Constitutional Court returns Sveti Stefan dispute to domestic courts

The Constitutional Court of Montenegro upheld the constitutional appeal filed by the company Sveti Stefan Hoteli AD Budva and annulled the ruling of the Supreme Court which had confirmed the lack of jurisdiction of domestic courts in the dispute with Adriatic Properties AD Budva concerning the performance of obligations under the Lease Agreement for the hotels Queen’s Beach and Miločer - Sveti Stefan. The Supreme Court had arbitrarily concluded that domestic courts lacked jurisdiction and that the dispute fell under international arbitration.

In its decision, the Constitutional Court found that the courts had failed to examine the essential issue of whether the dispute concerned a matter subject to the exclusive jurisdiction of Montenegrin courts, bearing in mind that the subject of the dispute relates to the lease of immovable property located in the territory of Montenegro.

The Commercial Court, the Court of Appeal, and the Supreme Court of Montenegro all declared themselves incompetent to hear the dispute regarding the non-performance of obligations under the Lease Agreement, claiming that the case involved a foreign element, since one of the contracting parties consisted of several legal entities headquartered abroad. They referred to the 2007 Lease Agreement, which stipulated that any dispute not resolved by mutual agreement would be settled before the London Court of International Arbitration.

The Constitutional Court found that the position of the Commercial Court, the Court of Appeal, and the Supreme Court, that there were no grounds to claim that the matter could not be adjudicated by domestic courts, was constitutionally unacceptable. This position was based on an interpretation of the Civil Procedure Act, while disregarding its transitional and final provisions, selectively invoking provisions of the Arbitration Act, and completely ignoring the relevant provisions of the Private International Law Act, which specifically prescribes cases of exclusive jurisdiction of domestic courts.

- The key issue in this case is whether the dispute is capable of being subjected to arbitration, which the courts failed to examine in substance, particularly in assessing whether at least one of the parties to the arbitration agreement is a natural or legal person with residence or registered seat abroad, even though the appellant explicitly pointed to this fact during the proceedings - the Constitutional Court stated.

The Constitutional Court further emphasized that the courts failed to assess the fact that the only contracting parties to the Lease Agreement were Hotelska grupa Budvanska rivijera AD Budva, as the lessor, and Adriatic Properties doo Budva, as the lessee, both domestic legal entities with registered seats in Montenegro.

Instead, the Supreme Court merely stated that „on the side of the lessee there are several legal entities, two of which are foreign legal entities“, even though the Lease Agreement was concluded between domestic legal entities registered in Montenegro as lessor and lessee, while Aidway Investments Limited, registered in the British Virgin Islands, was designated in the agreement solely as a guarantor.

In its decision, the Constitutional Court stated that the Supreme Court failed to distinguish between parties to the lease relationship and the guarantee agreement, which constitutes an ancillary contract and does not determine or affect the legal position of the contracting parties to the Lease Agreement.

- By confirming the position of the lower courts, and by treating the guarantor listed in the Lease Agreement as a contracting party, despite the fact that it is neither the lessee nor the lessor, the Supreme Court implicitly enabled the complete circumvention, without the necessary analysis, of the strict rules on state jurisdiction expressly prescribed by the Private International Law Act in cases involving the lease of immovable property - the Constitutional Court decision states.

The Court added that the Supreme Court failed to assess the content of the Lease Agreement in accordance with the basic principles of contract law, in the sense that such an agreement creates rights and obligations solely for the contracting parties, and that it failed to examine the legal position of the guarantor.

- The Private International Law Act prescribes the exclusive jurisdiction of Montenegrin courts in disputes concerning the lease of immovable property located in Montenegro. This is also supported by the case law of the Supreme Court, which stated in a revision case from May 2024 that Montenegrin courts have exclusive jurisdiction over real rights and rights arising from the lease of immovable property located in Montenegro. As the Supreme Court considered only those statutory provisions that favored Adriatic Properties doo Budva, thereby failing to provide clear answers to the claims raised in the constitutional appeal, and given the lack of adequate reasoning and ambiguities in the interpretation of the Arbitration Act and the Private International Law Act, the Constitutional Court concludes that the case was not examined in accordance with the requirements of a fair trial - the Constitutional Court stated.

The Constitutional Court annulled the ruling of the Supreme Court and remitted the case for retrial and reconsideration, in accordance with the legal views expressed in its decision.