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Helping Hungary’s MOL counter state misbehavior in Croatia

October 20, 2017

The Republic of Croatia launched an UNCITRAL arbitration in 2014 alleging that Hungarian oil and gas producer MOL had corruptly acquired controlling rights in Croatian national energy company INA in 2003 by paying a €10 million bribe to Croatian Prime Minister Ivo Sanader. Alleging that MOL had caused billions of dollars in damages to the country, Croatia sought to nullify certain agreements through which MOL had acquired control of INA, the “crown jewel” of Croatia’s economy.
 

MOL clearly had to act to defend its global reputation and the US$2 billion it had invested in INA since 2003. Company CEO Zsolt Hernádi, who stood accused of having personally paid the bribe, also faced dire criminal consequences.

In addition, the allegations affected MOL’s parallel, billion-dollar ICSID arbitration claim against Croatia under the Energy Charter Treaty and threatened to jeopardize Hungarian-Croatian political relations.

Importing criminal procedure into the arbitration

MOL and Dechert knew that Croatia’s allegations were fabricated and based on the concocted testimony of a Swiss-domiciled Croatian oligarch who had good reason to assist the Croatian authorities in wresting back control of INA. But with a key witness testifying falsely under coercion, another in solitary confinement, others too scared to testify, and the key exculpatory evidence in Croatian hands, how to show it?

To overcome the potential effects of Croatia’s domestic court judgments, Dechert convinced the tribunal to marry international arbitral practices with criminal law and procedure. Assembling a team of public international law and criminal law specialists, including co-counsel Peters & Peters and counsel from five jurisdictions, Dechert set out to test the criminal allegations underlying Croatia’s commercial claims.

Contesting Croatia’s evidence

To challenge the admissibility of the evidence, Dechert and its co-counsel:

  • Engaged ex-Scotland Yard detectives to review Croatia’s evidence against Hernádi and Sanader using the “HOLMES 2” protocol developed by UK police forces to investigate the most serious offences.
  • Secured safe passage allowing Hernádi to testify in The Hague, overriding an Interpol Red Notice issued after Croatia’s prosecution of Hernádi in absentia.
  • Secured the testimony of former Prime Minister Sanader after his release from four years’ solitary confinement.
  • Employed a little-used mechanism to compel, via the Swiss courts, a key Croatian witness to appear for cross-examination.These actions gave MOL the opportunity to test the accounts of Croatia’s key witnesses and secure the testimony of favorable witnesses.

They also provided a means to bring forward evidence for MOL’s own World Bank arbitration against Croatia.

MOL wins complete victory

The UNCITRAL arbitration did not turn out as Croatia had hoped. Dechert secured the exclusion of significant documentary evidence that Croatia had submitted to the arbitration in violation of its international treaty obligations.

The tribunal ultimately cleared MOL of Croatia’s bribery allegations and dismissed every claim brought against it. Croatia was also ordered to pay most of MOL’s expenses, to the tune of US$15 million.

“Dechert’s insights and strategies were a game changer,” said Dr. Pál Kara, General Counsel for the MOL Group. “As a result, we were able to show that Croatia’s evidence was completely unreliable. Dechert’s strategy and trial skills ultimately enabled MOL to prevail in a dispute of great significance to the company.”

Dechert’s strategy a model for investors

The consequences of the result stretch far beyond the case in hand. As corruption in the making of an investment can serve as a complete bar to investor claims, allegations of bribery are occurring more frequently as states seek to limit exposure to foreign investors’ claims.

Dechert’s procedural and advocacy strategies and innovative case management may serve as a model when other investors seek to rebut frivolous allegations of corruption.