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Legal basis for investment arbitration in Serbia: Potential disputes over major projects

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So far, at least publicly, Serbia has not signed any contract with Rio Sava Exploration regarding the realization of the Jadar project, the well-known lithium mine near Loznica. However, this does not mean that if the country decides to abandon the project, the company would not have a legal basis to seek protection through international bodies. Even without a signed contract, which would typically imply a direct violation of contractual obligations, Rio Sava Exploration could still pursue its rights.

Investment disputes, including those over projects like Jadar, could be handled by arbitration mechanisms that are available even in the absence of formal agreements. The International Center for Settlement of Investment Disputes (ICSID) at the World Bank in Washington and the International Chamber of Commerce in Paris are two prominent bodies that mediate such disputes.

Forbes Serbia examined whether there is a legal foundation for arbitration proceedings in Serbia, especially if the government decides to suspend some of its most significant projects, including Jadar, Belgrade Waterfront and EXPO 2027. The investigation looks into the potential consequences for the country, including the financial implications of losing such disputes.

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Investment arbitration concerns

Both President Vučić and Assembly President Ana Brnabić warned that Serbia could face compensation claims ranging from one to three billion euros if the Jadar project were abandoned. However, they did not provide details to substantiate these claims. This could be seen as an attempt to prepare the public for possible consequences, rather than a precise evaluation.

Rio Sava Exploration made similar statements, particularly in 2022 when it was announced that the Jadar project might be suspended. They pointed to a bilateral agreement between Serbia and the United Kingdom that guarantees investment protection mechanisms, asserting that the project is protected by international law.

These warnings highlight the role of investment arbitration, which can be initiated even in the absence of a formal contract. Such disputes are based on bilateral investment treaties (BITs) between countries, which protect foreign investments from being harmed by actions of the host country. Serbia has around 50 BITs with various nations, including the United Kingdom, offering a legal foundation for such arbitration.

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Legal basis for arbitration

Vladimir Pavić, a professor at the Belgrade Faculty of Law and president of the Belgrade Arbitration Center, explained to Forbes Serbia that while it cannot be conclusively said whether there is a clear legal basis for arbitration in the Jadar case, mechanisms exist to initiate such a dispute. If Rio Sava Exploration believes that Serbia has not fulfilled promises under its investment protection agreement with the UK, they may pursue arbitration.

Investment arbitration is typically initiated for two main reasons: the first concerns actions or inactions by the host country that impact the investment, while the second involves regulatory changes that affect investors. While countries have the right to alter regulations, such changes can harm investors who rely on stable legal frameworks. For instance, Spain is currently facing several investment arbitrations for changing its solar energy regulations.

Potential compensation

Pavić notes that the compensation estimates mentioned by Serbia’s leaders cannot be fully assessed externally due to a lack of publicly available data. It is possible that the authorities have access to undisclosed information that informed their estimates. However, such evaluations typically require extensive and costly analysis.

In similar cases, evaluation costs have been high, often reaching several hundred thousand euros. Rio Tinto, for example, could potentially claim compensation for both the amount already invested in the project and any future profits that would have been generated if the project had proceeded. However, these remain speculative scenarios, and it is unclear if such claims would be accepted or to what extent they would be successful.

Investment arbitrations in the mining sector are typically valued at over a billion dollars, and some claims can reach into the tens of billions. One notable example is a case where a Canadian company sued Romania for denying mining rights, with the claim valued at five billion dollars, although the result was in favor of Romania.

EXPO 2027 and arbitration possibilities

As for Serbia’s involvement in EXPO 2027, there are still many unknowns regarding its obligations and whether those could lead to arbitration or penalties if the project is abandoned. Business disputes related to the EXPO, like those in other sectors, could end up in arbitration if the contracts with contractors provide for such a resolution.

If the government decided to withdraw from hosting EXPO 2027, there could be legal and financial repercussions, particularly in terms of the country’s international reputation. However, the specific contractual clauses with contractors for the event would determine whether arbitration is possible in this case.

Belgrade Waterfront project and arbitration

Unlike the Jadar project, a contract was signed in April 2015 for the Belgrade Waterfront project between Serbia, Belgrade Waterfront Capital Investment LLC, and the strategic investor, Al Maabar International Investment LLC. This contract contains provisions for resolving disputes through arbitration under the International Chamber of Commerce (ICC) rules in Vienna.

Additionally, the agreement includes a clause that allows the strategic partner, the Arab investor, to seek protection under the investment agreement between the UAE and Serbia. This means that if the Serbian government halts the project, the investor has the right to initiate investment arbitration, seeking compensation for any damage caused by the suspension.

The Belgrade Waterfront project thus serves as a clear example where legal protection for the foreign investor’s interests is embedded in the contract, potentially leading to arbitration proceedings if the project is jeopardized.

Conclusion

The possibility of arbitration over significant projects like Jadar, Belgrade Waterfront, and EXPO 2027 highlights the complex legal landscape of investment protection. While Serbia has mechanisms to handle such disputes, the costs and outcomes remain uncertain. If these projects face setbacks, the state could be faced with substantial financial claims, underscoring the importance of clear legal frameworks and well-negotiated contracts to mitigate potential risks.

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