80 Chi.-Kent L. Rev. 119
Chicago-Kent Law Review
2005
Symposium: Final Status for Kosovo: Untying the Gordian Knot
Article
*119 RESOLVING CLAIMS WHEN COUNTRIES DISINTEGRATE: THE CHALLENGE OF KOSOVO
Copyright © 2005 Chicago-Kent College of Law; Henry H.
Perritt, Jr.
Introduction
Final status for Kosovo [FN1] must be
accompanied by mechanisms for resolving claims by and against Kosovo and
persons operating within its territory. When states break up, as in the cases
of the Soviet Union, Yugoslavia, and East Timor, the international legal,
political, and economic systems must deal with conflicting claims by and
against the elements of the preexisting state. [FN2] Who is entitled to
a bank account maintained by the former state
of Yugoslavia in New York: Serbia-Montenegro? Croatia? Slovenia? Who is
responsible for a debt of a socially-owned enterprise ("SOE") located
in Kosovo? Serbia-Montenegro? The purchaser of the assets of the SOE in a
privatization sale? The privatization agency? Are the debts of the former
Yugoslavia to be allocated in the same way as claims on its assets?
Some but not all of the same issues arise
when the former government of a state is displaced by revolution or by the
international community, as in Afghanistan or Iraq. [FN3] Is the new
government responsible for all the debts of the old regime? Are elements of the
old regime or nominally private persons or entities enjoying franchises under
the old regime entitled to *120 some of the assets, on the grounds that
they were personal and not governmental in character? [FN4] Public international law provides only scant guidance for
resolving these questions.
Part I of this Article discusses the
categories of claims, the dispute resolution mechanisms, and the private
international law concepts developed in other contexts that may be useful in
deciding the final status of Kosovo. Part II addresses the legal concepts,
tools, and frameworks available that may provide insight for resolving claims
in Kosovo. In Part III, this Article surveys frameworks used in other
situations with features similar to those present in Kosovo. Part IV discusses
the need for any claims resolution system to have the power to extinguish
preexising rights. Part V describes the unique situation
in Kosovo, including problems with claims dispute mechanisms already in place
and common criticisms of the procedures currently being followed. Part VI then
offers several scenarios that might reduce the potential of claims disputes to
block successful negotiations over final status for Kosovo. In order to frame
the claims resolution issues, the Article assumes an independent Kosovo. Final
status other than independence, such as defining an autonomous Kosovo within
the Union of Serbia and Montenegro or within a separate state of Serbia,
presents fewer claims resolution challenges because an overarching legal system
would already exist within which claims could be resolved.
I. Universe of Claims, Dispute Resolution
Machinery, and Private International
Law Rules
Any policy analysis of claims affecting the
future status of Kosovo involves three overlapping tasks: categorizing claims,
identifying institutional mechanisms for resolving disputes over claims, and
crystallizing questions of private international law (conflict of laws) to know
what sources of substantive law, what tribunals, and what enforcement
mechanisms are available to decide claims disputes.
A. Categories of Claims
Claims relating to Kosovo fall into two broad
categories: intergovernmental claims and
private claims. Intergovernmental claims include *121 claims by the state
of Serbia, a possible new state of Kosovo, and third states to physical assets
and to intangibles (such as currency and gold reserves), regardless of where
they are located. Intergovernmental claims also include claims by international
organizations such as the World Bank for repayment of loans.
A useful analytical framework for evaluating
mechanisms for claims resolution must accommodate differences along two
dimensions: a sovereignty dimension and a public-private dimension. The first
dimension involves disputes over where sovereignty resides. In some cases, such
as Cuba in 1958, or Afghanistan or Iraq in 2002-2004, state boundaries remain
intact, but one government is supplanted by another, which seeks to exercise
sovereign power in a way that affects ownership or other claims to property. In
other cases, such as the breakup of the Soviet Union, a preexisting state
dissolves, but a part of the territory enjoys the status of "surviving
state." In the most difficult case, a preexisting state, such as Yugoslavia,
dissolves, and there is no entity entitled to the status of surviving state.
The second dimension concerns the
characterization of an entity obligated on a claim or asserting rights to
assets. In some cases, a creditor or debtor may unambiguously be a state. At
the opposite pole, a creditor or debtor may unambiguously be a private
person--natural or legal, such as a corporation. A number of intermediate possibilities exist, such
as nationalized enterprises, SOEs in the former Yugoslavia, and enterprises
formerly owned by the state but that had been privatized in whole or in part.
Private claims fall into three overlapping
categories: claims by natural persons to real property; employment-related
claims, as for unpaid wages, termination pay, or pension benefits; and
commercial claims, as by owners of equity interests in enterprises or claims by
creditors of enterprises. In some cases, the alleged obligor on private claims
is a state or quasi-public entity. In other cases, the alleged obligor is
another private person, natural or juridical.
Mechanisms for claims dispute resolution must
encompass all of the relevant permutations:
1. a state asset holder's relations with a
state claimant,
2. a state asset holder's relations with a
private claimant,
3. a private asset holder's relations with a
state claimant, and
4. a private asset holder's relations with a
private claimant in conditions in which the power to change legal relations is
clouded by changes in sovereignty. *122 Most of the literature on state
succession focuses on the first permutation, and, indeed public international
law concerns itself with only that permutation. The fourth permutation has
often been ignored, presumably on the basis that it involves private law only,
and is a matter for national courts. But in
the case of Kosovo, all four permutations must be addressed.
B. Dispute Resolution Mechanisms
Most scholarly attention to successorship has
focused on the resolution of intergovernmental claims because there is no
permanent, comprehensive mechanism for resolving such claims in the
international public law system. Conversely, a variety of legal systems already
exist for resolving private claims, including the national legal systems of the
surviving states, the national legal systems of third states in which assets
may be located or where creditors may be citizens, and international private
arbitration under the New York Convention. [FN5]
In the case of Kosovo, policymakers and lawyers
should focus attention on mechanisms for resolving disputes over private claims
as well as intergovernmental claims. Presumably, whatever final status is
determined for Kosovo, both Kosovar and Serbian claimants could file claims in
the domestic courts of Kosovo, the domestic courts of Serbia, or the domestic
courts of third states. This approach is unlikely to be acceptable, however,
because of likely mistrust by Kosovars of the domestic courts in Serbia [FN6] and mistrust by
Serbs of the domestic courts in Kosovo. Whether the domestic courts of third
countries are perceived as fair depends substantially on what substantive law they apply, an issue that
implicates questions of private international law considered in the next
section.
Likely mistrust of the neutrality of
conventional judicial institutions for claim resolution suggests consideration
of specialized claims resolution tribunals accompanied by procedures and
personnel appointment processes that assure neutrality. Following sections of
this Article consider various models that should be considered.
*123 C. Private International Law
Any mechanisms for resolving private claims
disputes must address the three traditional subjects encompassed by private international
law: choice of substantive law to be applied to a case; adjudicative
jurisdiction (the power of a particular tribunal over the parties to a
particular dispute); [FN7] and enforcement of tribunal decisions, especially
enforcement by the courts of states in which assets belonging to a judgment
debtor may be located.
Choice of law is a complex and--in the United
States, at least--substantially indeterminate legal regime. Nevertheless, some
basic rules of thumb, common to most choice of law regimes, are helpful in
designing claims dispute resolution systems. First, in a dispute over real
property, the law of the place where the property is located usually is
applied. [FN8] Second, in
employment disputes, the law of the place where the workplace is located
usually is applied. [FN9] Third, in contract disputes, explicit choice of law
provisions in the contract usually are enforced. [FN10] In the absence of such choice of law provisions,
adjudicative forums usually apply either the law of the place of performance of
the contract or the law of the place where the contract was made. [FN11]
Uncertainties with respect to adjudicative
jurisdiction can be reduced by ensuring that any tribunals intended to be
available for resolution of claims related to Kosovo are fair and fully
accessible to claimants, and that their organic statutes or regulations give
them exclusive jurisdiction over such claims. Such features increase the
likelihood that the doctrine of forum non conveniens, discussed in Part
VI(A)(11), will steer claims to the preferred tribunals, and that the doctrine
of lis pendens will give priority to the preferred tribunals if claims are
filed there first.
The same features that reduce uncertainty
with respect to adjudicative jurisdiction will increase the likelihood that
decisions by the preferred tribunals *124 will be effectively enforced
by courts in places where judgment-debtor assets are located.
Nevertheless, residual uncertainty is
inescapable because the source of private international law for any specific
case is the law of the forum. [FN12] An external sovereign, in the absence of a treaty
mechanism, cannot determine absolutely what choice of law, adjudicative
jurisdiction, or judgment enforcement rules
will be applied by a court in another legal system. [FN13]
II. Legal Concepts, Tools and Frameworks
A. Elemental Concepts
Claims incident to the dissolution of a state
are similar to those arising in the context of other legal relationships, but
the conflict of laws problems are more serious when states are involved. When
the dissolving state is solvent at the time of dissolution, the situation
resembles probate of a will, severance and partition of a joint tenancy, or a
corporate division such as a spin-off. [FN14] When a will is probated, claimants may be sad that the
decedent no longer exists, but their wealth may increase. The challenge for the
legal system involves marshalling of assets, valuation, notifying debtors, and
distribution according to rules set by the will. Distribution is shaped by the
requirements of one legal system for the interpretation of the will and for
forced shares of certain privileged descendants. In the severance of a joint
tenancy and partition of the resulting tenancy in common, [FN15] claimant assets are not increased, but they are not
diminished either. Equitable distribution *125 is the standard, but most
cases involve the comparatively simple reality that land is located in only one
state, whose local law is applied to the partition. [FN16]
When the dissolving state is insolvent, not all the claimants can be
satisfied, and the problem resembles bankruptcy or equity receivership, [FN17] with the added
complexity that multiple legal systems are involved. In a bankruptcy, assets
are insufficient to satisfy all claims, and there often are multiple,
conflicting claims to the same assets. Once the bankruptcy is complete,
claimants have fewer assets than they did before the bankruptcy. [FN18]
Any model for apportionment of claims and
assets must include a mechanism for resolving disputes over valuation [FN19] and distribution.
B. Legal Frameworks for State Succession
Public international law provides only scant
guidance for resolving claims when states break up. Until 1989, when the Soviet
Union broke up, the customary international law doctrine of state succession
focused mainly on treaty continuity and membership in international
organizations, and not much on succession to debts and assets. [FN20] Among other
things, this was due to the fact that most instances of state succession until
1989 involved decolonization where most of the assets and debts were clearly
under the control of the colonial power. [FN21] Natural
resources located in the former colonies did present issues, however.
*126 In discussions in the U.N.
General Assembly beginning in 1981, former colonies
asserted indefeasible claims to their natural resources. The International Law
Commission drafted some preparatory documents, and a diplomatic conference
authorized by the General Assembly produced the Vienna Convention on Succession
of States in Respect of State Property, Archives and Debts in 1983 ("1983
Vienna Convention"). [FN22] The 1983 Vienna Convention, which has not entered into
effect because it has not obtained the requisite fifteen ratifications, failed
to resolve many important questions arising in the dissolution of states, as in
the cases of the Soviet Union, Yugoslavia, [FN23] and East Timor.
For example, the treaty failed to distinguish between territorial and national
assets. [FN24] It did not require any proportionality between assumption
of claims and assets. [FN25] It did not
provide for any ongoing dispute resolution machinery. In the main, it provided
for claims to be resolved by international agreement and provided only a
general framework of default rules.
Customary international law with respect to
state succession distinguishes between continuation and dissolution:
In the case of continuation, one or more
sub-state entities breaks away from the predecessor state and forms an
independent state. What remains of the predecessor state is referred to as the
continuing state . . . and is deemed to continue the international legal
personality of the predecessor states. The break-away states are referred to as
successor states or newly independent
states.
In the case of dissolution, the predecessor
state dissolves into a number of independent states, with none of these states
considered the continuing state. All of the emerging states are considered
successor states and are treated as equal heirs to the rights and obligations
of the predecessor state. [FN26]
The 1983 Vienna Convention did not
distinguish between continuation and dissolution, although it did distinguish
between newly independent *127 states, separation of part or parts of
the territory of a state, and dissolution of a state. [FN27] Under customary
international law, the continuation case left the assets with the continuing
state, a practice derived from decolonization, where the national property did
not come within the sovereignty of the successor state. [FN28]
But in the case of dissolution, the
predecessor state, having lost its international legal personality, is no
longer competent to own property [FN29] and, thus, state property must devolve to successor
states. [FN30] But the legal position of successor states depended on
whether they were recognized as states. [FN31]
Because the 1983 Vienna Convention has not
entered into effect, customary international law, informed by commentary
arising from negotiation of the 1983 Vienna Convention, provides the principal
legal framework for resolving state succession
issues involving debts and assets. But this legal environment also is
indeterminate and incomplete, primarily because public international law
focuses only on the relationships among states. [FN32] The 1983 Vienna
Convention defined state property as "property, rights and interests . . .
owned by that state." [FN33] State debts are
defined as "any financial obligation . . . towards another State, an
international organization or any other subject of international law." [FN34]
The treaty framework contemplated by the 1983
Vienna Convention also is incomplete in that it fails to implement a freeze or
standstill to preserve assets. [FN35]
Williams and Harris draw the following
principles from state practice after the end of the Cold War: first, a
distinction should be drawn between *128 national and territorial debts;
[FN36] second, the
principle of pacta sunt servanda should govern debt obligations; [FN37] third, the proportion of territorial debt can be used as a
basis for allocating national debt; [FN38] and finally,
population and economic indicators can determine the share of national debt. [FN39]
Whatever guidance the 1983 Vienna Convention
or customary international law may give for adjusting debts owed by dissolving
states to other states and for allocating assets held by other states among the
components of dissolving states, neither offers theoretical guidance for claims
by private persons against dissolving states
and assets owned by dissolving states but held by private entities. Those
private sector issues are rather the province of informal arrangements in the
financial community, such as the Paris Club [FN40] and the London Club, [FN41] or by
specialized mechanisms established by bilateral agreement, such as the
Iran-U.S. Claims Tribunal. [FN42]
C. Legal Frameworks for Private Claims
Legal regimes for resolving private claims
associated with dissolution of states are fragmentary and incomplete. This is
due, in part, to the traditional limitation of customary international law to
relations among states, and to the conventional belief that private claims can
be resolved by national legal systems of the debtor or creditor states
according to private international law principles for adjudicative
jurisdiction, judgment recognition and enforcement, and choice of law. [FN43]
Private claim resolution has been addressed
in international law in the context of transnational investment disputes,
including expropriation and privatization, and in bilateral U.S. treaties
providing for comprehensive claims dispute resolution in the cases of Russia,
Korea, Vietnam, and Iran. Privatization can have a significant impact on the
resolution of claims in the state succession context. The Yugoslav experience,
where Serbia refused*129 to
participate in various EU mechanisms for resolving claims involving the former
Yugoslavia, [FN44] in part because
it wanted to include assets held by SOEs in Yugoslavia, [FN45] is an example. [FN46] The breakup of
Czechoslovakia provides another example, where disagreements between the Czech
Republic and Slovakia were driven in large part by the differential impact of
privatization. [FN47]
One of the few comprehensive mechanisms for
private claims is the International Center for the Settlement of Investment
Disputes ("ICSID"), established under the Convention on the
Settlement of Investment Disputes between States and Nationals of Other States
("Settlement Convention"), which came into force on October 14, 1966.
[FN48] Among other
things, it provides standing machinery for conciliation and arbitration of
investment disputes between nationals of signatory states and other signatory
states. [FN49]
One hypothesis of this Article is that
private debts and claims should follow the same norms as those for public debts
and claims, unless there is a clear private agreement to the contrary, such as
one containing explicit guarantees by states.
The absence of comprehensive international
law models for the resolution of private claims associated with dissolution of
states requires reference to features of several overlapping international and
national law regimes: nationalization, privatization, and bankruptcy.
The most general legal regime for resolving
private claims that cross state boundaries is the regime for breach of
contract. Even when unresolved controversies exist over apportioning state
assets and responsibility for state debts in cases of state succession, private
creditors and debtors *130 remain subject to preexisting private
contractual obligations. Claims for breach of those obligations lie in national
courts.
Breach of contract actions traditionally were
not available against states and their instrumentalities, [FN50] so the private
contract regime may be unavailing when a predecessor or successor state is the
obligor on a contract obligation. [FN51] Moreover, breach
of contract liability may not provide a private creditor with meaningful relief
when the debtor--public or private--is insolvent. [FN52]
2. Sovereign Immunity
Sovereign immunity is implied by an
international legal system of coequal sovereigns. [FN53] As U.S. law
evolved, however, it extended sovereign immunity more broadly than the law of
many foreign jurisdictions. [FN54] Moreover, the
extension of state activities into the commercial sphere spawned calls for
revision of sovereign immunity doctrine under U.S. law. [FN55] In 1952, the U.S. State Department adopted a
"restrictive" interpretation of sovereign immunity, which extended
immunity to governmental acts, but not to commercial
ones, albeit undertaken by entities nominally governmental. [FN56] The restrictive theory is regularly applied by foreign
courts in suits against instrumentalities of the U.S. [FN57]
In 1976, Congress enacted the Foreign
Sovereign Immunities Act ("FSIA"), codifying the restrictive
interpretation of sovereign immunity. [FN58] The FSIA contains a "commercial activities"
exception to sovereign immunity, which subjects foreign entities to suit in
U.S. courts over their commercial*131 activities. [FN59] Uncertainty with respect to the commercial activities
exception to sovereign immunity is particularly troublesome in connection with
suits by private parties against central banks, which often guarantee private
commercial transactions. [FN60]
3. Bankruptcy
Bankruptcy is the traditional method for
resolving private claims when the debtor lacks sufficient assets fully to
satisfy all creditors, but significant limitations vitiate its utility in the
context of final status determination for Kosovo.
Bankruptcy is a statutory procedure, usually
triggered by insolvency, [FN61] in which a
(usually private) debtor is reorganized or liquidated by a judicial body for
the benefit of the debtor's creditors. [FN62] Under U.S. law,
there are two basic forms of bankruptcy: reorganization and liquidation. In a
reorganization, the debtor continues as a going concern, and its future earnings are structured to satisfy part or all
of its debts. [FN63] In a
liquidation, the debtor's assets are sold off, with the proceeds used to
satisfy its debts. [FN64]
The bankruptcy laws of other countries vary
widely. French bankruptcy law was extensively reformed in 1984, 1985, and 1994,
with goals of saving enterprises, preserving jobs, and paying creditors. [FN65] Bankruptcy
proceedings occur before panels of the Commerce Tribunal, comprising lay
businesspeople elected by local chambers of commerce. [FN66] Creditor control of the debtor estate is minimized [FN67] and the court itself decides whether *132
reorganization is possible or whether liquidation is necessary. [FN68] In contrast, virtually all reorganizations in Germany
occur out of court, a result of inadequate reorganization procedures under
German bankruptcy law. [FN69]
In 1995, the member states of the European
Union adopted the Convention on Insolvency Proceedings ("Insolvency
Convention"), which integrates European bankruptcy law. [FN70] The Insolvency
Convention applies to insolvencies of individual and corporate debtors, but
excludes banks and insurance companies. [FN71] It provides for
an automatic stay and for the appointment of a trustee. [FN72] The decisions resulting from an insolvency proceeding in
one member state must be recognized and enforced by courts in all member
states, subject to choice of law rules contained in the Insolvency Convention
and to the possibility of ancillary
proceedings. [FN73] It does not, however, address the effect to be given bankruptcy
court decisions from states outside the EU. [FN74]
The United Nations Commission on
International Trade Law ("UNCITRAL") has formulated a legislative
guide on insolvency law, [FN75] seeking to strengthen and harmonize national bankruptcy
law. [FN76] The guide distinguishes between liquidation and
reorganization, making recommendations for effective national law regimes,
while noting the socio-political interests that may thwart complete
harmonization. [FN77] Among other
things, it recommends subjecting SOEs to bankruptcy provisions applicable to
purely private enterprises. [FN78]
A bankruptcy system, whether international or
purely local, is infeasible unless the legal system within the territory where
assets are located has an effective creditors' rights regime. A declaration by
a bankruptcy tribunal *133 that a creditor is entitled to particular
assets is worthless unless the creditor has a way to compel the legal
authorities to force those in possession of the assets to give them up. Thus,
if the assets involved in a bankruptcy are located in a territory where the
authorities do not recognize the legal authority of the bankruptcy apparatus,
or in which there is no effective commercial rule of law, those assets are not
a meaningful part of the bankrupt estate. [FN79]
A
number of commentators have proposed a "universalist" approach, in
which states would recognize the decisions of the bankruptcy courts of the
state of incorporation of multinational corporations. [FN80] Other
commentators insist that the most that can be hoped for is a greater measure of
cooperation among national courts, considering parallel bankruptcy proceedings
for the same corporate entity. [FN81] Chapter III of
the UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment
provides for national court recognition of decisions by bankruptcy courts of
other jurisdictions, subject to important exceptions. [FN82]
4. Nationalization, Expropriation, and
Eminent Domain
International law does not distinguish
meaningfully among nationalization, expropriation, and eminent domain. [FN83] All three terms
refer to the exercise of legal power by a state to transfer the ownership of
private property into state hands. Whenever such power is exercised, the former
owners of the property are likely to have difficulty realizing their claims
through litigation in national courts of other states. The biggest barriers are
sovereign immunity and the act of state doctrine.
*134 In Banco Nacional de Cuba v.
Sabbatino, the U.S. Supreme Court held that the validity of an expropriation
decree by the Cuban government could not be questioned in a U.S. court because
of the act of state doctrine. [FN84] The controversy arose from facts typical of
nationalization or expropriation. A commodity
broker purchased sugar from a private enterprise operating in Cuba. After the
sugar was loaded, but before it was shipped, the government of Cuba
nationalized the enterprise. Both the former owners of the nationalized
enterprise and the Cuban government claimed the proceeds, and the Cuban
government sued in U.S. federal court. [FN85] The district
court found the expropriation decree invalid because it violated international
law, and the court of appeals affirmed. [FN86]
The Supreme Court reversed. [FN87] First, even
though the U.S. had not recognized the Cuban Government, the Court held that
the government of Cuba could sue in U.S. federal court. [FN88] Second, the Court held that the act of state doctrine
foreclosed judicial invalidation of the Cuban law on which the Cuban
Government's claim was based. [FN89] The Court
characterized the act of state doctrine as having arisen in England in 1674 and
having been transplanted to the U.S. in the late eighteenth and early-nineteenth
centuries. [FN90] The Court expressed the doctrine as follows:
Every sovereign state is bound to respect
the independence of every other sovereign state, and the courts of one country
will not sit in judgment on the acts of the government of another, done within
its own territory. Redress of grievances by reason of such acts must be
obtained through the means open to be availed of by sovereign powers as between
themselves. [FN91]
If the posture of the case had been somewhat
different, the Court said, the act of state
doctrine could have been interposed successfully as a defense to a claim by the
former owner of the enterprise for the proceeds. [FN92]
The act of state doctrine thus is a powerful
barrier to litigation of private claims in national courts when the outcome of
the litigation is determined by an expropriation or nationalization law.
The international community has sought to develop
international legal frameworks, accompanied by dispute resolution machinery, to
fill the gap, *135 but working out a multilateral framework for
encouraging and protecting private investment in developing countries has
proven difficult. [FN93]
In the late 1990s, members of the
Organization for Economic Cooperation and Development ("OECD") sought
unsuccessfully to negotiate a Multilateral Agreement on Investment
("MAI"), working with the World Bank through its International Center
for the Settlement of Investment Disputes ("ICSID"). The MAI
negotiations were scheduled to be completed by April 1998, but that deadline
has long passed, and most observers consider the initiative to be dead. [FN94]
The MAI was to have defined rights for
private sector investors and to have included a procedure for seeking recourse
against host governments in investment disputes. The MAI's scope would have
included more than outright nationalization or expropriation; it would have
extended to excessive or discriminatory taxation or regulation. The proposed
MAI included the following key components:
1. Nondiscrimination: guaranteeing that
"host states" (i.e., states where the investment is taking place)
grant foreign investors equal or comparable rights to host state (national)
investors;
2. Restrictions on certain performance
requirements: this would prohibit states from imposing special targets or other
conditionalities on the activities of investors
3. Transparency: ensuring that
investment-related laws, guidelines, and procedures are publicly available to
ensure predictability;
4. Funds transfer guidelines: ensuring that
host states will not restrict certain investment-related financial transactions,
such as the transfer of profits back to an investor's home country;
5. Tight controls on expropriation: setting
international limits and laws governing expropriation and subsequent
compensation; and
6. Dispute resolution: establishing binding
arbitration procedures to settle investment-related disputes between states and
investors and between host and home states. [FN95] *136 Absent such a treaty framework, disputes over
alleged discriminatory treatment of investors or expropriation of investments
must be resolved in national judicial systems of the host country, or of the
investor's country, or through various third-party arbitration and conciliation
mechanisms.
Despite the failure of the MAI, bilateral investment-protection treaties
fill the gap. [FN96]
Federal statutes in the U.S. contemplate suspension of foreign assistance to
states that expropriate the property of U.S. investors. [FN97] Chapter 11 of the North America Free Trade Agreement
("NAFTA") is the only instance so far in which private investors have
been given direct access to dispute resolution mechanisms that are binding
against states. [FN98]
5. Privatization
Privatization superficially appears to be the
converse of nationalization. In privatization, property formerly owned by the
state is transferred to private owners. But this formulation is misleading.
State-owned property subject to privatization usually is held subject to
private claims arising from loans or other commercial claims by suppliers of
equipment or raw material. Privatization of such property often involves
application of governmental power to extinguish or otherwise to limit such
claims. Moreover, the property subject to privatization often was the subject
of an earlier nationalization. Some commentators frame the legal issues
involved in privatization as relating to a "nationalization-privatization
cycle." [FN99]
Privatization thus presents special problems
in the state succession context. By definition, it results in the transfer of
property interests from *137 the state to private owners. But to
encourage private investment, the privatization process often strips
liabilities from the privatized assets and requires
that these claims be satisfied by recourse to a special privatization fund,
accumulated from a combination of public funding and payments by investors in
the assets. [FN100]
When the legal personality of the state changes, the new state may seek to
repudiate those transfers. Or, in many cases, preprivatization creditors of the
privatized enterprises may assert liability against the new owners.
In more complicated cases, such as Kosovo,
enterprises were already privatized or transformed into private ownership, then
renationalized by the political trustee, and finally privatized through a
process deriving its legal power from an ambiguous legal mandate to the
trustee. Some claimants argue that the first privatization process was invalid.
Other claimaints argue that the first privatization process was valid and the
second invalid.
Such privatization disputes frequently result
in litigation in the courts of third states. When that occurs, courts presented
with the disputes must decide whether to exercise judicial power over them.
U.S. courts generally have uniformly viewed the activities of privatization
agencies as falling within the judicial immunity conferred by the U.S. Foreign
Sovereign Immunities Act, although case authority is mixed on whether such
activities nevertheless present justiciable controversies under the commercial
activities exception of the Act. In Sablic v. Croatia Line, the New Jersey
intermediate court held that the Croatian Privatization Fund was a foreign
entity entitled to FSIA immunity. [FN101] In World Wide
Minerals, Ltd. v. Republic of Kazakhstan, the court of appeals held that the
district court lacked jurisdiction to adjudicate a variety of contract claims
asserted by an entity granted *138 management rights over a state-owned
uranium mining enterprise in Kazakhstan. [FN102]
Two district courts found privatization in
other countries to be within the commercial activities exception of the FSIA. [FN103] To be sure,
"[e]ngaging in a program of privatization does not automatically insulate
[another state] from suit in the United States." [FN104] But it is well accepted that the applicability of the
commercial activities exception is determined, not with reference to the
purpose of the entity claiming immunity under the FSIA, but with reference to
the specific activities drawn into question in the litigation. In Ampac Group,
Inc. v. Republic of Honduras, the activity in litigation was "[t]he sale
of a company from its owners to the highest bidder [which] is a routine
commercial transaction." [FN105] In the case of
Kosovo, many activities *139 in potential litigation would be policy
decisions by the Kosovo Trust Agency ("KTA") board relating to how
privatization should be conducted after an earlier phase of commercialization
under the direction of another agency. [FN106]
Privatization disputes also may be insulated
from litigation in third countries by the act of state doctrine, which requires
the dismissal of certain national court
lawsuits when deciding the merits would require the court to rule on the
validity of acts performed by a foreign government. [FN107] In World Wide
Minerals, Ltd. v. Republic of Kazakhstan, the court of appeals held the act of
state doctrine foreclosed litigation of certain claims involving privatization
as to which the state of Kazakhstan and its instrumentalities had waived
immunity. [FN108]
*140 III.
Past Practice and Models
A. Secession and National Disintegration
1. Yugoslavia
Yugoslavia presents an especially complicated
case. [FN109] Two
revolutions were overlaid by the dissolution of a state. Persons owning
property before the Communist revolution presided over by Josip Tito stand in
line alongside persons with property interests derived from the Tito regime--
perhaps as part of a worker community. They compete with persons who obtained
property during Slobodan Milosevic's discriminatory privatization regime. [FN110] By the time of its dissolution, Yugoslavia was one of the
most heavily indebted states involved in the transition from socialism, owing
some $15 billion in 1991, [FN111] and having
participated in two rounds of major debt restructuring in 1983 and 1988. [FN112] "Allocated debt"--debt incurred for the benefit of specific republics--amounted
to about $12 billion, and "unallocated debt"--debt incurred by the
federal government for purposes not easily identified with a specific
republic--accounted for the $3 billion remainder. [FN113] The Socialist Federal Republic of Yugoslavia
("SFRY") owed $683 million to the International Monetary Fund
("IMF") and $2 billion to the World Bank. [FN114] A 1993 estimate concluded that as of 1990 the net assets
of the SFRY were about $60 billion, with military assets comprising 75%,
immovable assets 3.4%, and financial assets 21.6%. [FN115]
Negotiations over the apportionment of and
succession to Yugoslav assets and debt began soon after international
recognition of the former Yugoslav republics of Slovenia and Croatia in
1991-1992. Three international peace conferences on the former Yugoslavia
addressed succession, without significant results. [FN116] A negotiated
solution was frustrated until *141 2001 by rump Yugoslavia's insistence
that no dissolution of Yugoslavia had occurred and, instead, that rump
Yugoslavia was the "continuator" state. [FN117] All of the breakaway republics and the international community
disagreed. [FN118] In Republic of Croatia v. Girocredit Bank A.G. der
Sparkassen, the Austrian Supreme Court enjoined rump Yugoslavia from disposing
of assets represented by an account in an Austrian bank, holding that, after
the dissolution of Yugoslavia, the assets represented joint property of the
successor states. [FN119]
A
further barrier to negotiations was the fact that most of the assets were held
by one successor state--the Federal Republic of Yugoslavia ("FRY").
Moreover, the FRY had spent most of the foreign currency reserves. [FN120] Disagreements
existed over the proper date to use for dissolution, a date that significantly
impacted valuation. [FN121] In addition,
Slovenia argued that Yugoslav "connected persons" should be excluded
as beneficiaries of any negotiated agreement. [FN122] And, what constituted "state property" was
blurred by the Yugoslav concept of "social ownership." If
socially-owned property were excluded, the level of assets would be diminished
significantly. [FN123]
The lack of success with the international conference
approach to resolving succession issues, combined with the desire of the
breakaway republics to normalize their relations with the international
financial community, led all to embrace direct negotiations as the
institutional mechanism for determining succession. [FN124] These direct
negotiations resulted in agreement on several important issues, including
assignment of allocated debt to the republic for whose benefit the debt had
been occurred, conforming to customary international law, [FN125] and determination of a *142
"key"--percentages for apportioning nonallocated debt to each
breakaway republic. [FN126] Separate
bilateral agreements were then reached between the successor states and the
London and Paris Clubs, which dealt with the bulk of the former Yugoslavia's financial liabilities, [FN127] mostly following the pattern set by the IMF and World Bank
negotiations as to assignment of allocated debt and the key for apportionment
of unallocated debt. [FN128]
After Milosevic stepped down as leader of
rump Yugoslavia, that state abandoned its position that it was the continuator
state and agreed that Yugoslavia had dissolved. [FN129] Shortly
thereafter, the five former states of the SFRY reached an agreement regarding
various succession issues in June 2001, using the IMF key. [FN130] All five successor states signed the Agreement on
Succession Issues Between the Five Successor States of the Former State of
Yugoslavia ("Agreement") on June 29, 2001. [FN131]