Constitutional Court overturns arbitration ruling for Sveti Stefan over fair trial violation

The Constitutional Court of Montenegro upheld a constitutional complaint filed by the company „Budvanska Rivijera“ AD Budva and annulled the decision of the Court of Appeals regarding the recognition of legal costs in the dispute over Sveti Stefan, finding that the court had arbitrarily concluded that domestic courts lacked jurisdiction and that the matter fell under international arbitration.

As stated in the announcement, the Commercial Court of Montenegro, in enforcement proceedings of an arbitration award issued by the London Court of International Arbitration, recognized that „Sveti Stefan Hotels“ AD Budva and the Ministry of Economic Development must pay the company „Adriatic Properties“ 522,000 British pounds (approximately 620,000 euros) in legal costs.

The Court of Appeals rejected Budvanska Rivijera’s appeal as unfounded and upheld the position of the Commercial Court.

- The Constitutional Court’s decision established that the courts failed to examine the essential issue - whether the dispute concerns a matter under the exclusive jurisdiction of Montenegrin courts, given that it relates to the lease of real estate located in Montenegro - the statement says.

The Commercial Court and the Court of Appeals had concluded that the case involved a foreign element, as one contractual party consisted of multiple legal entities based abroad, noting that the 2007 Lease Agreement stipulated that any dispute not resolved amicably would be settled before the London Court of International Arbitration.

- The Constitutional Court finds that there was no assessment regarding the exclusive jurisdiction of Montenegrin courts as a ground for refusing recognition of a foreign arbitral award, which courts must consider ex officio. Both the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the Arbitration Act provide for two conditions to be examined ex officio: the arbitrability of the dispute and public policy - the Constitutional Court stated.

According to the Court, the Commercial Court and the Court of Appeals failed to assess the relevant provisions of the New York Convention and the Arbitration Act.

Privredni i Apelacioni sud nijesu cijenili, navodi se u odluci Ustavnog suda, odredbe Njujorške konvencije i Zakona.

- They did not evaluate, as a condition for recognizing a foreign arbitral award examined ex officio, whether the dispute is one that can be resolved through arbitration under Montenegrin law. Instead, they allowed the prorogation of foreign arbitration to effectively and formally override the exclusive jurisdiction of Montenegrin courts - the statement says.

The key issue in this case, as emphasized, is whether the dispute is suitable for arbitration - something the courts failed to properly examine, particularly in determining whether at least one party to the arbitration agreement is a natural or legal person domiciled or headquartered abroad, even though the applicant highlighted this point throughout the proceedings.

- The Constitutional Court particularly noted that the courts did not consider the fact that the lease agreement lists only Hotelska grupa Budvanska Rivijera AD Budva, as the lessor, and Adriatic Properties DOO Budva, as the lessee, both domestic legal entities registered in Montenegro, while Aidway Investments Limited, registered in the British Virgin Islands, is designated in the contract merely as a guarantor - the statement clarified.

For the Constitutional Court, the position of the Court of Appeals, that the arbitration award concerned only the determination of costs related to an interim measure, independent of the underlying contract, was constitutionally unacceptable, because the Law on Private International Law prescribes the exclusive jurisdiction of Montenegrin courts in disputes involving real rights or leases of immovable property located in Montenegro.

- Consequently, even ancillary costs arising from such leases or ownership cannot be considered in isolation - the Court’s decision states.

The rulings of the Commercial Court and the Court of Appeals lacked a legal analysis of the relevant provisions of the Arbitration Act and the Law on Private International Law concerning the existence of exclusive jurisdiction of Montenegrin courts in disputes related to leases of immovable property located in Montenegro, as well as cases where the parties to the lease are domestic legal entities. They also failed to apply the explicit provision of the Arbitration Act stipulating that arbitration cannot be conducted when another law prescribes that certain disputes cannot be resolved through arbitration.

- The Law on Private International Law establishes the exclusive jurisdiction of Montenegrin courts in disputes concerning leases of immovable property located in Montenegro. This is also reflected in the practice of the Supreme Court, which in a revision case from May 2024 stated that Montenegrin courts have exclusive jurisdiction over real property rights and lease rights related to immovable property in Montenegro. The Constitutional Court found that proceedings before the Court of Appeals violated the right to a fair trial, as it failed to clearly and explicitly analyze the relevant procedural law provisions and apply them to the specific case - the statement emphasized.

Had the objections raised by Budvanska Rivijera before the ordinary courts actually been considered, they could have been decisive for the outcome of the case and therefore required a convincing and well-reasoned response.

- The Constitutional Court annulled the decision of the Court of Appeals due to a violation of the right to a fair trial and returned the case for retrial and decision in accordance with the legal positions expressed in its ruling - the statement concludes.