Claims Resolution

Henry H. Perritt, Jr.

[Synopsis of article: Resolving  Claims When Countries Disintegrate: the Challenge of Kosovo]

Resolving the question of final status for Kosovo must be accompanied by establishment of a mechanism for resolving claims by and against Kosovo and persons operating within its territory.[1]

Claims relating to Kosovo fall into two broad categories:  intergovernmental claims, and private claims.  Intergovernmental claims include 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. 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 and 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. 

Most scholarly attention to successorship has focused on 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: the national legal systems of the surviving states, national legal systems of third states in which assets may be located or where creditors may be citizens, international private arbitration under the New York Convention.

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.”

In the case of Kosovo, policymakers and lawyers should focus attention on mechanisms for resolving disputes over private claims as well as intergovernmental claims. While private claims could be presented in the domestic courts of Kosovo, the domestic courts of Serbia, or the domestic courts of third countries, mutual mistrust by Serbs and Kosovar Albanians undermines the viability of such an approach.

Any new 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), and enforcement of tribunal decisions, especially enforcement by the courts of states in which assets belonging to a judgment debtor may be located.

Uncertainties with respect to adjudicative jurisdiction can be reduced by making sure 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, 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 of effective enforcement of decisions by the preferred tribunals by courts and 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.  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.

I.       Former Yugoslavia Succession Agreement

The five former states of the Socialist Federal Republic of Yugoslavia reached an agreement regarding various succession issues in June of 2001. Croatia’s ratification in March, 2004 should allow the Agreement to come into force.

Under the Agreement, a percentage of the former Yugoslavia’s assets, not distributed according to previous bilateral agreements, were divided up between the successor states.    All immovable state property of the former Yugoslavia was passed to the successor state in whose territory the property was currently situated.  Movable state property of the former Yugoslavia was passed to the successor state in whose territory the property was located on the date that state declared independence.

A joint committee of senior representative of each successor state serves as a forum to address issues arising from the implementation of the Agreement.  Any disagreements over the interpretation or application of the Agreement were first to be resolved by discussion among the concerned states.  If the disagreement cannot be resolved through discussion, the concerned state can refer the matter to either an independent person or the joint committee.

II.    Iran-U.S. Claims Tribunal

The Iran-United States Claims Tribunal, characterized as an “international arbitral tribunal,” was established after the revolutionary government of Iran released American hostages in order to permit Iran to regain its international financial position by lifting various attachments and liens on its assets resulting from piecemeal litigation in the regular courts.

“The Tribunal has jurisdiction to decide claims of United States nationals against Iran and of Iranian nationals against the United States, which arise out of debts, contracts, expropriations or other measures affecting property rights; certain ‘official claims’ between the two Governments relating to the purchase and sale of goods and services; disputes between the two Governments concerning the interpretation or performance of the Algiers Declarations; and certain claims between United States and Iranian banking institutions.” Purely private claims—those by private persons against private persons were excluded. Claims were decided by one of three three-member Chambers of the Tribunal or by the Full Tribunal. Rules of decision were the arbitration rules of the United Nations Commission on International Trade Law (UNCITRAL) as modified by the Governments and the Tribunal. Awards in favor of United States claimants were payable from an account established by Iran at the Settlement Bank of the Netherlands. By October, 2003, the Tribunal had terminated 880 claims by decision or order, and causes $2.2 billion to be awarded to U.S. parties.

III.  United Nations Compensation Commission for Iraq

The United Nations Compensation Commission (UNCC) was created by the UN Security Council in 1991 to resolve claims growing out of Iraq's invasion of Kuwait. Iraq, however failed to cooperate, and the Commission and the Fund operated under a variety of ad-hoc arrangements until adoption of Security Council Resolution 1330 in 2000, which established a 25% level of funding.

The Commission accepted claims by individuals, corporations and Governments, submitted by Governments, and claims submitted by international organizations for individuals who were not in a position to have their claims filed by a Government. Under the rules adopted by the Commission claims, including claims of individuals and private corporations could be submitted only by governments or other persons or entities specifically authorized. Eligible claims included those for losses occasioned by forced departure from Iraq, and for loss of personal property, loss of bank accounts, stocks and other securities, loss of income, loss of real property, construction or other contract losses; losses from the non-payment for goods or services; losses relating to the destruction or seizure of business assets; loss of profits; and oil sector losses and individual business losses. Deadlines were established for presentation of claims, the latest of which expired in 1997. As of early 2004, the Commission reported that approximately 98% of claims totalling some $265 billion had been resolved, with $48 billion awarded, and $18 billion actually paid.

After the U.S. led invasion of Iraq in 2003, the Security Council linked the Compensation Commission and Compensation Fund to the new governing institutions of Iraq under the Occupying Authority and Governing Council and provided for continuing funding of the Compensation Fund It also stayed national legal proceedings against proceeds from petroleum and other energy products, pending establishment of a representative government and a restructuring of Iraq's debt.

IV.Holocaust Victims Mechanisms

A Claims Resolution Tribunal was established in 1997 to resolve claims by Holocaust victims and their successors to dormant Swiss bank accounts, assets deposited in Swiss banks before and during World War II, and to claims arising under insurance policies issued to victims of Nazi persecution by Swiss insurance companies. The dispute resolution system was funded by $1.25 billion deposited by Swiss banks and the Swiss government in exchange for release of all claims relating to the Holocaust and World War II.

The Holocaust Tribunal illustrates use of class action litigation under U.S. law as a mechanism to force negotiation of claims dispute resolution machinery in the international context.

A separate International Commission on Holocaust Era Insurance Claims was established in 1998 to resolve claims arising from insurance policies issued prior to and during the Holocaust. ICHEIC was established through negotiations involving European insurance companies, U.S. insurance regulators, representatives of international Jewish and Holocaust survivor organizations and the State of Israel. The signatory insurers promised to fund claims awards. As of early 2004, the Commission had received nearly $500 million to pay claims, had paid $16 million to claimants, and had offered $55 million.

The success of any system for claims resolution depends, either on voluntary waiver of pre-existing rights, as in the ICHEIC system, or the effective exercise of governmental power to extinguish those rights. The inherent cross-border nature of claims incident to state succession and of certain controversies involving regime change, necessitates attention to the power of international institutions or of individual sovereigns to extinguish rights in order to reinforce comprehensive claims resolution.

V.   Kosovo

Succession issues are especially complicated in Kosovo, and are not addressed by the 2001 Former Yugoslavia Succession Agreement. Kosovo, formerly an “autonomous province” of the Republic of Serbia within Yugoslavia, has been, since June 10, 1999 under the “civil administration” of the United Nations, operating through the United Nations Interim Mission in Kosovo (“UNMIK”), backed up by a NATO security force called “KFOR.”

Claims disputes in Kosovo are characterized by a number of unique—or at least unusual—features of Kosovo as a constituent unit of the former Yugoslavia, with ambiguous legal personality within Yugoslavia, subjected to ten years of exploitation by the Milosevic regime in Yugoslavia, and then a period of international political trusteeship.

Social ownership presents some special problems because ownership of SOEs was highly ambiguous.  The state retained some attributes of ownership of some assets. Possession however, was the right of SOE employees, represented through workers councils, with municipalities in which SOE assets were located also having rights and powers resembling those of trustees holding property rights on behalf of the workers. This murky set of legal relationships was further complicated by privatization or “transformation” of many SOEs during the Milosevic period.

In Kosovo conflicting claims arise from the conflict in Kosovo held by Serbs leaving Kosovo forced out of property such as apartments occupied by the international institutions conducting the civil administration or the provisional institutions of self government in Kosovo, or simply occupied by Kosovo Albanians or other Serbs.  Kosovar Albanians have claims to pension assets held in Serbia. A variety of commercial entities around the World have claims to assets that were privatized by the Milosevic and then renationalized and re-privatized through the privatization process under U.N. administration.

Sorting all this out is made more difficult by the “parallel state” run by the Albanians during the Milosevic regime, in which many property transfers were not recorded, and others were allegedly coerced, and by the chaotic situation after the NATO bombing campaign in 1999, when transfers from Serbs were allegedly coerced, and in many cases not recorded. In addition, the Serbs, as part of their ethnic cleansing campaign deliberately destroyed many formal documents held by Kosovar Albanians.

A.   Existing machinery

The international civil administration in Kosovo has set up two specialized legal regimes to handle claims with respect to socially owned property and residential property. These regimes are incomplete, in that their scope excludes a significant universe of claims likely to impede agreement on and implementation of any final status. They also are imperfect in their operation. Moreover, other uncertainties in Kosovo are likely to spawn new claims, including an incomplete property registration system, imperfect functioning of the regular courts, and failure of several levels of executive authority to comply with procedures for expropriating property. In the aggregate, these difficulties create a situation significantly out of compliance with property-rights guarantees under the European Convention on Human Rights.

A number of criticisms have been aimed at the privatization and claims resolution regimes in Kosovo, especially by Serb interests. While designers of claims resolution machinery in conjunction with final status determination need not necessarily accede to these criticisms, it is appropriate to take them into account because they will shape the political constraints within which any claims machinery must be negotiated.

The broadest of the criticisms asserts that the transfer of property interests through KTA represents an unauthorized deprivation of property interests. This allegedly occurs at two levels. Most broadly, critics claim that UNMIK’s mandate does not extend to compulsory transfer of property interests such as necessarily occurs when assets are leased to investors for 99 years through the privatization process. They argue that the powers of UNMIK should not exceed those of a “belligerent occupant” under international law, who power to change law and institutional arrangements, is strictly limited to measures necessary to protect security of occupying forces and to assure the short-term welfare of local populations, pending resumption of the government displaced by the occupation. But this argument fails to take account of the reality that Kosovo is not appropriately classified as a belligerent occupation, where the pre-existing sovereign is expected to return intact. A separate note prepared for this Symposium explains why “political trusteeship” is a better model for UNMIK than belligerent occupation.

Critics of the privatization regime also argue that KTA has acted ultra vires in interfering with property interests in enterprises outside its mandate. KTA has authority only over socially owned and publicly owned enterprises registered or operating in the territory of Kosovo, expressly excluding those lawfully transformed into a different form of business enterprise. KTA has, they argue, asserted authority over enterprises, and sold assets or intends to sell assets belonging to enterprises, that do not qualify as socially- or publicly owned. Such claims should be within the jurisdiction of the Special Chamber to resolve, but critics also find fault with the Special Chamber.

Even if KTA and Special Chamber authority extends to enterprises and claims contended to be outside their authority, critics argue that the procedures used by KTA and the Special Chamber violate European and international norms of due process, and therefore breach UNMIK’s duty under the European Convention on Human Rights, expressly made applicable in Kosovo by UNMIK. Article 1 of the First Protocol to the Convention guarantees “peaceful enjoyment of possessions,” and this provision has been interpreted by the European Court of Human Rights to cover cases of privatization and nationalization.

An over-reaction to criticisms of KTA and the Special Chamber resulted in a number of roadblocks being thrown in the road of privatization, after a very promising start, by new EU personnel, beginning with a freeze in October, 2003, and followed by an effort to substitute illogical operational policies that would not allow investors to obtain clear title to assets. The result was significant political controversy, pitting the PISG and the Kosovar trade union organization against the new management of the KTA, and resulting in paralysis of the privatization machinery well into 2004.

Now that the SRSG has removed the Managing Director of the KTA, a person who was largely responsible for stalling privatization, these short-term controversies can be resolved in a way that will allow privatization to continue, with disputes over the extent of KTA and Special Chamber authority presented for adjudication in the Special Chamber.

In the longer run, however, a strategy must be adopted that provides for a more robust and comprehensive mechanism for resolution of claims associated with SOEs, POEs and their management, liquidation and privatization. Any viable strategy must include features that respond to the criticisms of the KTA/Special Chamber machinery.

Such a strategy also must encompass the universe of housing claims within the jurisdiction of the Housing Property Directorate and the other types of claims entirely outside the scope of the KTA/Special Chamber and Housing Property Directorate institutions.

B.   Future machinery

Elements of a comprehensive claims resolution strategy for Kosovo can take one of three basic approaches to claims and challenges associated with privatization and residential housing: they can ratify KTA, Special Chamber, and HPD decisions, while reinforcing and extending the existing machinery; they can replace the existing machinery with a new set of claims resolution institutions with broader jurisdiction; or they can provide new mechanisms for review of KTA, Special-Chamber, and HPD decisions.

Choosing among these approaches will necessarily involve a political resolution of the controversies incident to each existing system. At the same time, however, the process of designing and erecting new claims resolution machinery should not interrupt progress in economic transformation, or introduce new uncertainties for investors or claimants. The best approach would be one that allows decisions made through the existing institutions to stand, ratifying them in general, while affording narrow grounds for those aggrieved by those decisions to seek compensation through new mechanisms.

If Kosovo (or UNMIK as political trustee) and Serbia-Montenegro reach agreement on claims resolution, the two entities could agree on a mechanism resembling the Iran-U.S. Claims Tribunal. Issues might arise about the power of the two signatories to alter legal relations involving other states or citizens of other states.

If Kosovo and Serbia-Montenegro are unable to reach agreement, two basic possibilities exist for orderly claims resolution: the United Nations Security Council could mandate a process for resolving claims, or creditors could cooperate in “the shadow of the law” (a very dim shadow, given the paucity of clear law on the subject)

But claims relating to Kosovo present a less daunting challenge to the international legal system than efforts to develop a comprehensive global system for handling international bankruptcies or a global system for adjusting investment disputes; fewer players are involved, and an ad-hoc mechanism rather than a permanent one will suffice. Accordingly, any useful evaluation of the possibilities for Kosovo claims should begin with an identification of the key players, both state players and private stakeholders. State players are those in which Kosovar or Serbian assets are located, or in which claimants to property in Kosovo are located. Switzerland, Germany, France, Great Britain, the United States, Albania, states formerly a part of Yugoslavia, Bulgaria, Turkey, Italy and Greece probably account for the lion’s share.

A second, potentially simplifying, inquiry relates to the magnitude of available assets, compared to the magnitude of total claims. The Milosevic regime in Yugoslavia is widely viewed as having dissipated most of the assets owned by the Yugoslav state. If the assets are de minimis, then sophisticated claimants are unlikely to invest substantial amounts of energy in aggressive battles over claims resolution.

C.   Specific principles to guide design of a claims resolution system

1.      Even though recognition of Kosovo as a new state, separate from Serbia, may not meet the usual prerequisites for dissolution of the state of Serbia, the dissolution model followed in the Yugoslav Succession agreement should be followed

2.      Kosovo should accept responsibility for the “allocated” portion of Yugoslav and Serbian debt—debt directly associated with projects and other benefits in the territory of Kosovo

3.      22 March 1989 should be used for determining debt and asset values to be apportioned to the states of Serbia and Kosovo

4.      Kosovo should be entitled to the same percentage of Yugoslav assets as the percentage of Yugoslav debt apportioned to it

5.      An adjustment be made for “waste” by the former Yugoslav regime, including losses due to corruption and expenditures for ethnic cleansing in Kosovo. Serbia-Montenegro should be required to account for assets that have been spent and for military assets that have been destroyed or rendered obsolete since the appropriate date for dissolution.

6.      Serbia-Montenegro be entitled to an adjustment for damage resulting from the NATO bombing campaign and/or the KLA insurgency

7.      A “peace conference” approach more likely to be efficacious than a “direct negotiations” approach

8.      The PISG should negotiate on behalf of Kosovo, with UNMIK participation and oversight

9.      The claims resolution system should include an adequate system for identifying assets available to satisfy claims and subjecting them to the automatic stay

10.  A fund must be established to pay claims, financed by Serbian state revenues, Kosovar state revenues, and by the international community

11.  An automatic stay should be imposed as soon as the claims resolution system is adopted

12.  Private claims as well as intergovernmental claims should be included

13.  Private claimants should have standing to present claims directly to claims resolution tribunals

14.  A deadline of two years after establishment of the claims resolution system should be imposed

15.  Valuation techniques should be those used in other recent claims resolution systems

16.  Decisions on private claims should be insulated from collateral attack under appropriate recognition and enforcement rules

17.  Claims should be tradable in the private marketplace before and after they are presented to any claims resolution tribunal

[1] In order to frame the claims-resolution issues, the article assumes an independent Kosovo. That assumption should not be understood as a prejudgment of the most appropriate final status. 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 can be resolved.