AWYN GmbH: Purchased 100% of the shares in CB Wood from InterTrade.
CAPLH: The Czech Forestry Association.
CE Wood: The Czech forestry company in which the Claimant purchased shares; formerly known as EP Kapital Group, s.a.
EP Kapital Group, s.a.: A Czech forestry company wholly owned by Exporter Prumyslova, a,s. until its purchase by InterTrade on 3 September 2000; a holding company for four different regional investment companies: FORESTINVEST Praha, a.s., FORESTINVEST Brno, a.s., FORESTINVEST Frÿdek-Mistek, a.s., and FORESTINVEST Velkó Karlovice, a.s..
Exportni Prumyslova: The initial owner of the EP capital Group, s.a,, declared bankrupt on 25 July 2001.
InterTrade Holding GmbH: The Claimant, a German company.
Lesy Beskydy, a.s: A Czech corporation, formerly Lesy Silherovica, a.s., established on 1 July 2004; won three forestry units (Lysa, Ostravice and Silherovice) in the tender proceedings.
Lesy Ceske Republiky, S.P.: The Czech State enterprise responsible for, inter alia, management of State forests.
Lesy Hluboka: A Czech corporation that won five out of nine forestry units in the tender proceedings.
Lesy Silherovica, a.s.: Predecessor corporation to Lesy Beskydy, a.s,, established on 26 February 2003.
NKU: The Supreme Audit Offioe, responsible for auditing the management of State property, among other tasks.
UOHS: Czech Office for the Protection of Competition.
[REDACTED] : The Chief Executive Officer of CE Wood (and its predecessor companies) since October 1995.
[REDACTED] : Minister of Agriculture of the Czech Republic from 2007 to 2009.
[REDACTED] : Minister of Agriculture of the Czech Republic from 2002 to 2005.
G. The Post-Hearing Procedure
(1) Disputes between either Contracting Party and an investor of the other Contracting Party regarding investments shall, as far as possible, be settled amicably between the parties to the dispute.
(2) If the dispute cannot be settled within six months from the date on which it was officially raised by either party to the dispute, it shall at the request of the investors of the other Contracting Party, be submitted for arbitration. In the absence of any other arrangements between the parties to the dispute, the provisions of article 9, paragraphs 3 and 5 shall apply mutatis mutandis subject to the proviso that the members of the arbitral tribunal shall be annotated by the parties to the dispute in accordance with the provisions of article 9, paragraph 3, and that, if the party to the dispute may, in the absence of any other arrangements, request the Chairman of the Arbitration Institute of the Stockholm Chamber of Commerce to make the necessary appointments. The award shall be recognized and enforced under the Convention of 10 June 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.
(3) The Contracting Party which is a party to the dispute shall not in [sic: the] course of arbitration proceedings or the execution of the arbitral award raise an objection on the grounds that the investor who is the other party to the dispute has already received compensation for all or port of Ills losses under au Insurance policy."
(1) Eaoh Contracting Party shall in its territory promote as far as possible investments by investors of the other Contracting Party, permitting such investments in accordance with its Iaws. It shall in all cases afford investments just and equitable treatment.
(2) No Contracting Party shall in any way impede the management, maintenance, use or enjoyment of investments in its territory by investors of the other Contracting Party by means of arbitrary or discriminatory measures.
(2) Each Contracting Party shall accord in its territory, to investors of the other Contracting Parly, in respect of their nativities in connection with such investments, treatment no less favourable than that accorded to its own investors or to investors of third States.
(1) Investments by investors of either Contracting Party shall enjoy lull protection and full security in the territory of the other Contracting Party.
(2) Investments by investors of either Contracting Party may be expropriated, nationalized or subjected to other measures with effects equivalent to expropriation or nationalization only in the public interest and against compensation. Such compensation shall correspond to the value of the investment expropriated immediately before the date on which the actual or pending expropriation, nationalization or similar measure was made public. Compensation shall be paid without delay and shall bear interest at the normal rate of bank interest; it shall be effectively convertible and freely transferable. Provision for the determination and payment of such compensation shall be made in an appropriate manner no later than the date of the expropriation, nationalization or similar measure. The legality of the expropriation, nationalization or similar measure and the amount, of the compensation may be subject to review in a properly constituted legal proceeding.
(a) DECLARE that the Tribunal has jurisdiction to decide the present dispute under the German-Czech BIT;
(b) DECLARE that the Respondent has breached Articles 2(1), 2(2), 3(2), 4(1) and 4(2) of the German-Czech BIT;
(c) ORDER the Respondent to pay the Claimant damages in the amount of € 84,424 million;
(d) ORDER the Respondent to pay the Claimant interest based on a return of 39.26% generated from an investment into German Government bonds in total for the period of 1 January 2005 until 29 April 2011, in the amount of £ 33.14 million;
(e) ORDER the Respondent to pay the Claimant interest, based upon the investment into German Government bonds in an amount to be specified until the date of the payment of the Award;
(f) ORDER the Respondent to pay the costs of the arbitration, including all expenses that the Claimant has incurred or will incur in respect of the fees and expenses of the arbitrators, legal counsel and experts;
(g) ORDER the Respondent to pay the Claimant compound interest on the sum awarded under (f), at the rate indicated in (e), from the date of the Award until the date of full payment;
(h) ORDER such other and further relief as the arbitrators shall deem appropriate.
(a) DECLARE that the Tribunal does not have jurisdiction over any claim based upon Articles 2,3 and 4 of the Gorman-Czech BIT1; or, in the alternative,
(b) DECLARE that the Claimant has not made an investment within the meaning of the German-Czech BIT;
(c) DISMISS the Claimant's petition to declare that the Respondent has breached Articles 2(1), 2(2), 3(2), 4(1) and 4(2) of the Gorman-Czech BIT;
(d) DISMISS the Claimant's petition to order the Respondent to pay the Claimant compensation for damages and interests thereon;
(e) DISMISS the Claimant's petition to order the Respondent to pay the costs of the arbitration; and
(f) ORDER that the Claimant shall be liable for all costs of the proceeding, including the Respondent's legal costs and expert fees on a full indemnity basis.
However, the new forestry companies inherited the liabilities of their centrally-planned predecessors, such as long-term obligations towards employees, loss-making housing management and redundant and unproductive property. In order to aid in this transition, the companies were provided with a 10 year "framework guarantee", that is, access to the forest units in which their predecessors had operated. LCR entered into a two-year contract with each forestry Company at the end of which the performance of the forestry company was assessed and prices re-negotiated. Contracts were only terminated by LCR if price re-negotiations, based on an industry pricing formula (the So-called "KALK formula"), were unsuccessful or a forestry company failed to fulfill its contractual obligations, the result being that few competitive tender proceedings, if any, were held (see Expert Opinion of J. Vasicek, para. 133).
(a) Jurisdiction: Does the Tribunal have jurisdiction ratione materiae and ratione temporis over the present dispute?
(b) Attribution: Are the acts and/or omissions of LCR attributable to the Czech Republic?
(c) Liability: If the answer to the above two issues is affirmative, did the Respondent breach Article 2(1), 2(2), 3(3), 4(1) and/or 4(2) of the German-Czech BIT?
(d) Causation: If the answer to the above question is affirmative in respect of any of the identified provisions of the German-Czech BIT, did the Claimant suffer loss or damage as a result of the Respondent's treaty breach(es)?
(e) Damages: If the answer to the above question is affirmative, to what sum of damages is the Claimant entitled?
(f) Interest: If the answer to the above question results in a positive value, to what sum of interest is the Claimant entitled?
(g) Costs: Based on the foregoing disposition of the dispute, how should costs be allocated as between the Parties?
The Respondent submits as a preliminary point that the Claimant bears the burden of proof to establish the Tribunal's jurisdiction (see Resp. PHB, para. 50, citing Phoenix Action Ltd, v, The Czech Republic, ICSID Case No. ARB/06/5, Award of 15 April 2009, para. 64 ("Phoenix Action")). In the Respondent's view, the Claimant has failed to meet its burden.
Referring to the award in Cementownia "Nowa Huta" S.A. v. Republic of Turkey, ICSID Case No. ARB(AF)/06/2, Award of 17 September 2009 ("Cementownia"), the Respondent observes that an ICSID arbitral tribunal recently faced a similar situation when asked to determine whether the claimant held the investment when the acts at issue were performed. The Respondent submits that, in that case, the claimant's failure to record the claimed transaction in its own financial statement for the year in which the transaction allegedly occurred proved fatal to its claim (see Resp. PHB, para. 59, quoting Cementownia at para. 129).
(a) A promissory note that the Claimant alleges to have destroyed;
(b) Two substitute promissory notes that were not produced; and
(c) An assumption about an around-the-world transaction with no transfer agreements documenting the existence of the transaction.
The Respondent submits that an investment not performed in good faith cannot benefit from investment protection, relying on the arbitral awards in Phoenix Action, Inceysa v. El Salvador, ICSID Case No. ARB/03/26, Award of 2 August 2006 ("Inceysa"), and Gustav FW Homester GmbH & Co. KA v. Republic of Ghana, ICSID Case No. ARB/07/24, Award of 18 June 2010 ("Gustav Hamester") in support of its proposition.
"On 31 January 2001, InterTrade purchased from Allwood a receivable against EPAS worth CZK [REDACTED] At the same time, InterTrade also purchased a receivable from EP Kapital against EPAS over the amount of [REDACTED] CZK. Both of these transactions were financed through promissory notes. Consequently, the claim which EPAS had against InterTrade for payment of the purchase price for the shares was set off against the receivables against EPAS which InterTrade had purchased. InterTrade no longer owed money to EPAS, but to Allwood and EP Kapital stemming from the purchase of the mentioned receivables. Therefore, also on 31 January 2001, InterTrade and EPAS signed an agreement stating that each party's claim against the other party shall be considered paid. Hence, InterTrade no longer owed money to EPAS for the purchase of the shares. Having thus fulfilled its payment obligation, it received the shares, which it had purchased, out of Allwood's custody." [footnotes omitted]
As indicated above, the Respondent's jurisdictional challenge evolved over the course of these proceedings. The Tribunal addresses below those arguments in which the Respondent has persisted, namely jurisdiction ratione temporis, jurisdiction ratione materiae, and fire existence of a "good faith" investment, Il no longer appears to be disputed that the Claimant is an "investor" within the meaning of the German-Czech BIT. For the avoidance of doubt, however, the Tribunal finds that the Claimant is and was at all material times an investor of a Contracting State within the meaning of the BIT.
This evidence alone is sufficient, in the Tribunal's view, to establish jurisdiction ratione temporis. However, there are other indicators which also support this finding, For example, on 10 November 2004, CE Wood's lawyer at the time wrote to LCR and advised it that InterTrade was the sole shareholder of CE Wood (see CB-62. Exh. R-47). There is also evidence that InterTrade, as shareholder, approved the CE Wood annual report in May or June 2005 (see Second Witness Statement of [REDACTED] para. 3).
"Terms of Payment
4. The Buyer shall procure and the Seller shall accept that the Consideration to the conditions given in this agreement shall be paid to the Seller.
4.2.1 The Payment of the first instalment of the Consideration by assignment of the Receivable and the set-off shall be executed by the Parties in agreed form not later than on 15 July 2004.
4.2.2 The Payment of the second instalment of the Consideration shall be executed by the Buyer no later than on 31 December 2004.
4.2.3 The Payment of the third instalment of the Consideration shall be executed after the closing of Due Diligence of the Company by the Buyer, however, no later than on 28 February 2005.
4.2.4 Should the Buyer withdraw from the Agreement (without being entitled to do so according to the Agreement), then the amounts paid by the Buyer as instalments under clause 4.1 here above shall not be paid back to the Buyer but remain with the Seller as penalty for Buyers withdrawal from the Contract." (emphasis added)
"Terms of Payment
4.2 The Buyer shall procure and the Seller shall accept that Consideration shall be paid to the Seller at terms as set out hereunder.
4.2.1 The Payment of the first instalment of the Consideration by assignment of the Receivable and the set-off shall be executed by the Parties in agreed form not later than on 30 May 20.0.5.
4.2.2 The Payment of the second instalment of the Consideration shall be executed by the Buyer not later than on 30 June 2005.
4.2.4 Should the Buyer withdraw from, the Agreement without being entitled to do so according to this Agreement, tiren amounts paid by the Buyer as instalments' under clause 4.1 here above shall not be paid back to the Buyer but remain with the Seller as penalty for Buyers withdrawal. [sic]" (emphasis added)
The Respondent also argues that the "Claimant's case is that [REDACTED] rather than Mr. [REDACTED] was the potential purchaser of CE Wood in August 2004." (see Resp. Reply PHB, para. 36). However, this is clearly not the Claimant's case, In making this argument, the Respondent appears to conflate the sale of the InterTrade receivable by Mr. [REDACTED] to [REDACTED] with the sale of InterTrade's shares in CE Wood, evidence, which was not challenged by the Respondent, was that the purchased the receivable in January 2004 from [REDACTED] but did not meet [REDACTED] before December 2004, and negotiated the purchase of the CE Wood shares on behalf of Awyn in May 2005, [REDACTED] was not, and was not alleged by the Claimant to be, the potential purchaser of the CE Wood shares in August 2004, It is also illogical to think that a due diligence report commissioned by [REDACTED] or written for him would have been done by an Italian firm and drafted in Italian. The evidence indicated that Mr. [REDACTED] had personal knowledge of GE Wood's operations from his affiliations with Czech consultants, which would have been better placed to provide a due diligence report on a Czech company to a Czech national. It Is more likely, in the Tribunal's view, that an [REDACTED] Italian businessman (now deceased) with commercial interests in the Czech Republic, was responsible for commissioning the Savino Report.
The Respondent has sought to expose what it considers to be inconsistencies in the two versions of the SPA in evidence to found its jurisdictional argument. However, it has not provided a coherent alternate theory or timeline that would result in a finding that the Claimant sold its shares in CE Wood before the bidding process in January 2005. The totality of the evidence in the record, including the two versions of the SPA, written and oral witness testimony, and other contemporaneous documents support the Claimant's version of the events. Moreover, the Claimant has provided a plausible explanation for the one inconsistency in its version of events, i.e., the sale being booked in the financial statements for 2003-2004. Accordingly, the Tribunal dismisses the Respondent's objection to the Tribunal's jurisdiction ratione temporis over the dispute.
The Respondent, raised for the first time in its post-hearing submissions questions concerning the proper translation of the German-Czech BIT in evidence in these proceedings. In its view, the definition of investment under the BIT turns on whether a "contribution" was made in the territory of the Czech Republic. The UN Treaty Series translation of the BIT has been, on the record since October 2008 when the Respondent was served with the Claimant's Request for Arbitration. Article 10 of the BIT establishes that disputes between "either Contracting Party and an investor of the other Contracting Party regarding investments shall, as far as possible, be settled amicably between the parties to the dispute", failing which the dispute may be submitted to arbitration.
"For the purpose of this Treaty
(1) The term 'Investments' comprises all kinds of assets that are invested in accordance with domestic legislation, particularly:
(a) Movable and immovable property as well as any other rights in rem such as mortgages and liens;
(b) Shares and any other kinds of participation in companies;
(c) Claims to money that has been used to create economic value or claims to services that have economic value and are related to an investment;
(d) Intellectual properly rights, including, in particular, copyright, patents, registered designs, industrial designs and models, trademarks, trade names, technical processes, know-how and goodwill;
(e) Concessions under public law, including concessions for prospecting and exploitation,
(2) The term 'returns' refers to amounts yielded by an investment such as profits, dividends, interest, royalties or other remuneration;
(3) The term 'investor' refers to an individual. having a permanent place of residence in the area covered by this Agreement, or a body corporate having its registered office therein, authorized to make investments."
"The first part, in which Exported transferred the CE Wood shares to Claimant, and Claimant's payment obligation to Exportai was set-off against receivables that Claimant acquired from two of Exporter's subsidiaries; and
The second part, in which two new substitute receivables against Claimant were 'parked' in non-transparent, off-shore structures and ultimately cancelled in a second, set-off, when Claimant sold the shares to the same entity that held the substitute receivables against Claimant."
"1. Exportai Prumyslova, a,s., with the registered office at Prague 6, Slikova 18, Company ID No. 25136551, represented by the Chairman of the Board of Directors, Ing. [REDACTED] (hereinafter referred to only as the "Transferor")
2. InterTrade Im-& Export Beteiligungs-GmbH, with the registered office at 53783 Eitorf. Am Hagen 37 b. The company is registered in the Commercial Register at the District Court of Siegburg under No. 51.68, represented by the company's executive [REDACTED] (hereinafter referred to only as the "Transferee").
The Transferor is the owner of [REDACTED] of the EP Kapital Group, a.s. company [eventually CE Wood], with the registered office at Zlin, Kvítková 4703, Company ID No.: 60745479. They are documentary ordinary bearer shares having the nominal value of [REDACTED].
The Transferor transfers by this Agreement the above documentary securities to the Transferee and the transferee accepts these documentary securities.
The Parties hereby agree the purchase price for the transfer of the above securities in the amount of [REDACTED].
The Parties hereby agree the right of the Transferor to withdraw from this Agreement, namely unilaterally, by 31 Nov. 2000 at the latest. The Transferor has reserved this right due to the intention to perform the valuation of the transferred shares based on an expert opinion.
The Parties hereby agree the due date for the purchase price to be by 31 Jan. 2001. The payment of the purchase price can be made also by offsetting receivables, if the purchaser buys receivables in respect of the seller of the companies ALLWOOD, a,s,. EP Kapital Group, a,s. and potentially of other companies, Unless a physical payment of the purchase price (including a bank transfer) is made, it is necessary to offset the purchase price, as the priority, against a receivable of the ALLWOOD, a.s. company In respect of a repayment of loans In the nominal value of over [REDACTED] and only In case of the full payment of ALLWOOD's receivable, It is possible to make an offset against receivables of other companies.
"Q.... Respondent has repeatedly argued that the [REDACTED] would have been a genuine price if they had been paid out in cash, to the seller, which was EPAS, the'parent company of EPKG at the time. But this is not what happened, economically or factually. or legally speaking. It was an assumption of debt by InterTrade vis-à-vis the company by a series of transactions. And therefore what respondent says is : this is in fact, if you want, not. a cash payment; it's merely an assumption of debt.
And what I am trying to put to you is: if a company can invest in the form of an assumption of debt, and that debt is with the target company it acquires, then would you look at it differently, that is if it has to hand out, as you said before, [REDACTED] of cash to the seller?
A. Yes, So if we are in a world of assumption of debt, if you've got exposure to this situation, I mean, there's like a host of facts that the around the decision.
Okay, so if I can swap [REDACTED] of debt into this entity, into control of this entity, I am left with a view of yes, in a limited liability world, the sort of hypothesis is not that you are buying a bucket with, minus in it. So it could be that if I swap a debt for control of the entity, well, I've got the opportunity if something good happens, I might get some money back. But if I am owed by someone that's worth minus, I might think: well, my [REDACTED] isn't worth very much".
"I started to deal with EP Kapital Group in 2000. My father told me that Exportai Prümyslová is going to sell EP Kapital Group. He brought the files of the group's results and asked me to analyse them. I analyzed the results for 3997-1999 and the actual numbers for 2000. Based on the DuPont analysis and benchmarking of companies within the group, we could see easily that there are big differences in generating operating profit and that the results are influenced by extraordinary expenses. These models are used also by banks to understand where the profits are coming from to see the potentials of a company and estimate the future of the company. My conclusion was that the company had a chance to generate significant cash flows from operating business to cover its debt and to increase value. However, we would need some time to finance the deal. Because it was not possible and Exporter Prumyslová had to sell, my father came up with the idea to ask for a payment condition of weeks to secure financing and secure the purchase through a promissory note. It was usual at that time in the Czech Republic, because this is secured against ail personal assets of the issuer." (emphasis added)
"In light of the doubts which have been raised by Respondent in these proceedings in this regard, I herewith confirm that the purchase of the shares of the company EP Kapital Group from EPAS was financed with a promissory note over [REDACTED] This promissory note made me liable with all my personal users in Germany for the payment of the purchase price to EPAS. Aller the debt vis-à-vis EPAS had been settled, the promissory note was destroyed. Neither the original nor any copies are today in my possession."
"A. Yes, the promissory note was used as a security during the purchase. And after the purchase was done, my father received this promissory note in return, and the promissory note was destroyed, because it was a private document which had only been used as a security for this operation."
The Respondent also makes issue of the fact that the shares were acquired through the mutual set-off of receivables when InterTrade acquired debt owing to EPAS's subsidiaries, CE Wood and Allwood, rather than through the payment of cash (see CB-65 and CB-66; Tr. Day 2, p, 79). [REDACTED] explained on cross-examination during the Hearing that (see Tr. Day 3, p. 163):
"... we were looking for someone and we found someone who was willing to buy, to buy a company that had a problematic value we had to allow for the consideration for the payment to be done through getting out of debt rather than through cash. For us, that had the very same value, because we in that way were able to get rid of that debt."
As with the Claimant's purchase of shares in EP Kapital, the acquisition of EPAS's receivables with CE Wood and Allwood was secured, against two other promissory notes, neither of which has been produced in this proceeding. [REDACTED] explanation for their absence, among the documentary materials on the record is that they were immaterial from a financial point of view, as it was "irrelevant whether the liability took the form of a promissory note or not". Moreover, he averred that he did not decide which documents were placed on the record and which, were not (see Tr. Day 2, p. 52).
As noted above, the Respondent nevertheless alleges for the purpose of establishing a protected investment that there are, in effect, two parts to the transaction, the second part involving a "journey around the world" by the receivables that InterTrade acquired to set off its payment obligation for the shares (see Resp. PHB, para. 100). The Respondent notes that the assignment agreements provided for payment of the receivables by 31. July 2002, failing which the assignments would become null and void. The Respondent contends that payment was not made until, the end of 2003, and therefore the first part of the share transaction was invalid because the Claimant set off its obligation to pay for the shares with liabilities against EPAS that were null and void (see ibid., para. 102). The Respondent reaches this conclusion "as a matter of logic", reasoning that "otherwise the liability of the Claimant towards Allwood could not have been transferred by All wood to Nauli AG in Nieu on 30 November 2003. Had the Claimant paid for its liability prior to 30 November 2003 it would have ceased to exist and could not have been assigned to Nauli AG." (pee Statement of Rejoinder, para. 97).
The question remains whether the lapse of the date for payment of the receivables with Allwood and EP Kapital voided or invalidated the Claimant's investment for the purpose of its BIT claim. The Claimant has provided a copy of the Agreement on Mutual Set-Off of Receivables, dated 31 January 2001, in which InerTrade and EPAS agreed "the mutual set-off of receivables... by which the receivables referred to... become void in their entirety," The receivables in question were, respectively, InterTrade's payment obligation to EPAS for the shares it had received in EP Kapital and EPAS's re-payment obligation to its subsidiaries Allwood and EP Kapital in respect of loans it had received from them. There is no mention in the Mutual Set-Off Agreement of the payment obligation in the assignment agreements. No evidence was adduced to the effect that those receivables reverted, to EPAS' or formed part of its eventual bankruptcy. Rather, the conduct of all relevant parties to the acquisition and sale of the shares in CE Wood collectively suggests that the Claimant did in fact acquire the Shares in CE Wood at the time it has alleged and, as discussed above, sold those shares at the time it alleged.
Thus, while the matter is not without some doubt, the Tribunal does not believe that the absence of an explanation in respect of the date for payment of the assigned receivables voided its investment for the purpose of its BIT claim. The Tribunal agrees that the Claimant holds the burden of proving its claim, as well as establishing the Tribunal's jurisdiction over that claim. However, the standard of proof in investment treaty cases is not a criminal standard, i.e. beyond a reasonable doubt. The Tribunal must be satisfied that, an investment was made within the meaning of the German-Czech BIT. Based on the totality of the evidence put before the Tribunal, the Tribunal, finds that the constituent elements of an investment pursuant to Article l(1)(b) of the BIT are present (i.e., evidence that shares in a Czech company were acquired by the Claimant pursuant to an agreement for that purpose) and the Respondent has not persuaded the Tribunal that any apparent inconsistency in the date of payment of the assigned receivables and the date provided for in the assignment agreements is sufficient, in this case, to nullify that investment.
The Respondent's third objection to the Tribunal's jurisdiction was made only in its posthearing submissions and is based on the premise that an investment must be made in good faith in order to benefit from the protection of an investment treaty. The Tribunal takes no issue with the general principle of international law that, in order to benefit from investment protection, an investment must be made in good faith. As the Tribunal in Gustav Hamester observed, this is a general principle that exists independently of specific language to this effect in the treaty (see Gustav Homester, para. 124).
"According to internal statements on this point within the Czech Republic, the tender which was organized and conducted aimed at a fundamental restructuring, of the way the Czech forests were handled, [REDACTED] the Minister of Agriculture made various statements in this regard. According to Respondent's own words, this was a "change of paradigm" seeking to remedy a situation which was "unsatisfactory both in the light of antimonopoly legislation and economic effectiveness, and in the light of European law". The purpose of the tender was, as also indicated in the Master Contact no. 122/04/2005 on the Supply of Comprehensive Forestry Activities, to conclude with the successful participant of the tender so that the activities will be "ensuring the optima] performance of all functions of forests", thereby complying with the NPF which declared that one of the priorities must be "forest management in accordance with principles of sustainable management a fundamental strategic priority".
Hence, the Ministry of Agriculture was the state organ responsible for the administration of the State forests and thereby exercises the right, but had also the duties as the owner of the forest, i.e. the Czech State. The tender organized and conducted in 2004/2005 concerned the State forests and their management and thus fell squarely into the responsibility of the Ministry of Agriculture whose actions and omissions are those of the Czech Republic. Consequently, the conduct of the tender concerning the State forests falls into the ambit of responsibility of the Czech Republic."
"•Another reason for the deficiencies determined, in LCR was failure to conscientiously meet the obligations which ensue to MAg as the founder of LCR on the basis of the state enterprise act:
• insufficient inspection on the part of MAg concerning whether the requirements of the state safeguarded by LCR through its activity were, being secured purposefully and economically.
• upon handling of certain assets MAg did not verify whether LCR was concluding contracts in accordance with the submitted proposal,
• MAg did not conduct any inspection in (he period from 2001 to 2003 focusing on the area of business contracts or LCR's handling of temporarily free financial resources;
• Insufficient co-operation of MAg and the supervisory board of LCR;
• MAg did not evaluate how its appointed members of the SB [Supervisory Board] were representing the interests of the state;
• the SB did not find any fondamental deficiencies in the activity of LCR during the inspected period."
"LESY CR state enterprise was established to fulfill the state's interest in maintenance, protection and recovery of the forests, It is true that LESY CR state enterprise also performs planting and cutting activities that potentially lend to the sale of wood. These activities are necessary for fulfilling the tasks required by the state and therefore cannot be the primary reason for which LESY CR state enterprise was established."
The Claimant adds that any commercial contract concluded by LCR had to be approved by the Ministry of Agriculture. Accordingly, it reasons feat LCR's business activities, even when carried out by way of commercial relationships, "warrant the State's interests" (see Statement of Reply, para. 154).
The Claimant distinguishes the cases relied upon by the Respondent, referring the Tribunal instead to R.F.C.C. v. Morocco, ICSID Case No. ARB/00/6 Award (22 December 2003) ("R.F.C.C") and Salini Construttori S.p.A, et al. v. Morocco, ICSID Case No. ARB/00/4, Award on Jurisdiction (23 July 2001) ("Salini"), which it submits deal with the parallel factual situation of tender proceedings. The Claimant also refers the Tribunal to the following discussion in F-W Oil Interests, Inc, v. Republic of Trinidad and Tobago (see Cl. PHB, para. 158, quoting F-W Oil, para. 203):
"The Tribunal thus observes that, where the operation of a State enterprise is at the core of an international dispute, it is theoretically possible that the enterprise's conduct (acts and omissions) may engage the responsibility of the State.either as an organ of the State; or as a body exercising elements of the governmental authority of the Slate; or as a body which is in fact acting on the instructions of the State, or under its direction or control (ILC draft Articles 4-8), There is in other words a whole gamut of possibilities, whose application to particular situations depends upon an amalgam-of'questions' of*law.and questions of fact which will vary from case to case according to the circumstances. The internal law of the State will be the starting point, but not the end point. One obvious example may suffice, namely the question whether a State enterprise is or is not exercising the elements of the governmental authority; [...]. The Tribunal notes that the draft Articles contain no definition of the broad notion of 'elements of the governmental authority' (any more than does the BIT for the equivalent phrase 'other governmental authority delegated to it'). Indeed the ILC consciously refrained from including in the draft even elements towards defining its application in particular cases. Rather, the Commission took the view, as expressed in paragraph (6) of the Commentary to draft Art, 5, that the notion had to be judged in the round, in the light of the area of activity in question, and in the light of the history and traditions of the country in question. In short, the notion is intended to he a flexible one, not amenable to general definition in advance; and the elements that would go into its definition in particular cases would be a mixture of fact, law and practice. Moreover - and the point is of some importance — it is not the case that the same answer would necessarily emerge on every occasion; in. some of its activities.a. State enterprise might, fall on one side of the line, in others on the other."
Turning to Article 8 of the Articles on State Responsibility, the Claimant submits that "attribution under Article 8 is without prejudice to the characterization of the conduct under consideration, as either sovereign or commercial in nature, For the sake of attribution under this rule, it does not matter that the acts are commercial, jure gestionis, or contractual" (see Statement of Reply, para. 168, quoting Bayindir v. Pakistan, ICSID Case No. ARB/03/29, Award (27 August 2009) ("Bayindir"), para. 129).
Although the level of control required to satisfy Article 8 is not set out in the ILC's Articles, the Claimant refers to the tribunal's consideration of this criterion in PDF Services Ltd. v. Romania, ICSID Case No. ARB/05/13, Award (8 October 2009) ("EDF"), which in turn relied upon commentary to Article 8 (see Statement of Reply, para. 170, quoting EDF, para. 201):
"Where there was evidence that the corporation was exorcising public powers, or that the State was using its ownership interest in or control of a corporation specifically in order to achieve a particular result, the conduct in question has been attributed to the State."
"The blame for the unfortunate state of affairs after the illegal tender proceedings is borne fully by my predecessors who reached a number of incorrect decisions, The company is folly entitled to make such a claim."
"In fact acts of the same nature are being performed by commercial.entities in the Czech Republic. As the Claimant has admitted in its Statement of Claim, private companies own 22-23% parts of the forests in.the Czech Republie. Those companies are subject to the same laws as LCR regarding the forests (including the requirement to protect the forests) and they, too, hold tenders for third-parties to obtain forestry services contracts. As the tribunal in Jan de Nul v. Egypt held, "[i]n its dealing with the Claimants during the tender process, the SCA acted like any contractor trying to achieve the best price for the services it was seeking. It did not act as a State entity."
That is precisely what Lesy' CR did here. It acted like any contractor trying [to] achieve the best contract for the services it was seeking. It did not act as a State entity." [emphasis in the original; footnotes omitted]
"By means of an exhaustive list the law only determines the decisions, which are in the founder's scope of authority. The founder's scope of authority does not include giving orders to the Director on how to proceed in particular cases as regards the state enterprise's regular operation. Such an order is not binding for the Director. The state (the founder) may influence the conduct of the slate enterprise only by means of determination of the general framework, especially of the state enterprise's management rules. By means of refusing consent in the determined cases (see above) the founder may preclude the disposition of the property, which the enterprise is entitled to manage, However, the founder may not command the Director of the stale enterprise to dispose with the property in a certain way? (Respondent's emphasis)
The Respondent argues that Jan de Nul N, F. v. Arab Republic of Egypt, ICSID Case No. ARB/04/13, Award (6 Nov. 2008) ("Jan de Nul") and CSOB v. Slovakia, ICSID Case No. ARB/97/4, Final Award (29 December 2004) ("CSOB"), demonstrate that even when a separate legal entity exercises certain governmental powers, its acts are not necessarily attributable to the State if those acts were connected only to commercial activities and not to the exercise of its governmental powers. The Respondent relies on the following reasoning of the tribunal, in Jan de Nul (see Statement of Defence, paras. 263-64, quoting Jàn de Nul, paras. 169-170):
"Consequently, the fact that the subject matter of the contract related to the core functions of the SCA, i.e., the maintenance and improvement of the Suez Canal, is irrelevant, The Tribunal must look to the actual acts, complained of. In its dealing with Claimants during the tender process, the SCA acted like any contractor trying to achieve the best price for the services it was seeking. It did not act as a State entity. The same applies to the SCA's conduct in the course of the performance of the Contract.
It is true though that the Contract was awarded through a bidding process governed by the laws on public procurement. This is not a sufficient element, however, to establish that governmental authority was exercised in the SCA's relation to Claimants and more particularly in relation to the acts and omissions complained of What matters is not the 'service public' element, but the use of "prérogatives de.puissance.publique" or governmental authority. In this sense, the refusal to grant an extension of time at the time of the tender does not show either that governmental authority was used, irrespective of the reasons for such refusal. Any private contract partner could have acted in a similar manner." [footnote omitted]
- LCR is an independent legal entity separate from the State;
- The State has no direct control over LCR's acts;
- Non-commercial activities of the State are irrelevant in this case;
- The nature of a State interest in a State enterprise is the same as interest of any other shareholder ina private business company;
- State representatives have been aware that only the director of a State enterprise is responsible for running the enterprise and did not interfere with his rights of conducting LCR's business activities."
In any event, the Respondent avers on the basis of the tribunal's reasoning in Duke Energy, that even when the State itself is acting, there can be no breach of a BIT if the State is acting as a "normal contract partner" and not using its "imperium" (see Resp. PHB, para. 151, quoting Duke Energy Eleotroquil Partners and Eleotroquil S.A. v. Republic of Ecuador, ICSID Case No. ARB/04/19, Award of 18 August 2008, para. 354).
"Article 2. Elements of an internationally wrongful act of a State
There is an internationally wrongful aot of a State when conduct consisting of an notion or omission:
- (a) is attributable to the State under international law; and
- (b) constitutes a breach of an international obligation of the State."
Therefore, the first question to be addressed is the attribution of certain acts to the State. As States are juridical persons, the question necessarily arises whether acts committed by natural persons or separate entities, which are allegedly in violation of international law, are attributable to the State. Only after this question has been answered in the affirmative, may the Tribunal address the second question, which is the qualification of the act attributed to the State as an illegal act. If the question is answered in the negative, it is, of course, unnecessary to analyze the question of legaiity/illegality of the acts complained of [REDACTED]
The following excepts from Prof. Cerná, in particular, have informed the Tribunal's conclusions on the issue of whether or not LCR's acts and omissions can be attributed to the Czech State:
- "A state enterprise executes its business activities with state property on its own behalf and at its own liability"(sic) (Paras 4-6)
- "The Term "on its own behalf' implies the fact that the state enterprise acts in legal relations as an independent entity detached from the state" (Para. 6.1.)
- "... the state enterprise disposes of independence in managing its property with which it executes its business activities." (Para. 6.2)
- "The state enterprise's proprietary independence is inter alia represented by the fact that such enterprise is an independent accounting unit... and a taxpayer." (Paras 7 and 8)
- [The Act] does not grant any rights to the founder to decide on the state enterprise's regular operations." (Para. 20)
- the founder's interventions in the state enterprise's operation are limited to the exhaustive list of cases defined by law (Article 16 Section 7, 9. Article 17 ZSP), while all other decisions are in the scope of authority of the state enterprise as a business entity or in the scope of authority of its Director and other internal managing authorities. Thus, the law doesn't grant to the founder any legal tools to directly influence regular commercial activity of the state enterprise." (Para. 2Ï)
- "By law the state enterprise is an entrepreneur. Its function is generally formulated in Article 2 Section 1 ZSP, which explicitly defines the state enterprise as an entity created for the execution of business activities." (Para. 23)
- "... the legislator does not grant to the state enterprise any special rights or seigniorial authority but puts it in equal position with the other participants in legal relations," (Para. 26)
-... the founder of a state enterprise may not give binding orders to the Director regarding the business management." (Para. 29)
- "We can therefore conclude that the business activity of a state enterprise is driven by the achievement of profit." (Para. 47)
Before toning to a review and analysis of the Parties' specific arguments invoked in aid of their respective thesis, the Tribunal also notes that, in answer to the specific question put to her as to whether the Czech State, as file founder of LCR, has the option of directly intervening in the terms and conditions and course of tenders announced by a state enterprise. Prof. Cerná opined categorically that (see Cerná Expert Report, para. 56):
"Neither the State Enterprise Act (see answer above) nor special regulation on entering into contracts according to the Commercial Code or the Public Contracts Act grants the founder of a state enterprise the authority to intervene in the selection of a contractual partner or to determine the terms and conditions of entering into a specific contract."
"Article 4. Conduct of organs of a State
1. The conduct of any State organ shall be considered an act of that State under international law, whether the organ exercises legislative, executive, judicial or any other functions, whatever position it holds in the organization of the State, and whatever its character as an organ of the central government or of a territorial unit of the State.
2. An organ includes any person or entity which has that status in accordance with the internal law of the State."
"Article 5. Conduct of persons or entities exercising elements of governmental authority
The conduct of a person or entity which is not an organ of the State, under article 4 but which is empowered by the law of that State to exercise elements of the governmental authority ["à exercer des prérogatives de puissance publique", in the French version] shall be considered an act of the State under international law, provided the person or entity is acting in that capacity in the particular Instanos,"
The Tribunal notes the Claimant's submission that "LCR's task was not simply to exploit the State Forests to its maximum financial advantage but that it had clearly the purpose of benefiting wider public interest and it is in this context that its actions, including the tender, have to be viewed."(see Cl. PHB, para. 147). The Tribunal cannot agree with this submission, which is far too sweeping. State entities are always deemed to act in the public interest, but this, in and by itself, is not sufficient under Article 5 to attribute all their acts to the State. In some of its activities, a state enterprise might exercise elements of governmental authority, in others it might not. The specific activities need to be scrutinized. Accordingly, the Claimant's reliance on the opinion of Prof, Cerná, who observes generally that the motivation to found a state enterprise is the public interest, is misplaced (see Cl. PHB, para. 148).
"Consequently, the fact that the subject matter of the contract related to the core functions of the SCA, i.e. the maintenance and improvement of the Suez Canal, is irrelevant. The Tribunal must look to the actual acts complained of. In its dealing with Claimants during the tender process, the SCA acted like any contractor trying to achieve the best price for the services it was seeking. It did not act as a State entity. The sanie applies to the SCA's conduct in the course of the performance of the Contract.
It is hue though that the Contract was awarded through a bidding process governed by the laws on public procurement. This is not a sufficient element, however, to establish that governmental authority was exercised in the SCA's relation to Claimants and more particularly in relation to the acts and omissions complained of. What matters is not the "service public" element, but the use of "prérogatives de puissance publique" or governmental authority, In this sense, the refusal to grant an extension of time at the time of the tender does not show either that governmental authority was used, irrespective of the reasons for such refusal. Any private contract partner could have acted in a. similar maimer. " [footnote omitted]......
In the opinion of the Tribunal, in the particular instance of conducting the tender operations in respect of which the Claimant complains, LCR engaged in commercial activities "on its own behalf and at its own liability", to quote Prof. Cerná, and with a view of being profitable (see Cl. PHB, para. 129) in the very same way as private owners of forested land who, concurrently, were also performing tenders for forestry activities (see Resp, Reply PHB, para. 77).
The fact that the creation of LCR happened in the context of the transformation of a centralized economy to a market economy does not change the Tribunal's conclusion, on the contrary. The tribunal in the CSOB case was faced with a similar process and it found the following (see Ceskoslovenska Obchodni Banka, a,s. v. The Slovak Republic, ICSID Case No. ARB/97/4 (Czech Republic/Slovak Republic BIT), Decision of the Tribunal on Objections to Jurisdiction, 29 May 1999, para. 23):
"It cannot be denied that a State's decision to transform itself from a command economy to a free market economy involves the exercise of governmental functions. The same is no doubt true of legislative and administrative measures adopted by the State that are designed to enable or facilitate the privatization of State-owned enterprises. It does not follow, however, that a State-owned enterprise is performing State functions when it takes advantage of these State policies and proceeds to restructure itself, with or without governmental cooperation, in order to be in a position to compete in a free market economy. Nor does it follow that the measures taken by such an enterprise to achieve this objective involve the performance of State or governmental functions. In bofo instances, the test as to whether or not the nets are governmental or private turn on their nature."
"- established.for the specific purpose of meeting the needs of public interest, not having an industrial or commercial character, and
- being a legal entity, and
- financed, for the most-part, by the State, or regional or local authorities, or other bodies governed by public law; or subject to management supervision by those bodies; or having an administrative, managerial or supervisory board, more than half of whose members are appointed by the State, regional or local authorities or other bodies governed by public law."
"Article 8. Conduct directed or controlled by a State
The conduct of a person or group of parsons shall be considered an aot of a State under international law if the person or group of persons is in fact acting on the instructions of, or under the direction or control of that State in carrying out the conduct."
"Article 11. Conduct acknowledged and adopted by a State as its own
Conduct which is not attributable to a State under the preceding articles shall nevertheless be considered an act of that State under international law if and to the extent that the State acknowledges and adopts the conduct in question as its own."
"The phrase "acknowledges and adopts the conduct in question as its own" is intended to distinguish, cases of acknowledgement and adoption from cases of mere support or endorsement... as a general matter, conduct will not be attributable to a Stale'under article 11 where a State merely acknowledges the factual existence of conduct, or expresses its verbal approval of it. In international controversies, States often take positions which amount to "approval" or "endorsement" of conduct in some general sense but do not involve any assumption, of responsibility. The language of "adoption", on the other hand, carries with it the idea that the conduct is acknowledged by the State as, in effect, its own conduct... However such acceptance may be phrased in the particular case, the term "acknowledges and adopts" in article 11 makes it clear that what is required is something more than a general acknowledgement of a factual situation, but rather that the State identifies the conduct in question and makes itltsown." (emphasis added)
Based on the Tribunal's above findings, there is no need for the Tribunal to discuss the merits of the Claimant's claim. For the sake of completeness, however, the Tribunal finds it appropriate to record here the principal arguments advanced by the Parties in respect of liability, causation and damages.
(a) Ambiguity arising from the late changes made by LCR to the bid criteria, including the striking through of the term "comparable" from the definition of average references;
(b) The invention of criteria by the evaluation committees according tó which, bidders had to show réferences from, a corresponding regional inspector from the given region;
(c) Ambiguity in the drafting of tender documentation such that, bidders did not know precisely what they were bidding for; and..
(d) Inconsistency and non-transparency of the evaluation process as compared to the tender documentation.
"... [I]t was not the company with the most competitive price or the most experience which,won. Neither was the case. With price and references being equally important in the tender, one might think that, the fact that a company which was far from offering the best price might have won because its references were outstanding. However, at least in the units Lysa, Silherovice and Ostravice this was not the case. There, with Lesy Beskydy a,s.,.a. company won which barely, owned any equipment, had a very limited workforce and no prior experience of working in the Czech State forests administered by LCR. Another company, Dusan Panacek -INTER PAN, ranked better than CE Wood although pursuant to the Czech commercial register it did not officially exist at the time of the 2004/2005 [sic] so that Claimant wonders how it could have provided any decent references. Other companies Won-although they did not meet the formal criteria for participating." [footnotes omitted]
b) The Respondent Position
The Respondent submits that while the term "fair and equitable treatment in Article 2(1) of the German-Czech. BIT is subject to interpretation, it is not open to the Tribunal to make a decision ex aequo et bono. The Respondent relies on several NAFTA awards, including Mondev Intel-national Ltd. v, United.States of America, ICSID Case No. ARB(AF)/99/2, Award (11 October 2002) Mondev"), Waste Management, Inc. v. United Mexican States, ICSID Case No. ARB(AF)/00/3, Final Award,(30 April 2004) ("Waste Management"), and S.D. Myers, Inc. v. Canada, UNCITRAL (NAFTA), First Partial Award (13 November 2000). ("S.D. Myers"), as well as the award in Saluka, for an articulation of the FET standard, observing that the circumstances of the specific case always play a key role in determining whether the standard, has been violated.
The Respondent avers that alleged breaches of European law are outside of the scope of the BIT and cannot, in any event, form the basis of a breach of the BIT's FET standard in this case (see Statement of Defence, para. 275), The Respondent refers to the ICJ's reasoning in Case concerning Elettronica Sicula (ELSI), ICJ, 20 July 1989, ICI Rep (1989) 15 ("ELSP'), among other arbitral authority, in support of its position (see Statement of Rejoinder, para. 228, quoting ELSI, para. 124):
"Yet it must be borne in mind that the fact that an act of a public authority may have been unlawful in municipal law does not necessarily mean that that act was unlawful in international law, as a breach of treaty or otherwise. A finding of the local courts that an act was unlawful may well be relevant to an argument, that it was also arbitrary; but by itself, and without more, unlawfulness cannot be said to amount to arbitrariness. It would be absurd if measures later quashed by higher authority or a superior court could, for that reason, be said to have been arbitrary in the sense of international law. To identify arbitrariness with mere unlawfulness would be to deprive it of any useful meaning in its own right"
With respect to the legitimate expectations element of the Claimant's FET claim, the Respondent submits that protected legitimate expectations are those expectations that the investor takes into account when it malees the investment. Relying on the tribunal's reasoning in PSEG v. Turkey, ICSID Case No. ARB/02/5, Award (19 January 2007) ("PSEG"), at paragraph 241, the Respondent adds that legitimate expectations can only be based on specific assurances given to the investor by the host State. As the Claimant does not allege that it received any specific commitments from the Czech Republic when it made its investment, the Respondent reasons that whatever the Claimant's alleged expectations, they did not constitute protected "legitimate expectations" under the German-Czech BIT (see Statement of Reply, paras. 238-240),
The Respondent submits that the recent decision in AES Summit Generation Ltd. et. al. v. Republic of Hungary, ICSID Case No. ARB/07/22, Award (23 September 2010) ("AES"), provides guidance as to the standard under international law governing tender processes. In that case, the tribunal determined that not every alleged "process" failure amounts to a failure to provide FET under international law (see Statement of Rejoinder, para. 242, quoting AES, paras. 9.3.37 and 9.3.40):
"... [T]he Tribunal has concluded that there was nothing so irrational or otherwise unreasonable In Hungary's policy decision to reintroduce administrative prices in 2006 as would constitute a breach of its Treaty obligation to ensure that Claimants were treated fairly and equitably und that their investments were not impaired by unreasonable or discriminatory measures.
The Tribunal has approached this question on the basis that it is not every process failing or imperfection that will amount to a failure to provide fair and equitable treatment. The standard is not one of perfection. It is only when a State's acts or procedural omissions are, on the facts and in the context before the adjudicator, manifestly unfair and unreasonable (such as would shock, or at least surprise a sense of juridical propriety)... that the standard can be said to have been infringed."
The Respondent further explains that, in reaching its decision, the tribunal emphasized that while a government cannot force a private party to give up existing contractual rights, parties cannot complain if, in the process of the government exercising its authority, private contractual rights are affected (see Statement of Rejoinder, para. 244, quoting AES, para. 10.3.13):
"[I]t cannot be considered a reasonable measure for a State to use its governmental powers to...force a private party to change or give up its contractual rights. If the State has the conviction that its contractual Obligations to its investors should no longer be observed (even if`it is a commercial contract, which is the case), the State would have to end such contracts 'and assume contractual consequences of such early termination. This does not mean that.the State cannot exercise its governmental.powers, including its legislative function, with the consequence that private interests - such as the investor's contractual rights - are affected, Rut that effect would have to be a consequence of a measure based on public policy that was not aimed only at those contractual right's. Were it to be otherwise, a State could justify the breach of commercial, commitments by relying on arguments that such breach was occasioned by an act of the Slate performed in its public character."
The Respondent concludes that the Claimant did not succeed in the tenders because its bids were non-competitive, not because the tender proceedings were manipulated. Indeed, the Respondent takes the position that "CE Wood lost market share because it failed to adjust its cartel-like business model to the newly-competitive Czech forestry market" (see Statement of Rejoinder, para. 14).
2. Arbitrary or Discriminatory Measures
a) The Claimant's Position
Noting that Article 2(2) of the German-Czech Republic BIT does not define arbitrary or discriminatory measures, the Claimant relies on the interpretation of arbitrariness offered by the ICJ in ELSI (see Statement of Claim, para. 185, quoting ELSI, p. 76):
"Arbitrariness is not so much something opposed to a rule of law, as something opposed to the rule of law. […] It is a wilful disregard of due process of law, an aot which shocks, or at least surprises, a sonso of judicial propriety."
"The standard of 'reasonableness' has no different meaning In this context than in the context of the 'fair and equitable treatment' with which it is associated; and the same is true with regard to the standard of 'non-discrimination'. The standard of 'reasonableness' therefore requires, in this context as well, a showing that the State's conduct bears a reasonable relationship to some rational policy, whereas the standard of 'non-discrimination' requires a rational justification of any differential treatment of a foreign investor.
Insofar as the standard of conduct is concerned, a violation of the non-impairment requirement does not therefore differ substantially from a violation of the 'fair and equitable treatment' standard. The nonimpairment requirement merely identified more specific effects of any such violation, namely with regard to the operation, management, maintenance, use, enjoyment or disposal of the investment by the investor."
The Claimant submits that the préparation and conduct of the tender proceedings was contrary io the rule of law and would shook any sense of judicial propriety. The Claimant contends that its investment, CE Wood, was, at the time of the tenders, the most successful forestry company in the Czech Republic. Yet, in a tender for approximately 60 forestry units, it won only two with a minor volume of wood. By contrast, newly founded companies with little experience in forestry received better marks for their references and companies which failed to fulfill the formal participation requirements for the tender won important units. The Claimant takes the position that such conduct hears no rational justification, but rather finds explanation only in the intentional destruction of CE Wood.
b) The Respondent's Position
"impairment means, according to its ordinary meaning... any negative impact caused by 'measure' taken by the Czech Republic.
Insofar as the standard of conduct is concerned, a violation of the non-impairment requirement does not therefore differ substantially from a violation of the 'fair and equitable treatment' standard. The non-impairment requirement merely, identifies more specific effects of any such violation, namely with regard to the operation, maintenance, use, enjoyment or disposal of the investment by the investor."
"... individual criteria for each contract (the entrepreneur's individual contracts may be evaluated differently) which include: payments discipline regarding the contract, performing of the contract with subcontractors and assessment of the contract by the Forest Authority and Regional Inspectorate, (Surah evaluation of the entrepreneur's eaoh contract shall reflect the general profile of the company as well as the detailed behaviour of the entrepreneur's employees in respect to the contract)..."
"- that only one third of bidders whose bid was evaluated succeeded in acquiring the unit they operated before initiation of the tender;
- that many of the successful bidders in particular units had to transfer their equipment and labor to newly acquired units and were happy to do so even when they acquired one unit only;
- The tender achieved its intended result of creating a fair and open competition environment enabling 'new players' to effectively enter the forestry market if they submitted a competitive bid. [footnotes omitted]
"... (1) whether the foreign investor and the domestic investor are placed in a comparable setting or as often said 'like circumstances' and (2) whether the conduct of the State results in a treatment less favourable than, that accorded to the. domestic comparator, thereby precluding de facto or de jure discrimination."
b) The Respondent's Position
The Claimant submits that the German-Czech BIT contains two separate provisions requiring the Contracting Parties to provide full protection and security. The first, at Article 4(1), requires each Contracting State to provide "full protection and full security" to all investments made by the nationals of another Contracting Party in the territory of the host State. The second, at Article 2(3), provides that "[i]nvestments and returns thereon together with returns on any reinvestment shall enjoy full protection under the Treaty." The Claimant contends that this latter provision must be interpreted as extending protection to returns on investment and reinvestment, with the result that the obligation in Article 4(1) must be interpreted as a separate and independent obligation on the part of the host State (see Statement of Claim, para. 211).
The Claimant reasons that while this standard has traditionally been associated with the obligation of a host State to ensure the physical protection of an investor and its assets, it has since been broadened to include "legal security", The Claimant relies in this regard upon the award in Vivendi, where the tribunal found that "[i]f the parties to the BIT had intended to limit the obligation to 'physical interferences, they could have done so by including words to that effect", the absence of any such limiting words meaning that acts or measures which deprive an investor of protection and security so as to violate the standard "need not threaten physical possession or the legally protected terms of operation of the investments" (see Statement of Claim, para. 205, quoting Compañía de Aguas del Aconquija S.A. and Vivendi Universal v. Argentina, ICSID Case No. ARB/97/3, Award (20 August 2007) (" Vivendi"), para. 7.4.15).
The Respondent submits that the standard of full protection and security is still invoked almost exclusively in cases regarding physical protection, referring here to Saluka. PSEG, Wena Hotels Ltd v. Arab Republic Egypt, ICSID).Case No. ARB/93/1, Award (21 February 1997) ("Wena Hotels"), and Asian Agricultural Products Ltd (AAPL) v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/87/3, Final Award (27 June 1990) ("AAPL"). In those cases where the standard has been considered, the Respondent notes feat it is always - or at least usually - limited to the context of physical security, barring exceptional circumstances.
The Claimant submits that Article 4(2) of the Gorman-Czech BIT covers not only direct but indirect expropriations, relying on the definition of indirect expropriation articulated by the tribunal in Metalclad Corp. v. Mexico, ICSID Case No. ARB(AE)/97/1, Award (30 August 2000) ("Metalclad") (see Statement of Claim, para. 223, quoting Metalclad, para. 103):
"expropriation [...] includes not only open, deliberate and acknowledged taking of property, such as outright seizure or formal obligatory transfer of title in favour of the host State, but also covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of property even if not necessarily to the obvious benefit of the host State."
In considering the nature of the property allegedly expropriated, the Claimant explains that when it invested in CE Wood, EP Kapital held contractual rights for forestry services which far outnumbered its competitors, two thirds of its contracts with LCR were unlimited in duration, and those contracts conferred the right to purchase timber from LCR up to 66% of the wood harvested. As a result, the Claimant contends that its assets encompassed not only the shares purchased in CE Wood but CE Wood's contractual rights, including access to raw material and the business potential which this entailed (see Statement of Claim, paras 231-232),
The Claimant takes the view that the Respondent's intention is irrelevant to determining whether an expropriation occurred, However, even should the.Tribunal find that intention is relevant, the Claimant contends that an expropriation has still occurred, arguing that the tenders furthered the interests of a few rather than.furthering the public interest and the Minister of Agriculture announced publicly that it was. its intention to destroy CE Wood (see Statement of Claim, para. 244).
The Respondent submits that a claim for expropriation requires a State action that (i) constitutes a "taking" of a claimant's property rights; (ii) has a substantially severe impact on the claimant's investment as a whole, and (iii) does not fall into any of the categories of permissible (non-compensable) expropriation, such as bona, fide regulatory action within the police powers exception, (see Statement of Rejoinder, para. 295).
In determining whether an act caused damage to the Claimant, the Claimant observes that the Tribunal must be satisfied that "the causal relationship is sufficiently close (i.e. not too remote) to satisfy the applicable standard of causation" (see Statement of Reply, para. 250, quoting Mark Kantor, Valuation for Arbitration: Compensation Standard, Valuation Method and Expert Evidence (2008), p. 106).
"PROFESSOR STERN: My second question is I was a little bit struck by what you say in two different paragraphs. in paragraph 13 you say: 'I am convinced that in 2004 and before the bidding process the company was in very good condition.' And then before, in 11, you say: 'Given the liquidity situation in April 2005, CE Wood was close to insolvency...'
So does that mean that the situation has changed in four months, from a very good condition to bankruptcy -
A. Well, not to bankruptcy,
PROFESSOR STERN: It was "close to insolvency",
A. Yes, it was close to if somebody filed bankruptcy -
PROFESSOR STERN; In four months?
A. Yes. Because from one day to the other one the tender proceedings were published, we lost one-third of the company business, from one day to the other. Because we've got so many employees, [REDACTED] at the end of 2004, and we were, our outlook was that we have to reduce by one-third, then the cashflow was dramatically influenced by that. And if somebody will file bankruptcy on CE Wood we will not be able to pay our payables on time. So there as a risk for that. And in 2004, presuming that the condition will stay the same, I think we were in a good condition.
2. The Respondent's Position
The Respondent asserts that the Claimant has failed to establish a causal link between the alleged damage and the alleged wrongful conduct of the Respondent. The Respondent submits that any loss of timber supply was more likely the result of a managerial failure to adjust CE Wood's business model to the Newly-Competitive Czech forestry sector than any manipulation of the tender proceedings, The Respondent calls in aid the tribunal's discussion of this proposition in Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22, Award (24 July 2008) ("Biwater") (see Statement of Rejoinder, para. 305, quoting Biwater, para. 786):
"The key issue in this case is the factual link between the wrongful acts and the damage in. question, as opposed to any issues as to remoteness or indirect loss. The Arbitral Tribunal notes In this regard the approach of the ICJ in the ELSI case. In that case, the ICJ held that the primary cause of the Claimant's difficulties lay in its own mismanagement over a period of years, and not the act of requisition imposed by the governmental authorities, in reaching this conclusion, the Court applied an 'underlying' or 'dominant' cause analysis...."
2. The Respondent's Position
1. "Except as provided in paragraph 2, the costs of arbitration shall in principle be home by the unsuccessful party, However, the arbitral tribunal may apportion each of such costs between the parties if it determines that apportionment is reasonable, taking into account the circumstances of the case.
2. With respect to the costs of legal representation and assistance referred to in article 38, paragraph (e), the arbitral tribunal, taking into account the circumstances of the case, shall be free to determine which party shall bear such costs or may apportion such costs between the parties if it determines that apportionment is reasonable.
3. When the arbitral tribunal issues an order- for the termination of the arbitral proceedings or makes an award on agreed tenus, it shall fix the costs of arbitration referred to in article 38 and article 39, paragraph 1, in the text of that order or award.
4. No additional fees may be charged by an arbitral tribunal for interpretation or correction or completion of its award under articles 35 to 37."
In addition, the Tribunal recalls that while the Respondent has prevailed in its jurisdictional objection based on attribution, it only raised this objection in its Statement of Defence, approximately six months after the date on which the Respondent was directed to identify its jurisdictional objections and one week before the teleconference scheduled between the Parties and the Tribunal to address the matter of bifurcation. The Respondent has variably treated the issues of attribution as a merits issue (see Statement of Defence, paras, 239-265) and an issue on par with jurisdiction (see Statement of Rejoinder, paras. 162-205). Its submissions in this respect, as with its arguments on jurisdiction, also evolved over too course of the proceedings.
Taking these and other circumstances of the case into account, the Tribunal determines to exercise its discretion under Article 40 of the UNCITRAL Rules in respect of costs by ordering that each party bear its own costs of the arbitration, as well as its own costs of legal representation. The Tribunal considers that this apportionment is reasonable.
(a) The Tribunal dismisses the Respondent's jurisdictional challenge and declares that it has jurisdiction to decide on their merits all claims advanced by the Claimant against the Respondent in this proceeding;
(b) The Tribunal finds and declares that the acts and/or emissions complained of by the Claimant to constitute breaches of the Respondent's obligations under the German-Czech BIT are not attributable to the Respondent;
(c) In view of the Tribunal's finding in paragraph 277(b) above, the Tribunal hereby dismisses all other claims made by the Claimant and the Respondent in these arbitration proceedings, save as to costs;
(d) The Tribunal orders that each Party shall bear its own costs.
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