CSOB: Claimant's Memorial on the Merits, dated November 15.1999;3
Slovak Republic: The Slovak Republic's Counter Memorial, dated April 19.2001 ;
CSOB: Claimant's Reply, dated August 31, 2001;
Slovak Republic: The Slovak Republic's Rejoinder, dated February 28, 2002.
CSOB's Post Hearing Submission on Issues Addressed at the Hearing of November 812, 2002;
The Slovak Republic's First Post Hearing Memorial.
On June 20, 2003: CSOB's Post Hearing Submission on Issues Addressed at the Hearing of April 14-18, 2003; The Slovak Republic's Second Post Hearing Memorial;
On July 18, 2003: CSOB's Reply to the Slovak Republic's Second Post Hearing Memorial; The Slovak Republic's Third Post Hearing Memorial.
On June 20, 2003, the Slovak Republic further filed a brief under the title "The Slovak Republic's Proposed Findings of Fact and Conclusions of Law", to which CSOB submitted a Reply on July 18, 2003.
The Consolidation Agreement that was the basic agreement to implement the second stage of CSOB's restructuring provided, inter alia, for the assignment by CSOB of nonperforming loan portfolio receivables to two so-called "Collection Companies", one to be established by the Czech Republic (Ceska inkasni s.r.o., hereinafter "CI"), and the other by the Slovak Republic (the Slovenská inkasná spol s.r.o., hereinafter "SI"), in their respective national territories. This operation led to the conclusion of a number of agreements which, in respect of SI, have been described collectively as the "CSOB/SI Agreements".
The losses of the Collection Company shall be compensated for over the period 1995-2003. The MF CR [Ministry of Finance of the Czech Republic] and the MF SR [Ministry of Finance of the Slovak Republic], each undertakes to cover any losses made by the Collection Company in its respective territory.
In its Memorial of November 15, 1999, CSOB claimed compensation of -
1. The sum of SKK 24,659,907.271, being equal to the principal and interest due to June 30, 2000 under the SI Loan Agreement;
2. The sum of SKK 9,064,537.958, being the additional losses of CSOB it may claim pursuant to Section 3 79 et seq. of the Commercial Code of the Czech Republic, measured by the Slovak Government bond yield to June 30, 2000;
3. The additional sums due when the damages under 1 and 2 above are carried forward from June 30, 2000 to the date of the award to be issued in this case;
4. Such additional sums as may be calculated and submitted to the Tribunal prior to the closure of this proceeding representing CSOB ’s further damages, ineluding lost productive management time and professional fees and expenses incurred relating to
a. all proceedings relating to SI’s bankruptcy,
b. obtaining, documenting, implementing, and maintaining Czech shareholder financial support of the Bank;
c. this proceeding; and
d. otherwise asserting its rights under the Consolidation Agreement;
5. Interest at a rate (or rates) to be determined on all sums aw arded from the date of the award until the date it is paid.
1. The sum as of March 31, 2003 of SKK 40,300,940.576, consisting of:
(a) SKK 32,443,747.036 in ‘actual damage’, being equal to the diminishment in value of CSOB's rights under the SI Loan Agreement caused by the Slovak Republic's breach of the Consolidation Agreement; and
(b) SKK 7,857,193.540, reflecting the additional gains that CSOB would have realised had the Slovak Republic satisfied its obligation to CSOB in April 1997 and if CSOB had invested the amounts then due and owing in Slovak Government bonds;
2. CSOB's costs including all the costs and expenses of this arbitration proceeding; and
3. Interest at a rate (or rates) determined with reference to Section 735 of the Commercial Code of the Czech Republic, as amended, on all sums awarded from the date of the award until the date of payment.
• dismissing all of CSOB's claims;
• ordering CSOB to pay all the Slovak Republic's costs associated with this proceeding, including attorney's fees and expenses, and
• grant the Slovak Republic any further relief that the Tribunal deems appropriate.
that its competence covers, and is confined to, issues arising out of the Consolidation Agreement (No. 32)
33. - For the guidance of the parties in the merits phase of these proceedings, the Tribunal reiterates that it has jurisdiction to determine the validity, nature and scope of Respondent's obligation to cover SI’s losses as provided by Article 3(II) of the Consolidation Agreement, to establish whether Respondent has breached that obligation, and to assess damages, if any, payable by Respondent to CSOB for any such breach.
While it is true that investment disputes to which a State is a party frequently have political elements or involve governmental actions, such disputes do not lose their legal character as long as they concern legal rights or obligations or the consequences of their breach. Given these considerations, the Tribunal is satisfied that CSOB’s claim is legal in character.9
This agreement shall be governed by the laws of the Czech Republic and the Treaty on the Promotion and Mutual Protection of Investments between the Czech Republic and the Slovak Republic dated November 23, 1992.
Investments of investors of each Party shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Party.
It may further be added that the Slovak Republic's legal experts on Czech law, despite the fact that they contend that CSOB has no rights as a private party under Article 3 CA,30 nevertheless accept that the CA has a private law part and that the provisions of Article 3 CA, to the extent they may create rights of CSOB, are to be interpreted on the basis of Czech private law.31 They add in this respect the following -
After all, all the parties considered the Consolidation Agreement as a commercial law agreement and confirmed this fact also in the course of these arbitration proceedings, doing that they in fact made a subsequent choice of law under Section 262 of the Commercial Code.32
The Tribunal does not need to examine whether the Parties have concluded effectively a subsequent choice of Czech private law in the course of these proceedings. Indeed, such a choice was already made when they accepted the choice of law clause in Article 7(4) CA. This was also the conclusion of another expert, presented by the Slovak Republic during the jurisdictional phase of these proceedings, who stated that -
... the nature of the Consolidation Agreement is a private law agreement, i.e. a civil law or commercial law agreement.33
... the Consolidation Agreement is a special agreement that, in terms of its strict legal nature, falls into the category of private law agreements.34
The payment for the assigned receivables shall be made by the Collection Companies on the basis of a schedule of payments for the assigned receivables over the years 1995 to 2003. CSOB shall provide a loan to cover the 1994 operating costs of the Collection Companies and secure the refinancing of the Collection Companies by making advances under a loan facility up to the sum of considerations for the receivables assigned to the Collection Companies. The terms and conditions for the refinancing shall be determined under special agreements to be entered into by and among CSOB and the Czech and Slovak Collection Companies.
It follows from the nature of the assigned receivables that the Collection Companies will make a loss. Such loss will result from the operating costs and the schedule of payments for the receivables assigned by CSOB to the Collection Companies, including payments of interests.
The losses of the Collection Companies shall be compensated for over the period 1995-2003. The MF CR and the MF SR each undertakes to cover any losses made by the Collection Company in its respective territory. For this purpose, the MF CR, in co-operation of the NPF CR [National Property Fund of the Czech Republic], shall prepare a mechanism for covering any losses of the Czech Collection Company and the MF SR shall prepare a mechanism for covering any losses of the Slovak Collection Company.
An act in law must be made... in a definite and intelligible [also expressed as "understandable"] manner; otherwise the act is invalid.
Both Parties accept that to the extent that the CA may create rights for which CSOB has title to sue, the Czech Commercial Code applies to the CA. To construe the meaning of the relevant provisions of the CA, Section 266(3) of the Czech Commercial Code instructs the Tribunal as follows -
When interpreting a manifestation of will under subsections (1) and (2), due account shall be taken of all the circumstances related to the manifestation of will, including the negotiations about conclusion of the contract in question and the practice which the parties have introduced between themselves, as well as the subsequent conduct of the parties, if the nature of the case so permits.
Thus, all the relevant circumstances, including the context and purpose of the agreement, the history of the negotiation and the Parties’ subsequent conduct, are relevant to reconstruct the Parties’ intentions and to identify the meaning of their agreement.
Acts in law expressed in words shall be construed not only according to the verbal expressions but shall also in particular take into account the intention [also translated as "will"] of the person who performed the act, provided that such intention is not conflicting [also translated as "inconsistent"] with the wording.
The Tribunal is aware that the relationship between Section 35 Civil Code and Section 266 Commercial Code is a delicate and debated matter under Czech law. The starting point is that commercial agreements are governed by the Commercial Code as the Czech Commercial Code Section 1(2) clearly indicates. This first Section of the Czech Commercial Code reads, under the title "Scope of the Code", as follows -
(1) This Code regulates the status of entrepreneurs, business obligations and some other relationships connected with business activities.
(2) The legal relationships specified in subsection (1) above are subject to the provisions of this Code. Should it prove impossible to resolve certain issues according to the provisions of this Code, they shall be resolved in accordance with the civil law provisions. In the event that such issues cannot be resolved in accordance with the civil law provisions, they shall be considered according to trade usage (commercial practice) and, in the absence of this, according to the principies upon which this Code is based.
Pursuant to this provision, the CA, that the Parties agree to be subject of the Czech Commercial Code, is governed by this Code. This includes Section 266 of the same Code on the matter of interpretation of the Parties’ will, and in particular paragraph 3 of this Section. The Slovak Republic has not argued that Section 266 would not allow the resolution of issues of interpretation in respect of the CA. This would be the only case where the Civil Code could come into play according to Section 1(2) Commercial Code.38 The Slovak Republic argues that Section 35 Civil Code shall apply as it is more restrictive in matters of interpretation than Section 266 Commercial Code. This, however, is not a situation for which Section 1(2) Commercial Code provides for the application of the Civil Code to commercial agreements.
For the Slovak Republic, in a case where a contract provision is too vague, it cannot become valid by later specification from the Parties. Interpretation only allows specifying the content of an existing contractual provision; it cannot turn a vague and therefore legally unbinding commitment into a valid contract by making an imprecise and therefore ineffective manifestation of will more precise. In brief, it cannot rescue a provision that was vague and therefore non-existent. However, interpretation can help to understand the meaning of a contract provision. This has been confirmed by a decision of the Czech Supreme Court of October 7, 1998,42 quoted by the Slovak Republic, where it is stated that "by interpretation it is not possible to supplement a legal act", while "by interpretation it is only possible to determine the content of a legal act". In another case the Czech Supreme Court decided on November 26, 1998 that interpretation can be used to see whether the agreement was sufficiently certain and definite to be valid.43 It ruled that -
... it is precisely the process of interpretation that is to dispel doubts as to the content of the legal act, even in case that the written manifestation of will contains an expression permitting multiple interpretations.44
In the decision referred to above, of February 7, 2001, the appellate court was criticized because it considered a legal act uncertain without interpreting the act pursuant to Section 266 Commercial Code. In another example, a clause that "the price may be altered" was in itself not per se unclear, insufficient and thus uncertain; it all depended on what the parties understood under this provision. Because in that case it was clear for the parties that such clause meant that the price would be adapted to changes in the currency rate, it was sufficiently clear to be binding.45 In a more recent decision, rendered on November 5, 2002 and referred to above, the Czech Supreme Court explained that a clause that used a clear term can still be a matter for interpretation, as follows -
The fact that the parties used a statutory term (contractual fine) in the contract, with reference to the applicable provisions of the law, does not in itself rule out the application of Section 266 of the Commercial Code and cannot justify the court interpreting the legal act in question solely according to the meaning of the verbal expression ensuing from the referencéd legal norm, without regard to the acting parties’ intent, or the circumstances relevant for the interpretation of the parties’ manifestation of will within the meaning of Section 266 of the Commercial Code, as the case may be.
Another decision of the Czech Supreme Court, dated October 27, 1999, stated -
If the principle that the content of a legal action may only be determined by interpretation, and that the demonstration of will cannot be amended thereby, is respected (cf.....), the will of the person/entity who undertook the action, can be determined, inter alia, with regard to subsequent conduct of the contractual parties (cf....).46
Parties may also conclude a contract which is not specified as a particular type of contract. However, if the parties fail to identify adequately [also translated as: "sufficiently define"] the object of their obligations, such a contract is not considered as concluded.
Section 269 Commercial Code also deals in paragraph 3 with cases where the content of an obligation is identified in subsequent agreements. This provision reads as follows -
An agreement regarding a certain part of a contract may be replaced by an agreement of the parties on the method allowing the content of the obligation to be defined subsequently, provided that such method does not depend on the will of one party only. If a missing part of a contract is to be established by a court or a particular person, the agreement must be in writing and the provisions of Section 291 shall apply mutatis mutandis.
It may be recalled that this provision follows paragraph 2 that declares an innominate agreement not concluded if it fails to identify adequately the object of the parties’ respective obligations. Nothing in the text of these provisions prevents the conclusion that a further agreement on the identification of the content of an innominate agreement may also allow the adequate identification of the object of the parties’ obligations in an agreement that otherwise would not meet the requirement on precision as stated in paragraph 2. Section 269(3) Commercial Code constitutes therefore a further confirmation that an agreement can contain legally binding rights and obligations even if their identification may be in part contained in subsequent agreements like those referred to in Article 7(1) CA. Therefore, the issue of whether the CA may be called a "framework agreement" or not is not relevant.
It follows from the nature of the assigned receivables that the Collection Companies will make a loss, [emphasis added]
... in order to hit that exactly, you would have to spend incredible amounts of money to monitor profit and monitor risk weighted assets.....It will not be cost effective.53
The Working Group that was appointed by the Slovak Republic's Government to deal with stage II of the restructuring of CSOB charged the Minister of Finance -
to make provisions for the expenditures intended for the coverage of losses of the collection company in the State budget, commencing in the year 1995 and ending 2003.
The Resolution No. 937 of the Government of the Slovak Republic of December 15, 1993 that appointed the Slovak Republic's Working Group, also recognized the proposal for the project for stage II that had been prepared by the Minister of Finance and the Governor of the National Bank of Slovakia. This proposal stated in its rationale -
With account taken of the fact that CSOB is active in both Republics, the participation of both states in the coverage of losses from bad loans and guarantees will be necessary, (page 6, emphasis in the original)
It was further stated that bad assets in a total amount of approximately SKK 9.3 billion would be transferred to the Collection Company in the Slovak Republic and that the total estimated net expenditures of the state budget of the Slovak Republic would amount to at most approximately SKK 13.3 billion until 2003 (page 7). As a result, no doubt can remain that the Slovak Republic had therefore full knowledge, not only of its obligation to cover SI’s losses, but also of the scope of its exposure and the need to provide for the necessary budget.60
Under Section III of the Technopol OBS Assignment Agreement No. 01/1/1995, CSOB assigned all Technopol OBS receivables to SI, including those due in the future. Section IV stipulated that for each assigned receivable, upon provision of payment in favor of the beneficiary under an OBS instrument, SI shall pay consideration to CSOB in the amount of 100% of the nominal value of the receivable. Concurrently with each such payment, in accordance with Section 1(b) LA -
... the Assignor [CSOB] shall provide the Assignee [SI] with a loan for such reaccounted payment in the corresponding amount pursuant to a separate loan agreement ("partial disbursement of the loan by the Assignee").
In the second part of the same Section IV, it was stated that the same procedure "shall be applied for each partial monetary payment in favor of a beneficiary under a specific off-balance sheet instrument". Similarly, Article 2 LA provided that the OBS loans "shall be drawn as the need arises".
Each individual (partial) disbursement of the loan shall be regulated by the amendments thereto.
By signing this Amendment, the Client accepts such loan.
It is thus demonstrated that for CSOB as well, SI’s signature was considered as a legal requirement for the existence and disbursement of each partial loan.
Who ever breaches a duty arising from a contractual relationship is obliged to provide compensation for the damage caused to the other party, unless he proves that such a breach was caused by circumstances excluding his liability.
The Tribunal recalls that the Slovak Republic's cover losses obligation and its duty to provide compensation for CSOB's damage is based on and limited by the relevant provisions of Article 3(II) CA.109 The Slovak Republic had to "cover", respectively to "compensate" SI’s losses (Art. 3(II)(5) CA), such losses being identified as resulting -
... from the operating costs and the schedule of payments for the receivables assigned by CSOB to the Collection Companies, including payments of interest.
As this has been explained above, the payments hereby referred to relate to the loan that CSOB was required to provide "up to the sum of considerations for the receivables assigned to the Collection Companies" (Art. 3(II)(3) CA). To the extent that SI was not in a position to repay this loan and therefore made a loss, the Slovak Republic was required to compensate for such loss in the same amount as determined by paragraphs 3 and 4 of Article 3(II) CA.
The Loan Agreement sets out in Article 4(II) the following provisions for the fixing of interest rates and the method for their calculation -
The loan shall bear interest at an annual interest rate. The interest shall be payable, along with the installment of the principal of the loan, always at the end of each calendar quarter commencing on March 31, 1995. The interest rate shall be determined as a floating rate to be fixed at regular three-month intervals for the subsequent period. The first interest rate shall be fixed at the time of loan drawdown, the second fixation shall be made as of March 31, 1994 and, thereafter, the interest shall be fixed at regular three-month intervals, as mentioned above.
The interest rate shall be determined by using one of the following methods or a combination thereof. Such interest rate shall be increased by a uniform surcharge to cover the Bank’s overhead costs at a rate of 3/4 (three-quarters) % per annum.
a. The loan made hereunder shall be refinanced for each subsequent three-month period (until the next interest rate fixation) on the interbank market. The interest rate shall be determined at the rate ‘sale’ indicated in the table InterestRate Fixing in the Market of Interbank Deposits for a Three-Month Period as published in HOSPODARSKE NOVINY two business days prior to the fixation date. In the event that such rate is not quoted in the future or the quotation is not adequate, a similar interest rate shall be used.
b. If there is not sufficient liquidity in the inter-bank market to allow the refinancing of the Bank to the required extent, the interest rate shall be calculated as the average price of the Bank’s resources with a residual maturity of more than two years.
c. If the interest rate as calculated by the methods referred in Section 4a or 4b is not sufficient to cover the cost of the Bank’s refinancing, the interest shall be determined so as to reflect the price of the specific resources used by the Bank to refinance the loan.
Paragraph 1 of this provision was modified on April 18, 1996 in Amendment No. 7 in order to take account of situations when the relevant calendar day was a non-banking day.
On May 25, 1994, CSOB and SI concluded Amendment No. 1 to the LA to modify section 1 (a) of the LA as follows -
On July 1, 1994, the Bank has provided the Client with the following loans:
- SKK 5,284,795.781.91
- CZK 1,055,000.000
for the covering of receivables assigned to its Client as of December 31.1993...
The analysis starts from Article 5 of the Loan Agreement which reads as follows -
Capitalization of Interest
Until December 31, 1994, interest shall be capitalized by. adding it to the principal of the loan on each of the following dates:
The Tribunal, at the April 2003 hearing, asked the Parties-
if possible, the Tribunal would appreciate to receive the interest rates asked by the Bank, quarter by quarter, since 1994 until now. If possible, also, with details, for instance, we are thinking of the document which has been submitted and how this amount could be financed by the different sources of funds available. If this documentation is available.156
One important item for calculation is the actual amount of the outstanding loan for each quarter that takes account of the progress in reaching maturity of the OBS receivables and of the repayments made by the FTOs and credited to SI’s account with CSOB. In reply, CSOB referred to the calculations of its accounting expert, to CSOB's letters fixing quarterly interest rates and to the SI Supervisory Board meetings.157 However, this documentation does not allow a new calculation of the interest evolution with the rates actually used, as CSOB's expert used his own and different rates and as the other materials contain very little and anyhow insufficient information about the evolution of the principal loan amount. In response to the Tribunal's question, the Slovak Republic observed that CSOB had not produced any contemporaneous documents showing the total running balance of the SI loan.158 CSOB's accounting expert did not recall an overall summary and he referred to the KPMG report,159 that is, however, not periodic and did not serve as support for CSOB's quarterly calculations. For some quarters, the loan balance was not available at the time when the refunding had to be determined and the quarterly interest rate to be fixed.160
Until the day, on April 10, 1997, when CSOB called the full amount of the loan from SI and claimed damages in the corresponding amount from the Slovak Republic, the actual quarterly rates determined under Article 4 LA were as follows, for each quarter -
1994: 18.84%, 18.59%, 21.27%, 18.91%;
1995: 17.73%, 17.75%, 8.86%, 8.61%;
1996: 12.70%, 14.19%, 12.05%, 13.70%;
1997; 12.91%, 14.53%.
The Customer and the Bank have agreed that if there is an event of default under this Agreement, the Bank shall be entitled to exercise vis-à-vis the Customer a sanction remedy consisting of an increase in the interest rate pursuant to Section 4 hereof by two percent per annum.
in an effort, after these six years, now to render this phase of these already somewhat complex proceedings as simple as possible and to give the Tribunal a considerable measure of comfort in the correctness and in the justness of CSOB’s claim, CSOB desires to assure the Tribunal that it will feel that justice has been done if it is awarded the full amount that it asserts as actual damages, the sum I have mentioned, as 32,443 billion Slovak Crowns.180
Immediately after the statement quoted above, counsel for CSOB continued -
You may rightly ask then: does the concept of lost profits then any longer have a role here ? My answer to that is: yes, most definitely.182
CSOB's counsel then elaborated extensively on these lost profits. While CSOB declared thus that it was upholding its lost profit claim, its statement would nevertheless allow the interpretation that CSOB would accept that its total claim would not reach a figure above SKK 32,443 billion. Moreover, CSOB maintained its claim for lost profits in the restatement of claim in its post-hearing submissions.183
In respect of interest accruing on its damage claim, CSOB offered as an alternative to apply Section 735 Commercial Code that provides for the following -
Delay in Fulfilling a Monetary Obligation
On delay in fulfilling a monetary obligation, interest on the amount in arrears is payable in the same currency as the monetary obligation. The debtor is obliged to pay interest on the sum in arrears at a rate one per cent higher than the interest set under section 502, with the decisive rate of interest being the rate fixed or offered by banks on credits granted for a period corresponding to the debtor's default in the country where the debtor has his seat, place of business or home address.193
The quoted provision is part of a chapter on "Special provisions on contractual relations in international trade" that is applicable to the CA, as one of the parties has its seat, place of business or his home address on the territory of a country different from that of the other party and, further, as their relationship is governed by Czech law. CSOB did not explain for what reason such "interest on the amount in arrears" would be applicable to the instant case where interest has to be determined by the Tribunal in respect of damage resulting from the non payment by the Slovak Republic of the amounts that would have permitted to cover SI’s losses. The Slovak Republic objected to the application of this provision to the determination of interest on CSOB's damage claim (except for post-award interest) and it argued that it had not had full opportunity to address this issue that was raised by CSOB as ah alternative only.
1. The Slovak Republic shall pay to Ceskoslovenská Obchodni Banka A.S. the amount of Slovak Crowns 24,796,381.842.00 as compensation, including principal and interest until November 30, 2004, for Ceskoslovenská Obchodni Banka's damage.
2. The Slovak Republic shall pay to Ceskoslovenská Obchodni Banka A.S. on the amount of Slovak Crowns 24,796,381.842.00 interest at a rate of 4.19% between December 1, 2004 and the date of this Award.
3. The amounts awarded under No. 1 and 2 shall be paid by the Slovak Republic to Ceskoslovenská Obchodni Banka A.S. within 30 days from the date of this Award. Thereafter, the amounts awarded under No. 1 and 2 will accumulate interest at an annual rate of 5%, until paid.
4. The Slovak Republic shall bear its own costs, expenses and counsel fees, including its share of the costs incurred by the Arbitral Tribunal and ICSID.
5. The Slovak Republic shall pay to Ceskoslovenská Obchodni Banka A.S. the amount of US$ 10,000,000 within 30 days from the date of this Award, together with interest running thereafter at an annual rate of 5%, as a contribution to Ceskoslovenská Obchodni Banka’s costs, expenses and counsel fees, including its share of the costs incurred by the Arbitral Tribunal and ICSID. Ceskoslovenská Obchodni Banka A.S. shall bear its costs, expenses and counsel fees, including its share of the costs incurred by the Arbitral Tribunal and ICSID, in any amount higher than US$ 10,000,000.
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