicant company alleges a violation of Article 1 of Protocol No. 1 since it could not protect its property rights acquired abroad.

QUESTION TO THE PARTIES

1. Does the refusal of the domestic authorities to recognise the foreign arbitral award obtained by the applicant company before the Croatian courts constitute an unjustified interference with its right to the peaceful enjoyment of its possessions contrary to Article 1 of Protocol No. 1? In particular, can the applicant company ’ s claim be considered as an asset and raise a ‘ legitimate expectation ’ as to the enforcement and recognition of the award? If so, was the interference ‘ in accordance with the law ’ and did the domestic courts strike a fair balance between the applicant company ’ s rights under Article 1 of Protocol No. 1 and the general interest?

2. Was the applicant company denied the right to a fair trial in the proceedings before the domestic courts concerning the recognition and enforcement of the arbitral award?