Chapter 5. The protection of investment in Croatia

This chapter reviews the provisions in both domestic legislation and Croatia’s international investment agreements offering protections for investors. It looks at the domestic framework, particularly the rules for expropriation and the protection of intellectual property rights, and discusses the legal and institutional framework for contract enforcement and dispute resolution, with particular attention given to the judiciary and alternative dispute resolution mechanisms. It also reviews Croatia’s international investment treaty practice and its legal framework for investor-state dispute settlement.

    

The conditions faced by investors, both when they establish and in their on-going operations, are only part of the overall investment environment. The protection of ownership, contracts, intellectual property and other rights extended to investors by domestic legislation, combined with effective enforcement mechanisms, is an important pillar of a sound investment climate. When procedures for making and enforcing contracts are overly bureaucratic and cumbersome, or when contract and other disputes cannot be resolved in a timely and cost-effective manner, investors may restrict their activities and foreign investors may refrain from engaging in the country. As a result, providing protection for investors and offering reliable and efficient enforcement procedures or alternative dispute resolution mechanisms are fundamental for markets to function properly and investors to be confident to place assets.

Croatia's domestic legal framework provides protection for investors consistent with an open and modern policy regime for investment. This framework reflects the gradual adoption of the EU acquis and the country's transition towards a market economy. As an effective judicial system is an important pre-condition for the promotion of investments and the country's development, Croatia has also taken a number of steps to streamline the workings of its judiciary, including by rationalising the courts’ network, deploying modern information technologies, and developing tools for ensuring the integrity and transparency of the judiciary. Croatia has also increasingly made available alternative dispute resolution mechanisms for resolving commercial and investment disputes. As a result, the performance of the justice system has improved significantly in recent years.

Rights or procedures established under international law can reinforce or complement guarantees extended to certain investors by domestic legislation. In practice, such rights are often established in investment treaties and associated international arrangements. Although most issues addressed in treaties and multilateral conventions are also covered in domestic legislation, international law based guarantees are not always redundant. Rights established under domestic law can be abrogated or altered by the legislator or authorities of the host state within certain limits, while rights or protections afforded by international law are less at the disposition of the host state, and can only be amended through more onerous procedures. This feature of protections afforded by international law, along with adjudication mechanisms that are more protected from potential interference from host states, contributes to the perception that investment treaties have a role to play in strengthening investor confidence, especially in countries with weak governance. That being said, countries can be successful in attracting international investment without the use of investment treaties.

Croatia has concluded a significant number of investment treaties, beginning immediately after independence and until 2008. In 15 years, Croatia established treaty-based investor protection with 78 countries through bilateral or multilateral arrangements. Croatia also adhered to associated multilateral agreements, such as the ICSID and the New York conventions, which deal with adjudication and enforcement mechanisms, respectively. Croatia’s investment treaties reflect the features common to most treaties concluded at the time, including vague language and favourable substantial and procedural conditions for investors. Croatia has faced at least a dozen claims under its investment treaties; this, in conjunction with a global reconsideration on the balance of investor protection and the right to regulate, has led Croatia to embark on a more cautious approach than in the 1990s. The future of treaty protections is partly determined by developments at the EU level, both for the sort of intra-EU BITs and for new treaties that are concluded on behalf of Croatia by the EU. For the moment, Croatia holds on to its treaties despite their perceived shortcomings, but seeks to alter their balance through amendments; it also seeks to enter into some new treaties based on a more balanced approach.

The domestic legal framework

Croatia’s domestic legal framework provides protection guarantees for investors consistent with a modern policy regime for investment

Croatia's strong fundamentals

Croatia has pursued a comprehensive reform agenda encompassing protection of ownership and other rights. Property rights and regulations on acquisition, benefits, and use of property are well defined under domestic legislation. The right to ownership of private property is established in the Croatian Constitution and in several general and separate acts and regulations, and the laws are the same for Croatian investors as for foreign investors and there is no discriminatory or more favourable treatment of foreign investors (as seen in the previous chapter, reciprocal treatment is required for foreign investors headquartered or with residence in a non-WTO member country). The right to ownership is further confirmed by the amended 1996 Law on Property and Other Property Rights where foreign entities incorporated under Croatian law are viewed as Croatian legal persons and thus may acquire property without restriction.

The Constitution provides several additional guarantees. It is especially enacted that all rights acquired through the investment cannot be reduced or modified by law or any other legal act and that investors are free to transfer profits abroad and to repatriate any invested capital. Expropriation rules based on national interest apply equally to domestic and foreign investments. As discussed below, these laws provide different venues to enforce these rights.

Guarantees against expropriation

The right to expropriate is an undisputed prerogative of sovereign states, safeguarding their ability to pursue legitimate interests. In Croatia, the right of ownership is guaranteed under the Constitution that may be restricted, subject to compensation equal to the market value. Ownership rights may be exceptionally restricted by law for the purposes of protecting the interests and security of the Republic of Croatia, nature and the human environment and human health (Article 50 of the Constitution of the Republic of Croatia).

The possibility of restricting or acquiring ownership rights is regulated by the Act on the Expropriation and Determination of Compensation. Under that law, property may be expropriated, unless provided otherwise by a special act, when necessary, for example, for construction of facilities or carrying out works of state interest and when it is deemed that the real property to be proposed for expropriation will provide a higher benefit when used for other purposes than the benefits resulting from the prevailing use of that property.1 The Law on the Expropriation and Determination of Compensation and other relevant regulations describe the conditions for an expropriation and provide guidelines for the calculation of the amount of compensation.2 Four principles guide the process: expropriation is permitted for the public interest, without discrimination, against the payment of prompt, adequate and effective compensation and under due process of law. The entire process is public and transparent.

Article 50 of the Constitution guarantees compensation equal to the real market value of the investment. Compensation is determined in cash at the market value of the property being expropriated at the time when the first-instance expropriation decision is made or at the time of settlement, taking into account the usable feature of the property before changing its purpose, which is the cause of expropriation. If possible and mutually acceptable, compensation is determined by assigning to another appropriate property whose value reflects the market value of the property subject to expropriation in the same municipality or town, which provides the owner of the expropriated property with the same living conditions and conditions of use that he/she had in using that real estate.3 Investors, like any other owner of a property, may bring expropriation claims with respect to the decision and conditions of expropriation.

Croatia has a modern system of protection of intellectual property rights

The granting and protection of intellectual property (IP) rights, e.g. through patents, trademarks, is another important component of any policy aiming at attracting investment. Protection of IP rights also fosters development and innovation: It is widely acknowledged that a well-functioning and balanced IP system is key to promoting innovation and creativity, which are the main drivers of economic development of knowledge-based economies (OECD, 2011; WIPO, 2016). The role of intellectual property as a lever of economic growth and a driver of scientific, cultural and social progress has been recognised by the Croatian authorities, notably in the National Strategy for the Development of the Intellectual Property System of the Republic of Croatia for the period 2010-12 and the Strategy for Encouraging Innovation of the Republic of Croatia for the period 2014-20.4 The protection of intellectual property rights also results in better protection of consumers, who buy reliable products, and as such promotes positive contributions by enterprises to consumer interests as recommended by the OECD Guidelines for Multinational Enterprises.

Main traits of Croatia’s IP rights system

Croatia has a modern system of IP rights that is aligned with the European Union norms and standards.5 Croatia’s main legal instruments on IP rights include the Patent Act, the Trademark Act, the Industrial Design Act, the Act on the Geographical Indications of Products and Services, the Act on the Protection of Layout Design of Integrated Circuits, the Act on Copyrights and Related Rights and, most recently, the Act on the Protection of Undisclosed Information with Market Value.6 These acts define the process for protecting and enforcing IP rights in Croatia. Croatia is a member of the World Intellectual Property Organization (WIPO) and the European Patent Organisation, and is a signatory of all the most important international treaties in the field, including agreements under the World Trade Organisation (WTO) such as the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).7

The central body responsible for granting rights and coordinating the national IP rights system is the State Intellectual Property Office of the Republic of Croatia (SIPO) (Državni zavod za intelektualno vlasništvo Republike Hrvatske). Industrial property (for protection of patents, trademarks, industrial designs, geographical indications and designations of origin other than for agricultural products, foodstuff, wines and spirit drinks and topographies of semiconductor products) has to be examined and registered before the SIPO in order to enjoy protection in Croatia. On the other hand, copyright protection is automatic and no official registration process is required. Information by the European Trademark and Design Network shows that the duration of the registration process for trademarks and industrial designs in Croatia (three to six months) is within the average in comparison to other EU member states.8

By contrast, due to limited capacity in particular fields of technology at the SIPO, the average duration of the registration process for patents is twice as high as the one at the European Patent Office (seven years against three years). This being said, due to the fact that Croatia is a member state of the European Patent Organisation, since 2008 an increasing share of patents registered in Croatia has been granted through the European Patent Office procedure which only requires formal validation by the SIPO (in 2017 only 4% of newly granted patents were processed by the SIPO). Also, given Croatia’s status as a member state of the European Union, the EU Trademark system and Community design system are substantially being used by companies for obtaining protection for the territory of Croatia.

Enforcement

Enforcement rules are the procedural complement of substantive protection. In Croatia, enforcement of IP rights is provided through administrative,9 civil and criminal proceedings. In addition to the courts, the customs authorities and the Ministry of Interior are also involved in the protection of IP rights.10 The authorities keep public records of the enforcement of intellectual property rights in the country.11 According to the latest available report from the SIPO, in 2016 the customs administration initiated a total of 1,229 procedures concerning the shipments of goods suspected of infringing intellectual property rights, 22 (1.8%) out of which were initiated ex officio and 1,207 (98.2%) upon the right holder’s request; a total of 125,158 counterfeited products were destroyed (with an aggregate retail value of EUR 2 067 169). Still in 2016, customs officials carried out a total of 692 inspections in the internal market related to the protection of IP rights, out of which 509 inspections (74%) resulted in serving indictments for initiating a misdemeanour procedure or issuing a misdemeanour warrant.

Enforcement through court proceedings presents a more mixed picture, manifested in particular in a very low number of criminal proceedings in relation to Croatia’s ambition to attract investors in the field of innovative industries. According to data by the Ministry of Justice, the total number of persons accused of criminal offences against intellectual property was 18 in 2016 (32 in 2015), out of which 12 persons (16 in 2015) were found guilty.12 Enforcement of IP rights is challenging for many governments but the low number of criminal proceedings and convictions in Croatia calls into question the dissuasiveness of enforcement of IP rights in the country. In light of this, continuing efforts to improve the functioning of the court system would benefit IP rights holders as well as consumers’ interest, as they would facilitate the enforcement of IP rights and foster consumers’ protection. Echoing this sentiment, Croatia introduced in 2018 a new Courts Areas and Seats Act (Official Gazette no. 67/2018 of 25 July 2018), which enables the specialisation of courts in the field of intellectual property in misdemeanours and criminal cases.

Dispute resolution

Businesses operating in Croatia, as elsewhere in the world, need to have well-functioning contract enforcement and dispute settlement mechanisms because they help increase predictability and certainty in commercial and investment activities. The national justice system has in this regard a fundamental role to play. Its efficient functioning is necessary for the competiveness and development of the Croatian economy. The particular relevance of the court system for Croatia's competitiveness, growth, SMEs development, and innovation has been regularly pointed out by Croatian governments as well as international institutions such as the European Bank for Reconstruction and Development (EBRD), the European Commission, the International Monetary Fund (IMF) and the World Bank group. The beneficial impact of well-functioning national justice systems for the development of a country has also been underlined in a range of policy tools, literature and research, including from the OECD.13

Croatia offers an increasingly efficient and professional judicial system

In Croatia, judicial power is vested in regular and specialized courts. Regular courts are municipal courts, county courts and the Supreme Court of the Republic of Croatia, Croatia's highest judicial instance. Specialised courts are administrative courts, misdemeanours courts and commercial courts. Commercial courts (trgovački sudovi) are competent in disputes between companies, intellectual property disputes, bankruptcy proceedings, unfair market competition and other disputes as provided for in the law such as disputes arising from the foundation and termination of companies. Commercial courts also conduct proceedings for the recognition and enforcement of foreign judicial decisions and arbitral awards in commercial cases. All commercial courts are hierarchical and organised in two instances: commercial courts at first instance, and the High Commercial Court. The Act on Courts regulates the organisation, competence and jurisdiction of courts and their rights and responsibilities.

In international and regional comparison, the judicial system in Croatia typically ranks above average. According to the 2018 EU Justice Scoreboard (European Commission, 2018), Croatia has rates of case efficiency for civil, commercial, administrative and other cases comparable with other EU member states. This is also reflected in specialized surveys that assess the business environment. According to the World Bank’s Doing Business report, contract enforcement in domestic courts is an area where Croatia fares well, ranking 25 out of 190 economies in 2019 (World Bank, 2019). In another report by the World Bank on doing business in the European Union, all five of the Croatian cities benchmarked in the study (Osijek, Rijeka, Split, Varaždin, and Zagreb) outperformed the EU average on cost and the quality of judicial processes in 2018 (World Bank, 2018b).

Despite these positive ratings, investors and the public in general reportedly lack confidence that their disputes will be handled fairly and expeditiously in Croatian courts. In 2016, in a report on the impartiality and efficiency of judicial systems in the European Union, Croatia ranked higher than in only three other EU members regarding the public perception of the judicial system. 59% of respondents to the EU survey believed that they could not expect a fair trial in Croatian courts, and 48% had no trust in the impartiality of judges and state attorneys.

The same year, the World Bank carried out a study to sound out the reasons for public distrust in Croatia’s judicial system.14 People surveyed saw the long duration of proceedings and possible political influence on judges as the main causes of the general negative opinion on the functioning of the judicial system, although opinions regarding political influence were divided: the same number of respondents (48%) felt that judges in Croatia were mostly or fully independent as those who believed that the judiciary lacked independence. The possibility of bias of judicial officials was also mentioned as a cause of distrust of the judiciary.

Reform efforts to improve the judiciary

Past and on-going reforms show that the government has been taking these grievances very seriously. For example, five general areas formed the basis of the Judicial Reform Strategy and its Action Plan for the period 2013-2018 adopted in 2012: Independence, impartiality and professionalism of the judiciary; efficiency; Croatian judiciary as part of the European judiciary; human resources management; and using the potential of modern technologies. In this regard, the European Union has acted as an important catalyst for change, in particular during the six years of accession negotiations, but also since then. Croatia has also received significant donor assistance from various international organisations in implementing judicial reform.

In order to diffuse concerns about the lack of professionalism and impartiality of the judiciary, significant changes have been introduced in judicial appointments to enhance the objectivity and transparency of magistrates (Council of Europe, 2014 and 2016). For example, the Constitution was amended in 2010 to reduce political interference in the State Judicial Council (SJC), a body modelled on the French and Italian Superior Councils of the Judiciary with important functions in the selection process of judges.15 New criteria selection procedures based on verified qualifications and expertise for the appointment of judges and prosecutors were introduced, limiting political involvement in selecting and disciplining judges and increasing the autonomy of the SJC as well as of the National State's Attorney Council, a body which appoints, dismisses, and decides on the disciplinary responsibility of state attorneys (Dallara, 2014). In 2019, Croatia upgraded the selection procedure for the appointment of the President of the Supreme Court in order to enhance transparency and objectivity of the selection process and minimize risks of improper political influence (Council of Europe, 2019).

As a further response to the low level of confidence in the judiciary, the authorities have launched different initiatives to strengthen the integrity of the judicial personnel. Both judges and prosecutors have their own codes of ethics and are subject to financial disclosure.16 Guidelines for the interpretation of deontological principles and the prevention of conflicts of interest were adopted in 2016. Judicial integrity has become part of the in-service training curricula of both judges and prosecutors. In 2019, technical improvements were in the pipeline to strengthen the verification of declarations of assets of prosecutors and judges.

Modernising the courts has also been seen as critical to increasing public trust in the judiciary and for the purpose of achieving a more effective judiciary. Before and since accession to the EU, Croatia's courts have been gradually modernised with simplified, automated procedures using information and communications technology (ICT) and improved public access and transparency. An upgraded ICT system at courts began to be introduced in 2014 in all first-instance municipal, county and commercial courts. The Integrated Case Management System (ICMS) is now functioning in a majority of courts, including the High Commercial Court and the High Misdemeanour Court which both joined the unified e-File System in 2016, enabling electronic court operations and electronic communications with lower courts; introduction of the e-File System to the Supreme Court was in the testing phase in 2018. Case law and centralised legislative databases are now increasingly available, providing further support for court professionals with the overall objective of greater court practice consistency and increased legal certainty.17 ICT skills have become part of the in-service training curricula of magistrates in support of greater use of electronic communication in litigation and other proceedings.

Significant additional efforts have been undertaken to accelerate court processes and improve the way courts operate. After a first phase of court network reforms in the late 2000's and early 2010's18, as from 2015, the government began to implement a new reorganisation of the court system. The reform, affecting municipal, misdemeanour, and county courts, has aimed to increase specialisation and balance out the uneven workload of judges by merging courts. This process is in progress. Further rationalisation of Croatia's judicial map is expected to come into force in 2019 through the merging of most misdemeanour courts with municipal courts.19

In order to improve legal security and the efficiency of courts, the government has also taken steps aimed at rationalising laws and procedures, as evidenced by the adoption of a large volume of legislation in this area. For example, significant amendments to the Civil Procedure Act were introduced in 2013 to streamline the way the litigation process is administered, including the way litigants submit evidence. During 2005-13 alone, the Act on Courts was amended 10 times. These new acts, or amendments to existing ones, have been drafted following discussions by ad-hoc working groups bringing together experts and professionals in the field, thorough public consultations including with business associations, and taking into consideration international and EU legal requirements and case law.

As a result, the performance of the justice system has improved in recent years. Croatia now has rates of case efficiency for civil, commercial, administrative and other cases comparable with other EU member states. Important progress has also been made in reducing pending cases, which have plagued the judiciary for many years. In 2017, backlogs in first instance courts in civil, commercial, and enforcement cases decreased by 6% in comparison to 2016 whereas, at second instance, they decreased by 23% in commercial cases (before the High Commercial Court) and by 13% in civil cases, before county courts.20 Overall, according to the World Bank, the number of pending cases has fallen by half over the past decade.21

Despite these encouraging developments, in 2018, only 23% of Croatia's inhabitants had very good or pretty good opinion about the courts and judges in their country, according to a survey conducted by Eurobarometer (European Commission, 2018). This more or less corresponds to the level of public discontent expressed eight years before in the November 2010 Eurobarometer on “Trust in Institutions”: at that time, 76% of the respondents expressed mistrust of the judiciary. On their part, businesses continue to perceive the courts as too slow for their needs (Foreign Investors Council, 2017). This important contradiction between perception and reality suggests the need for the development of a targeted communication policy, which reflects on the important reforms already introduced and those in the pipeline. 22

Weaknesses in the judicial system nevertheless persist. For example, professionalization is still insufficient, especially at local level. The implementation of e-procedures in the court is progressing, though slowlier than expected. There is scope for further strengthening Croatia's judiciary to stimulate investor confidence. This includes further reducing delays in court decisions. More intensive continuous training for judges in emerging areas of law should also result in greater court practice consistency. As discussed below, initiatives to facilitate the use of out-of-court methods of dispute resolution also need to be followed through.

Alternative dispute resolution mechanisms: arbitration and mediation

Encouraging out-of-court settlements has been a priority of Croatia (Strategy for the Reform of the Justice System 2006-2010; Strategy for the Reform of the Justice System 2011-2015; National Reform Programme 2017). Alternative dispute resolution (ARD) schemes have been seen by the Croatian authorities as an additional tool to cope with the under-performing judiciary, in particular with regards to small-value commercial cases.23

Croatia's legal framework for arbitration and mediation is largely defined by the Arbitration Act (Official Gazette No. 88/2001), and the Mediation Act (Official Gazette No. 18/11), which entered into force in full on the accession date of Croatia to the EU. Provisions on ARD are contained in other acts, such as the Civil Obligations Act, the Trades and Crafts Act, and, most recently, the Act on Alternative Consumer Dispute Resolution, enacted in 2017.

The Arbitration Act is based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law. It applies to commercial and non-commercial disputes and considers that any arbitration seated in Croatia is a domestic arbitration. The Act applies, as such, to disputes with an international element - i.e. those where at least one of the parties is a foreign person or legal entity - if the seat is in Croatia. In addition to domestic arbitration, the Act addresses recognition and enforcement of arbitration rulings, jurisdictional matters and procedures. Once an arbitration decision has been reached, the decision is executed by court order. Arbitration rulings have the force of a final judgment, but can be appealed. There is one major arbitration institution in Croatia, which is the Permanent Arbitration Court at the Croatian Chamber of Economy (PAC-CCE), first established in 1853 and re-established in 1965 when the soviet model of arbitration was replaced by the modern Western model of voluntary arbitration. Arbitration proceedings at the PAC-CCE are governed by the PAC-CCE Rules of International Arbitration, also called Zagreb Rules, which have been drafted along the lines of the UNCITRAL Arbitration Rules. The usual duration of arbitration proceedings is between one and three years; the Zagreb Rules require that the proceedings are concluded within one year.24

For its part, the Mediation Act provides that mediation can be conducted in all regular and specialised first and second instance courts (municipal, county, commercial courts and the High Commercial Court) in all stages of the proceedings, including during the appeal proceedings. Mediation can also be carried out outside of courts by various mediation centres established at professional associations. A range of organisations for mediation are in place, such as the Centre for Mediation at the Croatian Chamber of Economy, the Centre for Mediation at the Croatian Association of Employers, and the Croatian Mediation Association. Mediation with selected mediators can be conducted outside of these centres. Mediation is initiated on a proposal by one party involved in a dispute accepted by the other party, by a joint motion of both parties, or a proposal by a third party (e.g. a judge in a court proceeding). Mediation must be completed within 60 days upon receipt of the acceptation of the proposal for its launch; that period may be extended if the parties fail to reach an agreement.

Despite the availability of out-of-court methods of dispute resolution in Croatia, in practice arbitration and mediation as an alternative to resolving disputes in courts are under-used (International Bar Association, 2018; American Chamber of Commerce, 2017). Arbitration is seen as a dispute resolution method for large companies, not for small and medium-sized enterprises due to the costs involved, and is primarily used as an alternative in international disputes. In civil and commercial disputes involving exclusively domestic entities, including disputes in which one party is the Republic of Croatia, parties mainly rely on court proceedings.

As far as mediation is concerned, despite increasing promotion efforts in recent years both by state courts and the newly formed mediations centres, the use of mediation in commercial and civil matters also falls short of expectations. According to the World Bank, in 2014, less than 5% of civil litigation cases were resolved using court-annexed mediation.25 Although the state of play in Croatia does not differ significantly from the practice in other EU member states (European Commission, 2016), the underutilisation of services such as mediation calls into question the effectiveness of Croatia's efforts in promoting the use of out-of-court methods of dispute resolution. Efforts aimed at strengthening the use of alternative dispute resolution mechanisms, including through appropriate information campaigns, should be increased as this should help to further alleviate the backlog in Croatian courts (Council of Europe, 2016; European Commission, 2016).

The establishment of an NCP (see chapter 8) is a positive development in that regard. NCPs facilitate access to consensual and non-adversarial means, such as conciliation or mediation, to resolve issues that arise if the Guidelines for Multinational Enterprises are not observed. NCPs provide a government-based non-judicial grievance mechanism. The problem solving focus of NCPs allows the involved parties to exercise a better level of control over the process of reaching an agreement than more formal processes in which a third unrelated party makes a final binding decision. This can often be a significantly more expeditious and cost saving alternative to more formal procedures.

International investment agreements

Like many countries in the world, Croatia has taken on international obligations to grant foreign investors specific treatment in international investment agreements (referred to as investment treaties or IIAs), most often in the form of bilateral investment treaties (BITs).26 These treaties grant stand-alone protections to covered investors in addition to and essentially independently from protections afforded by domestic law. Investment treaties grant these protections only to a selected group of investors: foreigners as defined in and for the purpose of each individual treaty. Domestic investors are in principle not covered by this favourable regime unless they structure their investment in a fashion that turns them into “foreigners” for the purpose of the treaty.

On substance, investment treaties typically guarantee covered investments relative treatment standards of non-discrimination – most prominently most-favoured nation (MFN) treatment and national treatment (NT) – as well as absolute standards such as protection against “expropriation without compensation” and “fair and equitable treatment” (FET), which do not necessarily have equivalents in protections offered under domestic law. Furthermore, investment treaties typically give covered investors access to investor-state dispute settlement mechanisms (ISDS) to directly seek damages in cases where they claim the host state has infringed any of these rights.

The reasons why states have concluded such investment treaties since the late 1950s are debated as part of a recent broad reconsideration of these arrangements in some countries. It is generally held that one of the main reasons that motivated certain countries to conclude investment treaties was to attract foreign investment; capital exporting countries are thought to value these treaties among others to provide additional protections to enterprises operating from their soil – assumptions that are increasingly questioned by a growing strand of empirical literature on the drivers of investment treaty proliferation.27 Croatia’s past policies and practice are in many respects similar to what is observed in the global system of IIAs.

Brief history of Croatia’s investment treaties policy and current trends

According to publicly available information, Croatia inherited only a single treaty through state succession from Yugoslavia.28 Almost immediately after independence, Croatia began concluding additional investment treaties, and within 15 years between 1993 and 2008, it negotiated and concluded 58 BITs. Since 2008, Croatia has not concluded any further BITs. However, it concluded at least eleven amendments to existing treaties since 2008 – leading Croatia to be among the countries with the highest proportion of known treaty amendments in the world. On substance, these amendments essentially adjusted treaty provisions to prepare Croatia for EU-Membership.29

In addition to concluding BITs, Croatia also became party to several plurilateral investment treaties with investment protection content, notably the Energy Charter Treaty, which Croatia signed in December 1994. More recently, several further plurilateral treaties concluded by the European Union with Canada, Japan, Singapore, and Viet Nam, were added; they will bind Croatia once in force.

As a result of this treaty making activity, as of March -2019, Croatia had signed investment treaty relationships with 78 economies; treaties covering 67 relationships were in force at this time, of which 48 were based on bilateral treaties. The investment protection content of agreements concluded by the European Union – and which will ultimately bind Croatia – had not yet entered into effect in March-2019.

Croatia chose to conclude treaties with a diverse set of economies, large and small, advanced or developing, with no pattern that would reveal an obvious policy or strategy; there appears to be a slight tendency that Croatia first concluded with “richer” countries, measured in GDP per capita, and later also concluded treaties with partners that had a lower GDP per capita than Croatia at the time30 (see Figure 5.1 for a timeline of treaty conclusions since Croatia’s independence).

Figure 5.1. Evolution of Croatia’s investment treaty relations (signed relationships)

Source: OECD calculations based on OECD treaty database and Croatian government; World Bank data on GDP.

Croatia’s treaty making activity and the choice of treaty partners has led to a very significant coverage of its inward and outward FDI stock.31 Bilateral agreements concluded in 1996 to 1998 alone contributed treaty cover to over 70% of Croatia’s inward and outward FDI stocks (Figure 5.2) at its peak, before the termination of the Italy-Croatia BIT (1996),32 almost 95% of Croatia’s inward FDI stock was treaty-covered. Treaties concluded before and after that 3-year period barely added any treaty cover to Croatia’s FDI stock, inward or outward. Three treaties alone, the BITs with the Netherlands, Austria, and Hungary together brought almost half of Croatia’s inward FDI stock under treaty cover, and the BITs concluded with the Netherlands, Bosnia and Herzegovina and Slovenia cover around two thirds of Croatia’s outward FDI stock.33 Many treaties that Croatia has concluded cover no or almost no FDI stock; in this respect, as in many others, the Croatian treaty sample is not an outlier when compared with the global sample.

Figure 5.2. Approximate evolution of Croatia’s inward and outward FDI stock coverage by treaty cohort

Source: OECD calculations based on OECD treaty database; FDI data was taken from OECD FDI database and IMF Direct Investment Positions and reflects FDI stock as of 2016 rather than historical values.

In the course of the present Review, the Croatian government stated in early 2018 that it has now chosen a more selective approach to concluding new treaties. Croatia’s overall objective is to conclude new treaties with countries in which Croatian businesses operate in order to grant these businesses the advantages that come with treaty coverage. The objective to attract investment to Croatia by offering foreign investors treaty protection does no longer feature among the current government’s objectives, according to its own statement.

According to the Croatian government’s statements in early 2018, there was no intention to terminate existing treaties to avoid sending a misleading signal on its stance in relation to investment protection. The government intends however to amend or replace its existing treaties to address perceived shortcomings in the design used in its earlier treaties.

On 15 January 2019, Croatia co-signed the Declaration of the Representatives of the Governments of the Member States on the legal consequences of the Judgment of the Court of Justice in ACHMEA and on Investment Protection in the European Union, along with 21 EU member states. As part of this Declaration, Croatia engaged to “terminate all bilateral investment treaties concluded between [the EU Member States] by means of a plurilateral treaty or, where that is mutually recognised as more expedient, bilaterally”. The remaining six EU Member States signed separate declarations on 16 January 2019 with broadly similar effect. Croatia and the rest of the EU Member States committed to make best efforts to finalise this process by early December 2019.

Developments related to this process – which may ultimately also concern Croatia’s position under the Energy Charter Treaty in relation to investments originating from other EU Member States – are likely to have a significant impact on Croatia’s exposure to investment treaty obligations, given that a large share of inward FDI coverage is currently afforded by the 25 remaining intra-EU BITs. All else equal, the termination of Croatia’s intra-EU BITs would bring the share of treaty-covered inward FDI stock from currently over 80% of total inward FDI into Croatia to less than 3%, not considering investment that is covered by the Energy Charter. The proportion of outward FDI stock of Croatian investors that is under treaty cover would drop from around 77% to around 28%.

In early 2018, the Croatian government expressed its interest to conclude new treaties with Kazakhstan, Qatar34 and Turkmenistan, based on a new model BIT that was still under development in October 2018 but that would, according to the Croatian government, emulate the approach taken in the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada. By February 2019, negotiations with these three countries had not yet concluded.

Availability of Croatia’s IIAs to treaty users

Croatia has made its IIAs or related Protocols and amendments available to treaty users through official websites. Texts of treaties and protocols can be found with some effort in the official gazette,35 albeit only in Croatian language, which is typically only one of the authentic languages of the treaties. Information on the existence of protocols and amendments and their in-force status is available in English and Croatian. No consolidated versions are available however despite a significant number of treaty amendments.

Croatia does not advertise its treaties, for example through the website of relevant ministries or in investment promotion material. In this regard, Croatia is in a similar situation as many countries, especially transition and developing countries.36

Main features of Croatia’s IIAs

Croatia’s BITs testify to the pace at which Croatia concluded its investment agreements in the 1990s and of the limitations on the Croatian government’s capacity to anticipate implications and future interpretation of treaty language. The treaties show many of the features associated with “first-generation” treaties concluded in great numbers in the 1990s, notably a lack of clarity of the meaning of key provisions, absence of rules that most would consider to be essential and ubiquitous in a domestic law context, and generous protections favourable to covered investors.

From the treaty texts it appears that Croatia has accepted the treaty models of its partners in an earlier phase of treaty making, especially when it contracted with comparatively richer countries. From this period results some heterogeneity in treaty designs and provisions. In a later period in and after 1998, treaties that Croatia has concluded with less advanced economies suggest that Croatia proposed and potentially even imposed its own model treaty, as the treaties that have been concluded during this period feature common elements in their design and text.37

An unusually high proportion of Croatia’s treaties – when considered against a global sample – have unique features, both in terms of provisions and language used. These include the absence of a fair and equitable treatment clause in one IIA,38 the absence of an initial validity period in two BITs,39 an explicit statement on the possibility for Croatian joint-venture partners to bring treaty-based claims,40 the possibility for an investor to bring an investment dispute to a domestic commercial arbitration forum of one of the treaty partners,41 the binding nature on an investor-state dispute award on the Parties to the IIA,42 a clause that seeks to prevent double recovery in an expropriation clause,43 a clause that requires the information about disputes between treaty parties,44 and unusually sophisticated design of the ISDS clause among parties that are not know for the use of this type of clause, especially at the time when the treaty was concluded.45 It is not certain whether these unique features in Croatian treaties respond to identified specific situations or reflect poor understanding of implications; they suggest a possible desire to experiment or innovate.

Diversity of provisions in IIAs tends to broaden countries’ exposure to claims, especially in connection with unspecified most favoured nation (MFN) provisions as currently interpreted by many arbitral tribunals. As Croatia’s treaties systematically grant MFN and do not specify how MFN is to be interpreted and applied,46 many arbitral tribunals are likely to allow investors to use a treaty that contains the provisions that are most favourable to its specific situation and claim. In this scenario, diversity of treaty provisions tend to harm a defendant state.

Some of the most central provisions that determine Croatia’s exposure to treaty based claims and the balance between investor protection and the right to regulate include the “fair and equitable” treatment (FET) clause and the design of investor-state dispute settlement mechanism included in its IIAs.

Fair and equitable treatment clauses

Fair and equitable treatment is at the centre of investment treaty claims and treaty policy; is has been invoked in a great number of cases and tribunals have often found a breach of this standard.47 Provisions providing generally for FET have been considered or applied by tribunals in a broad range of claims and there have been widely different interpretations by some arbitral tribunals. Some interpretations of FET are seen as having a significant impact on the right to regulate.48

All IIAs concluded by Croatia grant FET to covered investors.49 Almost all of Croatia’s treaties either state that foreign investors shall be accorded FET without providing further specification; other treaties provide that FET shall be granted “in accordance with international law”. One single treaty, the Croatia-Azerbaijan BIT (2007), links FET to the minimum standard of treatment under customary international law. This latter treaty echoes a growing trend to define FET provisions in treaties to give more direction to arbitrators by clarifying the original intent of the contracting parties (see Box 5.1 for more details).

Given the centrality of FET to many investor claims and the uncertainty of its meaning, combined with the unspecified design in most of Croatia’s treaties, clarification of government intent could improve predictability for both governments and investors. Croatia might wish to reflect the more specific language found in recent international treaty practice in its own policy.

Box 5.1. Two approaches to specifying and limiting the FET provision

Two important approaches to further specifying the scope of fair and equitable treatment have emerged:

• Express limitation to the minimum standard of treatment under customary international law (MST): This approach has been used in a number of major recent treaties in Asia and the Americas. A FET provision limited to MST has been repeatedly interpreted under NAFTA. It has been interpreted more narrowly than FET provisions under other treaties. NAFTA governments have also had much greater success than other governments in defending FET claims (UNCTAD, 2012: 61). In addition to the limitation of FET to MST, the Comprehensive and Progressive Trans-Pacific Partnership agreement (CPTPP), which is a largely built on U.S. practice, specifies that the mere fact that government action is not consistent with an investor’s expectation does not constitute a breach of FET (Art. 9.6(4). Art. 9.6(3) and (5) contain further specifications).

• Defined lists of elements of FET: Treaties negotiated by the European Union contain a defined list of elements of the FET provision. This approach lists the elements that can constitute a breach of the standard, namely denial of justice, fundamental breach of due process, targeted discrimination on manifestly wrongful grounds, and abusive treatment of investors. While it is a closed list, this approach is broader than some interpretations of MST. Arbitration tribunals cannot add new elements. Only the Parties may agree to add further elements to the list. The article also provides that the tribunal “may take into account” (or “will take into account”, in EU-Viet Nam FTA) specific representations that created legitimate expectations. Other defined list approaches are also used. For example, the ASEAN-China Investment Agreement (2009) limits the application of its FET provision to cases of denial of justice (Art. 7).

Both options are more specific than the broad language of treaties that only refer to “fair and equitable” treatment. This does not mean, however, that issues of interpretation may not arise. The content of the minimum standard of treatment, for example, is subject to debate as are a number of elements in the defined EU lists.

Investment dispute settlement mechanisms

Starting in the 1970s, mechanisms for covered investors to bring claims directly against host governments – ISDS mechanisms – for alleged violations of treaty obligations had become a near-universal feature of investment treaties by the late 1980s. OECD research shows that around 96% of the global IIA stock provides access to ISDS (Pohl et al., 2012).

Croatia’s treaties share this feature: All of the IIAs that Croatia has concluded or to which it has adhered contain ISDS provisions. Treaties that Croatia has negotiated itself systematically offer, in addition to or as an alternative to domestic remedies, such as dispute settlement mechanism through investor-state arbitration (ISA). ISA generally involves ad hoc arbitration tribunals selected for each case in an approach derived from international commercial arbitration (Gaukrodger and Gordon, 2012). The disputing parties and arbitration institutions can be involved in the process to select arbitrators. The emphasis is on finality and there are no appeals; arbitrators’ decisions are subject only to very limited review.

Proponents of ISA contend that it provides a forum to settle disputes that is independent from both the host state and the investor. However, ISA has been increasingly challenged in recent years for reasons related to the characteristics of a pool of investment arbitrators dominated by private lawyers, concerns about inconsistent outcomes, and alleged conflicts of interest and economic incentives among arbitrators and arbitration institutions (Gaukrodger and Gordon, 2012: 43, 58; Gaukrodger, 2017).

The European Union has rejected ISA and has instead developed a new approach to dispute settlement under investment treaties. The EU has proposed to set up a permanent court and an appellate tribunal to resolve investor-state disputes (the Investment Court System (ICS)). This approach has been included in four treaties negotiated by the EU (EU-Canada CETA, EU-Viet Nam FTA, EU-Singapore FTA, EU-Japan FTA). As a EU Member, Croatia will be involved in the development of the court, and may later be a defendant against cases that may be brought under treaties concluded by the EU. Future Croatian treaties may also refer to a court mechanism.

Generally, ISA mechanisms in investment treaties are typically barely regulated (Pohl et al., 2012: 39; Gaukrodger and Gordon, 2012) – in stark contrast to procedural rules observed in domestic adjudication in advanced systems of law. Some issues that the treaty does not address may be regulated by the arbitration rules, but as rules designed for commercial disputes between private parties, they may need adjustment in light of the nature of investment claims. Other issues remain unregulated if the treaties refrain from doing so. For example, in the absence of treaty provisions, ISDS is often rather opaque and lacks statute of limitations.

Croatian treaties are not an exception in these regards when compared to a global sample. With two exceptions – Canada-Croatia BIT (1997) and Croatia-Kuwait BIT (1997) – Croatian treaties regulate dispute settlement unevenly:

• Only one of Croatia’s treaties50 has a statute of limitation – a feature that is standard in domestic law systems and that has become more and more common in IIAs concluded since 2005.

• Most Croatian treaties do not clarify the relationship between domestic remedies and dispute settlement through international arbitration; on the face of the treaty text, investors would be in a position to pursue their case first in domestic courts and subsequently through international arbitration.

• Only a third of Croatia’s treaties specify on which legal basis the tribunals decide a case brought before them, and those that do, do not establish a consistent list.

• The overall regulatory depth of ISDS in Croatian treaties is low. On average, Croatian treaties address only 2.3 issues, lower than the average of the global sample, including when taking into account the average age of Croatia’s treaty sample. Regulatory depth of ISDS provisions generally increased over time (see Figure 5.3).

Figure 5.3. Regulatory depth of ISDS provisions: individual countries, Croatia, and global trend

Source: OECD calculations based on OECD treaty database.

Furthermore, most Croatian treaties offer investors two (54% of Croatia’s treaties) or even three (27% of Croatia’s treaties) different arbitration fora to choose from, bringing the average number of fora for investors to choose from well over the global average. This generous offer allows investors to bring claims under rules that are most beneficial for their specific case. In particular, 77% of Croatia’s treaties offer access to both ICSID and ad hoc tribunals under UNCITRAL rules, which have different regimes in relation to the composition of tribunals, transparency and enforcement.51

As for other areas of treaty content, ISDS clauses in Croatia’s treaty sample show some unique features that are extremely rare or otherwise absent from the global treaty sample. For example, the Lithuania-Croatia BIT (2008) allows investors to unilaterally choose to entrust “national commercial arbitration institutions” of the treaty parties with investor-State arbitration – a unique occurrence in 1755 assessed IIAs in the global sample. The Turkey-Croatia BIT (1996), which, unusually, limits the scope of issues that could be subject to arbitration, also states that the award of a tribunal binds the treaty parties – rather than the parties to the dispute; even the later amendment – Protocol (2009) to Turkey-Croatia BIT (1996) – did not remedy this situation, although it modified the ISDS clause. Such unusual provisions may have concrete implications for Croatia’s exposure and defense against claims, while commensurate benefits to the Croatian government or Croatian investors are not immediately obvious.

Treaty use: ISDS claims under Croatia’s investment treaties

Croatia and Croatian enterprises have some practical experience with treaty-use as a base of investor claims. By October 2018, 12 claims were known to have formally been brought against Croatia, and the Croatian government was aware of three claims that Croatian investors had brought based on IIAs concluded by Croatia.

Croatia as a defendant

The 12 treaty-based claims that had formally been brought against Croatia by October 2018 were based on five treaties to which Croatia is a party. Half of the claims were brought under the Austria-Croatia BIT (1997) and two cases each under the Netherlands-Croatia BIT (1998) and Energy Charter Treaty. All claims against Croatia have been filed after 2013, five years after Croatia had concluded its so far last investment treaty.

Five of the 12 claims brought against Croatia were associated with legislation that converted foreign-currency denominated mortgage and consumer loans into Kuna-denominated loans in late 2015. The measure was taken in response to a steep fall of the Kuna and resulting pressure on households that bore the foreign exchange rate risk. The other cases related to spatial planning, energy, and courier services. By October 2018, three cases had been concluded in terms that the Croatian government characterised as favourable; the remainder of the cases were pending in October 2018.

Croatia organises the defence against treaty-based claims through the Attorney General’s department, which procures services from private law firms. Initially, the costs associated with the law firms’ services were funded out of the Attorney-General’s department, but as they rose quickly, a single account has been created within the Croatian government. Aggregate annual expenditure for the sourcing of these services is publicly available in budgetary reports.

The sourcing of legal advice from private law firms itself is not without implications: While it allows to mobilise specialised knowledge and resources that may not be available to a government that is only occasionally involved in such proceedings, law firms may have economic interests that differ from those of the government. This situation, known as “principal-agent situation” – may for instance lead a law firm (agent) to advise the government (principal) to take steps that prolong or expand procedures in defence of the claim, as this also expands the mandate of the firm. Croatia seeks to address these implications by capping expenditure for each phase of the dispute.

In order to manage emerging investor-state disputes against Croatia, the government has established an early-warning system in relation to disputes with foreign investors.

Croatian investors as claimants

Three Croatian investors are known to have brought claims, all under the Energy Charter Treaty, against treaty partners of Croatia (Bosnia and Herzegovina, Slovenia, Serbia) in what the Croatian government describes as relatively minor-value cases. To the knowledge of the Croatian government, all three cases had been settled by early 2018, and no new cases had become known by October 2018.

Outlook and policy recommendations

Domestic framework for investment protection

Croatia has a rich past history of reforming its judiciary and a good success rate to bring these reforms into concrete results. The authorities have notably actively worked on the reduction of court backlogs, on digitalisation of the courts and on judicial integrity and professionalism. Overall the changes to the judicial framework go in the right direction: the performance of the justice system has improved significantly. Most recent business surveys nevertheless indicate that the judiciary is still perceived as one of the biggest shortcomings when it comes to business conditions in Croatia compared to other countries in the region (American Chamber of Commerce in Croatia, 2018).

Against this background, efforts to facilitate arbitration and mediation as mechanisms to settle disputes with the overall purpose of unburdening the judiciary in Croatia are welcome. For example, the recently established Civil Arbitration Court (Parnični arbitražni sud) provide parties with an alternative forum for the resolution of disputes related to small claims with shorter deadlines for the delivery of decisions (within 60 to 90 days for a dispute of up to approximately EUR 50 000, and four months for larger disputes), no requirement for parties to be represented by counsels and no hearing, unless necessary.52 By comparison, according to data from the Ministry of Justice, municipal and commercial courts needed in 2017 513 days on average to make a first-instance decision (Croatia, 2018). Initiatives to facilitate the use of out-of-court dispute resolution need to be followed through.

To further improve its dispute settlement mechanisms, Croatia could consider establishing institutional dispute avoidance mechanisms, such as offering ombudsman services to investors to try to resolve problems before they lead to disputes. Experiences in countries such as Ukraine, which has been operating a Business Ombudsman Council since 2014, or Korea, with its Foreign Investment Ombudsman, suggest that alternative processes may have a potentially powerful role to play (Nicolas et al., 2013; Wehrlé, 2015).

First, such mechanisms can be a stopgap measure to compensate for the shortcomings of the judiciary, and can address issues at an early stage before they become a dispute. They further have the scope to provide quick solutions to companies’ grievances by providing businesses with a direct line of communication with a public authority at a high level, by mitigating fears of retaliation by allowing them to report these to an institution that is independent from the agencies they complain about, and by empowering them to become partners with public authorities in advancing their rights and business interests through their involvement in the dispute resolution process. The common denominator among such mechanisms is that they act as redress mechanisms. Their main purpose is to find resolutions of grievances outside the judicial process for reasons such as time and cost saving, informality, and a desire to avoid confrontation (Wehrlé, 2015).

Such mechanisms, which wish to serve the purpose of offering a less formal and quicker way of resolving disputes, should nevertheless not be seen as a substitute for a well-functioning national judiciary (OECD, 2015). While high burdens and backlogs may be reduced through measures aimed at speeding up the resolution of small disputes and the usage of alternative case resolution, a more efficient judiciary can only be achieved by addressing a number of inter-related components such as further simplifying and rationalising regulations dealing with procedural and administrative matters; providing more intensive training for judges in emerging areas of law; improving further the administration of courts; etc. Reforming the judiciary is a challenging undertaking for many governments, including for Croatia's EU peers. With the continuous pressure from the European Union to speed up reforms, more progress can be expected in this area in the coming years.

Investor protection afforded by arrangements based on international law

Croatia’s current investment treaties cover an important share of inward and outward investment to and from Croatia. This scenario entails exposure, especially given that Croatian treaties follow outdated design features with unspecific clauses, and are diverse in design and language. To better balance investor protection with government right to regulate, Croatia could pursue different courses of action.

Higher specification of investment protection provisions would help to better reflect government intent

International practice shows that investment protection standards in older IIAs have often been relatively vague. This vagueness gives investment arbitrators broad discretion to interpret and thereby determine the scope of protection they provide. Many provisions in Croatia’s IIAs – beyond those discussed in some greater detail here – lack specific language to indicate government intent as to their scope and meaning.

More specific language in investment protection provisions would lead to increased predictability and thereby benefit both investors and governments. The specifications reflect policy choices and also play a crucial role in the quest for balance between investor protection and governments’ right to regulate. In some cases, the specifications may affect the degree of protection for covered foreign investors. Policy-makers need to carefully consider the costs and benefits of these choices, and their potential impact on foreign investors and domestic investors, as well as on the host state’s legitimate regulatory interests and its exposure to investment claims.

Croatia has a rich history of amending its treaties and a good success rate to bring these amendments into force – a feat that is not a given. Other countries have, according to anecdotal evidence, had less success to change their IIAs through amendments. The many amendments that Croatia have concluded so far have not led to a more homogeneous treaty set nor have they brought into place designs that would today be considered sound treaty policy. None of the amendments have addressed shortcomings in ISDS provisions or clarified the scope of what “fair” and “equitable” treatment requires, for instance.

Procedural considerations: exit and renegotiation

Given Croatia’s investment treaty features, Croatia might wish to consider reviewing its existing agreements to ensure that they reflect government intent and sound practices emerging in recent treaty policy. Review and renegotiation of investment treaties takes time, as Croatia will have experienced during the review of its treaties carried out to prepare its EU-Membership. Also, the option to terminate treaties is not available at all times, as investment treaties’ clauses on their temporal validity often place limits on exit (see Box 5.2 on designs of temporal validity provisions in IIAs).

Many of Croatia’s treaties contain a design of the temporal validity that delays possibilities for unilateral exit from the treaty. Where this design can be found, it would appear that it was initiated by Croatia: the treaties that Croatia concluded with less developed countries in the later period – and which are presumably based on a Croatian Model BIT – contain automatic extensions for fixed periods. When compared to a global sample, Croatia’s policy choice locks its choice in for around 5 more years than average. Croatia is bound by at least one treaty until 2032, and even if it wanted to unilaterally withdraw from the IIA system at the earliest possible occasion, effects of its past treaty policy could bind Croatia until 2047 (Figure 5.5).

Box 5.2. Designs of temporal validity provisions in IIAs

Unlike most international treaties, which can be denounced at relatively short notice, investment treaties typically contain clauses that extend their temporal validity for significant periods of time. Three designs can be found, often cumulatively in the same agreement: First, most investment treaties set and initial validity period of often 10 years or more, counting from the treaty’s entry into force; after that period, many treaties only allow States Parties to denounce the treaty at the end of specific intervals of often 10 years or more; finally, treaty obligations almost universally continue to apply for a “sunset period” after the termination of the treaty, again for periods of typically 10 years or more. Many treaties thus bind the States Parties for at least two decades, and in some extreme cases for up to 50 years.

Treaty designs that automatically extend the validity of the treaty for fixed terms are included in around 30% of the global treaty stock, but this design is used less frequently in recent time. This design tends to prolong the period for which States Parties are bound without granting additional benefits in terms of predictability for investors: on the contrary, the oscillating residual treaty validity is hard to grasp and predict without detailed study, and drops to very short residual validity of no more than 6 months (Figure 5.4).

Figure 5.4. Residual validity of treaties depending on the design of their validity clause

Note: Adapted from Pohl, J. (2013), “Temporal Validity of International Investment Agreements: A Large Sample Survey of Treaty Provisions”, OECD Working Papers on International Investment 2013/04, https://doi.org/10.1787/5k3tsjsl5fvh-en.

Source: OECD calculations based on OECD treaty database.

Figure 5.5. Projection of the temporal validity of Croatia’s IIAs compared to global sample

Note: Projections based on a hypothetical scenario of unilateral denunciation of all treaties at the earliest possible occasion.

Source: OECD calculations based on OECD treaty database.

Unilateral exit from treaties is not the only option to address perceived shortcomings, and Croatia has signalled that it does not wish to pursue this approach. Possibilities for exit may however influence how amendments or agreed exits can be negotiated. Croatia may want hence to consider whether the current design of its temporal validity provisions serve its interests and consider adjusting its treaty policy in the context of amendments or renegotiation of existing treaties or in negotiations of future treaties.

Policy recommendations

Domestic framework

• Continue efforts to improve the functioning of the court system. Building on recent reforms, further improvements in the capacity of the courts to deal with private sector cases will likely boost confidence of businesses and the general public in the judiciary. This may include additional compulsory training for judges, further digitalisation of court procedures, further promoting out-of-court settlement,

• Enhance dispute resolution mechanisms. Establishing a dispute avoidance mechanism, tailored specifically to business needs, such as a Business Ombudsman, would help expedite the legal process and reduce the cost to businesses and citizens.

Investor protection afforded by arrangements based on international law, in particular investment treaties

• Continue and enhance efforts to manage existing treaties and associated exposure. Treaties with vague provisions concluded by Croatia in the past, including those subject to unwanted interpretations in ISDS, should be updated to current standards by amendments, clarifications – for example through joint interpretations –, replaced, or if appropriate, terminated by consent or unilateral action to manage exposure and safeguard the right to regulate in the public interest.

• Engage in international efforts to balance treaty-based investor protection and associated governance mechanisms. Croatia should engage actively in current efforts at international level to balance investor protection and the right to regulate, and contribute its experience.

References

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Notes

← 1. Article 2 paragraph 1 of the Law on the Expropriation and Determination of Compensation (Official Gazette, 74/14 and 69/17).

← 2. Law on the Expropriation and Determination of Compensation; Law on Valuation of Real Estate (Official Gazette, 78/15); the General Administrative Procedure Act (Official Gazette 47/09).

← 3. Article 46 of the Law on the Expropriation and Determination of Compensation.

← 4. State Intellectual Property Office of the Republic of Croatia, National Strategy for the Development of a Croatian National Intellectual Property System for the period from 2010 – 2012: www.dziv.hr/hr/nacionalna-strategija/; Ministry of Economy, Strategija poticanja inovacija Republike Hrvatske 2014 – 2020. www.ciraz.hr/wp-content/uploads/2017/03/Strategija_poticanja_inovacija_18_12_14.pdf

← 5. Compliance of the Croatian IP legislation with the EU standards and requirements was subject to a thorough assessment as part of the negotiation process for Croatia's accession to the EU.

← 6. The Act on the Protection of Undisclosed Information with Market Value (“Zakon o zaštiti neobjavljenih informacija s tržišnom vrijednosti“) (Official Gazette 30/18) entered into force in April 2018, and transposes into Croatian legislation the EU Directive 2016/943 of 8 June 2016 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure. The Act defines trade secret, regulates lawful and unlawful acquisition, use and disclosure of trade secrets and establishes a system for protection in the event of an infringement.

← 7. The State Intellectual Property Office’s website displays a list of international conventions to which Croatia is a signatory as well as all relevant legislation, in addition to forms necessary for registration procedures together with various information brochures: www.dziv.hr

← 8. See the Quality Standards Reports on the Quality for the European Trade Mark and Design Network's website: www.tmdn.org/network/web/csc/home

← 9. In 2018, Croatia's parliament passed amendments to the Law on Patents, resulting in the abolishment of the IPO Appeal Boards (dedicated to IP rights matters) as bodies of second instance in all industrial property registration proceedings under the jurisdiction of the IPO. The law, as amended, provides for the possibility to file a lawsuit against the first instance IPO decision before the Administrative Court of the Republic of Croatia in Zagreb, thus reducing the number of instances to challenge IPO’s decisions to two (the Administrative Court and the High Administrative Court) instead of three.

← 10. The Ministry of Interior conducts criminal investigations related to the detection and investigation of acts characterised as infringement of intellectual property rights under the Criminal Code.

← 11. State Intellectual Property Office (2017), Statistics of the Infringement of Intellectual Property Rights in the Republic of Croatia: Annual report for 2016.

← 12. Ibid.

← 13. See e.g., the OECD Policy Framework for Investment- 2015 Edition, OECD Publishing, Paris, 2015, and "The Economics of Civil Justice: New Cross-Country Data and Empirics", OECD Economics Department Working Papers, No. 1060, August 2013, ECO/WKP(2013)52.

← 14. World Bank (2016), Evaluation on Quality of Selected Justice Services in the Republic of Croatia in 2016, Justice Sector Support Project.

← 15. The autonomy and independence of the judiciary is guaranteed by the Constitution and the Courts Act, which is overseen by the State Judicial Council (SJC). After the constitutional reform of June 2010 and further reforms introduced in 2013, the majority of the SJC members became elected by the judges themselves, thus ensuring greater independence of the body from the political power.

← 16. The conduct of judges is primarily regulated through the Constitution, the Act on Courts, and the Code of Judicial Ethics, adopted in October 2006 and substantially amended since then. The conduct of prosecutors is primarily regulated by the Law on Prosecution, the chapter of the Law related to the work of the State Prosecutorial Council and the Code of Ethics for State Attorneys and Deputy State Attorneys, adopted in February 2008.

← 17. In 2016, Croatia reported an equipment rate of 50-99%: European Commission for the Efficiency of Justice (CEPEJ), "European judicial systems: Efficiency and Quality of Justice. Thematic report: Use of information technology", CEPEJ Studies, No. 24, 2016.

← 18. Madir, J., "Recent developments in judicial reform in Croatia", Law in Transition, 06 (2011), EBRD.

← 19. Government of the Republic of Croatia, Nacionalni program reformi 2018 [National Reform Programme 2018], April 2018; Government of the Republic of Croatia, 5 July 2018.

← 20. European Commission, Commission Staff Working Document: Country Report Croatia 2018 Including an In-Depth Review on the Prevention and Correction of Macroeconomic Imbalances, March 2018, COM(2018)120 final, p. 49.

← 21. The World Bank, Croatia Policy Notes 2016: Restoring Macroeconomic Stability, Competiveness and Inclusion, February 2016, p. 64.

← 22. Different reasons have been put forward to explain this perception gap. One relates to Croatia's turbulent past practices, which involved political interference with judicial independence and a high number of judges with limited professional experience. Another explanation would be misleading publicity as to the work of judges and state attorneys, in particular in connection to the media, which have been painted by the judicial profession as being too often sensationalist in their reporting. Council of Europe (2002), First Evaluation Round: Evaluation Report on Croatia, Greco Eval I Rep (2002) 4E Final, paragraph 6;. Council of Europe, Report on judicial independence and impartiality in the Council of Europe member states in 2017 prepared by the Bureau of the Consultative Council of European Judges (CCJE) following the proposal of the Secretary General of the Council of Europe, Strasbourg, 7 February 2018, CCJE-BU(2017)11, paragraph 302; Council of Europe, Fourth Evaluation Round: Corruption Prevention in Respect of Members of Parliament, Judges and Prosecutors, Greco Eval IV Rep (2013)7E, paragraph 129.

← 23. European Commission, Croatia - Review of Progress on Policy Measures Relevant for the Correction of Macroeconomic Imbalances, November 2014, p. 17.

← 24. International Bar Association, Arbitration Guide: Croatia, IBA Arbitration Committee, January 2018, p. 3.

← 25. World Bank, Croatia Policy Notes 2016: Restoring Macroeconomic Stability, Competiveness and Inclusion, February 2016, p.64.

← 26. The term IIA covers both stand-alone treaties and investment chapters in broader free trade agreements.

← 27. Pohl, J. (2018), "Societal benefits and costs of International Investment Agreements: A critical review of aspects and available empirical evidence", OECD Working Papers on International Investment, No. 2018/01, OECD Publishing, Paris, https://doi.org/10.1787/18151957.

← 28. The treaty with Austria, concluded on 25 October 1989, referenced in Article 12 of the Austria-Croatia BIT (1997).

← 29. The adjustments that were introduced added exceptions to MFN clauses for customs or monetary unions; added an exception for measures taken to safeguard essential security interests or to comply with international obligations, etc. Other countries that have relatively recently become EU Members, e.g. Romania, have a similar history of treaty amendments that also introduced the elements that are observed in Croatia’s amendments.

← 30. The comparison of GDP per capita in PPP terms between Croatia and its respective treaty partner was determined for the year when the treaty was concluded; where this data were not available, data for the earliest year available for the country-pair were used. The values of per capita GDP PPP in current terms were taken from the World Bank World Development Indicators as of mid-2018.

← 31. The coverage is assessed based on FDI stock data (2016 or, where 2016 data was unavailable, data of preceding years, giving preference to more recent data, based on data released by OECD and IMF) and IIAs in force in Ocotber-2018. For several reasons, reported FDI stock data is not a valid measure for assets that benefit from treaty protections (see Pohl, J. (2018), “Societal benefits and costs of International Investment Agreements: A critical review of aspects and available empirical evidence”, OECD Working Papers on International Investment, No. 2018/01, https://doi.org/10.1787/18151957 for details) and available data does not allow to determine ultimate ownership of assets. The proportions of FDI stock data may nonetheless serve as a rough approximation of stock held by immediate investing country to illustrate features and outcomes of Croatia’s past investment treaty policies.

← 32. The Italy-Croatia BIT (1996) was terminated on 11 June 2013 and had effect for a further five years for investments made before the termination, until mid-2018. Until its termination, it added treaty cover of around 12 percentage points of Croatia’s inward FDI stock.

← 33. The pre-eminence of inward and outward FDI from and to the Netherlands is likely driven by tax-motivated investment structuring. The Netherlands figure among the countries that report among the highest FDI inward and outward stock in the world when considering bilateral FDI stock. When flows through Special Purpose Entities (SPEs, or “letterbox companies”) are deducted, the numbers drop to a small fraction. For investment treaty purposes, the entity established in the Netherlands is often held to be able to claim under the treaty concluded with the Netherlands.

← 34. Qatar has not ratified the treaty with Croatia since 2001, and Croatian authorities do no longer deem its design appropriate.

← 35. Authoritative treaty texts in Croatian can be retrieved from the Official Gazette (https://narodne-novine.nn.hr/ ) by searching the Croatian term for investment agreements.

← 36. Yackee, J. W. (2010), “Do Bilateral Investment Treaties Promote Foreign Direct Investment? Some Hints from Alternative Evidence”, Virginia Journal of International Law, Vol.51, Number 2, p.397.

← 37. Amendments that were concluded after 1998 do not consistently reflect Croatia’s possibility – or desire – to impose its own model BIT’s design. The Protocol (2009) to Turkey-Croatia BIT (1996) for instance reflects an approach that differs from treaties that Croatia has concluded after 1998.

← 38. A FET clause was later added through an amendment Protocol (2009) to Croatia-Albania BIT (1993).

← 39. Canada-Croatia BIT (1997) and Croatia-Azerbaijan BIT (2007). BITs – unlike FTAs – almost universally set initial validity periods, see Pohl, J. (2013), “Temporal Validity of International Investment Agreements: A Large Sample Survey of Treaty Provisions”, OECD Working Papers on International Investment, No. 2013/04, OECD Publishing, Paris, https://doi.org/10.1787/5k3tsjsl5fvh-en

← 40. Croatia-FYROM BIT (1994), Croatia-Iran BIT (2000), Croatia-Kuwait BIT (1997).

← 41. Lithuania-Croatia BIT (2008).

← 42. Turkey-Croatia BIT (1996), and not remedies but repeated through the later Protocol (2009) to Turkey-Croatia BIT (1996) which changed parts of the ISDS clause but not that section.

← 43. Croatia-FYROM BIT (1994).

← 44. Croatia-Iran BIT (2000).

← 45. Croatia-Kuwait BIT (1997).

← 46. A number of arbitral tribunals, beginning with Maffezini v. Spain, Case No. ARB/97/7, have interpreted the MFN clause in a fashion that allowed claimants to import substantive treaty standards from other treaties concluded by the respondent country, despite vigorous objections of such interpretation by certain countries, especially NAFTA-countries. Treaties concluded by the European Union, among others, now clarify the meaning of MFN clauses explicitly, e.g. CETA art. 8.7(4). See OECD (2018), “Background information on treaty shopping” in: Treaty shopping and tools for treaty reform – Agenda and Conference material, www.oecd.org/daf/inv/investment-policy/4th-Annual-Conference-on-Investment-Treaties-agenda.pdf

← 47. According to case analysis covering the period 1997–mid-2018 and made publicly available by UNCTAD, out of 499 cases for which data on alleged breaches was available, investors worldwide have invoked the standard in 411 claims, or 82%, and tribunals have found a breach in 104 cases.

← 48. See Gaukrodger, D. (2017), "Addressing the balance of interests in investment treaties: The limitation of fair and equitable treatment provisions to the minimum standard of treatment under customary international law", OECD Working Papers on International Investment, No. 2017/03, https://doi.org/10.1787/0a62034b-en.

← 49. The Croatia-Albania BIT (1993) did not contain a “fair” and “equitable” treatment clause in the initial version, but a clause was introduced through amendment in the Protocol (2009) to Croatia-Albania BIT (1993).

← 50. Canada-Croatia BIT (1997).

← 51. The international community has developed specific institutions and rules to enforce arbitration awards. Croatia has adhered to the New York Convention and is a contracting state to the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) which has over 150 state parties. The ICSID Convention addresses both the arbitral proceedings and the enforcement of awards rendered under these proceedings. The enforcement of ICSID awards is governed by the ICSID Convention itself rather than the New York Convention. The ICSID regime is thus more self-contained in this respect. In particular, ICSID awards cannot be reviewed by national courts of the country in which their enforcement is sought. In contrast, the New York Convention permits national courts to refuse the enforcement of awards for, inter alia, reasons of public policy.

← 52. Živković, P., "Croatia: New Arbitration Court Specialised for Small Claims", Kluwer Arbitration Blog, 26 November 2015; "Prvi privatni sud u Hrvatskoj presude donosi u roku od 3 mjeseca" [The first private court in Croatia delivers its verdicts within 3 months], Večernji list, 4 November 2015.

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