Arbitrators clash on question of interpretation in Hrvatska Electroprivreda d.d. v. The Republic of Slovenia

By Elizabeth Whitsitt
15 July 2009

On 12 June 2009 the majority of a Tribunal convened pursuant to a Request for Arbitration under the ICSID Arbitration Rules issued a partial award finding the Republic of Slovenia  liable (subject to further proceedings)* to Hrvatska Electroprivreda d.d. (HEP), the national electric company of Croatia, for the financial value of undelivered electrical power from 1 July 2002 to 10 April 2003.

The dispute between HEP and Slovenia concerns the ownership and operation of a nuclear power plant in Slovenia, the Krško Nuclear Power Plant (“Krško NPP”).  Krško NPP was designed and built with funds contributed equally by the national power industries of both Slovenia and Croatia when both Republics formed part of the former Yugoslavia.

At that time, the financing, construction, operation, management and use of Krško NPP was regulated by four inter-related agreements entered into by Slovenia and Croatia together with representatives of their national power industries (the Governing Agreements).

Under the Governing Agreements, co-investors in Krško NPP were to be 50:50 partners in all aspects of the plant’s construction, management, use and operation. As a result, each investor had the right to receive 50 percent of the power output of the plant at prices to be determined in accordance with the Governing Agreements.

After Slovenia and Croatia declared their independence from Yugoslavia in 1991, disputes regarding the management and operation of Krško NPP began to arise.  On 30 July 1998 the Slovenians terminated all electricity deliveries from Krško NPP to HEP and issued a governmental decree which HEP claims affected its rights as a 50 percent owner and manager of Krško NPP.

Subsequently, the governments of both countries entered into negotiations aimed at restoring HEP’s rights; however, those efforts stalled over financial issues associated with the continued operation of Krško NPP.  In late 2001 negotiations between Slovenia and Croatia were renewed and culminated in the prime ministers of both republics recording an agreement (the 2001 Agreement) along the following lines: (i) all sums claimed by the parties as a result of past financial differences would be waived as of an agreed date, (ii) HEP would be recognized as co-owner and co-manager of Krško NPP, and (iii) deliveries of electricity to HEP would resume as of an agreed date.

While the intention of both parties was that the 2001 Agreement would be ratified and in force by the end of 2001 or during the first quarter of 2002, Croatia ratified the agreement on 3 July 2002 and Slovenia ratified the agreement on 23 February 2003.  The agreement subsequently came into force and electricity deliveries from Krško NPP to HEP resumed.

Commencing arbitral proceedings in November 2005, HEP sought compensation for alleged financial losses it claims to have suffered due to non-delivery of electricity from 1 July 2002 to 19 April 2003.

In support of its contention, HEP relied on provisions addressing the settlement of financial issues between Slovenia and Croatia within the 2001 Agreement to argue that the agreed deadline between the parties for the restoration of electricity deliveries as well as the deadline for the waiver of all financial claims was 30 June 2002.

In response to HEP’s allegations, Slovenia argued that the 2001 Agreement did not expressly define a starting date for the supply of power, and therefore HEP had no right to receive electricity after 30 June 2002.  Rather, Slovenia contended that HEP’s rights under the agreement were only activated upon its entry into force on 10 March 2003.

Noting that the appropriate framework through which to interpret the 2001 Agreement is found in Articles 31 and 32 of the Vienna Convention on the Law of Treaties (VCLT), the majority of the Tribunal focused their analysis on the financial settlement provisions of the agreement.  In particular, the majority of the Tribunal reasoned that the settlement of financial issues in the agreement created a balance between the parties on all other issues, including the supply of electricity to HEP and the waiver of all financial claims, as of 30 June 2002, irrespective of the Treaty’s ratification.

In so finding, the majority of the Tribunal appears to ground its interpretation on the basis of implied rather than explicit language in the 2001 Agreement.  To that extent, the majority of the Tribunal postulates that under Articles 31 and 32 of the VCLT “[n]o greater or lesser force resides in a [treaty] term by virtue of the relative magnitude of the clarity with which it has been (or has not been) written.”

In a dissenting opinion, Jan Paulsson flatly rejects the majority of the Tribunal’s decision imposing liability on Slovenia (subject to further proceedings) to compensate HEP for the financial value of undelivered electrical power from July 1, 2002 to April 19, 2003.  While Mr. Paulsson disagrees with a number of aspects of the majority’s decision, the crux of his dissent appears to centre upon the approach utilized by the majority of the Tribunal to interpret the 2001 Agreement.

Citing the majority’s interpretive approach as “nothing less than revolutionary”, Paulsson finds that “[t]he majority says, in effect, that one may postulate an outcome and force-fit it into the actual text.  Nuances and omissions in the text are of no moment.  In the result, the majority retains from Article 31(1) of the VCLT only the elements that confirm their subjective gloss (perceptions of good faith and object and purpose), ignoring those which are of an objective nature (textual terms and context).”

Having so decided, Mr. Paulsson further indicates that the majority’s approach is one “with which [he] cannot associate himself” and in fact “lies at the heart of [his] reason for producing [his] Individual Opinion.”

Accordingly, Mr. Paulsson would have found that Slovenia had no duty to supply electricity to HEP after 30 June 2002 given the fact that the 2001 Agreement did not contain such an express undertaking.

* The majority’s finding regarding the liability of Slovenia is subject «to the Tribunal determining in subsequent proceedings…whether or not, and, if so the extent to which: (i) HEP has waived such liability by acquiescence…or (ii) Slovenia’s liability has been satisfied by offers of electrical power made to HEP…on June 24, 2002 and November 13, 2002.”