The challenges of investment arbitration: success or failure? A comparative analysis of investment arbitration in north Macedonia and Kosovo

Established in 1993 within the Economic Chamber of Macedonia (a non-governmental business association), the Permanent Court of Arbitration possesses the authority to administer both domestic and international disputes. See more: `Permanent Court of Arbitration' (Economic Chamber of North Macedonia, 2023) North Macedonia mandates mediation in cases involving companies with a value of up to EUR 15,000 (USD 17,715 at the exchange rate as of 25 March 2021) before resorting to litigation.

In contrast to Kosovo's legislation, North Macedonia's laws do not contain a specific provision authorising foreign investors to initiate international arbitration against the state based solely on their status as investors. While the state has established a general legal framework for foreign investment, it lacks a specific provision similar to Kosovo's laws.

The legal framework pertaining to foreign investment in North Macedonia does not grant foreign investors an explicit right to pursue arbitration against the state. Consequently, in the absence of an agreed procedure, foreign investors in North Macedonia may be limited to seeking resolution of investment disputes through litigation before a domestic court or exploring alternative mechanisms for dispute resolution.

In 2017, by Decision 4 № 44-8454/1 of 19 December 2017, the Government established a Coordinating Body for monitoring arbitration proceedings arising from the concluded or ratified international agreements of the Republic of North Macedonia. Members of the body are the Minister of Economy, the Minister of Finance and the State Attorney of the Republic of North Macedonia, and from June 2021, the Minister of Justice. The Deputy Prime Minister chairs the body in charge of economic issues, coordination with economic departments and investments. The Coordinating Body is tasked with providing a coordinated approach regarding issues of monitoring activities related to resolving disputes that are or will be conducted before agreed international arbitrations. The coordinating body implements the procedure for selecting law firms as an established practice with established selection criteria. State Audit Office, Final Report on the Audit of Financial Statements and Compliance Audit for 2021 of the Government of the Republic of North Macedonia: Basic Budget Account (637) (SAO 2003)

According to an analysis prepared by the coordinating body, the total amount of funds that would potentially have to be paid is in the amount of MKD 82,267,500 (EUR 945 million and USD 420 million), of which the basic value of the disputes is in the total amount of MKD 51,543,443 (EUR 575 million and USD 282 million), while the total costs, namely interest costs, attorney's fees and other costs, amount to about MKD 30,724,056 (EUR 370 million and USD 138 million), which will have implications on the budget of the Republic of North Macedonia in the coming years. ibid 3, 40.

The State Audit Office of the Republic of North Macedonia, through the Final Report on the audit of the financial statements and compliance audit for 2021 of the Government of the Republic of North Macedonia on the basis of the basic budget (637), points out that: “During the audit in December 2022, a verdict was passed for an arbitration procedure (a dispute arising from the Agreement for the purchase and sale of shares and concession concluded on 8 May 1999 between the Republic of North Macedonia and the investor Hellenic Petroleum) in favour of the plaintiff, based on to which the Government should pay budget funds in the total amount of USD 21.5 million, although the amount claimed by the plaintiff was in the amount of USD 42.6 million (of which USD 31.6 million in the name of principal debt and USD 11 million in the name of default interest). Furthermore, the auditor's report states that: `during the audit procedure, a settlement agreement was signed to settle the debt arising from the arbitration dispute in connection with the Agreement between the Government of the Republic of India (the debtor) and the Government of the Republic of Macedonia, in accordance with which the debtor has to pay an amount in favour of the Government of EUR 858,000 in 4 instalments, whereby the signing of the agreement is conditioned by the payment of the first instalment of EUR 250,000, which was carried out on 2 January 2023 based on a notification received from the Ministry of Finance.'” ibid 40-1.

At present, North Macedonia is embroiled in four distinct international arbitration disputes encompassing various subjects, including:

The case of GAMA Guf Sistemleri Muhendislik ve Taahhut A.§. against the Republic of North Macedonia, documented as ICC Case No. 26696/HBH, centres on international commercial arbitration. The case, categorised under the Investor-State type, pertains to industries encompassing Electric Power Energy, Construction, and Specialized Construction Activities. Despite an unspecified introduction date, the proceedings remain ongoing, with Turkey representing the investor and North Macedonia as the respondent nation. The arbitration is overseen by the ICC (International Chamber of Commerce) under the framework of ICC Arbitration Rules, though the specific version remains undisclosed. Furthermore, the case is governed by treaties related to Macedonia and the former Yugoslavia. Case 26696/HBH GAMA Gtif Sistemleri Mtihendislik ve Taahhtit A§ v Republic of North Macedonia (ICC, 2021)

In the matter involving Gokul Das Binani and Madhu Binani against the Republic of North Macedonia (II), identified as PCA Case No. 2018-38, the nature of the proceedings is characterised as international. Falling under the Investor-State category, the case revolves around the domains of Mining and Metal Ores. The case was introduced on 7 August 2017, but its status indicates a discontinuation. The claimant's origin is India, with North Macedonia as the respondent and the PCA (Permanent Court of Arbitration) serving as the overseeing institution. The arbitration adheres to the UNCITRAL Arbitration Rules from 1976, with the seat of arbitration located in Geneva. The applicable treaties pertain to India, Macedonia, and the former Yugoslavia. Case 2018-38 Gokul Das Binani and Madhu Binani v Republic of North Macedonia (II) (PCA, 2020)

The Skubenko and others v. North Macedonia case, identified as ICSID Case № ARB/19/9, involves investors Valentyn Drozdenko, Artem Kadomskyi, Igor Kompanets, and others in a dispute with the Republic of North Macedonia. The heart of the matter lies in their shareholding in Copper Investments JSC and subsidiary company Sardich MC, which holds mining concessions. The case concerns North Macedonia's decision to terminate the claimants' concession for exploiting copper, gold, and silver at the Kazandol deposit in the country's southern region, citing environmental concerns. The parties involved are North Macedonia (the respondent state) and Ukraine (the investor's home state). The case falls within the economic sector of Mining and Quarrying, specifically Metal Ore Mining. The proceedings adhere to the arbitration rules of the ICSID (International Centre for Settlement of Investment Disputes), with the ICSID serving as the administering institution. The investor has claimed compensation of EUR 380.00 million (equivalent to USD 423.30 million). Case ARB/19/9 Artem Skubenko and others v Republic of North Macedonia (ICSID, 2019)

Cunico Resources N.V. vs Macedonia, former Yugoslav Republic, as identified by ICSID Case No. ARB/17/46 revolves around the ownership of FENI Industries, a local entity engaged in ferro-nickel mining and production activities within Macedonia. The case's essence is derived from allegations of governmental involvement hindering the claimant's planned sale of FENI Industries, leading to bankruptcy proceedings against the company. The participating entities include North Macedonia (the respondent state) and the Netherlands (the investor's home state). Legal representation is provided by Hogan Lovells from London, U.K., and Petrol Chilikov from Moscow, Russia, for the claimants. At the same time, White & Case from New York, NY, U.S.A. represents the respondent. The proceedings are conducted in English, and the case concluded with an outcome recorded on 31 January 2020, as the Tribunal acknowledged the discontinuance of the proceedings as per ICSID Arbitration Rule 43(1). Case ARB/17/46 Cunico Resources NV v Republic of Macedonia (ICSID, 2017)

Kosovo

In Kosovo, regular courts have jurisdiction over all matters. A newly established commercial court marks a significant milestone in Kosovo's legal system. By replacing outdated management structures and workflow processes, this court aims to address the inefficiencies and lengthy processing times experienced in commercial cases. See more: Commercial Court of the Republic of Kosovo (2023)

The jurisdiction of the Commercial Court is clearly defined in the law. In broad terms, the court will have authority over all commercial disputes and business-related administrative disputes. Law of the Republic of Kosovo no 08/L-015 of 21 January 2022 `On Commercial Court' [2022] Official Gazette of the Republic of Kosovo 7/3. This includes cases that are currently handled by the Commercial Department of the Pristina Basic Court and the Fiscal Division of the Administrative Department of the Pristina Basic Court, as well as other business-related administrative cases. Additionally, within the Department for Economic Matters, there is a dedicated division for disputes involving foreign investors, with jurisdiction extending throughout Kosovo. The Commercial Court will also prioritise bankruptcy cases and handle the enforcement of both foreign and local arbitral awards. Valbon Mulaj, `The Advantages and Disadvantages of Arbitration in Relation to the Regular Courts in Kosovo' (2018) 59(1) Hungarian Journal of Legal Studies 118, doi:10.1556/2052.2018.59.1.7.

The establishment of the Commercial Court is expected to significantly enhance the judicial system's efficiency and effectiveness in handling business disputes, offering businesses more streamlined and timely access to justice.

The presence of specialised Commercial Courts is crucial for the smooth operation of businesses and the attraction of investments. Foreign investors need a court with a specific focus on commercial matters. However, more efforts should be made to increase the professional capacity of judges and court staff in handling investor disputes more professionally.

However, when it comes to investment disputes, foreign investors are more inclined to use alternative dispute resolution methods, such as arbitration, to resolve their disputes with the state. The Law on Foreign Investments explicitly grants foreign investors the right to initiate legal proceedings against the state, and this right is widely exercised by foreign investors in Kosovo. Law of the Republic of Kosovo no 04/L-220 (n 7). Thus far, there have been six instances of international arbitration in Kosovo, as allowed by Article 16 of the Law on Foreign Investment. Out of these cases, three have been successfully concluded, while the decisions on the remaining three are expected to be announced in the coming weeks. Notably, the favourable outcomes of the resolved cases have led to savings exceeding EUR 470 million. However, there is a potential risk of losses amounting to EUR 50 million in the ongoing cases.

Three ongoing cases with a combined value of approximately EUR 50 million involve "Coutur Global" and "Mabco". Coutur Global has demanded EUR 20 million in compensation. The dispute revolves around the contract between Coutur Global and Kosovo for the construction of the "Kosova e Re" thermal power plant. The power plant, with an estimated cost of EUR 1.3 billion, was expected to commence in 2020 and be completed by 2023. However, due to the contract's non-execution, the case was brought before the International Court of Arbitration. Case ARB/20/50 Contour Global Kosovo LLC v Republic of Kosovo and others (I) (ICSID, 2020)

In July 2017, "Mabco" filed a lawsuit against the state of Kosovo in the International Court of Arbitration. Despite previous rulings by the Chamber of Special Supreme Court and Constitutional Court of Kosovo in favour of the Kosovo Privatization Agency, which had returned the Grand Hotel to its ownership after encountering buyer-related issues in 2015, Mabco sought compensation of EUR 6 million from Kosovo. Case ARB/17/25 Mabco Constructions SA v Republic of Kosovo (ICSID, 2020)

The Ministry of Justice has undertaken procedures to select an international law firm to represent the government of Kosovo in these cases, ultimately choosing the law firm "Wagner Arbitration Part MBB" based in Berlin. The agreement for legal representation in the arbitration decision cost the government EUR 600,000. ibid.

Another dispute revolved around the agreement signed between "Dardafon" and Telekom of Kosovo (a publicly owned enterprise) in January 2009. The agreement stipulated that "Z-Mobile" would serve as the virtual operator for "Vala" mobile telephony. However, conflicts emerged when Z-Mobile requested additional numbering, exceeding the initially allocated 200,000 numbers.

In December 2016, the Court of Arbitration ruled in favour of Z-Mobile. As per the decision, Telekom of Kosovo was obligated to pay approximately EUR 30 million in fines, compensating for damages, lost profits, and arbitration procedure costs. Following this, a second lawsuit was filed against the state subsequent to the dispute with Telekom, which dispute was won by Kosovo in international arbitration.

The defence costs incurred by Kosovo in three international arbitration cases amounted to over EUR 1.5 million. Case 20990/MHM Dardafon.net (Z-Mobile) vKosovo Telecom (I) (ICC, 2016)

foreign investor arbitration kosovo macedonia

Conclusions

Based on the aforementioned, it is evident that Kosovo has a specific law granting foreign investors the right to initiate legal proceedings against the state, while in Macedonia, such arbitration cases can only be filed if there is an investment treaty in place. This provision in Kosovo's law has exposed the country to the risk of losing significant sums of money in investment arbitration cases. On the other hand, eight arbitration disputes worth almost EUR 1.4 billion are being conducted against North Macedonia, which is estimated to cost the state a quarter of the budget. Hence, Kosovo's approach must be reassessed to find a balance between providing investors legal certainty and mitigating the risks associated with such provision.

Furthermore, in terms of numbers, Macedonia has attracted more foreign direct investment (FDI) than Kosovo in the past three years. Only in the last year did Kosovo manage to parallel to some extent with North Macedonia. This suggests that the inclusion of the provision granting investors the right to initiate arbitration proceedings may not necessarily lead to an increase in FDI. Despite not having a similar provision, Macedonia outperformed Kosovo in terms of FDI.

Moreover, while this provision in the law on foreign investment does not guarantee an increase in FDI, it exposes Kosovo to the risk of losing millions of euros in disputes where the state is not directly involved and generates high legal representation costs.

Since the law's entry into force on foreign investments vested foreign investors with the right to sue the state in international arbitration, the effectiveness of this right in attracting foreign investors was debatable. Considering the presence of such a provision in the law did not significantly impact increasing foreign investments, perhaps more attention should be directed towards establishing a comprehensive legal framework that facilitates a favourable business environment and considers a case-by-case approach that considers the specific circumstances of each dispute.

While the effectiveness of dispute resolution is important for foreign investors, other important factors still influence their attraction. A comprehensive legal framework that ensures transparency, stability, and enforceability of contracts and protection of property rights may play a more significant role in fostering investor confidence, followed by efficient administrative processes, reduced bureaucracy, and addressing corruption-related issues.

Finally, balancing dispute resolution mechanisms and creating a favourable investment climate requires careful consideration. In particular, it is crucial to evaluate the effectiveness of existing provisions and consider eventual adjustments or alternative approaches to maximise the benefits of foreign investment while minimising potential risks and uncertainties associated with dispute resolution processes.

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