On 9 February 2026, the Constitutional Court of Montenegro announced[1] that it set aside a 2025 decision of the Supreme Court of Montenegro. The disputed decision of the Supreme Court had affirmed that Montenegrin courts lacked jurisdiction over a dispute arising from an agreement for lease of immovable property located in Montenegro, on the grounds that the agreement contained an arbitration clause. The Constitutional Court established that the Supreme Court had “arbitrarily” concluded that Montenegrin courts lacked jurisdiction in the matter, thereby violating the plaintiff’s right to a fair trial.
Case history
Dispute and the underlying agreement
The dispute concerned a claim filed by a Montenegrin lessor against a Montenegrin lessee seeking recovery of a sum representing value-added tax (VAT) on rent payments. For several years, both parties had treated the rent stipulated in the lease agreement as a gross sum inclusive of VAT and the lessor had invoiced the contract amount without adding VAT. However, following an audit, the Montenegrin tax authority determined that the rent specified in the lease agreement was a net amount and required the lessor to pay the difference between the VAT due on the net amount and the VAT previously paid in 2020 and 2021 by netting down the amounts invoiced to the lessee. In response, the lessor sought to recover the difference from the lessee by issuing an invoice which the lessee refused to pay, disputing the tax authority’s interpretation.
Besides the Montenegrin lessor and the Montenegrin lessee, the parties to the underlying lease agreement signed in 2007 also included a Montenegrin guarantor for the lessor, on one side, and several foreign entities as joint and several guarantors for the obligations of the Montenegrin lessee, on the other. The lease agreement contained an arbitration clause providing for arbitration seated in London under the LCIA Rules.
Proceedings before the regular courts
In 2023, the lessor initiated enforcement proceedings against the lessee before the Commercial Court of Podgorica, based on the invoice as “credible document” which constitutes provisional enforcement title under the Montenegrin Enforcement Act. In such proceedings, an enforcement order is issued on a prima facie basis but does not become enforceable if the debtor files a timely objection. The lessee objected to the enforcement order invoking, inter alia, the LCIA arbitration clause from the lease agreement.
The Commercial Court of Podgorica, at first instance, dismissed the jurisdictional objection.[2] The court relied on Article 473 paragraph 2 of the 2004 Montenegrin Civil Procedure Act (“2004 CPA“), applicable at the time the lease agreement was concluded, and Article 2 paragraph 2 of the 2015 Arbitration Act, which replaced the arbitration-related provisions of the 2004 CPA and was applicable when the dispute arose.
Article 473 paragraph 2 of the 2004 CPA provides that, in disputes where parties are Montenegrin individuals or legal entities registered in Montenegro, “the parties may agree to domestic arbitration“, whereas “in disputes in which at least one party is … a legal entity with its seat abroad, the parties may also agree on the competence of a foreign arbitration“, in each case if the dispute is arbitrable and the Montenegrin law does not confer exclusive jurisdiction on Montenegrin courts. Article 2 paragraph 2 of the 2015 Arbitration Act contains a substantially similar provision, distinguishing between “internal” and “international” arbitration.
In this case, the arbitration clause provided for LCIA arbitration in London while the actual dispute brought before the Montenegrin court was between two domestic entities. Consequently, the Commercial Court of Podgorica concluded that the dispute could not be referred to international arbitration.
In January 2024, the Appellate Court of Montenegro annulled this decision and remanded the case[3], instructing the first-instance court to consider that under both the 2004 CPA and the 2015 Arbitration Act “it was possible to agree on international arbitration in disputes involving at least one party who is…a legal entity with its seat abroad“. The Appellate Court also noted that the lessee’s guarantors under the lease agreement were foreign entities (and were apparently also designated as “lessees” in the lease agreement). The Appellate Court further directed the lower court to examine whether “arbitration proceedings have been already initiated pursuant to the same arbitration clause”.
Upon reconsideration, the Commercial Court of Podgorica[4] granted jurisdictional objection, even though the dispute was between two Montenegrin entities. The court emphasized that the foreign guarantors, although not parties to the actual dispute, were jointly and severally liable for the obligations of the local lessee. The court also noted that the lessee had initiated LCIA arbitration proceedings against two parties, concluding that “this is an indication that the parties to the lease agreement agreed to resolve disputes arising out of the lease agreement before arbitration”. It is unclear from the redacted decision which parties were respondents in the arbitration initiated by the lessee and whether the arbitration pertained to the same lease agreement. In any event, this observation regarding a pending arbitration is misplaced as the issue before the court was not whether the parties agreed to arbitrate in London but whether two domestic parties could arbitrate their dispute within the framework of international arbitration seated in London.
The lessor appealed the Commercial Court’s decision. The Appellate Court dismissed the appeal, agreeing with lower court’s reasoning.[5]
The Supreme Court of Montenegro subsequently dismissed the request for revision, upholding the appellate judgment.[6]
Decision of the Constitutional Cout of Montenegro
The Constitutional Court questions both subjective and objective arbitrability of the dispute.
With respect to subjective arbitrability, the Constitutional Court disagreed with the conclusion that a dispute between two domestic parties could be referred to international arbitration on the basis that the lessee’s guarantors under the underlying agreement, who were not parties to the actual dispute, were foreign entities.
Regarding objective arbitrability, the Constitutional Court noted that the regular courts had failed to examine whether a dispute arising under a lease agreement for immovable property located in Montenegro falls within the exclusive jurisdiction of the Montenegrin judiciary. In this context, the Constitutional Court referenced Article 119 of the Montenegrin Private International Law Act (“PIL Act“), which provides that Montenegrin courts have exclusive jurisdiction “in proceedings where the subject matter is a proprietary right over immovable property or the lease of immovable property, if the immovable property is located in Montenegro“.
Assessment
Subjective arbitrability
The Commercial Court of Podgorica, the Appellate Court of Montenegro and the Supreme Court of Montenegro assessed the applicability of Article 473 paragraph 2 of 2004 CPA and Article 2 paragraph of the 2015 Arbitration Act by reference to the parties to the underlying contract rather than the parties to the actual dispute. They concluded that because the underlying contract providing for international arbitration included foreign guarantors for the lessee’s obligations, the requirement for an international element was satisfied and the dispute could be referred to international arbitration notwithstanding that both the plaintiff and the defendant were Montenegrin entities.
This interpretation does not square with the statutory language. The 2004 CPA and the 2015 Arbitration Act respectively define “foreign” and “international arbitration” by reference to the nationality of the parties to the dispute, not the parties to the underlying contract. The legislative intent behind distinguishing between domestic and foreign (internal and international) arbitration was likely to keep disputes between domestic parties within Montenegro. In this context, the presence of a foreign signatory to the underlying contract should not be relevant to the characterization of a dispute between domestic parties as international.
Accordingly, the Constitutional Court’s objection to the reasoning of the regular courts has some merit. Whether the arguable misapplication of the law by the lower courts rises to the level of the infringement of the Constitution is a separate question.
The protectionist policy underlying the distinction between internal and international arbitration, which is still reflected in the Montenegrin Arbitration Act, is anachronic and unwarranted. In the context of contracts involving several Montenegrin parties as well as foreign parties, such a policy proves impracticable, as it is not possible to predict in advance which parties may ultimately become involved in a dispute. It is regrettable that the sponsor of the amendments to the Montenegrin Arbitration Act currently before the National Assembly of Montenegro has not proposed repealing Article 2 paragraph 2 of the Arbitration Act.
Objective arbitrability
The Constitutional Court’s suggestion that Montenegrin courts may have exclusive jurisdiction because the dispute arose under an agreement for lease of immovables located in Montenegro is questionable. Article 119 of the PIL Act, which vests Montenegrin courts with exclusive jurisdiction, should be interpreted as applying only to disputes concerning rights to immovable property located in Montenegro. In this instance, the dispute concerned a contractual claim for money, specifically, whether the agreed rent under a lease agreement was inclusive or exclusive of VAT, and not the right to the lease itself. Accordingly, Montenegrin courts should not have exclusive jurisdiction.
Moreover, the Constitutional Court’s proposition that Article 119 of the PIL applies is inconsistent with its implied position that a dispute between two domestic parties is not capable of being referred to international arbitration. Pursuant to Article 1 of the PIL Act, the provisions on the jurisdiction of Montenegrin courts apply only to the extent a dispute has an international element.
Although the Constitutional Court did not reference Article 42 of the CPA, this provision merits consideration as the counterpart to Article 119 of the PIL Act for disputes without an international element. Article 42 of the CPA confers exclusive jurisdiction to the court in the territory within Montenegro where immovable is located for “adjudication of disputes on the ownership and other in rem rights concerning immovables, possessory disputes concerning immovables, as well as disputes out of relations for lease of immovables” (emphasis added).
The language of Article 42 CPA, referring to disputes out of relations for lease of immovables, is on its face broader than Article 119 of the PIL Act, which refers to disputes that have the lease as their subject-matter. A dispute concerning monetary claim for payment of rent (or VAT on rent) does not have the lease as its subject-matter although it arises out of a lease relationship. However, the context of Article 42 CPA suggests that exclusive jurisdiction is reserved for claims concerning rights to immovable property located in Montenegro, not for contractual claims for payment of money. A narrower reading of Article 42 CPA aligns with traditional rationale for exclusive jurisdiction provisions in cases concerning immovables, which is rooted in territorial sovereignty and the sensitivity of local laws regarding rights to immovable property.
Accordingly, both Article 119 of the PIL and Article 42 of the CPA should be interpreted so as not to preclude arbitration of disputes concerning contractual claims under lease agreements that do not concern the right to the lease itself. Ideally, future revisions of PIL Act and CPA should clarify these provisions.
[2] Decision of the Commercial Court of Podgorica P. no. 97/23 of 15 November 2023 (as referred to in the decision of the Appellate Court of Montenegro Pž. no. 41/24 of 23 January 2024)
[3] Decision of the Appellate Court of Montenegro Pž. no. 41/24 of 23 January 2024
[4] Decision of the Commercial Court of Podgorica P. no. 97/23 of 21 February 2024
[5] Decision of the Appellate Court of Montenegro Pž. no. 138/24 of 19 March 2024
[6] Decision of the Supreme Court of Montenegro Rev Ip. no. 20/24 of 6 March 2025
