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Lawyers, other representatives, expert(s), tribunal’s secretary


The Parties, Representation and Tribunal

The Claimant is INVESMART B.V. ("Invesmart"), a limited liability company registered with the Amsterdam Chamber of Commerce Company in the Netherlands under the Registration Number 34127007. It was incorporated in August 1999 under the name Robilant International Holding B.V. and was renamed in 2000. Its registered office is situated at:

Via Manzoni 46, 20122 Milan, Italy ("Claimant")

The Respondent is THE CZECH REPUBLIC, represented by Miroslav Kalousek, the Director of the Czech Ministry of Finance ("MOF"). Its registered office is situated at:

Leetenská 15 118 10 Prague 1 Czech Republic ("Respondent")

In this arbitration the Claimant is represented by:

King and Spalding LLP

Mr Reginald R Smith 1100 Louisiana Suite 4000 Houston, Texas 77002

Mr Kenneth R Fleuriet 25 Cannon Street London EC4M 5SE United Kingdom

Mr Craig S. Miles 1100 Louisiana Suite 4000 Houston, Texas 77002

In this arbitration the Respondent was originally represented by:

Linklaters Ludek Vrana Partner Palac Myslbek Na Prikope 19 117 19 Prague 1

By facsimile dated 20 November 2007, Linklaters informed the Tribunal that they no longer represented the Respondent and advised the Tribunal that new counsel had been appointed by the Respondent in this arbitration:

Weil, Gotshal & Manges

Ms Karolina Horakova Partner Krizovnicke nam. 1 11000 Prague 1

The Claimant, by letter dated 12 April 2007, appointed Professor Piero Bernardini as an arbitrator. The Respondent, by letter dated 14 February 2007, appointed Mr Christopher Thomas Q.C. as an arbitrator. Pursuant to Article 7(1) of the UNCITRAL Arbitration Rules, the two party-appointed arbitrators appointed Dr Michael Pryles as the third and presiding. member of the Tribunal on 11 May 2007. All members of the Tribunal signed an Arbitrators Engagement Agreement.
On 17 July 2008, the members of the Tribunal, at the consent of the parties, appointed Ms Leah Ratcliff as the Tribunal Secretary.

Procedural Background

This arbitration arises from alleged violations of the Agreement on Encouragement and Reciprocal Protections of Investments between The Kingdom of the Netherlands ("Netherlands") and the Czech and Slovak Federal Republic dated 29 April 1991 (the "BIT" or the "Treaty"). On 8 December 1994, the Czech Republic confirmed to the Netherlands that the Treaty remains in force for the Czech Republic as a successor state to the Czech and Slovak Republic. Article 8 of the BIT provides for the settlement of disputes as follows:

Article 8

1) All disputes between one Contracting Party and an investor of the other Contracting Party concerning an investment of the latter shall if possible, be settled amicably.

2) Each Contracting Party hereby consents to submit a dispute referred to in paragraph (1) of this Article, to an arbitral tribunal, if the dispute has not been settled amicably within a period of six months from the date either party to the dispute requested amicable settlement.

3) The arbitral tribunal referred to in paragraph (2) of this Article will be constituted for each individual case in the following way: each party to the dispute appoints one member of the tribunal and the two members thus appointed shall select a national of a third State as Chairman of the tribunal. Each party to the dispute shall appoint its member of the tribunal within two months, and the Chairman shall be appointed within three months from the date on which the investor has notified the other Contracting Party of his decision to submit the dispute to the arbitral tribunal.

4) If the appointments have not been made in the above mentioned periods, either party to the dispute may invite the President of the Arbitration Institute of the Chamber of Commerce of Stockholm to make the necessary appointments. If the President is a national of either Contracting Party or if he is otherwise prevented from discharging the said function, the Vice-President shall be invited to make the necessary appointments. If the Vice-President is a national of either Contracting Party or if he too is prevented from discharging the said function, the most senior member of the Arbitration Institute who is not a national of either Contracting Party shall be invited to make the necessary appointments.

5) The arbitration tribunal shall determine its own procedure applying the arbitration rules of the United Nations Commission for International Trade Law (UNCITRAL).

6) The arbitral tribunal shall decide on the basis of the law, taking into account in particular though not exclusively:

• the law in force of the Contracting Party concerned;

• the provisions of this Agreement, and other relevant Agreements between the Contracting Parties;

• the provisions of special agreements relating to the investment;

• the general principles of international law.

7) The tribunal takes its decision by majority of votes; such decision shall be final and binding upon the parties to the dispute.

Disputes having arisen between the parties, the Claimant filed a Notice of Arbitration dated 14 February 2007.
In its Notice of Arbitration the Claimant stated that attempts to settle the dispute amicably began on 29 July 2003, including a meeting held with the representatives of the Czech Republic in Prague on 24 October 2003, and that there appeared to be little prospect for an amicable settlement of the dispute.
Following constitution of the Tribunal a preliminary hearing was convened on 24 August 2007. At the hearing the claimant was represented by Mr Kenneth Fleuriet and Mr Craig Miles of King and Spalding LLP. The Respondents were represented by Ludek Vrana and Dr Rupert Bellinghausen of Linklaters.
Following the preliminary hearing the Tribunal made Procedural Order No 1 dated 30 August 2007 which provided, inter alia, that the language of the arbitration is English and, whilst the place of the arbitration is Paris, France, the hearing will be held in London, England.
Procedural Order No 1 also set out the following procedural timetable:

Claimant's statement of claim together with all documents upon which it relies and witness statements (fact and expert) 10 December 2007
Respondent's statement of defence together with all documents upon which it relies and witness statements (fact and expert) by 10 December 2007 25 March 2008
Parties to request the production of individual or defined categories of documents, in each instance explaining the relevance and materiality of the request 4 April 2008
Parties to produce the requested documents or provide reasons for non-production By 18 April 2008
Parties may seek an order for production of a document or documents not produced by the other parties On or before 23 April 2008
Tribunal to endeavour to decide applications for the production of documents 2 May 2008
Claimant to provide a Statement of Reply together with additional documents relied upon and responsive witness statements 15 July 2008
Respondent to provide a Statement of Rejoinder together with any additional documents relied upon and responsive witness statements 3 October 2008
Case Management Conference 9 October 2008
Hearing 10-19 November 2008

The parties, having each been granted brief extensions of time, provided the following submissions:

Statement of Claim dated 12 December 2007

Statement of Defence dated 27 March 2008

Reply Memorial dated 18 July 2008

Statement of Rejoinder dated 6 October 2008 `

The Claimant provided statements from the following lay witnesses:


Mr Paul de Sury

Mr Radovan Vavra

The Statement of Claim was also accompanied by the following expert reports:

Professor Hyun Song Shin

Associate Professor Raj Desai


The Claimant's Reply Memorial was accompanied by Second Witness Statements from each of the Claimant's fact witnesses and supplementary expert reports from each expert.
The Respondent provided witness statements from the following:

Mr Pavel Racocha
Mr Pavel Rezábek
Mr Bohuslav Sobotka
Mr ZdenDk Tüma

The Respondent provided expert reports from the following:

Dr Milan Hulmák
Dr Petr Kotáb
Professor Claus-Dieter Ehlermann
Professor Anthony Saunders
Mr Pavel Závitkovskrn (KPMG)
Mr Jean Luc Guitera (KPMG)

The Respondent's Reply Memorial was accompanied by Second Witness Statements from each of the Respondent's witnesses of fact and Second Expert Reports from Professor Saunders, Professor Elhermann and KPMG (prepared by Mr Pavel Závitkovskrw).

Discovery/doçument production

On 4 April 2008, both parties requested that the other produce certain categories of documents pursuant to section 6(a) of Procedural Order No 1 dated 30 August 2007.
Both parties responded to these requests on 18 April 2008, largely without objection. The Claimant, whilst stating that the "categories of documents requested by the Czech Republic appear overly broad, and the relevance of a number of the categories is neither apparent nor adequately explained", confirmed by letter dated 23 April 2004 that it had produced all of the documents in its possession that were covered by the categories identified by the Respondent. Similarly, by letter dated 18 April 2004 the Respondent produced all documents in its possession that were responsive to the categories, except for documents held by the Czech Office of the Protection of Competition or UOHS to use the Czech acronym ("OPC"), which were subject to formal administrative procedures to facilitate their release. These documents were provided to the Claimant on 16 June 2008.

Security for Costs

On 27 March 2008, the Respondent submitted an Application to the Tribunal seeking orders that the Claimant provide security for the Respondent's costs likely to be incurred in this arbitration.
On 21 May 2008, the Claimant submitted a Response to this Tribunal objecting to this application.
On 3 July 2008, the Tribunal made an Order that it did not have authority to make the order sought in the Respondent's application of 27 March 2008.

Procedural steps as requested by the Chairman to the Tribunal

On 3 July 2008, the Chairman of the Tribunal wrote to the Respondent requesting that they provide a table of abbreviations covering all abbreviations used in the Statement of Defence. The Chairman also asked the parties to provide the Tribunal with a list of persons referred to in their respective submissions.
On 4 July 2008, the Chairman of the Tribunal requested that the parties provide to the Tribunal, prior to the hearing:

(a) an agreed statement of facts;

(b) an agreed chronology; and

(c) a list of issues to be determined by the Tribunal.

On 10 July 2008, the Respondent provided to the Tribunal a list of persons referred to in the Statement of Defence. The Respondent also suggested that the Parties be required to provide the other documents requested by the Tribunal at a date following the second round of Parties' Submissions. The Claimant concurred.
By email dated 10 July 2008, the Chairman of the Tribunal deferred consideration of this issue.
On 19 September 2008, the Chairman of the Tribunal wrote to the parties requesting that the agreed statement of facts be provided to the Tribunal by 10 October 2008.
The Parties were not able to agree upon a statement of facts prior to the Case Management Conference. The provision of this document to the Tribunal was deferred until after the Case Management Conference.

Case Management Conference

By the agreement of the parties, the Tribunal postponed the Case Management Conference until 20 October 2008.
At this conference, the Tribunal considered a series of procedural matters as listed in the provisional agenda circulated by the Secretary prior to the Conference.
Specifically, the matters considered at the conference were the procedure to be followed at the hearing including, inter alia, opening statements, order of witnesses, examination of witnesses, sitting times, equal allocation of hearing time between the parties, restrictions on new evidence, interpreters, transcription, document bundles and restrictions on witness attendance.
In respect of the agreed statement of facts the Tribunal decided, by agreement of the parties, that negotiations on an agreed statement of facts would resume and that, where the parties' opinions diverged, their separate assessments of a particular fact were to be set out in the Statement.
On 24 October 2008, the parties provided to the Tribunal an agreed statement of facts and detailed hearing schedule.

Claimant's extraordinary submission dated 4 November 2008

On 4 November 2008, the Claimant made an extraordinary submission to the Tribunal in relation to allegations made by the Respondent in its Statement of Rejoinder that [REDACTED] Principal of Invesmart B.V. submitted to the Czech National Bank (" CNB ") "false minutes" of a meeting of Invesmart's shareholders on 16 October 2002.
On 5 November 2008, the Respondent submitted a short statement to the Tribunal in reaction to the Claimant's submission.
Consideration of the matters raised by the Claimant were deferred until the hearing.

The hearing

A hearing took place at the International Dispute Resolution Centre in Fleet Street, London. It commenced on 10 November 2008 and concluded on 18 November 2008. Verbatim transcripts were produced and made available concurrently with the aid of LiveNote computer software.
At the hearing the following persons appeared as legal counsel for the Claimant:

Mr Reginald Smith (King & Spalding)

Mr Ken Fleuriet (King & Spalding)

Mr Tom Childs (King & Spalding)

Mr Craig Miles (King & Spalding)

[REDACTED] Principal of Invesmart B.V. also attended the hearing as a representative of the Claimant.
The following persons appeared as legal counsel for the Respondent:

Ms Karolina Horakova (Weil, Gotshal & Manges)

Ms Barbora Balaptikova (Weil, Gotshal & Manges)

Professor James Crawford

Mr Zachary Douglas

Mr Radek Snabl, Ms Marketa Skypalova and Mr Vaclav Rombald attended the hearing as representatives of the Czech Ministry of Finance.
Both sides made an oral presentation at the opening of the hearing. At the close of the hearing, the Tribunal decided, by the agreement of the parties, that neither side would make post hearing submissions, except for those relating exclusively to costs.
At the hearing all of the above listed witnesses gave evidence and were cross-examined by opposing counsel, with the exception of Mr Milan Hulmák and Dr Kotáb. The Claimant waived its right to cross-examine these witnesses and as a consequence they did not appear at the hearing.

Factual Background

In 1990, as a primary step in Czechoslovakia's transition from a communist to a market economy, the Czechoslovakian banking system was reformed. The "monobank" system, in which the central bank was responsible for both monetary policy and commercial banking, was disestablished and privately owned commercial banks commenced operation in Czechoslovakia. Union Banka, which commenced operations in 1991, was one of a number of small banks that were established at this time.
The Czech banking system was plagued by instability and severe liquidity issues throughout the 1990s and a number of banks collapsed. In an attempt to address these crises the Czech government initiated three state aid programs, including two Consolidation Programs between 1991 and 1994, and between 1994 and 1995 and a Stabilisation Program between 1995 and 1998.
Under the First Consolidation Program the Czech government (and its successors, the Czech Republic and the Slovak Republic) strengthened the balance sheets of the four largest banks (Komercno banka, Česká sporitelna, Investicni a Postovno banka (IPB), and Ceskolovenska obchodni banka).
On 1 January 1993, Czechoslovakia peacefully dissolved into its constituent states: the Czech Republic and the Slovak Republic. The Second Consolidation Program was thus implemented by the newly formed government of the Czech Republic. It was similarly structured to the First Consolidation Program and directed state aid to mid tier and small Czech Banks. A number of insolvent small banks were acquired by other banks with the assistance of the CNB as part of the program.
Under the Stabilisation Program state aid was provided to failing banks through Česká Finanční, s.r.o (" CF "), a wholly owned Czech Government entity. Under the stabilisation program the CF purchased participant banks' poor quality (non-performing) assets at nominal value, - a maximum of 110 per cent of the bank's registered capital. In return the bank would, after seven years, repurchase at nominal value any assets that remained uncollected. This arrangement had the effect of offering participant banks a seven year interest free loan. Further, the banks had an obligation to accept and subsequently observe the terms and conditions of a stabilisation plan.
The banks were obliged to allocate the funds received from the CF preferentially to wellperforming assets having higher liquidity and bearing fewer risks. The implementation of a cautious investment policy should have improved the banks' liquidity and enabled them, in the course of a seven year period, to create sufficient resources to re-transfer the non-performing assets from the CF. A total of six small Czech bank participated in the Stabilisation Programme.

The expansion of Union Banka

Against this back-drop, Union Banka expanded its operations within the Czech Republic. In 1995 it underwent internal restructure through the establishment, by Union Banka's shareholders, of Union Group. This became the holding company of Union Banka.
Between 1996 and 1998, Union Banka acquired four distressed banks, Ekoagrobanka, Evrobanka, BDS and Foresbank. The acquisitions of Ekoagrobanka, Evrobanka and BDS took place under the aegis of the Second Consolidation Program. These acquisitions were made pursuant to agreements with the CNB whereby the CNB agreed to compensate Union Banka for the difference between the assets recorded on the banks' accounts and the value of those assets as determined by independent audits. The purpose of this agreement was to mitigate the losses Union Banka would have otherwise borne as a consequence of absorbing the nonperforming loan books of other banks.
In 1998, a dispute arose between Union Banka and the CNB about the terms of their agreement in relation to Union Banka's acquisition of BDS. This matter was settled in December 1999 pursuant to the "BDS Settlement Agreement". The CNB had agreed to compensate Union Banka for 85 percent of the difference between the book value of BDS’ balance sheet liabilities and the value of its assets and goodwill, to be established by an independent audit. Compensation was paid but Union Banka subsequently claimed a further amount. When the CNB refused, the bank commenced and succeeded in an arbitral claim. The CNB complied with the arbitral award but in doing so required Union Banka to sign a settlement agreement recording their agreement that the settlement was final and binding1
In September 2002, while the principal events at issue in this arbitration were occurring, Union Banka initiated further arbitral proceedings against the CNB in relation to the terms of the BDS Settlement Agreement. Union Banka valued this claim at CZK 1,762 billion. This was recorded in its books on 23 September 2002 (the "CNB Receivable") as is discussed further below at paragraph 110. The CNB won that arbitration in April 2003.
Meanwhile, in late 1997, Union Banka entered into an agreement with CF, the state consolidation agency, to acquire Foresbank as part of the broader Stabilisation Program. However, in 1998 Foresbank was taken out of the Stabilisation Program and an alternative set of agreements were concluded between Union Banka and CF.
Pursuant to these agreements, Foresbank repurchased its assets from the CF at the nominal value of the uncollected assets, discounted from the original 2004 payment at 11.5 percent per annum (a rate derived from the then prevailing market interest rate). The discounting of the purchase price allowed Union Banka to retain the economic value of the interest free loan. In addition it was agreed that (1) CF would deposit the proceeds from the sale of the loans back to Union Banka, (2) the deposit (known as the "Fores Deposit") would mature on the original 2004 payment date and bear the same 11.5 percent per annum interest rate, and (3) the deposit would be fully secured by Government Bonds. Under the terms of these agreements the Fores Deposit, plus interest, would be worth CZL 1,591 billion to CF at maturity in December 2004.
By 2002, market interest rates had fallen to below 4 percent in the Czech Republic and Union Banka was incurring significant losses on the Fores Deposit.

Union Banka's accumulation of related party loans

Throughout this same period Union Banka entered into a number of related party loans ("RPLs") with its shareholders or related parties for the purpose of purchasing shares in Union Banka. The majority of these loans were under-secured and non-performing.
In its 1998 Audit Report, Union Banka valued the RPLs at approximately CZK 4.5 billion.2 The CNB took remedial action against Union Banka. However, Union Banka's practice of granting RPLs continued. By June 2000, the CNB quantified the RPLs at CZK 5,461 billion.3
In January 2001, the CNB took further remedial action against Union Banka and requested that it confine its investment of the proceeds received from repayment of the RPLs or from the sale of Union Group's shareholdings in other companies to assets with zero-risk weighting.4 On 31 May 2001, Union Banka was fined CZK 2.5 million by the CNB for providing new RPLs to finance the purchase of Union Group shares.5
As a result of problems inherited from the acquired problem banks compounded with the RPLs, Union Banka became a problem bank itself. It sought to address these issues through state aid.

State aid discussions between Union Banka and CF in 2001

During 2001, Union Banka put forward three separate proposals for state aid. Each involved the assistance of CF in cleansing Union Banka's balance sheets.
First, in February 2001, Union Banka proposed that CF buy 100 percent of the shares of Foresbank for its liquidation value thereby terminating the Foresbank Deposit early.6
Secondly, in October 2001, Union Banka proposed that Foresbank would purchase certain of the assets of Union Banka, including a number that Union Banka acquired through the takeovers of Ekoagrobanka, Evrobanka and Foresbank. CF would then acquire the Foresbank for a purchase price of CZK 1.2 billion.7
Thirdly, in December 2001, Union Banka proposed the transaction which is referred to as the CF Transaction whereby CF would relinquish its deposit arising from Union Banka's acquisition of Foresbank in exchange for a portfolio of under-performing loans.8 This was effectively a debt for cash swap which was premised on the Government having greater leverage to recover under these loans than Union Banka. The Government could also seek to acquire equity in the debtor companies (which were mostly state owned entities) in service of the loans.
In these proceedings the CF Transaction was also referred to as the Foresbank Settlement.

Invesmart retained by Union Banka

In late 2001, Union Banka opted for a strategy whereby it would implement a restructuring plan. The primary aim of the plan was to clean up Union Banka's balance sheet, bring its internal governance in line with western banking standards and improve its profitability. In particular, the management of Union Banka aimed to redevelop both its corporate and retail banking enterprises by attracting additional customers and offering a broader range of services including insurance and leasing services.9
In order to achieve this, Union Banka, with the support of the Czech Government, sought to find an investor that would acquire Union Banka and assist with its restructuring.
Invesmart was hired as a consultant to Union Banka on 8 November 2001 to assist with this process. Under the terms of the consultancy agreement between Union Banka and Invesmart, Invesmart was to:

(i) assist Union Banka in restructuring its debts;

(ii) conduct due diligence of the bank and its loan portfolio; and

(iii) prepare the bank for sale to a strategic investor..

Invesmart simultaneously entered into a share sale and purchase agreement ("SPA") with certain shareholders of Union Group, effectively acquiring an option to buy their 70 percent shareholding.10 The Claimant made submissions that the purpose of this agreement was to ensure that initiatives proposed by Invesmart could not be frustrated by shareholders of Union Group or Union Banka...
Shortly after being appointed as Invesmart's CEO, [REDACTED] met with Union Bank's President, Ms Marie Parmová. At that meeting Ms Parmová informed [REDACTED] that the Government and Union Banka were:

in the final stages of negotiating a deal with Česká finanční (the Foresbank Settlement) that would address the problem of the underperforming loans that Union Banka has unherited under the Czech Government's Consolidation and Stabilization Programs and which would also rectify the issue of the excess interest that Union Banka was having to pay on the Česká finanční deposit.11

In December 2001, Invesmart commenced due diligence to determine the value of the bank. Invesmart hired Ernst & Young to undertake due diligence of Union Banka's loan portfolio. Deloitte & Touche, Union Banka's external auditor, was retained to conduct additional reviews of the bank's accounts, including an audit of Union Banka's books ("2001 Audit").
By February 2002, Invesmart was aware as a result of this due diligence that Union Banka had neither properly characterised its RPLs as unsecured nor made adequate provision for the unsecured credit it had extended. Ernst & Young also established that a number of commercial loans made by Union Banka required higher provision than Union Banka had recorded in its accounts.12

Invesmart's decision to acquire Union Banka

Notwithstanding these disclosures, in March 2002 Invesmart decided to acquire Union Banka in its own right. It planned to restructure the bank itself and then sell it to a strategic investor in the short to medium term.13
It was from this time onwards that the events that form the basis of Invesmart's complaints in this arbitration transpired. These events include a complex array of communications between Invesmart, Union Banka and various organs of the Czech Government regarding the provision of state aid to Union Banka, as well as regulatory and private contractual steps that were taken by Invesmart to acquire a controlling interest in Union Banka. In order to assess Invesmart's claim it is necessary to consider the various "strands" of events that ultimately led to the revocation of Union Banka's license.
These are:

(a) Invesmart's contractual arrangements with Union Banka and Union Group to acquire a controlling interest in both entities;

(b) Invesmart's applications to the CNB for regulatory approval to acquire a controlling interest in Union Banka;

(c) Union Banka's growing financial problems throughout 2002; and

(d) MOF's consideration of Invesmart's request to provide state aid to Union Banka.

The material facts are considered in turn below.

Invesmart’s contractual arrangements to acquire Union Banka

Invesmart contracted to acquire an indirect interest in the bank through two SPAs ("SPA A" and "SPA B").14 These were concluded with different groups of shareholders of Union Group on 9 and 10 May 2002. The transactions contemplated by both SPA A and SPA B were structured with the specific purpose of cleansing the balance sheet of Union Banka and addressing the RPL problem.
What was known as "SPA A" was an agreement with the selling shareholders to, in the future, purchase 36.24 percent of the shares in Union Group.15 Invesmart was to pay two of the shareholders CZK 600 million for their shares. Both of these shareholders were debtors of Union Banka and Invesmart was to pay this part of the purchase price to Union Banka and the remainder (approximately CZK 1 billion) to a third selling shareholder. This agreement was unconditional. Invesmart was to place the purchase price in escrow by 17 June 2002 and to unconditionally close the transaction on 24 June 2002, subject to the payment by Invesmart of a contractual penalty of CZK 60,000,000 in case of failure to close by such date.
Under "SPA B" Invesmart agreed with the selling shareholders to, in the future, acquire 33.82 percent of the shares of Union Group.16 Four of the shareholders selling shares under SPA B were also debtors of Union Banka. Their share of the purchase price (approximately CZK 660 million) was to be used to repay the RPLs owed to Union Banka. The remainder (i.e., approximately CZK 500 million) was to be released to the selling shareholders. Under the terms of SPA B, Invesmart was to post a letter of credit under which it would pay the selling shareholders by 17 June 2002. The payment itself was to take place by 9 December 2002. Simultaneously with the posting of the letter of credit, the selling shareholders would move the shares into escrow.
Completion of the transaction was conditional on the provision of state aid by 2 December 2002.17 Relevantly, the agreement contained the following provision:

If by December 2,2002, Purchaser fails to receive:

a) the approval statement of Government of the Czech Republic to the proposal of the Ministry of Finances of the Czech republic of settlement of the relationship between Česká finanční, s.r.o and Union Banka, a.s. concerning the programme of stability reinforcement and consolidation of Foresbank, a.s. (now Fores a.s.) then this Contract shall expire on the date of December 3, 2002.

b) the approval statement of the Czech National Bank to indirect acquisition of Union Banka, a.s....then this Contract shall expire on the date of December 3, 2002.

Together SPA A and SPA B constituted an agreement to acquire 70 percent of Union Group for CZK 2,833 billion.
In the following months SPA A and SPA B were amended.
In particular, on 27 May 2002 the SPAs were amended such that a cash payment, instead of the letter of credit, was to be deposited in escrow under SPA B on 17 June 2002 and the closing date under SPA A was postponed to 30 September 2002.
On 14 August 2002, Invesmart and Union Group's selling shareholders entered into Addendum No 4 to the SPAs. Instead of making payment to the shareholders in exchange for their shares, Invesmart would assume the shareholders' debts under the RPLs "as soon as the CNB gives the approval with the taking over of debts by [Invesmart]". The Addendum was to become effective upon approval by the shareholders of Invesmart. Thus, SPA A had also become conditional.18
On 14 October 2002, Invesmart and the selling shareholders entered into Addendum No 5 to the SPAs. Invesmart was to assume the debts of the selling shareholders to Union Banka without undue delay. Addendum No 5 was to become effective upon (1) the CNB's approval of Invesmart's acquisition of control over Union Banka and assumption for selling shareholders' debts and (2) approval of Invesmart's shareholders.19

Invesmart's applications to the CNB for regulatory approval to acquire Union Banka

On 4 April 2002, Invesmart submitted to the CNB the first of three formal applications to acquire a controlling interest in Union Banka.
Much is made in the Claimant's submissions about the CNB's ultimate decision to approve Invesmart's acquisition of Union Banka on 24 October 2002. For this reason, it is worthwhile setting out the surrounding facts to enable the CNB's decision to be viewed in context.
Pursuant to Czech Law No 215/89 Col. on Banks, Invesmart was required to obtain the CNB's approval before it could acquire a controlling interest in Union Banka.
In 2002, Invesmart made three separate applications to the CNB to acquire Union Banka.
The first two applications, dated 4 April 2002 and 4 June 2002 respectively, were both rejected by the CNB on the grounds that Invesmart had failed to furnish essential information relating to the source of the funds with which it proposed to acquire Union Banka. This was a significant omission because under Section 9(3)(c) of Decree of CNB No. 166/2002 Coll., dated 8 April 2002, an applicant seeking to acquire an interest in a Czech Bank was required to submit:

documents on the origin of the applicant's funds from which the purchase of shares of the bank or purchase of a share in an entity through which is acquired indirect share in the bank...is to be covered.20

The CNB's decisions to reject Invesmart's first two applications were both subject to 15 day appeal periods. These expired on 3 July 2002 and 22 October 2002 respectively. Despite frequent requests by the CNB, Invesmart was unable to provide evidence of the provenance of its funds. Instead, it sought to secure further government support and alternative forms of finance to strengthen Union Banka's ailing balance sheets and complete the acquisition.
The following exchange of correspondence in relation to Invesmart's second application is illustrative of this conduct:

(a) On 2 September 2002, CNB wrote to Invesmart requesting further information regarding the source of Invesmart's funding for the acquisition of Union Banka.21

(b) On 12 September 2002, Invesmart met with the CNB. At this meeting the CNB warned that if Invesmart could not adduce evidence regarding the provenance of its funds its application would be rejected.22 The minutes of this meeting show that Invesmart informed the CNB that its investors would not commit funds for the transaction until a final decision regarding state aid was taken.

(c) On this same day Union Banka wrote to CNB proposing that it would fund Invesmart's acquisition of itself by replacing its existing RPLs with a new RPL to Invesmart.23 This structure was rejected by CNB.24

(d) On 16 September 2002, Invesmart wrote to the CNB requesting additional forms of support from the Czech Government. Specifically, Invesmart requested that the Czech Government "define" the financial commitment it would make to support Union Group's Polish banking subsidiary, Bank Przemyslowy.25 It also requested a guarantee from the CNB not to withdraw Union Banka's banking licence unless there is a deterioration "of the Bank's financials" related to the activity of the new management. By this letter Invesmart also informed the CNB that:

The Union Group acquisition will therefore be entirely covered by Invesmart with its own asset [sic], A Board Meeting and a Shareholder Meeting have been called to increase the capital of the company of additional 90 million euro.

(e) In response to Invesmart's 16 September 2002 letter the CNB informed Invesmart that:

...any [state assistance] is primarily a matter for the Ministry of Finance, requires approval of the Czech Government and must have the support of the Office for Protection of Economic Competition.

On 4 October 2002, the CNB denied Invesmart's second application to acquire a controlling interest in Union Banka on the basis that it had not received sufficient information about the source of the funds that Invesmart would use to finance the acquisition. On the advice of Governor Tûma, Invesmart did not appeal this decision. Rather, it waited until the expiration on 21 October 2004 of the 15 day appeal period for appeal of the decision dated 4 October 2002 to submit a new application.26
On 22 October 2002, Invesmart submitted its third application for approval by CNB for it to acquire a controlling interest in Union Banka.27 The application included Minutes of an Extraordinary General Meeting of Shareholders that was convened by Invesmart on 16 October 2002.28 The application stipulated that the meeting was duly held and a resolution was validly approved for a capital increase of "EUR 90 million by way of share premium upon sole request of the Board of Managing Directors of the Company". [REDACTED] further signed and contemporaneously submitted to the CNB a declaration by Invesmart that:

The acquisition of 70% of Union Group, a.s. of the value of approximately EUR 90 million will be entirely funded by Invesmart B.V. with its own capital which has been increased by the Shareholders Meeting of the Company on October 16, 2002 and it will be entirely subscribed by shareholders.29

This was the only information submitted by Invesmart to the CNB as evidence of the provenance of the funds that it would use to acquire a controlling interest in Union Banka.
The expiration of the appeal period and the consequential failure of Invesmart's second application received significant public attention in the Czech Republic on 22 October 2002.
On that day Miada fronta Dnes, one of the Czech national daily newspapers, reported that Invesmart had confirmed that it did not appeal against the negative decision of the CNB.30 [REDACTED] was quoted as saying: "It is very complicated. It cannot be definitively said that we do not continue in our negotiations. We are in contact with the CNB".
The CNB also publicly commented on the situation at Union Banka. In the afternoon on 22 October 2002 a spokesperson for the CNB, Ms Alice Frisaufová, made the following comment to the Czech media:

In this administrative proceeding the CNB did not grant its approval to Invesmart for the acquisition of qualified interest in Union Banka because the investor failed to provide the source of funding for the acquisition. As far as this proceeding is concerned, the decision is final. This does not, however, preclude Invesmart from filing a new application and commencing new administrative proceedings on granting the approval with the transfer of the shares.31

The parties agree that depositors of Union Banka commenced a run on Union Banka on 23 October which caused Union Banka to lose approximately CZK 1.7 billion in deposits. Invesmart attributes this event to the comments made by Ms Frisaufová. The Czech Republic argues that the run was caused by public uncertainty generated as a result of the expiration of the appeal period of Invesmart's second application.
It was in these circumstances that on 24 October 2002 the CNB approved Invesmart's application to acquire a controlling interest in Invesmart.32

Union Banka's growing financial problems throughout 2002

The October 2002 run occurred at the end of a period of declining financial fortunes for Union Banka. In June 2002 it became apparent, as a result of Invesmart's due diligence, that its financial situation remained impaired by RPLs to the value of CZK 2.5 billion.33
On 6 June 2002, CNB delivered a report to Union Banka indicating that Union Banka had extended new RPLs to certain of its shareholders and that, as a consequence, significant additional funds (between CZK 160 billion and 1,878 billion) needed to be created by the bank.
Invesmart responded by requesting replacement of Union Banka's board of directors. The CNB was informed of this request34 and by letter dated 4 July 2002 informed Unión Banka that it too required that it replace all of the members of its Board of Directors.35
Union Banka's financial situation continued to deteriorate as Deloitte & Touche sought to finalise its Union Banka's 2001 auditor's report. In the end an acceptable auditor's report for the bank was only secured as a result of two transactions that Invesmart entered to support the balance sheet of Union Banka.
First, on 13 August 2002, Invesmart entered into the Receivables Assignment Agreement with Union Banka (the "Receivables Assignment Agreement") under which Invesmart unconditionally agreed to purchase the portfolio of loans earmarked for assignment to CF for a cash payment of CZK 1.2 billion, if by December 1, 2002 CF did not take assignment of these loans. As security for its promise to pay, Invesmart agreed to post a CZK 300 million bank guarantee on the date of signing the Receivables Assignment Agreement. Invesmart's commitment under the Receivables Assignment Agreement, combined with the bank guarantee, thus 'replaced' provisions on the loan portfolio earmarked for transfer to CF for the purposes of the audit. In effect, the Receivables Assignment Agreement removed the CF loans from Union Banka's balance sheet.
Secondly, on 14 August 2002, and as is discussed at paragraph 86 above, Invesmart and Union Group's selling shareholders entered into Addendum No 4 of the SPAs. Instead of making payment to the shareholders in exchange for their shares, Invesmart would assume the shareholders' debts under the RPLs "as soon as the Czech National Bank gives the approval with the taking over of debts by [Invesmart]". The effect of this agreement, having been entered into simultaneously with the Receivables Assignment Agreement, was to remove the CF Transaction as a condition precedent to the acquisition of Union Group share by Invesmart.
The 2001 audit of Union Banka, dated 16 August 2002, was issued in explicit reliance on the Receivables Assignment Agreement and Addendum No 4.36 Specifically, the report was qualified by a statement that in Deloitte & Touche's opinion Union Banka might not be able to continue as a going concern absent Invesmart's capital entry into the bank.37 However, Invesmart did not issue the bank guarantee required under the RAA on 13 August 2002 or at any time thereafter.38 Moreover, when the 1 December 2002 deadline for the contemplated assignment of the loan portfolio to CF passed and Invesmart became liable under the Receivables Assignment Agreement to pay the CZK 1.2 billion it had agreed to pay, it failed to do so.
Union Banka's balance sheets were further supported by the entry of the "CNB Receivable" on its books on 23 September 2002. This "receivable" was based on an amount sought by Union Banka from the CNB which, having been rejected by the latter, resulted in an arbitration claim quantified by Union Banka at CZK 1,762 billion against it.39 (Union Banka ultimately lost the arbitration in April 2003.) On 22 October 2002, the same day that Invesmart submitted its third application to the CNB and the day before the run on Union Banka took place, the CNB requested that Union Banka de-recognise the CNB receivable in its accounts by 25 October 2002.40 Union Banka never took this action, even though the recording of a contingent asset such as the CNB receivable was contrary to IFRS Standards.41
Union Banka also failed to respond to the CNB's 4 July 2002 request to replace its Board of Directors. Consequently on 27 September 2002 the CNB requested that Union Banka replace all members of the Supervisory Board.
[REDACTED] Mr de Sury and Mr Piga were subsequently appointed to Union Banka's board on 27 September 2002. On 8 October 2002 Mr Vavra was appointed CEO of Union Banka and commenced further due diligence of the bank's loan portfolio.42

Negotiations for state aid between Invesmart and Czech Government agencies

The documentary record clearly shows that throughout 2002 the MOF was favourably disposed to consider making a grant of state aid to Union Banka. In particular, on 12 April 2002, based on assessments of Union Banka's 2001 proposals, the MOF prepared a draft proposal to Cabinet for the solution of the relationship between Union Banka and CF. This proposal was based on the proposed CF Transaction.43 The MOF decided not to submit this proposal to Cabinet. Union Banka was informed of this decision in May 2002.44
Parliamentary elections took place in the Czech Republic on 14 and 15 June 2002.
Notwithstanding the parliamentary elections, [REDACTED] wrote to Minister of Finance Rusnok on 28 June 2008. In this letter [REDACTED] reiterated Invesmart's intention to proceed with its investment in Union Banka and asked Minister Rusnok to reconsider if the relationship between Union Banka and CF relating to the Fores Deposit could be resolved.45
Following the elections, with effect from 15 July 2002 a new Minister of Finance, Mr Bohuslav Sobotka, took office. After the change in leadership in July 2002, the MOF was favourably disposed to considering a grant of stats aid to Union Banka. On 25 July 2008 First Deputy Minister of Finance, Eduard Janota, wrote to Invesmart stating that:

[The Government]...appreciates [Invesmart's] activity and I may confirm we are ready to discuss your proposal in detail. Please do not hesitate and sent [sic] to the Ministry of Finance and authorised an detailed project prepared in collaboration with Union Banka. Ministry is going to submit it to the Czech government and expects it will make final decision.46

In August 2001, Invesmart initiated more regular contact with Czech Government agencies and negotiations with the newly elected Czech Government for the provision of state aid to Union Banka commenced in earnest.
Invesmart submitted a three part proposal to the Czech Government on 20 August 2002 (the "20 August Proposal"). The key parts of this proposal were as follows:

(i) settle Union Bank's obligations under the Fores Deposit immediately by payment of CZK 1,134 million (as opposed to the CZK 1,591 million which Union Banka was obligated to pay on 31 December 2004 under the existing contract);

(ii) sell problem loans taken over from the 4 small banks in aggregate nominal value of CZK 1.6 billion (purchase price was not specified); and

(iii) invest the amount freed by the early termination of the Fores Deposit (i.e., CZK 1,134 million) into subordinated debt of Union Banka of unspecified maturity and bearing an 8 percent rate of interest, to be modified on an annual basis.47

This proposal was rejected by the MOF on 24 September 2002 at a meeting between the MOF, CKA and CNB. At that meeting Minister Sobotka informed the officials of the CKA and CNB that the MOF would not accept the 20 August Proposal, but that it would be willing to submit an alternatively structured state aid proposal to the Czech Cabinet. Specifically:

...the lowering of prospective interest to market rate was proposed for discussion.

The MOF was also willing to discuss a reduction in the principal amount of the Fores Deposit by some CZK 400 million through a transfer of problem assets of that amount.48

Minister Sobotka also indicated that any grant of state aid would be subject to OPC approval.49
Invesmart was informed of the outcome of the 24 September meeting by letter from the CNB dated 25 September 20202.50
On 25 October 2002, the day after CNB issued its regulatory approval, discussions resumed between the MOF and Invesmart about the provision of state aid to Union Banka. A meeting took place between Euro-Trend, the consulting group hired by Union Banka on 16 October 2002 to conduct the state aid negotiations,51 and First Deputy Minister of Finance Dr DoruSka,52 At this meeting Dr Doruska suggested possible forms of state aid. Specifically, a combination of:

(a) lowering the interest rate on the Fores deposit; and

(b) the acquisition by CKA of a portfolio of non-performing loans at a value to be determined by an independent expert plus a mark-up of CZK 650 million, less cost of administration of the portfolio.53

On 1 November 2002, Union Banka submitted a state aid proposal to the MOF which totalled CZK 1.2 billion (the "First Euro-Trend Proposal").54 The proposal envisaged:

(a) lowering the interest rate on the Fores Deposit of 11.5 percent to a rate between PRIBOR and a standard commercial rate;

(b) acquisition by CKA of a portfolio of non-performing assets at a price determined by independent experts plus an additional amount of state aid; and

(c) withdrawal of the arbitration claim which Union Banka filed against the CNB on 25 October 2002 in connection with Union Banka's takeover of the BDS (the "BDS Arbitration Claim") discussed above at paragraph 110.55

On 5 November 2002, a meeting took place between Union Banka, the MOF and the CKA which was attended by Messrs Vávra (CEO of Union Banka), Nekovar (Euro-Trend), Oklestek (Eurotrend), Janota (First Deputy Minister of Finance, DoruSka (MOF), Majer (MOF), Rezábek (CKA) and Svoboda (CKA). At this meeting the parties mooted the possibility of a commercial settlement of the BDS Arbitration Claim as an alternative to the First Euro-Trend Proposal.56 The parties also discussed the regulatory requirement that any grant of state aid would have to be approved by the OPC. Invesmart claims that this was the first time at which this requirement was specified by the Czech Government.57
On 8 November 2002, the CNB, which had already informed Union Banka that it refused to pay the "BDS Receivable" and had requested the bank to de-recognise it in its accounts by 22 October 2002, again advised Union Banka that it would not recognise nor settle the BDS Arbitration Claim.58 Due to the CNB’s objections, the BDS claim was subsequently removed from consideration as a means of providing state aid. (It was later resurrected by Union Banka in its Restructuring Plans.)
On 13 November 2002, the CEO of Union Banka, Mr Vávra, again met with staff of the CNB. At this meeting, Mr Vávra informed officials of the CNB that the new Euro-Trend proposal that was about to be circulated would not include the settlement of the BDS Arbitration claim and that Union Banka would limit its request for state aid to CZK 650 million. According to the statement of Mr Vávra, Union Banka was prepared to limit its request for state aid to CZK 650 million in order to avoid any further delay to the completion of the Foresbank settlement.
On 14 November 2002 Euro-Trend submitted to the MOF an amended proposal (the "Second Euro-Trend proposal") for the provision of state aid. This proposal was for the Czech Republic to provide aid in an amount not exceeding CZK 650 million on the following terms:

(a) the lowering of the interest rate applied to the Fores Deposit to a floating market rate;

(b) early termination of the Fores Deposit and its transformation into a five year subordinated debt;

(c) the acquisition by the Czech Consolidation Agency ("CKA") of a portfolio of non. performing assets at a price determined by independent experts plus an additional amount of state aid; and

(d) a state guarantee of a portfolio of loans.59

Invesmart's takeover of Union Banka and Union Group

On 17 November 2002, Invesmart signed 18 agreements to unconditionally assume certain of the RPLs of Union Group and Union Banka in the aggregate principal amount of CZK 2.67 billion.60
On 18 November 2002, Invesmart officially acquired approximately 60 percent of the shares of Union Group, which owned approximately 75 percent of Union Banka at that time. Invesmart also directly acquired approximately 22 percent of the shares in Union Banka. At the CNB's request, the purchase price paid by Invesmart for the shares in Union Banka was to be used exclusively to pay back Union Banka's RPLs.61
Invesmart never paid for the shares it acquired in Union Banka.

Continued negotiations regarding State Aid

On 28 November 2002, Mr Vávra met with officials of the CNB. At that meeting the CNB informed Mr Vávra that the OPC would provide its opinion on the feasibility of state aid. The CNB informed Mr Vávra that there were three obstacles to the provisions of state aid:

(a) the "one time, last time" rule, meaning that prior recipients would be denied future grants of state aid;

(b) the prohibition against state aid where losses were the result of intra-group transfers; and

(c) the aid provided must be sufficient for the bank to continue as a going concern.62

On 29 November 2002, another meeting took place between representatives of the Ministry for Finance, the OPC, the CNB, the CKA, Union Banka and Emo-Trend. At that meeting the OPC informed Union Banka that it would assess the Second Emo-Trend Proposal against the EC Guidelines on State Aid for Rescuing and Restructuring Firms in Difficulty. The OPC also offered rescue aid to Union Banka. Union Banka did not accept this offer but asked for three months to prepare a restructuring plan that would be verified by its auditor.63
Following the meeting of 29 November 2002, Union Banka began drafting a new restructuring plan that was directly based on the various EU guidelines relating to state aid.64
Between 7 January 2003 and 12 February 2003, Invesmart submitted three alternative restructuring plans to the MOF and CNB.
The first of these was submitted on 8 January 2003 ("The First Draft Restructuring Plan") along with a third proposal for the provision of state aid (the "Third Euro-Trend Proposal").

The Third Euro-Trend Proposal envisaged that the Czech Government would implement one or more of the following measures:

(a) a significant decrease of the fixed interest rate on the Fores Deposit or its reduction to zero;

(b) the early termination of the Fores Deposit and its transformation into five year subordinated debt;

(c) the acquisition by CKA of a portfolio of non-performing assets at a price determined by independent experts; and

(d) the purchase of the BDS Arbitration Claim by CF.65

The First Draft Restructuring Plan identified the settlement of the BDS Arbitration Claim as the proposed mechanism through which the Czech Government would provide state aid to Union Banka.66
On 23 January 2003, Union Banka delivered a "Second Draft Restructuring Plan" which envisaged the provision of state aid to the value of CZK 1,691 billion which was to be provided via:

(a) settlement of the BDS Arbitration Claim; or

(b) a guarantee from the Czech Republic covering a portfolio of non-performing loans.67

The MOF provided comments on both the First and Second Restructuring Plans at a meeting held on 28 January 2003.68
On 12 February 2003, Union Banka submitted its third and final restructuring plan to the MOF ("Third Restructuring Plan") in which Union Banka proposed settlement of the BDS Arbitration Claim or, in the alternative, a state guarantee. The settlement of the BDS arbitration was proposed notwithstanding the CNB's clear statement of 8 November 2002 that it would not recognise or settle the BDS Arbitration Claim on a commercial basis.69 The amount of state aid requested totalled CZK 1,762 billion.70
The Third Restructuring Plan demonstrated that Union Banka's new management led by new CEO Mr Vávra had carried out an in depth inspection of the bank and had decided to create extra adjustments to cover bad loans worth CZK 1.8 billion.71 It specifically noted that:

The proposed figures for adjustments and provisions to be created considerably exceeds the previously anticipated figures, primarily as a result of the more realistic approach towards the quality of the assets and risk of the Bank's portfolio adopted by the new management team for restructuring.72

The plan acknowledged that new management were of the opinion that Union Banka's situation was more dire than originally expected.

Union Banka's liquidity crisis and the denial of state aid

By 19 February 2003, it was clear that there was a growing liquidity crisis at Union Banka. On that day the assistant to Union Banka's CEO, Mr Vávra, sent a letter on his behalf to the Minister's secretary, requesting a meeting with Minister Sobotka within the next 48 hours "in a very urgent and pressing matter 'Crisis in Union banka'".73
On the same day that his assistant requested the meeting with the Finance Minister, Mr Vávra met with CNB officials. The meeting's minutes reveal the bank's deteriorating situation:

Mr. Vávra referred to the current development in the area of liquidity as to catastrophical (sic). During the last two weeks (i.e., since the beginning of February), the Bank registers a continuous drain of liquidity. The liquidity cushion of the Bank is currently represented only by ca. CZK 550 mln and if the situation doesn't change fundamentally, it will run down completely next week, according to the judgment of Mr. Vávra. {Note: in mid January, the liquidity cushion of the Bank was around ca. CZK 1.1 mln).

According to the statement of Mr. Vávra, corporate clients are leaving the Bank, whereas deposits in the retail area grow; however, the total amount of deposits drain represents ca. CZK 40 mln per day.

Mr. Vávra resumed the measures taken by the Bank to date:
- holdback of credit transactions since October 2002
- active effort to increase deposits by means of advertisement and interest rates increase. {Note: the current deposits interest rates at the Union Bank are in rank 2x higher than those by other banks with the highest rates on the market!)

However, the Bank is not currently able to prevent the deposits drain by the means of the standard market mechanism...74 [Underlining added; italics and bolding in original]

Thus, on the bank's own view, its liquidity situation was "catastrophical". It was plainly facing peril, and if no action was taken to stem the outflow of deposits, it faced the imminent prospect of having to close down.
The minutes continue, recording Mr Vávra as advising that:

If reversion in the liquidity situation did not occur and no hope for public support existed, there would be no other choice left than to "return the licence".

In this respect, he [Mr. Vávra] was warned by the CNB that optional termination of banking activities was possible only under the condition of settlement of all obligations. Thus in the current situation would come into question only administrative hearing about the licence withdrawal, because for example legal causes for the introduction of sequestration were not met (the stability of the banking system was not endangered) (sic).75 [Emphasis added.]

Mr Vávra's 19 February 2003 request for liquidity support from the CNB was denied.
At 3 pm on the following day, 20 February 2003, Union Banka's Supervisory Board, comprising [REDACTED] and Mr de Sury, met with Governor Turna and three colleagues from the CNB.76 At that meeting, Governor Turna read them his copy of the Minister's letter denying the aid which he had himself just received. The minutes record that the members of the bank's Supervisory Board were not able to express their opinion regarding the impact of this development on Invesmart's affiliation with Union Banka, "nor the possibility of the bank's shareholders securing its liquidity".77 They indicated that they would keep the CNB informed of their actions in the next few days.78
This meeting was followed by a meeting between the CNB and Mr. Vávra at 4 p.m. He too was informed of the Minister's rejection of the restructuring plan. According to the minutes,

Mr Vávra informed the CNB of:

....the critical situation of the bank with respect to its liquidity, when deposit withdrawals by particularly corporate clients increased and in average, the value of deposit values is daily decreased by approx. CZK 40 million. By October 2002, the bank had already used all commercial measures, particularly limitation of loan transactions in an active attempt to increase deposits through promotions and increase of interest rates and the sale of quickly liquid assets, but it unable to prevent further outflow of deposits. Other measures, particularly in the area of sale of receivables or repo operations with respect to receivables, are not feasible within the near future and do not resolve the situation of the bank.

... With regard to the above-mentioned situation, the bank is unable to fulfil its legal obligation to maintain solvency and further operation of the bank would only harm the position of its depositors.

The above statement is to be treated as notice under Section 26b of the Act No. 21/1992 Coll., as amended.

3. Mr. Vávra promised to discuss further steps by the bank at a meeting of the board of directors immediately following this meeting and to inform shareholders and the CNB.

4. The CNB acknowledged the above-mentioned facts and considers the eventual decision of the bank to close its branches to be rational. If the bank decides to close its branches, the CNB will immediately notify the Deposit Insurance Fund in order to start the pay-outs of compensation to depositors as soon as possible to minimize the impact on the depositors. Maximum information provided to the public is considered important by he CNB and the CNB is ready to cooperate with the bank in this area.

The CNB is interested in the most orderly exit of the bank from the sector with minimum impact on the bank's depositors and the banking sector..,79 [Emphasis added.]

In the evening of 20 February 2003, Union Banka's management met and decided not to open branches the next day. They informed the CNB about this decision by letter prepared later that same evening, with the time of 7 p.m., in which Mr VáBvra and two senior bank officers stated:80

...In a situation where the liquidity of the bank is continuously declining and this trend has continued culminating for the last two weeks, we were informed today of the decision of the State not to grant the bank the requested state aid. The decision was publicized during the afternoon and makes a real possibility, according to our recent experience, that a run on the bank will start on 21 February 2003. In accordance with Section 26b of the Banking Act, we have, therefore, come to the conclusion that the bank shall, as a result of the above-mentioned circumstances, in all likelihood become insolvent tomorrow and we give you this information pursuant to the above-mentioned Section 26b.

At the same time, in view of the last consultations with the Czech National Bank, we are taking immediate measures pursuant to Section 26 of the Banking Act and shall limit certain permanent activities, especially, with immediate effect. i.e" with effect from the next following business day - 21 February 2003 - we shall close all branches of Union banka, the clearing centre, etc.81 [Emphasis added.]

The following day, Union Banka closed all of its branches and the CNB initiated administrative proceedings to revoke the bank's licence.82 The Deposit Insurance Fund was notified that it might be required to compensate the bank's depositors and the CNB commenced administrative proceedings to revoke the bank's licence.83
It is evident that this notification did not find favour with Invesmart. Three days later, two of the three signatories to the letter, Messrs Vávra and Roman Truhlár, were dismissed and replaced by Mr Michal Gaube and Mr Roman Mentlik. It appears that the reason for their dismissal lay in what [REDACTED] considered to be "the fact that [the] members of the board of directors whose dismissal was proposed, may take irreversible steps, measures or legal acts that would contradict the interests of Union banka, a.s., its shareholders and clients of Union banka, a.s."84
There is further evidence of a disagreement between Mr Vávra and [REDACTED] as to the proper way to proceed. An article in the Czech publication, Tyden, dated 10 March 2003, later quoted Mr Vávra as saying that the depositors in Union Banka:

... should hope for a quick revocation of Union banka's licence and quick payout from the deposit insurance funds.... This was precisely my logic, why I closed the bank's branches, because the head of Invesmart [REDACTED] and the CNB did not do it. The branches were closed by me in order tor as much money as possible to be saved. [REDACTED] wanted to continue to keep the bank open. He did everything to make that happen, gave me various orders from his post as the head of the Supervisory Board. I firmly stood behind my view that under no circumstance would I do that.85 [Emphasis added.]

On 24 February 2003, the first two applications for declaration of bankruptcy of Union Banka were filed by creditors with the Regional Court in Ostrava.86

Union Banka's attempts to renew its operation

On 27 February 2003, Union Banka presented a salvage plan to the CNB for the renewal of its. operations.87 This plan was supplemented on three occasions during March 2003.
First, on 3 March 2003, Union Banka filed the plan with the CNB and commented on the CNB's notice of the commencement of administrative proceedings to revoke Union Banka's licence.88 This plan was based on unverified data. It included a statement that the plan was subject to change pending an external audit to verify the correctness of assumptions and information presented therein.
Secondly, on 10 March 2003, Union Banka submitted a supplement to its plan to the CNB.89 This proposal envisaged Union Banka continuing to operate on a limited licence whereby it would be prohibited from taking further deposits. It would pay out 100 percent of claims by depositors itself and would finance payment of claims by depositors in excess of CZK 5 million per client under a five year loan agreement with the Bank Deposit Insurance Fund ("FPV"). The Czech Government was not satisfied that Union Banka had funds to implement this plan. Further, the proposal was inconsistent with provisions of the Czech Banking Act and the law establishing the FPV.90
Thirdly, on 18 March 2003, [REDACTED] informed the CNB that Invesmart had entered into a memorandum of understanding with MTGLQ investors, L.P., a wholly owned subsidiary of Goldman Sachs, to cooperate on a new plan.91 The CNB was informed of this plan once it had already made its decision to proceed with the revocation of Union Banka's banking license, which occurred on that same day.
On 27 March 2003, the FMV applied for Union Banka's bankruptcy before the Regional Court in Ostrava. On 31 March 2003, Union Banka created provisions for debts assumed by Invesmart as requested by CNB, resulting in negative capital of CZK1.29 billion.92

The fraudulent bankruptcy proceedings of Union Banka

The orderly bankruptcy of Union Banka was interrupted by proceedings commenced on 31 March 2003 before the Commercial Court in Ústí Nab Labem. On that same day Judge Berka, the presiding Judge, declared Union Banka bankrupt and appointed Daniel Thonat as the bank's bankruptcy trustee. On 1 April 2003, Mr Thonat and a group of armed men forcibly entered Union Banka's main office in Prague.
It is common ground that these proceedings were fraudulent and were only sustained on the basis of forged documents. For this reason, Judge Berka annulled his bankruptcy decision on 4 April 2004. Further, on 8 April 2003, the President of the Czech Republic and Prime Minister approved the removal of Judge Berka's immunity.93 Judge Berka was subsequently prosecuted for abuse of power by a public official.
On 14 April 2003, Union Banka filed an application for a voluntary composition with its creditors with the Bankruptcy Court in Ostrava and a voluntary bankruptcy petition. The members of Union Banka's Board of Directors who filed the voluntary bankruptcy petition were recalled the same day and the petition for voluntary bankruptcy was withdrawn the same day.94
On 24 April 2003, Union Banka lost the BDS Arbitration Claim.95
On 28 April 2003, the Czech Securities Commission ("CSC") requested Invesmart to honour its obligations to purchase shares in Union Banka tendered to it by the minority shareholders who accepted Invesmart's mandatory tender offer.96

The revocation of Union Banka's banking licence and the liquidation of Union Banka

On 30 April 2003, the CNB Board rejected Union Banka's appeal of the CNB's decision of 18 March 2003 to revoke its banking licence. The revocation of Union Banka's licence became effective on 2 May 2003.97
On 9 May 2003, the CNB filed a petition with the Regional Court in Ostrava to dissolve Union Banka and appoint a liquidator.98 On the same day, the Regional Court in Ostrava declared Union Banka to have entered liquidation and appointed Value Added S.R.O. as liquidator.99 The decision came into effect on 19 May 2003. Union Banka did not appeal the decision.
On 17 May 2003, the FTV began making payments to Union Banka's depositors.100 '
On 27 May 2003, the Regional Court in Ostrava dismissed Union Banka's application for composition.101
On 29 May 2003, the Regional Court in Ostrava declared Union Banka bankrupt and appointed Ms Michaela Huserová as bankruptcy trustee.102 Ms Huserová immediately commenced liquidation of the banks assets, a process which continued until Ms Huserová was removed as Union Banka's trustee following a decision of the High Court in Olomouc that she had been involved in unlawfully selling the assets of Union Banka.103
On 13 June 2003, Union Banka appealed the declaration of bankruptcy and the decision rejecting its application for composition.104 Both appeals were rejected.

Invesmart's refusal to pay for shares it acquired in Union Banka

Invesmart's refusal to pay for the shares it acquired in Union Banka has been the subject of litigation both in the Netherlands and in the Czech Republic.
On 9 June 2004, a bankruptcy application lodged by Union Banka's then bankruptcy trustee Ms Huserová was rejected based on debts owing to Union Banka which Invesmart had assumed as consideration for the shares in Union Group.105
On 9 August 2004, Invesmart applied to the Municipal Court in Prague to annul its assumption of debts pertaining to Union Banka, claiming the assumption void on account of breach of the Banking Act by Union Banka. This claim is still pending. Invesmart in the same submission sued the CNB for EUR188 million in damages allegedly caused to Invesmart by wrongful official procedure applied by the CNB.106
On 23 April 2004, Ms Huserová on Union Banka's behalf filed three claims against Invesmart in court for a total of CZK670 million in connection with Invesmart's debt assumption.107
On 23 February 2005, the Regional Court in Ostrava ordered Invesmart to pay CZK670 million in connection with Invesmart's debt assumption following Ms Huserová's claim filed on 23 April 2004. Invesmart did not pay.
On 31 May 2005, Ms Huserová filed a further 15 claims against Invesmart totalling CZK 2.67 billion based on debts assumed by Invesmart as consideration for the shares in Union Group. These claims are still pending.



The Respondent has asserted that the Tribunal does not have jurisdiction to decide the case. In its Statement of Defence, Statement of Rejoinder and at the hearing the Respondent put forward several contentions for its assertion of lack of jurisdiction. In essence, three discrete arguments have been raised:

(i) the Claimant is not a Dutch investor;

(ii) the Claimant did not make an investment in the Czech Republic; and

(iii) the Claimant, through its actions in the Czech courts, is precluded from arguing that it validly acquired the shares in Union Banka and its holding company.

The Tribunal will deal with each of these arguments in turn.


Article 1(b) of the BIT defines "investors" as follows:

(b) the term 'investors' shall comprise:

i. natural persons having the nationality of one of the Contracting Parties in accordance with its law;

ii. legal persons constituted under the law of one of the Contracting Parties.

It is not doubted that Invesmart is a legal person constituted under the law of The Netherlands. However, the Respondent argues that the Claimant does not have any real connection to the Netherlands and for that reason does not satisfy the notion of an "investor" pursuant to the BIT. The Respondent argues that the Claimant has no real presence and no management in the Netherlands, it being physically located in Italy and controlled by Italian nationals.
For its part, the Claimant relies on the wording of Article 1 (b) of the BIT and on the fact that it is constituted under the law of the Netherlands. The Claimant argues that there is no "origin of capital" requirement in the BIT and no such requirement may be implied. It notes that the Czech Republic's "origin of capital" argument was rejected by another tribunal's Decision on Jurisdiction of 29 April 2004 in Tokios Tokelés v Ukraine.108
This Tribunal considers that the words of Article 1(b) of the BIT are clear and that, in the case of legal persons, the only requirement is that the legal person is constituted under the law of one of the Contracting Parties. There is no basis for implying any further requirement. Accordingly the Tribunal decides that the Claimant is an investor within the meaning of Article 1(b) of the BIT.


In its Statement of Defence the Respondent contended that the Claimant never acquired beneficial ownership of the shares in Union Banka and Union Group and made no substantive investment in the sense of committing capital. The Respondent contended that:

[a]s the Respondent has already shown in this Statement of Defence, Invesmart (i) paid no purchase price for the shares, (ii) having agreed (at a shareholder meeting held on 16 October 2002) to a EUR 90 million capital increase in order to allow the Union Banka transaction to proceed, did not increase its capital, (iii) entered into debt assumption agreements in return for the transfer of shares but never met its obligations to Union Banka and Union Group under those debts, (iv) defaulted on its obligation to pay for shares of minority shareholders in Union Banka, which Czech law required it to offer to acquire and (v) is still a party to the Czech Repudiation Claim proceedings in which it argues that the debt assumptions were void ab initio as a matter of Czech law.

As a result, even if it could be established that Invesmart had legal title to the shares in Union banka and Union Group (which is denied for the reasons detailed above), the Claimant never became the beneficial owner of the shares in question because it never performed the obligations which were the quid pro quo of its acquisition of those shares. Accordingly, Invesmart cannot be said to have invested any assets in the Czech Republic as required under Article 1(a) of the BIT. Therefore, Invesmart made no investment protected by the BIT.109

In its subsequent Statement of Rejoinder, and at the hearing, the Respondent appeared to retreat from its first contention, that the Claimant did not become the owner of the shares, and emphasised the second aspect of its argument, namely that there had been no investment of capital. As far as ownership of the shares in concerned, the decisions of the Czech courts, which are referred to below, would appear to establish, or at least are consistent with, the proposition that the Claimant did in fact become the legal owner of the shares in Union Banka and Union Group.
The second aspect of the Respondent's argument focuses on the substance of the investment. The Respondent refers to the preamble to the BIT which states that the Treaty’s object is to "stimulate the flow of capital and technology and the economic development of the Contracting Parties". The Respondent maintains that merely acquiring legal title over any kind of asset is not sufficient to bring that asset under the protection of the BIT. The Respondent contends that there must be a commitment of money to earn a financial return. The Respondent states that the Claimant has not paid for the shares and that throughout the lifetime of its activities in the Czech Republic, the Claimant has outlayed no expenditure for the benefit of Union Banka. Indeed the Claimant has instead been reimbursed for its due diligence work and for the living expenses of its representatives operating in the Czech Republic.
In support of its argument the Respondent refers to a number of cases including Salini Costruttori S.p.A and Italstrade S.p.A v Kingdom of Morocco;110 Joy Mining Machinery Limited v Arab Republic of Egypt,111 amongst others.
The Claimant contends that the cases cited by the Respondent are ICSID cases that examine the meaning of the term "investment" in Article 25 of the ICSID Convention, which was purposely left undefined by the drafters. However, the Claimant argues that the definition of investment for the purposes of the BIT is defined and is exclusive.
Article 1(a) of the BIT defines "investments" as follows:

(a) the term 'investments' shall comprise every kind of asset invested either. directly or through an investor of a third State and more particularly, though not exclusively:

i. movable and immovable property and all related property rights;

ii. shares, bonds and other kinds of interests in companies and joint ventures, as well as rights derived therefrom;

iii. title to money and other assets and to any performance having an economic value;.

iv. rights in the field of intellectual property, also including technical processes, goodwill and know-how;

v. concessions conferred by law or under contract, including concessions to prospect, explore, extract and win natural resources.

It will be seen that Article l(a)ii expressly includes "shares" in the definition of "investments". The Respondent's contention would require the Tribunal to read in a qualification that there be payment or other consideration for the acquisition of the shares. Moreover it would seem to follow that any consideration however small may not suffice. Would a nominal consideration of say one cent or a peppercorn be any different, in substance, from no consideration? The Respondent referred to the aim of the BIT, as set out in its preamble, which is to stimulate the flow of capital and economic development. If the shares were acquired for a nominal value this could hardly be regarded as sufficient to stimulate the flow of capital and economic development.


The consideration which the Claimant agreed to provide for its acquisition of the shares was an unconditional promise to pay EUR 90 million to discharge Union Banka's related party loans. The Claimant never made the payment, contending that the whole arrangement was conditional on the Czech Government providing aid to the bank. Subsequently Union Banka were placed in liquidation and the bankruptcy trustees commenced some 18 proceedings against the Claimant seeking payment of the EUR 90 million. The Claimant contended that the share acquisition agreements, and in particular its obligation to pay the EUR 90 million, were void or otherwise unenforceable. Three of these cases have been decided. In each, the Czech courts decided that the share purchase agreements were valid and that Invesmart consequently had an obligation to pay the EUR 90 million consideration.
The Respondent argues that the Claimant has adopted fundamentally inconsistent positions in the Czech court proceedings and in this arbitration. In this arbitration the Claimant states that it has made an investment in the Czech Republic and seeks relief against the Czech Government with respect to its alleged breaches of obligations under the BIT concerning that investment. However in the Czech court proceedings the Claimant contends that the debt assumptions, and in turn the share acquisitions, were void with the logical consequence that there could never have been an investment.
The share acquisition agreements were entered into between the Claimant and third persons who are not parties to this arbitration. Neither party to this arbitration has asked this Tribunal to determine whether the share acquisition agreements are valid and the Tribunal has not heard argument as to whether it has jurisdiction to do so.
In the circumstances, the Tribunal assumes the validity of the share purchase agreements unless and until it is established that another court or tribunal with authority has determined that the share purchase agreements are void as a matter of Czech law. Moreover, the evidence before this Tribunal is that in three decided cases, the Czech courts have held that the share purchase agreements as well as the obligation of the Claimant to pay the consideration of EUR 90 million are valid and enforceable. Therefore, this Tribunal has no basis for considering the agreements to be void. The Claimant is not precluded from contending that it made a valid investment in the Czech Republic.

Applicable Law

Article 8(6) of the BIT provides:

The arbitral tribunal shall decide on the basis of the law, taking into account in particular though not exclusively:

• the law in force of the Contracting Party concerned;

• the provisions of this Agreement, and other relevant Agreements between the Contracting Parties;.

• the provisions of special agreements relating to the investment;

• the general principles of international law.

The application of this provision was clarified by representatives of the Netherlands and the Czech Republic who held consultations pursuant to Article 9 of the BIT. As a result of these consultations, Agreed Minutes dated 1 July 2002 provided:

(i) On the issue of investment disputes and interpretation of Article 8.6 of the Agreement [i.e., the Treaty]:

The arbitral tribunal shall decide on the basis of the law. When making its decision, the arbitral tribunal shall take into account, [in particular] though not exclusively, each of the four sources of law set out in Article 8.6. The arbitral tribunal must therefore take into account as far as they are relevant to the dispute the law in force of the contracting party concerned and the other sources of law set out in Article 8.6. To the extent that there is a conflict between national law and international law, the arbitral tribunal shall apply international law.112

The Claimant submits that in practice this means that the Tribunal must apply the substantive legal provision set forth in the Treaty, the applicable international law instrument to the merits of this dispute, along with any relevant general rules of international law.113 According to the Claimant Czech law plays two roles. First, the Treaty itself provides that Czech law is relevant to the extent that it is more favourable to the investor then the Treaty. Secondly, it is a well-established principle of international law that, before an international tribunal, the host state's domestic law is relevant with respect to factual issues.114
The Respondent proposes that Czech law enforced during the events described in the Statement of Claim must be applied to the extent relevant to this dispute and to the extent not contrary to international law. According to the Respondent Article 3(5) certainly does not mean that the law of the host state should be disregarded and limited only to cases where it affords better treatment to the investor. There are good reasons why national law needs to be examined before turning to international law. The Respondent further claims that whether the existence of a "commitment" to provide state aid to the Claimant could have arisen in the circumstances must be based upon or consistent with Czech law as in effect.115
The Tribunal observes that the difference in the position of the Claimant and the Respondent is more apparent then real. The Claimant concedes that a host state's domestic law is relevant with respect to factum and refers to Oppenheim's International Law (9th Edition 1996 by Sir Robert Jennings and Sir Arthur Watts). In the Tribunal's opinion, Czech law is relevant insofar as it prescribes the requirements for making an investment and obtaining state aid. The difference in result if Czech Law is applied as factum or as a governing law is immaterial and to some extent academic. However, the Tribunal notes that Czech law is a governing law under the treaty, although its application as a governing law is always subject to the qualification that in the event of conflict between national law and international law, international law prevails.

Fair and equitable treatment

General standard

Chief amongst Invesmart's claims is its submission that the Czech Republic violated the fair and equitable treatment standard which is set out at Article 3(1) of the BIT. This article provides that "each Contracting Party shall ensure fair and equitable treatment to the investments of investors of the other Contracting Party".
The Tribunal notes that there has been a growing jurisprudence and case law dealing with the notion of fair and equitable treatment in recent years. The content of this obligation has been variously and not consistently described as including the different strands of protection of an investor's legitimate expectations, protection against manifestly arbitrary or grossly unfair treatment, requiring consistency of governmental decision-making, transparency, due process and adequate notice, protection against discrimination that does not amount to a breach of the national treatment standard and protection against acts of bad faith.
The tribunal in Waste Management v Mexico sought to bring together various NAFTA awards and to state the law in summary terms:

[F]air and equitable treatment is infringed by conduct attributable to the State and harmful to the claimant if the conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves lack of due process leading to an outcome which offends judicial propriety... in applying the standard it is relevant that the treatment is in breach of representations made by the host state which were reasonably relied on by the Claimant."116

In support of these observations the Respondent drew the Tribunal's attention to the Saluka Partial Award where that tribunal endorsed and commended ("as a useful guide") Waste Management's threshold for infringement of the fair and equitable treatment standard when interpreting the instant Treaty. Saluka went on to quote the comments of tribunals in the Tecmed, CME, Waste Management and the Occidental Petroleum cases as to the relationship between the notion of "legitimate expectations" and the fair and equitable treatment standard, and stated its view that:

304. This Tribunal would observe, however, that while it subscribes to the general thrust of these and similar statements, it may be that, if the terms were taken too literally, they would impose upon host States’ obligations which would be inappropriate and unrealistic. Moreover, the scope of the Treaty’s protection of foreign investment against unfair and unequitable treatment cannot exclusively be determined by foreign investors’ subjective motivations and considerations. Their expectations, in order for them to be protected, must rise to the level of legitimacy and reasonableness in light of the circumstances.

305. No investor may reasonably expect that the circumstances prevailing at the time the investment is made remain totally unchanged. In order to determine whether frustration of the foreign investor’s expectations was justified and reasonable, the host State’s legitimate right subsequently to regulate domestic matters in the public interest must be taken into consideration as well. As the S.D. Myers tribunal has stated, the determination of a breach of "fair and equitable treatment" by the host State must be made in the light of the high measure of deference that international law generally extends to the right of domestic authorities to regulate matters within their own borders.117

Legitímate Expectations

The Claimant

The central plank of Invesmart's fair and equitable treatment claim was its contention that it formed a legitimate expectation that the Respondent committed to provide state aid having a certain financial effect upon Union Banka. This expectation was said to have crystallised on 24 October 2002 when, after extensive written and oral communications with various Czech agencies, Invesmart’s third application to acquire control of the bank was approved by the CNB.
Invesmart submitted that throughout its discussions with the Czech Government it stated that its investment in the bank was contingent upon a grant of state aid and that its investment was based on an express, or in the alternative an implied, commitment of state aid. The Czech financial authorities were fully aware of its position as Invesmart had communicated this to them. The express promise came from governmental officials and the implicit promise lay in the CNB’s approval which, in the Claimant’s view, would not have been granted had the Ministry of Finance not committed to provide state aid. Therefore, when the CNB approved the acquisition of a controlling shareholding in the bank on 24 October 2002, a promise of state aid enforceable at international law was said to have crystallised.
Accordingly, Invesmart argued that the Tribunal should find in its favour if it finds that the Czech Republic made an express representation that state aid would be granted, or, alternatively, if the Czech Republic induced Invesmart to acquire the bank and assume the related party loans under circumstances where Invesmart held a legitimate expectation of state aid."118
The Claimant adduced several categories of evidence in support of its characterisation of the CNB's approval of its acquisition, including:

(a) written communications between Invesmart, the CNB and the MOF which Invesmart offered as proof that it had stated that its acquisition of Union Banka was subject to state aid being granted;

(b) internal government documents which Invesmart offered as proof of the CNB's understanding that Invesmart would not invest in Union Banka absent state aid; and

(c) communications surrounding internal government meetings held on 24 September 2002 and 24 October 2002, which Invesmart claimed were pivotal points in its negotiations concerning Union Banka.

In developing its submissions it went on to characterise the state aid negotiations following the CNB's approval as changing the rules of engagement once the acquisition had been made.
The specific items of evidence adduced by Invesmart in support of its submissions are described in more detail in the paragraphs directly below.

Correspondence between Invesmart and the CNB and MOF

The Claimant referred to five examples of written communications with the CNB and the Ministry of Finance where it stated that it would acquire control of Union Banka only if state aid were granted. For example, the minutes of a meeting held on 5 December 2001 between the CNB and Union Banka, just after Invesmart became involved with the bank, noted the contemplated sale of shares in Union Group to Invesmart and recorded that the sale was subject to conditions such as CNB approval and "resolving the Fores (Česká finanční project)" ("CF Transaction").119
Likewise, by letter dated 26 March 2002 to Pavel Racocha and Vladimir Krejca of the CNB, copied to Marie Parmová (then President of Union Banka), Invesmart’s Giuseppe Roselli stated the company’s intention to purchase 70 percent of Union Group’s shares. Mr Roselli’s letter recorded Invesmart’s position on the need for the CF Transaction:

In [sic] the same time we are preparing, in cooperation with our advisors, the reconstructing plans for both Union Group and Union banka. We want to finalise the whole transaction in the shortest time, as soon as your approval will be granted, therefore we would appreciate any support for the conclusion of the "Fores-Česká finanční" deal, which constitutes condition precedent for the contract’s completion [sic].120

Three letters to similar effect followed during the course of the spring and summer of 2002.121
The Claimant noted that the CNB itself believed that given Union Banka’s poor condition, if state aid were not granted, Invesmart would not invest in it. For example, a report prepared by the CNB’s Banking Supervision Division, dated 5 September 2002, noted:

Even though Invesmart B.V. has in no written material ever stated entirely unambiguously that if aid is not provided to Union Banka, a.s. it will have no interest at all in acquiring it, it is highly likely, given the bank’s situation, that state aid is absolutely essential for the profitability of the whole operation from the point of view of the applicant, and thus also for its decision whether to enter Union Banka, a.s.122

The Claimant also highlighted a draft unsigned letter that was annexed to the record of the CNB’s 5 September 2002 meeting from Governor Tûma to Finance Minister Sobotka. Invesmart argued that the Government "induced" it to acquire the bank through the promise of state aid, citing the draft letter in support of its contention. The draft letter stated:

... it appears that before making a definitive decision on the issue of financing its purchase of a stake in Union Banka, Invesmart B.V. is waiting to find out the Finance Ministry’s opinion on the proposal for dealing with the ‘Fores problem’ that the bank has put forward. The Finance Ministry’s decision on this issue is thus likely to have significant consequences for the situation in Union Banka, a.s. The Czech National Bank believes it is unacceptable for the uncertainty concerning the bank’s future to be further prolonged for an unlimited time, and so it would welcome if steps could be taken that would induce the applicant to make a decisive statement.123 [Emphasis added.]

Meeting of 24 September 2002

Invesmart also relied upon two meetings held in the autumn of 2002. The first, held on 24 September 2002, involved the CNB, CKA and Finance Ministry officials, including the newly appointed Finance Minister Bohuslav Sobotka. The troubled state of Union Banka and Invesmart’s possible equity participation in the bank was discussed at this meeting.
Under the heading "Conclusions", the minutes recorded that the loss from the credit agreement between CF and Union Banka should be covered by the National Property Fund in conformity with the 1996 government stabilisation fund, and in case of a change to the agreement, the Office for the Protection of Economic Competition (OPC) "will need to be consulted and government approval will be required". There was also a discussion of the form of state aid, namely, a reduction of the interest rate for the CF deposit in Union Banka from 11.5 percent to approximately 3.5 percent and the purchase of bad quality loans "according to selection by CKA against a decrease of the Česká finanční deposits".124
The Claimant placed particular emphasis on the recording in the minutes that "the minister of finance is ready to submit a document for the state aid defined in this way for the government session".125 The Claimant submits that this demonstrated that the amount and structure of state aid had been agreed; that, as matters stood, the consent of the OPC was not needed for its granting; and that the Minister undertook as of 24 September 2002 to submit the initiative to the government for its approval.126
The minutes proceeded to set out the next steps to be taken. These were that the Ministry of Finance and the CKA "will discuss the state aid with Invesmart by 25 October 2002 at the latest", the CNB "will notify Invesmart on necessity of submitting the documents" to obtain CNB approval, and the Ministry of Finance and the CKA "will discuss the form of the state aid with OPC as settlement of the stabilization programme following return of OPC representatives from Brussels by 1 October 2002 at the latest".127
Although Invesmart was not represented at the 24 September 2002 inter-agency meeting, it adduced evidence that the contents of the discussion and the decisions taken were communicated to it the next day,128 This was acknowledged by the CKA’s Mr. Pavel Rezábek in his second witness statement.129
Following the 24 September 2002 meeting, there were a number of communications on the Invesmart proposal between senior Czech officials. These documents were disclosed to the Claimant in response to its request for production of documents. For example, by letter dated 7 October 2002, Minister Sobotka wrote to the CNB Governor adverting to Invesmart’s earlier proposal and noting that the conditions of the entry of the investor to the bank had since been "mutually defined". He referred to the CF matter and noted that on 25 September 2002, a meeting was held at the office of the First Deputy Minister of Finance’s office at which representatives of Invesmart gave a binding promise to provide the documents that had been missing in Invesmart’s first application for acquisition of control of Union Banka.130
A reply to Minister Sobotka’s letter, dated 11 October 2002, was sent by Oldrich Dëdek of the CNB. Referring to the CNB’s rejection on 4 October 2002 of Invesmart’s second application to acquire the bank due to the missing documents, Mr Dëdek noted that while Invesmart had stated that it would supply the requested documents and it had also confirmed that its entry into the bank was "still subject to the state aid in resolving the problem of the receivable of Česká finanční, s.r.o. due from this bank". Mr. Dëdek continued: "Given the above, we may state that, if the state aid is refused, Invesmart B.V. will most probably cease its effort to enter into Union banka, a.s." He thus requested the Ministry of Finance to communicate "its clear standpoint to the representatives of Invesmart B.V."131 The Claimant construed these letters as confirming its view that the CNB would not have later approved its share acquisition without the Ministry of Finance’s having first agreed to provide state aid.

Meeting of 24 October 2002

The second meeting upon which Invesmart relied took place on 24 October 2002, the same day as the CNB approved Invesmart’s acquisition of indirect control of Union Banka. This was a meeting of the CNB’s Bank Board which the Minister of Finance also attended. An excerpt of the record of the meeting, produced by the Respondent in response to the Claimant’s request for production of documents, recorded that Union Banka was discussed. The minutes, which were in summary form, noted:

The Bank Board noted the oral details provided by Mr. Sobotka about the Czech Finance Ministry’s point of view with regard to negotiations with the foreign investor and the Banking Supervision Department’s approach to dealing with Invesmart’s latest application for approval to its purchasing of a stake in Union Group, a.s. and Union Banka, a.s.132

The Claimant acknowledged that the minutes did not record what the Minister actually said at the meeting, but contended that it could be inferred from the surrounding circumstances that he must have stated his intention to obtain the required state aid package at that meeting.
Those circumstances included: (i) Invesmart’s application had been expressly conditioned throughout on that requirement; (ii) Invesmart’s third application for the CNB’s approval had been submitted only two days previously; (iii) the CNB had been pressing the Ministry of Finance for its "clear standpoint" on state aid; (iv) the bank’s situation was serious due to a run on the bank after a CNB spokeswoman had commented on the rejection of Invesmart’s second application on 22 October 2002; and (v) the fact that CNB’s approval of the third application occurred after the Finance Minister made his comments to the Bank Board.133 The totality of the circumstances, Invesmart argued, allow the Tribunal to infer that the Minister must have stated his support for the requested state aid and Invesmart reasonably formed the expectation that that was the case when its third application was approved only two days after it was submitted to the CNB.134
Invesmart observed further that the day after the CNB approved its acquisition, a meeting was held between a Finance official, Josef Doruska, and two Euro-Trend representatives and the only form of state aid discussed there was the CF Transaction. The minutes record Mr Doruska asserting that "the only hope, in view of time pressure as well, is to proceed" with an amendment to the loan contract with CF.135 This indicated, in Invesmart’s view, that the form of state aid had been agreed.136
From the submissions made at the hearing, it appears that for the Claimant the significance of the CNB’s approval was twofold. First, it was said to constitute a commitment by the Respondent that state aid would be granted. Secondly, it was asserted that the CNB approved the acquisition knowing that Invesmart would be taking on a €90 million obligation in connection with the assumption of certain related-party loans.137 Invesmart pointed out that appended to its 22 October 2002 application to the CNB were its Share Purchase Agreements with the selling shareholders, together with various addenda thereto.138

Claimant's characterisation of negotiations following CNB approval

During the hearing, the Claimant developed the point that after the CNB’s approval was granted, the Czech authorities changed the rules of engagement and began to impose new conditions on the granting of state aid. This culminated in the denial of state aid to Invesmart, contrary to its expectation. The Claimant argued that it was only after the CNB acted and Invesmart had bound itself to acquire the shares in Union Banka and Union Group that these conditions were brought to its attention. Invesmart argued that at this point the structure of what was acceptable to the government changed and hurdles began to be raised that were inconsistent with its expectation that the CNB’s prior approval of 24 October had resolved the issue of state aid in its favour.
This argument relates both to the legitimate expectations claim and to the separate alleged violation of Article 3, namely, the claimed inconsistent treatment of Invesmart’s investment by the Czech authorities. Insofar as the legitimate expectation argument is concerned, the Claimant referred principally to two events.
First, it noted that unbeknownst to Invesmart, the Deputy Prime Minister of the Czech Republic had represented to the European Union that the Republic would not grant any new state aid to the banking sector.139
Secondly, Invesmart adverted to the meeting between the Ministry of Finance, CKA and Invesmart representatives on 5 November 2002 at which the bank’s First Plan was reviewed and Invesmart was informed of the internal discussions that had been held with the OPC. It was advised that any aid had to be "targeted, limited and pre-approved by the OPC" and had to be approved by the government. In addition, it was told that if the solution proposed in the material presented was chosen, the material required further work.140 Invesmart asserted that this marked the beginning of a series of demands for more detail and shifting mechanisms of delivering state aid, the effect of which was inconsistent with what it had been led to believe would occur after the CNB approved its acquisition of indirect control of Union Banka and its shareholders authorised the capital increase. The Claimant emphasised that the 5 November 2002 meeting occurred the day after Invesmart’s shareholders had ratified their 16 October 2002 decision to increase the company’s share capital by €90 million, i.e., after one of the conditions precedent for the completion of the SPAs with the selling shareholders was removed.141
By way of example, Invesmart pointed to the discussion at the 5 November 2002 meeting where the CKA’s Mr Rezábek raised the possibility of whether the CNB (not represented at the meeting) could recognise the BDS Arbitration Claim as a mechanism for providing state aid. Mr Rezábek suggested that this possibility offered a "purely commercial solution" that would bail out the bank but not require the competition authorities’ approval.142 This proposal was rejected by the CNB on 8 November 2002. The Claimant saw this as a troubling sign of inconsistent treatment (a point to which the Tribunal will return below).
With the BDS Receivable suggestion off the table, the discussions reverted to variations on the CF transaction and another possibility, which was to issue a state guarantee for the repayment of a selected group of debts. These were examined at another meeting between the Ministry of Finance, the OPC, the CNB, the CKA, Union Banka, Euro-Trend and Invesmart held on 29 November 2002. The meeting "aimed to achieve consensus" on how the Finance Ministry and Invesmart should proceed in relation to the OPC. The minutes noted that a decision from the OPC was a necessary condition for the government’s final decision on the granting of state aid.143.
The competition authorities also advised at this meeting that the request and its accompanying material, particularly the restructuring plan, would have to fully respect the EC’s Guidelines on State Aid for Rescuing and Restructuring Firms in Difficulty. It would also have to be shown why the bank could not survive in the market without state aid and the reasons why its existence should be preserved, "in other words, that state aid was essential (including why the shareholders or other parties could not rescue the bank themselves)".144 The Claimant also asserted that the record showed that the Minister of Finance’s requests for state aid regularly succeeded in being approved by Cabinet.145 This confirmed, in Invesmart’s view, the reasonableness of its expectation that once the 24 September 2002 meeting’s results had been communicated to it, with the CNB then having approved its acquisition of indirect control of Union Banka, state aid had been promised.

Amount of state aid

The disputing parties disagreed as to whether the amount of state aid discussed between August and September 2002 was CZK 650 million in total, or a (larger) grant of state aid that conferred a net benefit of CZK 650 million on the bank. In this regard, Invesmart observed that although the CZK 650 million figure was discussed, from the outset, the Czech authorities understood that the cost to the State would be greater than that sum and that any risk associated with the quality of the CF loan portfolio was clearly to be borne by the government.146 It pointed to a memorandum dated 10 September 2002 prepared by the Czech Consolidation Agency for Finance Minister Sobotka, which set out the CKA’s position on the proposed settlement of relations between CF and Union Banka presented by Invesmart in August 2002. The memorandum noted that the reduction in the interest rate on the Fores deposit would create a retroactive loss to CF of approximately CZK 207 million and a future interest loss of approximately CZK 251. As for the assumption of problem receivables, this would result in a loss of approximately CZK 330-771 million.147 At the upper end of the estimate, the state aid would cost the government more than CZK 1 billion. Invesmart pointed to this as proof that the parties had previously distinguished between the net impact of the grant of state aid on Union Banka and the cost to the government of providing such aid.
The Claimant stressed its view that notwithstanding the Respondent’s position in this arbitration, in September-October 2002 the parties were in agreement as to the effect of the state support in connection with Invesmart’s acquisition, namely, support in the form of the CF Transaction which would result in an uplift to the net asset value of Union Banka of CZK 650 million.148
As noted in the Facts, on 20 February 2003, the Minister of Finance decided against recommending state aid for Union Banka. The bank closed its doors the next day and an administrative proceeding for the revocation of its licence was immediately initiated by the CNB. The Tribunal will address these events in its discussion of the expropriation claim. For present purposes, it is not necessary to enter into a discussion of the reasons for the denial of state aid because the consideration of the legitimate expectations claim simply requires the Tribunal to proceed on the basis that the expectation said to have crystallised on 24 October 2002 was not met.

The Respondent

The Respondent argued that neither the factual record nor the governing law supported the legitimate expectations claim.
It began by asserting that as a matter of Czech law and European Union (EU) law, there was no right to state aid; indeed, state aid is forbidden unless its granting is permitted by the relevant competition authorities. Noting that Article 8(6) of the BIT specifies that the Tribunal must decide "on the basis of the law, taking into account in particular though not exclusively", inter alia, "the law in force of the Contracting Party concerned" and "the provisions of... other relevant Agreements between the Contracting Parties", the Respondent asserted that under both its own domestic law and under the various agreements to which The Netherlands and the Czech Republic were party at the time, including the treaty of accession governing the Czech Republic’s admission to the EU, there were prohibitions on the granting of state aid in 2002. Therefore, there could be no legally enforceable right to the grant of state aid.149
Given that the law of the host state did not confer a general right to state aid, but rather prohibited aid unless an exemption was granted, the Respondent argued that there could be no legitimate expectation which is contrary to the law of the host state:

No investor, can hold, at least not legitimately and not in the absence of the clearest possible commitment made by the state concerned, an expectation which the law of the host state contradicts.150

On a related point, the Respondent challenged the Claimant’s general approach to the governing law in this proceeding which, in the Respondent’s view, had avoided dealing in particular with the Czech law aspects of the case. In the Respondent’s view, the Czech law was extremely important in terms of the governing law.151
The Respondent also took issue with the Claimant’s characterisation of the acts of various. Czech entities as constituting a promise or commitment of state aid. In its submission, there must be a concrete, specific promise in writing and there was no such document on the record.152 With no explicit promise in writing unequivocally promising state aid to Union. Banka, the Respondent argued that there could also be no expectation of state aid based upon an implied or constructive promise.153 In its view, the Claimant was calling upon the Tribunal to construct a promise out of the materials before it. This was not possible because the granting of aid was a voluntary matter and could only be enforced as a legitimate expectation if the State made an actual promise to deliver the aid.154 One would fully expect in a matter as important as this that the representation sought to be enforced would be in writing and be unequivocal.
Insofar as the Claimant sought to tie the CNB’s approval of Invesmart’s application for approval of its acquisition of control of Union Banka to a commitment of state aid by the Ministry of Finance, the Respondent argued that the CNB’s approval was simply an approval of a shareholding interest, a "prior approval" in a multi-stage acquisition process and nothing more.155 One of the Respondent’s Czech law experts, Dr Petr Kotáb, had opined that under Czech law, the CNB’s approval is designed to prevent the entry into the banking sector of persons whose activities may be detrimental to the system’s stability.156 This supported the Respondent’s view that what the CNB did on 24 October 2002 was no more than a prior approval. The Respondent is, and was at the time, a party to the Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime which requires it to ensure that funds invested in its financial institutions were bona fide157 The CNB had to satisfy itself that Invesmart’s funds met this requirement. Beyond that, the CNB’s approval was a necessary step in Invesmart’s acquisition of indirect control of the bank, but the approval did not oblige Invesmart to complete that acquisition. Therefore, when the CNB issued its approval on 24 October 2002, that act could not reasonably be viewed to be a commitment to grant state aid by another state entity vested with that power, i.e., the Ministry of Finance.158
The Respondent argued further that there was a fundamental distinction to be drawn between a binding promise and a legitimate expectation. In its closing submission, the Respondent argued that a binding promise occurred when it could be clearly established that the state made a commitment of a particular kind, which was sufficiently specific that the investor could rely on it. A legitimate expectation was, on the other hand, "a modality of fair and equitable treatment", not to be equated with anything analogous to a contract. Even assuming arguendo that, on the facts of this case, the Respondent had given the Claimant an expectation of aid in the amount sought in the Third Restructuring Plan, CZK 1,762 billion, the state could give an investor an expectation of a certain treatment but in the end, that still did not mean that in failing to accord such treatment, the state had breached the fair and equitable treatment standard. Situations can change and an expectation is not a guarantee; nor is it an estoppel by a government that it could not act in light of changed circumstances.159
As for the terms of the alleged promise the Claimant sought to enforce, the Respondent argued that there cannot be a commitment without the content being sufficiently agreed. Even if there could have been a legitimate expectation of aid, it had to be a precise expectation and in the Respondent’s view, the content and conditions of the alleged commitment changed materially after the date on which the expectation was said to have crystallised.160 The Respondent took issue with the Claimant’s argument that the amount of state aid was agreed as of that date. It also challenged the suggestion made at the hearing that the objective of the exercise had been to return Union Banka to a capital adequacy ratio ("CAR") of 14 percent. In the Respondent’s view, there was nothing in the record evidence that made any reference to achieving that capital adequacy ratio.161 The Respondent suggested that the reason why the Claimant had advanced the 14 percent CAR result was that nothing else would have sufficed. The evidence showed that as the new management of Union Banka familiarised themselves with the bank’s finances, they discovered that the problems were greater than they had thought.162
The Respondent also took issue with the Claimant’s contention that the amount and form of state aid had been agreed by 24 October 2002. In its view, the evidence showed that the amount and conditions for the granting of the state aid at issue changed over time and materially so after the CNB’s grant of approval which had allegedly crystallised the commitment. Pointing to the Third Restructuring Plan, submitted to the Ministry of Finance on 12 February 2003, the Respondent noted that the amount of aid then being sought was considerably higher than what had been sought by Invesmart in its initial 20 August 2002 letter to the Ministry of Finance.163
The Respondent also disputed a number of the factual elements of the Claimant’s case. It pointed to contemporaneous documents which showed that Invesmart was aware of the need for the OPC's approval months before it filed its third application with the CNB.164 It asserted that, contrary to its pleading in this proceeding, Invesmart did not make its investment contingent upon the CNB’s approval and the implicit approval of state aid now claimed to be bound up in that approval. In this regard, the Respondent reviewed the documents amending the Share Purchase Agreements and argued that Invesmart had become an obligor with liabilities under the amended Share Purchase Agreements in mid-August 2002 (six weeks before Invesmart’s second application was rejected by the CNB and over two months before its third application was approved) and hence, contrary to Invesmart’s plea in this proceeding, it did not condition its acquisition of liabilities in connection with its assuming indirect control of Union Banka upon the granting of state aid.165
The Respondent also noted that the legitimate expectation claim had to be evaluated having regard to the state’s "margin of appreciation" recognised by international law. This margin is particularly wide, it was argued, when it comes to state aid and there was no case where a breach of fair and equitable treatment had been found as a result of a regular exercise of inherently discretionary governmental powers such as a refusal of state aid.166
Finally, insofar as the Basel Committee’s Guidelines had been relied upon in support of the legitimate expectations claim, the Respondent did not see such standards as being relevant to determining a breach of the fair and equitable treatment standard. The Guidelines addressed "best practices" and were by their own terms non-binding. They could not be equated with an international legal obligation, breach of which gave rise to a breach of Article 3 of the Treaty.167

The Tribunal’s analysis - General Approach

In the Tribunal’s view, six propositions are relevant to its consideration of this claim.

Detailed analysis

As noted above, Invesmart’s case is that it received an express, or in the alternative, an implicit commitment of state aid from the Respondent. With respect to the latter, Invesmart claims that it held a legitimate expectation that given its repeated prior statements that state aid was an essential condition of its investment and its understanding of what the internal thinking of the Czech financial authorities was (or must have been), the CNB could only have given its approval on 24 October 2002 on the basis of a prior commitment by the Ministry of Finance to provide the requisite state aid. Invesmart claims that it was reasonable on its part to have then ratified its earlier approval of the capital increase and to assume the related party loans.
Before proceeding with its detailed analysis of the claim, the Tribunal finds it helpful to summarise certain points elicited from [REDACTED] because his testimony had the effect, in the Tribunal’s view, of narrowing the legitimate expectations claim from the way in which it was advanced in the written pleadings. The Tribunal was struck by three points elicited from [REDACTED] on: (i) whether an express promise of aid was made to Invesmart; (ii) what the CNB’s role in the events at issue was; and (iii) the Claimant’s awareness of the potential role of the OPC.
[REDACTED] admitted that Invesmart received no written promise of state aid from the Respondent.171 In ternis of an oral promise, [REDACTED] was, in the Tribunal’s view, vague about who made such a promise. He testified that "several people within the Czech Government" made such a promise.172 But when asked to name someone who did so, he responded "there was - the information we were given by the Minister of Finance"173 and when asked whether he was referring to Minister Sobotka, he responded:

Yes. Not directly; from his office. We also consider - and I didn’t have the chance to finish what I was saying, but we also consider that the approval from the Czech National Bank to our acquisition of Union banka was implicitly a binding promise or commitment of state aid.174

He testified further that:

Someone promised me, or we understood a commitment was to help Union banka to increase its value of 650 million.175

This testimony is not sufficiently cogent and precise to support the claimed express promise of state aid. The witness could reasonably be expected to have a precise recollection of specifically who in the government promised state aid because that is such a material fact for this limb of the Claimant’s case. The witness should have been able to specify names and the circumstances in which such an important commitment was claimed to have been given. Yet the testimony on this point was vague and tentative. This, combined with [REDACTED] retreating to the CNB’s approval as an implicit promise of aid, leads the Tribunal to view the legitimate expectations claim as being more properly founded upon an alleged implicit promise of state aid.
That implicit promise was said to be bound up in the CNB’s approval on 24 October 2002. Reflecting Investmart’s awareness at the material time of the allocation of different jurisdictions, powers and responsibilities between the various state entities, conceded that the CNB could not promise state aid because it was a banking regulator.176 When asked whether Governor Tûma had ever stated that "we understand that by giving permission we accept a commitment to pay state aid", [REDACTED] responded, "No, no, he never said that".177 Insofar as the period prior to 24 October 2002 was concerned, when asked whether there was any document from the CNB promising state aid if Invesmart obtained CNB approval, [REDACTED] testified, "No, I don’t remember specifically".178
This means, in the Tribunal’s view, that the CNB’s approval in itself cannot be taken to have amounted to an implicit commitment because Invesmart understood that it had no role in the decision whether to grant state aid. This in turn narrows the inquiry to the Claimant’s contention that the CNB would only have approved its application if it had had a concrete statement from the Minister of Finance that state aid was going to be granted. The Tribunal will revert to this below.
As for the role of the OPC [REDACTED] acknowledged that when Invesmart was debriefed about the 24 September 2002 inter-agency meeting, he was told that the advice of the OPC was being sought "in order to get their advice on the viability as far as the EU issues were concerned".179 He agreed that the OPC was the entity of the Czech Republic that was to decide whether the reduction of the interest rate on the Fores deposit would constitute state aid.180 He also acknowledged that he was told by Union Banka’s consultants, Euro-Trend, on 25 October 2002 (one day after the CNB had approved Invesmart’s acquisition of indirect control of the bank) of the commitment made in writing to the EU by Deputy Prime Minister Rychetskÿ that the Respondent did not anticipate providing any further state aid to the Czech banking sector.181
[REDACTED]’s testimony that he was made aware of the OPC’s role as a result of the 24 September 2002 meeting, that it would determine whether lowering the Fores interest rate constituted state aid, and that Euro-Trend was informed of the Rychetskÿ letter to the EU on 25 October 2002 - eleven days before Invesmart’s shareholders ratified their earlier approval of the €90 million capital increase - is also relevant to the Tribunal’s consideration of the legitimate expectation claim.
With these points in mind, the Tribunal now turns to what it considers to be the key issues bearing on the claim.

The law on state aid

There is no legal entitlement to state aid at international law. As an exercise of its sovereignty, leaving aside any treaty obligations it may have, a State has the discretion to decide whether or not to grant aid. On the facts of this case, there was nothing in Czech law which affirmatively stated that state aid would be granted upon request and a properly advised investor would understand that to be the case.
In fact, rather than obliging signatory states to grant aid, the member States of the EU have to the contrary undertaken not to grant it within the common market. That is, they have agreed to constrain their previously unfettered right to grant aid in order to achieve the goal of free competition. As an aspiring member of the EU, the Czech Republic was one such state at the material time in this case.
Under Article 8(6) of the BIT, the Tribunal must have regard both to Czech law and the provisions of "other relevant Agreements between the Contracting Parties". The relevant EU instruments and the Czech law implementing them fall within these categories. Under those regimes (the national and the supranational, which were consistent with each other in 2002 as the Czech Republic moved towards full accession to the Treaty of Rome), there could be no prima facie legal right to the granting of state aid. To the contrary, Section 2 of the Law on state aid affirms that aid is forbidden if the OPC does not authorise an exemption from the prohibition.182

Due diligence

One element relevant to judging a legitimate expectation claim is whether the investor could have made itself aware of the regulatory issues that faced its investment. Some tribunals have characterised this as an issue of transparency. International agreements that have contained express transparency obligations have cast them in terms of a duty imposed on the state to publish its laws and regulations so as to allow a private party to familiarise itself with them and be able to conduct its business affairs accordingly.183
Czech law and the relevant international agreements between the two Contracting States to the Treaty were both readily discoverable by the Claimant in 2001-2002. The regulatory practice of the Czech Republic in the area of state aid was becoming more stringent in view of its impending accession to the Treaty of Rome. In the Tribunal’s view, this too was discoverable to the Claimant. The expert evidence of Professor Claus-Dieter Ehlermann adduced by the Respondent shows that the relevant law and guidelines were available to be consulted had Invesmart decided to retain counsel on this matter.184 Those materials posited relatively stringent requirements for granting an exemption to the prohibition on state aid. Counsel would have been able to examine publicly available information on the materials needed to request state aid and the types of considerations applied by national and supranational agencies when evaluating state aid proposals.
During the hearing, [REDACTED] acknowledged that Invesmart did not retain legal counsel to advise it on the competition law issues governing the grant of state aid.185 The Tribunal found this surprising because the evidence shows that Invesmart knew fairly early on that competition law and the enforcement agency, the OPC, both had a role to play in the resolution of the bank’s hoped-for state support.
In a letter dated 28 June 2002, addressed to the then-Minister of Finance, Jiri Rusnok, requesting him to "reconsider the possibility to realize the project of ‘Finalisation of the Foresbank stabilisation program’", [REDACTED] recognised that the state aid being sought by Invesmart could be refused on the objection of the competition authorities. He noted in this regard that:

... We are also working on submission of another expert’s opinion for selected assets’ portfolio and the Economic Competition Office standpoint so that the Office will not prevent us from the realisation of our project.186 [Emphasis added.]

Beyond [REDACTED], noting the fact that Invesmart was seeking an expert’s opinion, there is no record evidence of what that advice amounted to. In the Tribunal’s view, letter shows an awareness as of 28 June 2002 that the OPC could block the aid.
In the Tribunal’s view, Invesmart should have sought legal advice on the EU and Czech law so that it understood precisely what the requirements were for making out the case for the granting of an exemption to the restrictions on granting state aid. Had it done so, it could have determined for itself that the law imposed strict guidelines on what information would be required to be submitted to the relevant authorities in order to maximise its chances of obtaining the requested aid to be granted.
[REDACTED] conceded that "looking back, we should have" obtained legal advice on the state aid issue.187 His explanation was that Invesmart did not do so because it found an existing transaction on the table and it took it from there and that "my understanding, my shareholders’ understanding throughout the whole process, has been that it was in the primary interest of the Czech Government and the Czech Republic to rescue and save Union Banka".188 This does not assist the Claimant because, while the Claimant did indeed receive positive signals from the Respondent, the record shows that they were not all in that direction. There had been attempts by the bank’s existing management to resolve the problem, but those had been unsuccessful.
Indeed, when [REDACTED] approached the newly-appointed Minister of Finance in July 2002 after the parliamentary elections there was no "existing transaction" on the table because Minister Sobotka’s predecessor had rejected Invesmart’s approach in May 2002. This is what had led [REDACTED] to send his letter of 28 June 2002 to Minister Rusnok asking him to reconsider. His reference in that letter to Invesmart’s seeking an expert opinion so that the OPC would not block the project shows an understanding that state aid was not automatic even if the Minister of Finance were inclined to recommend its granting. Likewise, after the Ministry of Finance indicated that it was willing to look at the issue of state aid, as [REDACTED] 16 September 2002 letter shows, Invesmart’s 12 September 2002 meeting with the CNB was not entirely positive from the investor’s perspective. [REDACTED] recorded the CNB’s Mr Jiricek as stating that "he sees no or very little chances for the transaction to be completed".189 The CNB’s reply to [REDACTED] while not prejudging the outcome of the state aid issue, emphasised the MOF’s and OPC’s roles in approving the aid and pointed out that determining whether to grant aid was not the CNB’s responsibility.190 The information conveyed to Invesmart after the 24 September 2002 intra-govemmental meeting highlighted the OPC’s role. In short, even the positive statements made by government officials during the material period did not in any way purport to vary the legal regime applicable to state aid.
[REDACTED] position, though not entirely unreasonable, did not show the prudence that could be expected of an investor whose investment was being conditioned upon the government’s financial support.
The Tribunal considers that Czech counsel would have been aware of the tightening of the Czech rules on state aid and the increasing oversight of the EC. Not surprisingly, as the state aid regime became more stringent for the Czech Republic, the onus upon a party seeking such aid and indeed upon a state inclined to grant it became heavier. What might have passed muster in the mid-1990s would not necessarily pass muster in 2002.
The failure to seek legal advice reflected an underlying feature of the case: that the entire venture seemed to be driven by frequent requests for state aid bound up in [REDACTED] undoubted enthusiasm and drive to secure ownership of a cleaned up bank which he could then sell to an established Western European bank. While the Tribunal considers that [REDACTED] and de Sury brought financial acumen to the project, there appears to have been relatively little substantive legal due diligence performed by Invesmart. This is also reflected in Invesmart’s contractual dealings with the bank and the selling shareholders, a matter to which the Tribunal now turns.

Invesmart’s contractual relations with Union Banka and the selling shareholders

An important theme of the Claimant’s case was that at all material times, it informed various government entities that it would not proceed with the investment unless the state provided aid resulting in an uplift to the net asset value of the bank of some CZK 650 million.191 There is ample correspondence and records of meetings that demonstrates that this position was communicated by Invesmart throughout the period leading up to 24 October 2002.
In the Tribunal’s view, however, there is something of a disjunctive between those statements and the legal documents relating to Invesmart’s relationship with Union Banka and Union Group, some of which show that Invesmart did not act consistently with its position as articulated to the Czech Republic.
First, the Receivables Assignment Agreement was executed on 13 August 2002. At this point in time, according to the Agreed Statement of Facts, Invesmart had been communicating its interest in acquiring control of the bank for over eight months. Invesmart’s Gert H Rienmuller informed the CNB by letter dated 12 August 2002 that it had decided to "support" the bank "without closing the purchase of the bank".192
The text of the letter warrants reproducing because it shows that prior to even submitting its first summary proposal for the resolution of the bank’s issues with Česká finanční, Invesmart assumed obligations in relation to the Česká finanční loan portfolio. Mr Rienmuller stated:

... with reference to your letter dated 25 July 2002... I would like to inform you that in the above mentioned matter intense talks between the current shareholders and the investor, Invesmart, B.V. regarding the financial statements for the year 2001 have taken place. The result of the talks is that without closing the purchase of the bank Invesmart has decided to support Union banka by a grant of a guarantee in the amount of CZK 300 million in order to secure an acceptable auditor’s report on the bank for 2001.

Meantime, Invesmart was also acquainting itself with the Česká finanční case. After unsuccessful attempts of the existing shareholders of the bank Invesmart is attempting to solve this problem itself through direct negotiations with the CNB, Česká finanční and the MOF. The results of these contacts cannot be predicted at this time. However, taking into account that Invesmart increased its purchase price by CZK 300 million, it cannot be expected that it would assume additional obligations against Česká finanční, which were represented by the seller in negotiations as solved.193 [Emphasis added.]

Although Mr Rienmûller’s letter referred to a CZK 300 million guarantee being issued by Invesmart, that was only one aspect of the transaction. In the Receivables Assignment Agreement, Invesmart and Union Banka recognised that the bank was attempting to sell the loan portfolio to CF.194 Invesmart agreed to an irrevocable assumption and purchase of that portfolio if it was not transferred to CF, subject to the proviso that Union Banka would only be able to require such assumption if and after it had failed to, for any reason whatsoever, assign the receivables to CF by 1 December 2002.195 In that event, Invesmart agreed to pay CZK 1.2 billion for the portfolio and the CZK 300 million guarantee to which Mr Rienmûller referred was to secure that obligation. In the event that it failed to take over the loan portfolio, the guarantee, valid until 15 December 2002, was enforceable by the bank after its having given notice to Invesmart.196
The Receivables Assignment Agreement appears to have had at least two effects.
First, as Mr Rienmûller anticipated in his 12 August 2002 letter to the CNB, it permitted the bank to secure the issuance of the auditor’s report for the year ending 31 December 2001.197 On 16 August 2002, Deloitte & Touche issued its audit report on the bank’s 2001 financial statements. Without such an audit report, the evidence showed, the bank’s situation would have been extremely tenuous.
Secondly, the Receivables Assignment Agreement evidently led to an amendment of the SPAs because on 14 August 2002, the day after its execution, Invesmart entered into Addendum No 4 to the two SPAs. In the Tribunal’s view, the importance of these contractual developments is this: Invesmart assumed the obligation to pay for the CF loan portfolio - a key element of the state aid that it was seeking - 7 days before submitting its proposal on the settlement of the bank’s relationship with CF to the MOF. That is, Invesmart’s first proposal to the MOF was made on 20 August 2002, seven days after it executed the Receivables Assignment Agreement.198
In the Tribunal's view the Receivable Assignment Agreement and Addendum No 4 tend to undermine the Claimant’s contention that it made its participation in Union Banka conditional upon the grant of state aid. In mid-August 2002, it bound itself to having to deliver the substantial part of what it later proposed the state should grant. Moreover, although Addendum No 4 still reserved the power to approve the share purchase to Invesmart’s shareholders, its conditions for completing the transaction did not reflect the position that Invesmart was consistently articulating to different government agencies. When asked by the Chairman as to whether Invesmart sought legal advice on the amendments to the SPAs, [REDACTED] answered:

I believe it was not very much a legal issue at the time, it was very much contained in a business decision at the time.199

The Tribunal recognises that it is not privy to the negotiating history of the entire transaction and it is loath to impose legal perfection on an evolving situation after the fact. However, it considers that the Claimant exposed itself in a sense in the way in which it structured the conditions for the acquisition of the shares and the assumption of the related-party loans and when it assumed the CF loan portfolio.
If the grant of state aid was the sine qua non of Invesmart’s acquisition of control of Union Banka, it might have been expected that it would have either: (i) completed its acquisition of control of the bank only upon receipt of a written undertaking from the Minister of Finance that the requested state aid would be provided; or (ii) to be even more certain, have completed the acquisition simultaneously with the aid being granted. Invesmart did not follow either course of action.
[REDACTED] frankly admitted that they had erred in not obtaining a written promise of state aid, testifying that "stupidly enough, looking back, we didn’t ask for it".200 Invesmart’s failure to relate its requirements for completing the transaction, as communicated to various Czech agencies, to its contractual documents with the selling shareholders and the bank created exposure in the event that state aid was not granted. Such exposure is precisely what has forced the Claimant to argue that if there was no express promise of state aid, the CNB’s approval constituted an implicit promise to grant it. It would have been more prudent for Invesmart to have formally conditioned its obligation to assume the related-party loans upon the grant of state aid rather than rely upon what it now contends was an implicit promise of aid bound up in the CNB’s approval.
The Tribunal will discuss the last amendment to the SPAs, Addendum No 5, in the course of its discussion of the events of October 2002 below.

The Claimant’s general awareness of the domestic competition law regime prior to 24 October 2002

Consistent with its view as to the related roles of due diligence and the host State’s law and relevant international agreements between the investment Treaty’s Contracting Parties, the Tribunal now turns to consider the role of competition law and the competition authorities in the events at issue. This is an important issue when considering the legitimate expectations claim, because the regulatory approval structure for state aid provides the legal context in which the various government entities and indeed Union Banka and Invesmart itself operated at the time.
The Claimant’s legitimate expectations claim emphasised that it was only after Invesmart’s application was approved by the CNB that the role of the OPC in approving any aid and what it saw as increasingly onerous conditions for the aid’s granting became clear.201
The Tribunal has already noted at paragraphs 274-276 that Invesmart was aware by June 2002 that the OPC would have a role in approving state aid. By letter dated 25 June 2002 to the Acting Secretary of CF, [REDACTED] noted that Invesmart was trying "to get a standpoint of the Economic Competition Office".202 A letter dated three days later addressed to the then-Minister of Finance explicitly recognised that the aid being sought could be prevented by the competition authorities and for that reason Invesmart was "working on submission of another expert’s opinion for selected assets’ portfolio and the Economic Competition Office standpoint "so that the Office will not prevent us from the realisation of our project"".203
The minutes of the 24 September 2002 meeting at the Ministry of Finance, on which the Claimant placed significant reliance, also show that the state aid issue and the need to consult the competition authorities was part of the government’s internal discussions. The testimony is that the substance of this meeting was accurately and fully communicated to Invesmart the next day and [REDACTED] acknowledged that he was told that the advice of the OPC was being sought "in order to get their advice on the viability as far as the European Union issues were concerned".204

The issue of "old" versus "new" aid

One issue that arose during the hearing concerned whether the OPC had to consent to a resolution of the bank’s issues with CF. The Claimant contended that that was not seen as state aid that required the OPC’s approval because it was settling a previous arrangement that dated back to the mid-1990s.205 There was no new state aid being discussed, in its view, and the statements of government officials seemed to show that they likewise held that view, at least until after Invesmart decided to acquire the shares of Union Group.
In the Tribunal’s view, looked at on their own, the 24 September meeting’s minutes are not clear on precisely what the Ministry of Finance believed the competition authorities’ role to be in relation to the CF Transaction then being discussed.
Strictly speaking, the Ministry of Finance could not speak for the OPC. But on the basis that Invesmart thought that significant progress was being made towards a grant of state aid, the Tribunal will examine what was conveyed to Invesmart on the issue of state aid prior to its increasing its share capital and approving the SPAs.
On the one hand, the 24 September 2002 meeting’s minutes record that "in case... [there is a] change to the agreement" the "Office for the Protection of Competition will need to be consulted and government approval will be required". This, as the Claimant argued, suggests that the then-contemplated form of state aid (i.e., reduction of the Fores deposit interest rate and the purchase of bad loans at book value or something closely related to book value) did not have to be approved by the OPC.
On the other hand, as the Respondent pointed out, the "next steps" identified by officials in the same minutes record that the "Ministry of Finance and CKA will discuss the form of the state aid with OPC as settlement of the stabilisation programme following return of OPC representatives from Brussels by 1 October 2002 at the latest". This suggests that the competition authorities had to be consulted on any deal that might constitute state aid and that they might determine that the finanční interest rate and receivables deal did fall within their mandate.
The minutes are ambiguous on the issue of whether the competition authorities had to approve the CF deal sought by Union Banka and Invesmart. Since the substance of the discussions was disclosed to Invesmart, it would have been told that the OPC had some role to play in the approval of state aid (a point which was already known to it. However, the Tribunal cannot infer one way or the other whether the description of the meeting accorded with the part of the minutes that the Claimant emphasised or the part that the Respondent emphasised (or both).
Were this to be the only contemporaneous document that discussed the state aid issue, the Tribunal would be unable to judge what was conveyed to Invesmart. Further light-can be shed on this issue, however, by two other contemporaneous documents showing that the competition authorities would play a role in a decision to grant state aid of any kind.
The first document was generated after the 12 September 2002 meeting between Invesmart representatives and the CNB. The meeting had evidently not gone well from Invesmart’s perspective because of the CNB officials’ statements about Invesmart’s second application for approval and what its rejection might mean for Union Banka’s licence. (As shall be seen (at paragraphs 543-546), a representative of certain shareholders in Invesmart attended the meeting and evidently formed a less than positive view of the bank’s prospects.) In a letter dated 16 September 2002 sent after the meeting to the Governor of the CNB and four of his colleagues, [REDACTED] stated that the CNB’s Mr Jiri Jiricek had informed them that if enough information on the financial aspects of the acquisition was not received by 16 September 2002, he would start the process to deny authorisation of the acquisition by Invesmart. [REDACTED] also recorded Jiricek’s stating that in such a case he will also start the proceeding to withdraw the banking licence to Union Banka".206
[REDACTED] letter spurred a reply from the CNB dealing with among other issues the process by which the requested state aid would be addressed. At point 3 of its letter, the CNB recorded the fact that its representatives had informed Invesmart that:

3. As regards the CNB’s standpoint concerning the successful completion of the transaction to acquire a qualifying holding and the possibility of the Bank’s receiving state assistance, the CNB stated that any such assistance is primarily a matter for the Ministry of Finance, requires the approval of the Czech Government and must have the support of the Office for the Protection of Economic Competition, which is also assessing this matter in the context of the preparations for the Czech Republic’s accession to the European Union. The CNB’s opinion on the completion of the overall transaction was not expressed at the meeting.207 [Emphasis added.]

This passage is instructive because it expressly brought to [REDACTED] attention the division of competencies between the CNB, Ministry of Finance and the OPC, the need for Czech government approval above and beyond the Minister’s approval, the need for the support of the competition authorities, and the fact that the proposal was "also" being assessed within the context of the accession to the EU, the plain implication being that EU issues would be taken into consideration. At the hearing, [REDACTED] acknowledged that by this letter Invesmart was told by the CNB, before it approved the share acquisition, what the requirements for the granting of state aid were.208
The second document, a letter from Minster Sobotka to Governor Tûma, dated 7 October 2002, referred back to the meeting with Invesmart on 25 September 2002 at which the government’s deliberations were disclosed to it. The Minister noted that:

On 25 September 2002 a meeting was held in the office of the First Deputy Minister of Finance with the representatives of Invesmart B.V. (Mr. Roselli, Mr. Rienmüller, Mr. Braun) in the presence of CEO of the Czech Consolidation Agency. In the context of the meeting, the representatives of Invesmart B.V. were informed of the requirements of the Bank Supervision Department for completion of the documents needed for grant of approval with entry of the investor to the bank with the deadline of 4 October 2002. Mr. Roselli gave a binding promise to provide the missing documents to the Bank Supervision Department in due course. At the same time the representatives of Invesmart B.V. were informed of the planned meeting with the Office for the Protection of Economic Competition in Brno with the aim to assess the procedure and options for resolution of the investor’s requirement for settlement of the problems of Union Banka a.s. with regard to public support.209 [Emphasis added.]

Any ambiguity in the 24 September 2002 minutes as to the state of thinking within the Government and as to what was communicated to Invesmart is thus resolved by a clear statement in writing sent to Invesmart just before the 25 September meeting and corroborated by the letter sent by the Finance Minister to the CNB Governor recapitulating what occurred in the meeting held the preceding day.
In the Tribunal’s view, the role of the competition authorities in vetting any proposed state aid, including a settlement of the bank’s relations with CF, was brought to the Claimant’s attention before it submitted its third application on 22 October 2002.

The Czech Republic’s commitment to the European Union

The Claimant argued further that the Respondent did not advise it prior to its shareholders approving the capital increase on 16 October 2002 that a statement had been made to the EC that the Czech Republic did not expect any further provision of state aid to the banking sector.210 It also complained that it was not until a meeting held on 29 November 2002 that Invesmart was advised that Union Banka needed to submit a Restructuring Plan in accordance with the EU’s Guidelines on State Aid for Rescuing and Restructuring Firms in Difficulty.211
In this regard, the Claimant pointed to a document which showed that at a meeting held on 16 May 2002 between the Ministry of Finance, the CNB, CF, and the Czech Consolidation Commission, Invesmart’s potential acquisition of control of Union Banka was discussed by officials and in light of the undertaking given to the EU and the participants’ view that there was little reason to provide state aid to the bank, it was resolved that CNB would proceed with the approval procedures but the "Ministry of Finance will inform the investor about the infeasibility of provision of state aid".212 [Emphasis added.] The Claimant argued that it was not informed of this complicating factor until after it approved the capital increase.
The consideration of this complaint requires the Tribunal to first take note of the amendment to the SPAs that was effected just before Invesmart’s shareholders approved the €90 million capital increase at a meeting held on 16 October 2002. Addendum No 5, which cancelled its predecessor, No 4, was concluded on 14 October 2002. The purchaser and the sellers agreed in this addendum that Invesmart would assume the debts of the selling shareholders without undue delay. The assumption of debts obligation was made conditional upon (i) the CNB’s approval of Invesmart’s application to acquire control of the bank and its assumption of the selling shareholders’ debts; and (ii) the approval of Invesmart’s shareholders.213
Two features of this addendum are salient. First, consistent with its predecessor’s removal of Clause 3.3 from SPA B (the condition precedent relating to state aid), nothing in this addendum expressly made the completion of the Share Purchase Agreements conditional upon the granting of state aid. Secondly, Invesmart nevertheless still had a right not to complete the deal because its shareholders had to approve the transaction before it could bind the company.
The second point is relevant to the legitimate expectations argument because there is a temporal issue relating to the Claimant’s decision to approve the SPAs. The Claimant argued that it did not know about the Respondent’s commitment to the EC until after its shareholders approved the capital increase.214 This may be so, but it is not the end of the matter.
Due to Invesmart’s failure to properly convene the 16 October 2002 meeting at which its shareholders approved the capital increase, that decision had to be put to another vote on 4 November 2002 whereupon the shareholders ratified their earlier decision.215 It was at this same meeting that the SPAs were approved.216 Thus, the relevant time for determining whether Invesmart irrevocably committed to its investment in the bank without knowledge of the Czech Government’s undertaking to the EC is not 16 October, but 4 November 2002.
It is clear from the record that Invesmart was advised in the CNB’s letter of 19 September 2002 that the aid issue was being considered in "the context of the preparations for the Czech Republic’s accession to the European Union".217 To the extent that this failed to fully disclose the Minister’s undertaking, the Tribunal notes that at a meeting held on 25 October 2002, ten days before Invesmart’s shareholders approved the SPAs, the company’s advisors, EuroTrend, were informed of the Rycheckÿ letter to the EC that there would be no more public subsidisation of the banks.218
Thus, although the Claimant correctly points out that this discussion occurred one day after the CNB approved the acquisition, this information was conveyed to Invesmart’s representatives well before Invesmart held its second shareholders meeting on 4 November 2002 at which the shareholders approved the Share Purchase Agreements.
The Tribunal also notes that with respect to the need to draw up a Restructuring Plan, it appears from the record that that was explicitly discussed for the first time at a meeting held on 29 November 2002. The Claimant has sought to attribute responsibility for this to the Respondent in the sense that this was "sprung" on Invesmart after it completed its acquisition of its shareholding interests. The Tribunal notes however that at the 25 November meeting, Union Banka’s new Director, Mr Radovan Vávra, provided a different explanation. The minutes record him informing the meeting that:

... The UB’s director then explained why the former management has not made any efforts for granting of state aid earlier and had not prepared a restructuring plan -the reason was that they had assumed that the bank would win the arbitration against the CNB regarding the compensation of damages of CZK 1.9 billion.219 [Emphasis added.]

Mr Vávra’s remark must have been directed to the management personnel who held senior positions prior to his joining Union Banka in the autumn of 2002.
There is also record evidence that suggests that Invesmart had reason to appreciate that competition law considerations pertaining to EU accession could thwart its request for state aid for some months. As noted earlier, the inter-agency meeting which discussed the EU commitment was held on 16 May 2002. Invesmart met with the then-Minister of Finance shortly thereafter. The precise message conveyed to Invesmart when the Ministry of Finance then refused to consider granting state aid is not on the record, although the fact of that rejection is [REDACTED] wrote to the CNB’s Pavel Racocha by letter dated 20 May 2002 (four days after the inter-agency meeting was held), noting that:

... As you probably already know our meeting with the Minister of Finance was not particularly positive.

The Minister stressed that at this time they do not consider to conclude the acquisition of Fores by Česká finanční.

As I mentioned to you last Friday we consider that transaction a main condition for completing our acquisition of 70 per cent of Union Group.

Nevertheless, considering the upcoming elections and the fact that Union Banka application at Česká finanční has not been formally rejected, we have decided to follow up with our application with the Central Bank and to confirm our commitment to the project..220

The Tribunal has already adverted to [REDACTED] 28 June 2002 letter which recognised that the OPC could block the transaction.
Thus, although there is no direct evidence of precisely what was communicated to Invesmart by the Respondent after the inter-agency meeting of 16 May 2002, it can be inferred from [REDACTED] contemporaneous letters that Invesmart was informed of issues relating to competition law as it affected the granting of state aid to Union Banka. There would have been no reason for [REDACTED] to advert to the OPC’s role had that not been brought to Invesmart’s attention.
Finally, assuming arguendo that the Czech authorities did not inform Invesmart of the undertaking to the EU in May 2002 and instead referred only to competition law issues generally, the question is whether that undertaking was materially different from what Invesmart knew or should have known was the situation under Czech and EU law.
Here the Tribunal is of the view that: (i) the Czech Republic’s accession to the Treaty of Rome was well known; (ii) Invesmart knew from June 2002 that the OPC could, to use Mr Catalfamo’s words, "prevent us from the realisation of our project"; (iii) Invesmart was advised in mid-September 2002 that the state aid was being assessed "in the context of the preparations for the Czech Republic’s accession to the European Union"; (iv) Invesmart’s advisors were informed on 25 October 2002 of the Rychetskÿ letter; (v) reasonable due diligence into the governing Czech and EU law would have confirmed that state aid is prohibited unless an exemption is granted; and (vi) the Czech Republic’s undertaking was communicated to Invesmart at the latest by 25 October 2002, prior to 4 November 2002 when its shareholders approved the Share Purchase Agreements. The Claimant was in a position to understand that state aid had to be justified because it would be scrutinised by both Czech and EU competition authorities.

What did the Ministry of Finance commit to do?

The Tribunal turns to the seminal issue, namely; what did the Minister of Finance agree to do at the 24 September 2002 meeting? The parties disagree over the meaning and import of the 24 SeDtember 2002 meeting minutes’ statement that "the minister of finance jo ready to submit a document for the state aid defined in this way for the government session". The question is whether a document which by its own words indicates a willingness to follow a process of seeking approval of aid constituted a promise, to deliver that aid, enforceable under the Treaty.
The disagreement centres on whether the Minister undertook an obligation of result such that, beginning with the debriefing on 25 September 2002 and crystallising on 24 October 2002, the Claimant formed a legitimate expectation that state aid was approved (the Claimant’s view), or whether the Minister undertook an obligation of process, i.e., that he would evaluate the bank’s planned restructuring and if he formed the view that it had a reasonable prospect of success, he would submit it to the Cabinet and the OPC for approval (the Respondent’s view).
In the Tribunal’s view, the weakness for the Claimant’s case is that the evidence shows that as of 24 October 2002, the form of state aid and the modalities of getting approvals from the Ministry of Finance, the Cabinet and the OPC were not fully defined. Put simply, on 24 October 2002, the bail-out plan was a proposal from Invesmart dating back to 20 August 2002 which lacked the kind of detail and definition that would be required to obtain regulatory approval.
The Tribunal finds support for this finding in the following facts derived mainly from contemporaneous documents prepared prior to and after 24 October 2002.
First, although the Claimant relied upon the inter-agency meeting of 24 September 2002 as proof of the Minister’s commitment to deliver state aid in a particular form,221 the evidence strongly suggests that the CNB did not consider that the Finance Minister had made such a commitment at that meeting. Otherwise, there would have been no reason for the CNB’s Mr Dëdek to write to Minister Sobotka on 11 October 2002 to outline the CNB’s subsequent discussions with Invesmart, noting that the investor had stated its intention to deliver all of the missing documents (pertaining to the source of its funds for the acquisition of its shareholding in the bank) very soon, and to "ask you, dear Minister, that the Ministry of Finance of the Czech Republic... [communicate] its clear standpoint to the representatives of Invesmart B.V."222 Had the Ministry already promised to deliver state aid, a letter from the CNB requesting him to communicate his clear standpoint on the aid issue would have been unnecessary.
Secondly, the testimony of both Governor Tûma and former Minister Sobotka was consistent that up to 24 October 2002, including at the meeting of the CNB’s Bank Board that day, the Ministry of Finance had indicated its willingness to proceed with the process of considering state aid, but that no commitment to deliver state aid had been undertaken by the Ministry up to and including that date.223.
The minutes recording the Bank Board’s 24 October 2002 meeting are cryptic in that they record the fact of that the Minister spoke but not what he said. Due to the seminal importance of this issue, the Tribunal has examined the contemporaneous documents with care in order to determine whether there is any document that corroborates the witnesses’ testimony on this point. It notes that after the CNB approved Invesmart’s entry into Union Banka, the minutes of the meeting of 5 November 2002 record the Ministry of Finance’s view that the CNB’s approval of 24 October 2002 had been the MOF’s pre-condition for the resumption of negotiations between the Ministry and Invesmart. The minutes record him as stating that:

The MOF’s condition for negotiations to be reopened was an unambiguous position of CNB on the approval of the investor Invesmart B.V. entry into Union banka, a.s. This condition was fulfilled.224 [Emphasis added.]

This record, from a document prepared two weeks after the Bank Board meeting but prepared well before the instant dispute arose, is in the Tribunal’s view, corroboration of the two Respondent witnesses’ testimony on this point. It is consistent with Governor Tuma’s testimony that prior to 24 October, a certain deadlock had arisen between the CNB and the Finance Ministry: "On the one hand, the Finance Ministry wanted to know whether Invesmart was acceptable for us, and once again we are back to the question that Invesmart was not a substantial company and so on". He continued, "... on the other hand, we certainly would prefer to know from the State whether they would have been willing to provide the state aid or not". Somebody had to break the deadlock, he testified, "... so we said, ‘Okay, this investor is acceptable for the Czech National Bank’, and then it was up to the Finance Ministry to decide".225 The Tribunal also notes that there is no record of anyone representing Union Banka or Invesmart taking issue with the Ministry of Finance’s characterisation of its "condition for negotiations to be reopened".
Thirdly, roughly one week before the CNB issued its approval, on 16 October 2002, Union Banka retained Euro-Trend to advise it on the state aid issue.226 The letter of authorisation specifically contemplated Euro-Trend’s conducting negotiations " aimed at the restructuring" with "the Ministry of Finance of the Czech Republic, the Czech Consolidation Agency, Česká finanční s.r.o. and other state institutions".227 Reference to the terms of the contract shows that Union Banka’s objective was to negotiate "the restructuring of its balance sheet with the participation of the Czech State", and Euro-Trend was to " perform... all necessary negotiations with all involved parties, in particular with the Czech Ministry of Finance, Česká konsolidacní agentura, and Česká finanční s.r.o. in order to successfully implement the objective " just described.228 [Emphasis added.] The Agreement further provided that Euro Trend would be paid a fixed monthly amount of CZK 100,000 and a contingency fee of CZK 5 million in "the event the Customer’s objective is successful".229
The timing and content of this agreement indicates that having received a debriefing of the 24 September 2002 inter-agency meeting and having appointed Mr Vávra as its new CEO, Union Banka then retained professional advisors to negotiate on its behalf.230 The retention of advisors to assist in negotiations is indicative that a state aid package had not been agreed, even in Union Banka’s view. Moreover, with the contract’s heavy weighting of compensation towards a success fee, both parties explicitly recognised that the substantial part of EuroTrend’s fee would be paid only upon the attainment of the objective, i.e., the grant of the aid being sought.
This contract, executed on the same day as the shareholders of Invesmart initially voted on the capital increase, supports the finding that all parties, including Union Banka and Invesmart, considered that they were about to engage in a process of negotiation, the outcome of which was plainly hoped-for by the bank and the Claimant, but which could not be guaranteed.
Although it does not place great weight upon it, the Tribunal notes that an interview given by [REDACTED] on 24 February 2003, after the aid was refused, was consistent with its finding. The interview quoted [REDACTED] as stating that:

After obtaining a majority stake in Union banka, our first steps quite logically led to the Ministry of Finance, where we wanted to begin discussion on what would happen with the bank from now on. We received a letter signed by Mr. Janota stating that the Ministry of Finance was ready and willing to look for a solution and to assist in the restructuring of Union banka. In November, we therefore started negotiations...231 [Emphasis added.]

This was put to [REDACTED] during cross examination. He testified that he could not remember what was said on 24 February 2003 because the situation was very hectic and he participated in many press interviews. He asserted that the quote attributed to him, that there had been no negotiations before November 2002, was not accurate. He did accept, however, that there were "many differences, absolutely" between the story published by Euro magazine on 24 February 2003 and the case pleaded before the Tribunal.232
Fourthly, the Tribunal notes that Euro-Trend’s First Proposal for Union Banka, dated 4 November 2002, was submitted to the Ministry of Finance 11 days after the Claimant says that its expectation crystallised. The Plan set out the proposed CF Transaction (lowering of the interest rate and the sale of the loan portfolio to CF) but also noted that there was a potential connection between this aid (which Euro-Trend argued could not be characterised as a grant of new state aid as suggested by what it called a "potential opinion" of the OPC233) and the resolution of Union Banka’s arbitration claim against the CNB:

The proposed grant of state aid may be further connected to the resolution of the existing dispute between Union banka, a.s. and CNB, concerning the additional reimbursement of losses from transactions of overtaken banks amounting to approx. CZK 1.9 billion, such that no further requirement on fiscal funds would arise.234

This indicates that the form of the aid was still up for consideration even from Union Banka’s perspective. Indeed, the BDS "receivable" can be seen as an attempt by the bank to find an alternative to the CF Transaction, because Euro-Trend had been told on 25 October that that transaction raised competition law issues.
Fifthly, the view of government officials who reviewed the First Proposal was that it required more work. The minutes of the 5 November 2002 meeting recorded the view that "any aid must be targeted, limited and pre-negotiated with the UOHS [OPC]" and that the "submitted document, if the solution proposed therein is chosen, must be further supplemented by the description of evaluation method, averaging of gained values, if appropriate, and by the clarification of procedure used in ‘final calculation of the aid up to CZK 1.2 billion’".235
Sixthly, the Tribunal notes that in the meetings held on 25 October, 5 November and 29 November 2002, there is no record of Union Banka, Euro-Trend or Invesmart ever complaining that the issues then being discussed by the participants were inconsistent with their earlier expectation that a concrete state aid package had been promised when the CNB approved the share acquisition on 24 October 2002. The bank’s representatives did express concern at the length of time that it would take to obtain the OPC’s approval, but there is no suggestion in the minutes that the government was being accused of reneging on a prior promise to deliver an agreed amount of state aid.
In brief, the documentary evidence surrounding 24 October 2002 indicates that the form of state aid was not agreed and that negotiations were expected by all sides of the proposed transaction. If there is any doubt on this point, it is put to rest by the next meeting of the parties at which Euro-Trend’s Second Plan was discussed. This proposed changing the form of state aid, envisaging that the state would implement one or more of the following measures: (i) the lowering of the fixed interest rate on the Fores Deposit of 11.5 percent to a floating market rate; (ii) the early termination of the Fores Deposit and its transformation into five-year subordinated debt; (iii) the acquisition by CKA of a portfolio of non-performing assets at a price determined by independent experts plus an additional amount of state aid; and (iv) a state guarantee of a portfolio of loans.236 The possibility of a state guarantee was raised by EuroTrend. There is no indication from the record that it had been discussed previously.
Having regard to all the evidence, the Tribunal considers that although Invesmart could reasonably have held the view after 24 September 2002 that the Minister supported a potential bail out of Union Banka, it could not have a legitimate expectation either as of that date or as of 24 October 2002, when the CNB approved its acquisition of control of the bank, that the Czech government had promised to grant state aid. Had it retained counsel to advise on the competition law aspects of the state aid issue, it would have understood that the aid proposed through the settlement of the bank’s relations with CF almost certainly did constitute state aid under EU and Czech law and that the process of preparing a detailed justification for its granting was necessary and without such a document the Minister and the Cabinet, let alone the OPC, could not approve it.

Conclusion on legitimate expectations

Before concluding on the legitimate expectations claim, the Tribunal wishes to address one other limb of the Claimant’s case.
It appeared to the Tribunal that the Claimant argued that to the extent that the evidence showed that the Respondent had undertaken a commitment to a process as opposed to a result (the latter being the Claimant’s primary position), the Respondent could not take advantage of its own failure to comply with its domestic laws in failing to obtain the requisite approvals of the Czech Cabinet and the OPC.237 In its closing submissions, Invesmart argued that its case was not that state aid would be supported in violation of Czech or EU law, but rather that the Respondent "would take such steps needed to lawfully supply the promised state support.".238 At another point, it asserted that its legitimate expectation was "a clean bank with a combination of the Česká finanční transaction and a contribution of the assumption of the related-party loans with a net asset value of CZK 1,162 million".239
No matter how the proposition is put, in the Tribunal’s view, the Claimant’s legitimate expectation argument presupposed the approval of the Cabinet and the OPC. That is, on the basis of what was communicated to Invesmart prior to 24 October 2002, state aid would have been granted if the Minister had only submitted the request.
In the Tribunal’s view, this was not the case. Having regard to the legal framework that governed the granting of state aid, the Minister could not simply rubberstamp the bank’s application without evaluating its merits in terms of its potential to meet the requirements of Czech and EU law.240 For an application to be submitted to the Cabinet, let alone be approved by the OPC, the Minister had to be satisfied that it had a reasonable prospect of achieving the goal of stabilising the bank. This required the applicant to submit a restructuring plan that met the requirements of the law, and the Minister, the Cabinet and the OPC had to agree that the plan met those requirements.
The Tribunal does not see how the Claimant’s legitimate expectation that the Ministry of Finance would follow a process meant that such expectation would deliver the desired result. At the time that the expectation was said to have crystallised, the Respondent was not, in the Tribunal’s view, in a position to promise that state aid would be granted. It could, and did, undertake a commitment of process, but not of result and the Claimant should have understood that to be the case. As the evidence shows, ultimately, the Minister concluded that the Restructuring Plan did not have a reasonable prospect of success.

Inconsistency and ambiguity

The Claimant

The Claimant relied on a recent line of case law to argue that the Czech Republic breached the fair and equitable treatment standard by failing to treat its investments "consistently" and "without ambiguity".241
Specifically, the Claimant submitted that the Respondent had acted inconsistently by:

(a) Approving Invesmart's acquisition of Union Banka and then simultaneously causing a run on Union Banka by making irresponsible comments to the Czech media on 22 October 2002 ;242

(b) Adopting inconsistent positions towards Invesmart and Union Banka after Invesmart's assumption of Union Banka's RPLs. Invesmart submitted that it had invested in Union Banka and Union Group in the belief that the Government would provide state aid under the CF Transaction. Following the Invesmart's acquisition of Union Banka and Union Group the CNB continued to support the CF Transaction whilst the Ministry of Finance and the CKA did not;243

(c) Further, Invesmart submitted that it was caught between the inconsistent proposals of different organs of the Czech Government in relation to the form of state aid.244 Specifically, at the 5 November 2002 meeting, discussed at paragraph 124 above, the CKA supported the settlement of the BDS Arbitration Claim as a "purely commercial solution that should not meet with a negative response from the UOHS".245 However, the CNB was not prepared to settle the BDS Arbitration Claim;246

(d) Resiling from its position held prior to Invesmart's acquisition of Union Banka that the OPC need only be "consulted" with respect to state aid. Following the investment, the Czech Republic "changed the rules of engagement" by requiring that the OPC "pre-approve" any grant of state aid;247

(e) After Invesmart prepared the restructuring plan, the MOF failed to submit it for review and approval by the OPC as promised;248

(f) Failing to publicly declare its support for Invesmart and Union Banka through the making of a Resolution as it had promised to do on 29 November 2002, which would have aided the bank.249

Invesmart's claim of "ambiguity" in the context of, or in addition to, "inconsistency" related to the Respondent's failure to disclose, before approving Invesmart's acquisition of Union Banka and Union Group, that the Deputy Prime Minister of the Czech Republic had made a commitment to the EC that the Czech Republic would not provide any new aid to banks.250

The Respondent

The factual basis for each of these allegations was rejected by the Respondent. Its defence of these claims can be summarised thus:

(a) The run on Union Banka was not caused by inaccurate statements made by the CNB to the media but arose instead from the public's loss of confidence in Union Banka's capacity to resolve its long-standing difficulties when the deadline for Invesmart to appeal the rejection of its Second Application for state aid expired. This was of common public knowledge;251

(b) It did not adopt conflicting positions toward Invesmart and Union Banka for it was Invesmart and Union Banka, and not the Government, who introduced the CNB Redevable as a potential mechanism to secure delivery of state aid in January 2003 even though the CNB Receivable had been discussed and rejected by the Government a full two months earlier;252

(c) The requirement that state aid be "pre-approved" by the OPC was not arbitrary; rather it flowed from the then applicable Czech and EU law with which it was not erroneous of the Government to insist compliance on the part of Invesmart. Failure to comply warranted the denial of state aid;253

(d) The Czech Republic was under no obligation to publicly declare its support of Union Banka before a decision on the grant of state aid was given just as it was similarly under no obligation to grant state aid.254

With respect to the Claimant's allegation that the Czech Republic failed to provide adequate notice of its decision not to grant state aid, the Respondent points out that Invesmart was given notice of the decision not to grant aid orally on the day the decision was taken.255 Further a letter informing Invesmart of the decision in writing was sent to Union Banka's official registered address where the Bank publicly professed to have its place of effective management.256

Tribunal’s analysis

Inconsistency - OPC approval

At the core of Invesmart's claim that is the allegation that the Government changed the rules of engagement and following its assumption of the RPL's introduced a new requirement: that state aid be subject to OPC approval.
This issue was also raised in the context of legitimate expectations. The Tribunal concludes at paragraph 327 that the role of the competition authorities in vetting any proposed state aid, including in respect of the CF transaction, was brought to the Claimant's attention before it submitted its third application to acquire Union Banka on 22 October 2002. It follows from this conclusion that when the Government informed Invesmart on 5 November 2002 that the CF Transaction constituted "new" state aid and would be subject to OPC approval that there was no change in position as the Claimant alleges.257

The run on Union Banka

At the hearing the parties agreed as to the specific wording of the comment Ms Frisaufová made to the Czech media on 22 October 2002. Specifically, Ms Frisaufová made the following statement:

In this administrative proceeding the CNB did not grant its approval to Invesmart for the acquisition of qualified interest in Union Banka because the investor failed to provide the source of funding for the acquisition. As far as this proceeding is concerned, the decision is final. This does not, however, preclude Invesmart from filing a new application and commencing new administrative proceedings on granting the approval with the transfer of the shares.258

The Tribunal's considers that these comments were ill-considered, given Union Banka's already weak financial position. In late October 2002 the uncertainty surrounding Union Banka was, in part, a consequence of the CNB Governor's advice to Invesmart submit a new application to acquire a controlling interest in Union Banka rather than appeal the CNB's rejection of Invesmart's second application during the appeal period 4-22 October 2002. The CNB was aware that Invesmart had submitted a revised submission on 22 October 2002 and this was recognised by the CNB spokeswoman. In consequence, the CNB’s approval of the new application and the OPC’s approval of state aid were, at that time, open issues.
The destabilising impact of the CNB's comments is illustrated by the way the issue was reported by the Czech media. In particular, a report published by Česká Tisková Kancelár included the following sentence "Frisaufová said she did not want to anticipate future developments, but did not rule out that taking away the bank's license was one possibility".259
That the run on Union Banka might have been avoided is shown by the fact that it was ended when on 24 October 2002, the CNB approved Claimant’s application to acquire a share in Union Banka and Union Group.
The statements in question, having been made publicly by the CNB spokeswoman, are imputable to the CNB; the conduct of a state entity such as the CNB being attributable to the Czech Republic. The Respondent cannot escape criticism in view of the recognised sensitivity of public announcements in the banking sector.
That being said, the Tribunal holds that this conduct cannot amount, per se, in isolation, to a violation of fair and equitable treatment. The Tribunal notes that at the time this statement was made it was, strictly speaking, factually accurate. The purpose of making the statement was explained by Governor Tûma in cross-examination:

Everybody knew at that time that Union banka was in [a] difficult position, and the pressure for the bank didn't occur after the statement by Mrs FriSaufová. The pressure was long — longer, for a longer period. We decided, and everybody knew, or the general public knew that -- and by the way, it was used as the argument that the investor is applying and there is a chance that the investor would take over, and this is ~ so it was used also by the Union banka as the argument for the general public that the situation would calm down.260

These comments by Governor Tüma are persuasive. In particular, that the problems at Union Banka existed many months prior to October 2002 and that the comments made by Ms Frisaufová are capable of being characterised as an attempt to reassure the public. Whilst these comments may be criticised in retrospect, given the run that occurred on 23 October 2002, the Tribunal is not satisfied that the conduct constitutes a breach of fair and equitable treatment.
The Respondent also asserted that the information contained in Ms Frisaufová's statement was already in the public domain. This contention is strongly supported by public statements made by [REDACTED] prior to the comments made by Ms Frisaufová. The Respondent tendered evidence that on 22 October 2002 Mlada fronta Dnes, one of the principal Czech National dailies, reported that Invesmart had confirmed that it did not appeal against the decision of the CNB to deny its second application to acquire Union Banka. This paper quoted as saying "It is very complicated. It cannot be definitively said that we do not continue in our negotiations. We are in contact with the CNB".261
Ultimately, the run on Union Banka occurred as a result of public perception that the prospects of Union Banka being acquired by a foreign investor had declined. It may be equally fair to speculate that this perception existed as a result of [REDACTED] comments, or both [REDACTED] and the CNB's comments taken together.

The CKA’s proposal to settle the BDS arbitration claim

At the 5 November meeting CKA proposed settlement of the BDS Arbitration Claim for CZK 1.8 billion as a means of conferring a benefit on Union Banka "that would not meet with a negative response from the UOHS".262The minutes of the meeting record that the proposal would be put to the CNB expeditiously,263 the latter having not attended the meeting. However, few days later, at a meeting held on 29 November 2002, the CNB rejected the proposal since it "did not admit the Union Banka’s claim".264 Mr Vávra for Union Banka, present at the meeting together with a representative of Invesmart, took note of the CNB’s position, no remarks or objection on his part being reflected by the minutes of the meeting.
Thus, Union Banka and Invesmart were made aware, about three weeks after the CKA’s proposal, that the same could not be implemented due to the CNB’s opposition. The Tribunal considers that a governmental entity against which an arbitral claim had been made, and which was not represented at the meeting at which the settlement of the claim against it was discussed, was entitled to state its objection when it became apprised of the discussion.
This conduct by the various entities of the Czech Republic does not amount to a violation of Article 3.

The MOF’s failure to submit the Third Restructuring Plan to the OPC

The reasons for the MOF’s rejection of the Third Restructuring Plan were given by Minister Sobotka in his letter to Union Banka dated 20 February 2003.265 The application for state aid having been rejected, there was no reason for the MOF to submit Union Banka’s application to the OPC for an exemption from state aid prohibition, as mentioned by Minister Sobotka in the same letter. The MOF’s prior approval was in fact a necessary pre-condition of the OPC’s review of state aid proposals. Further, the MOF, after the many months spent in an attempt to find a solution to the state aid issue, had no obligation to meet again with Union Banka to explore alternative solutions. Union Banka’s financial situation at that point in time, as confirmed by its CEO, Mr Vávra, on 19 February 2003, was so critical ("catastrophical", regarding the liquidity situation) as to suggest that no time was left for further discussions.266

The MOF’s "undertaking" to issue a resolution in support of Union Banka

The minutes of the 29 November 2002 meeting do not appear to reflect the Claimant’s assertion that the Government undertook "to issue a public commitment in the form of a resolution allowing an exemption on the ban on State aid" with the view of reassuring the public and Union Banka's customers that the bank had the full support of the Government.267 The record shows that Mr Vávra proposed that:

Given the time needed to draw up a restructuring plan and the time it would take the UOHS to issue a decision, the UB CEO asked if it would be possible to make use of this period by submitting all the necessary material to the government, which would then issue a resolution stating that the government had considered the issue and would only assess the possibility of providing state aid to the bank on condition that the UOHS allowed such aid to be provided under Law 59/2000 on State aid - in other words, issue a decision allowing an exemption from the baa on state aid.268

The somewhat confused record of this part of the minutes prompted a clarification by the First Deputy Finance Minister (present at the meeting), who suggested that the exemption by the MOF was not meant to refer to the ban on state aid but rather "to the comments procedure".269
Following that meeting, based on its understanding that the Government had accepted to issue a resolution allowing an exemption on the ban on state aid, Union Banka circulated a draft of the Government’s resolution to that effect.270 The draft resolution was unacceptable to the Government since it amounted to the approval of state aid to Union Banka on condition of a positive decision of the OPC,271 providing further that the amount and form of state aid resulting from UB’s restructuring plan "shall be accepted by the Office for the Protection of Competition".272 [Emphasis added.]

The Czech Republic's renewed commitment to the EC

As already mentioned, the Czech Republic cannot be reproached for its alleged failure to alert Invesmart about the need of the OPC’s approval of the state aid. The Claimant contends that the Respondent should have informed Invesmart in a timely manner that obtaining such approval had become more difficult following the Deputy Prime Minister’s commitment to the EC that the Czech Republic would not provide any new aid to banks. Due to the terms of the commitment so made (as reflected in the minutes of 29 November 2002 meeting),273 the prospects of obtaining the EC’s approval of new state aid by the Czech Republic were reduced.
The minutes mention that "possible further aid to UB would mean a violation of the commitment made by Deputy Prime Minister Pavel Rychetsky that the Czech Republic would not provide any new aid to banks".274 In the Claimant's view, this wording underlines the fact that a serious additional obstacle existed to the granting of state aid to Union Banka, although the OPC’s representatives indicated at the meeting that "they would not rule out the provision of aid to the bank on principle".275
According to the Claimant, the significance of the Czech Republic’s failure to inform Union Banka and Invesmart in a timely manner is made manifest by the fact that by 29 November 2002 Invesmart had already completed its acquisition of Union Banka and Union Group. The Debt Assumption Agreements signed by Invesmart on 17 November 2002 had in fact become effective upon the transfer of shares in Union Banka and Union Group to Invesmart on 18 November 2002.276
The Claimant’s complaint is misplaced in more than one respect. As already indicated at paragraph 319 above, the Deputy Prime Minister’s commitment to the EC that there would be no more public subsidisation to the banks had been disclosed to Union Banka’s advisors, EuroTrend, at a meeting held on 25 October 2002.277
Further, as also already discussed at paragraph 318 above, the relevant time for determining whether Invesmart irrevocably committed to its investment in the bank without knowledge of the Respondent’s commitment to the EC is not 16 October, but 4 November 2002.
The facts at hand may therefore be distinguished from the cases to which Invesmart referred in making its claim. In the present case, no decisions or permits had been issued by the State on which Claimant could reasonably rely to assume its commitments. This was the case in Tecmed, and MTD. No such reliance was justified by the CNB’s approval of Invesmart’s acquisition of shares in Union Banka and Union Group since state aid had still to be cleared by the OPC. Contrary to the Saluka case, where the tribunal found that the Czech Republic had "acted inconsistently in its overall communications with IPB and Saluka/Nomura",278 no such inconsistency may be imputed in the present case to the Czech Republic.
In the light of the foregoing, the Tribunal holds that Claimant’s claim of breach by the Czech Republic of fair and equitable treatment for inconsistency and ambiguity of conduct fails.


The Claimant

With regard to its fair and equitable treatment claim, Invesmart also submitted that the Czech Republic's denial of state aid to Invesmart was discriminatory. The basis of this claim was Invesmart's contention that between 1990 and 2004 the Czech Republic routinely provided state aid to Czech banks whose circumstances were comparable to those of Union Banka whether viewed in terms of size, the amount of aid to be provided, the form of aid or the purpose of aid.279
Invesmart also argued that several of these banks had received emergency liquidity loans from the Czech Republic and that the Czech Republic's refusal to provide similar support to Union Banka was discriminatory.
In developing its submissions Invesmart referred the Tribunal to the Saluka arbitration in which the Czech Republic was found to have discriminated against a large Czech bank (IBP) without justification when it denied IBP's requests for state aid while granting state aid to three of the four other major Czech banks. In Saluka the tribunal accepted that this discrimination violated the fair and equitable treatment standard and the impairment clause. The Claimant argued that Union Banka's circumstances were analogous to those of IBP and that it was similarly discriminated against.
Invesmart went on to refer the Tribunal to its own analysis of state aid provided by the Czech Republic, and its predecessor state, to banks between 1990 and 2004.280 This analysis was largely derived from information provided to the EC by the Czech Republic.281 The Claimant's submissions on discrimination were also supplemented by Appendix A of the Statement of Claim which summarised the main forms of state aid that the Czech Republic provided to banks between 1990 and 2004. This evidence was summarised in the following way by the Claimant in opening submissions:

(a) 12 mid-sized and small Czech banks received state aid from 1996 to 2001, including Prago Banka (1997), Agrobanka (1998) and PMB (2000, 2001);

(b) Four Czech banks received state aid from 2001 to 2005 including PMB, Ceska Sportielna, Komercni Banka and CSOB;

(c) The Czech Republic provided vast amounts of state aid to promote restructuring and onward sales to strategic investors including IPB, Komercni Banka, Ceska Sporitelna, CSOB and Agrobanka.282

Invesmart also tendered expert evidence in support of its discrimination claim in the form of two reports by Associate Professor Raj M Desai dated 6 December 2007 and 11 July 2008. Professor Desai's first report was on the "relevant policies, methods and interests used in the provision of state support and assistance to the banking sector in the Czech Republic between the mid 1990s and mid 2000s".283 Professor Desai's second report was in the form of a reply opinion which sought to evaluate the submission made in the Statement of Defence that Union Banka "could not be reasonably compared with other banks that received direct or implicit state budgetary or off-budgetary assistance".284
Professor Desai's first report described the state aid provided to Czech banks under the first and second Consolidation Programs and the Stabilisation Program in the 1990s. He opined that from 1998 onwards it was the policy of the Czech Republic to find a strong private "strategic investor" to assist with the privatisation and restructure of banks.285 A number of Czech banks were privatised during this period and acquired by foreign investors, including EBP, Komercni Banka, Ceska Sporitelna, COB and Agro Banka. Each was provided with state aid in various forms.286 Finally, Professor Desai described a number of small and medium sized banks that were granted state aid in the 1990s.287
In Professor Desai's second report much was made of the similarities between Nomura's acquisition of EBP, that was the subject of the Saluka arbitration, and Invesmart's acquisition of Union Banka. This was based on the contention that the problems afflicting both banks were typical of those experienced by Czech Banks throughout the 1990s. The report stated:

Insufficient capital adequacy, related lending, non-transparency in ownership, and consequent asset stripping and non-performing loans, were common across all types of Czech Banks in the 1990s -big and small, formerly state-owned or de novo288

Professor Desai also opined that state aid was provided to numerous Czech banks from 2000 onwards. In paragraph 13 he states:

State aid was provided to numerous Czech banks after 2000. In particular, state support to Česká Sporitelna, a.s., took the form of bad-asset transfers (in March 2000) and contingent guarantees (June 2000 and June 2001). In the case of Komercní Banka, a.s. (KB), state aid was provided through rescue and restructuring support (March 2000) and guarantees as part of a sale of stock (October 2001). Ceskoslovenké Obchodni Banka, a,s., (CSOB) received state aid in conjunction with its acquisition of IPB (in June 2000), as well as through state-supported rescue and restructuring operations (throughout 2000, 2001, and 2002).289

The Respondent

The Respondent submitted that the factual record did not support Invesmart's discrimination claim.
The Respondent referred the Tribunal to the test for discrimination enunciated by the Saluka tribunal, namely as being whether (i) similar cases are (ii) treated differently (iii) without reasonable justification.290
The Respondent submitted that the Tribunal should distinguish Union Banka's circumstances from the facts in Saluka on the basis that in Saluka there was differential treatment between four clearly analogous banks. The Respondent pointed to a number of similarities between IBP and the three other major Czech banks: the four banks were all of a similar size; all had portfolios of non-performing loans; all were undergoing a process of privatisation; the failure of any of the banks would have had systemic consequences for the Czech banking sector.291
The Respondent went on to argue that no Czech banks operated under conditions similar to those of Union Banka. It submitted that:

(a) Union Banka was one of a more diverse group of small privately owned banks, some of which had been allowed to fail without the provision of state aid or following the provision of state aid;292

(b) Union Banka's balance sheet problems were the unique consequence of its acquisition of the four smaller banks in the 1990s;293 and

(c) No similarly situated Czech bank was granted state aid in 2002 or 2003.294

The Respondent's submissions were supported by two expert opinions prepared by Professor Dr Dr h.c. Claus-Dieter Ehlermann dated 25 March 2008 and 2 October 2008, respectively.
In particular, Professor Elhermann's analysis introduced a temporal aspect to the discrimination case. Professor Ehlermann opined that "the situation in February 2003 was different from and not comparable to the situation in which earlier privatisations and takeover operations had taken place".
Professor Elhermann advanced two main arguments in support of this position.
First, the Czech Act on state aid, which was enacted on 1 April 2000 and entered into force on 1 January 2001, restricted the Czech Republic's legal right to grant state aid unless the OPC approved the grant.295 The implementation of the new law had a significant impact on the preparedness of the Czech Government to make grants of state aid. Professor Elhermann acknowledged that the Czech Republic made grants of state aid after the implementation of the Act between January and June 2001. However, he suggested that these grants of state aid related to 'older' negotiations that pre-dated the Act.296
Secondly, state aid controls were imposed on the Czech Republic as part of its accession to the EU. Large sections of Professor Elhermann's first report were dedicated to describing how the EC required that state aid control be implemented by the Czech Republic. These requirements were not strictly observed by the Czech Republic between 1998 and 2001. However, Professor Elhermann opined that the observance of these controls crystallised during the pre-accession period which coincided with Invesmart's and Union Banka's negotiations with Czech government officials concerning state aid.297
At the core of Professor Elhermann's analysis was the distinction between the granting and payment of aid. As Professor Elhermann stated in his second report:

... there is a fundamental different between the act of entering into a legally binding commitment, i.e. the grant, on the one hand, and the acts of implementation, i.e. the payments etc., on the other. These two different acts do not have the same character and should therefore not be characterised to be "alike" for a meaningful comparison under the principle of non-discrimination.298

The Respondent conceded that since 2000 there have been many examples of state aid being paid pursuant to arrangements made prior to 2001. However, the Respondent submitted that from 2001 onwards only two grants of state aid were made to banks by the Czech Republic.299
In closing submissions these grants were described by Professor Crawford in the following terms:

Since 2001 State aid was given to two banks and this aid was subsequently notified to the European Commission in the document exhibits C17 and C18. Each of those transactions has special features.

First in relation to PNB, this was a small bank in which the City of Prague had an interest, and under an indemnity of 27 December 2001 an amount of [CZK] 3.43 million was paid by way of aid. That amounts to €114,000 by my calculation.

Secondly. Komercni Banka was granted a tax relief in relation to State aid previously granted in an earlier year, which gave it an extraordinary profit. So in effect the government accepted the argument that the earlier aid shouldn't, as it were, be taken away in the form of taxation.300

In closing submissions the Respondent also tendered, without objection from the Claimant, a table listing 21 examples where OPC denied requests for state aid between 2001 and 2004.301 Similarly, in the Statement of Defence the Respondent listed four small and medium sized banks that had been allowed to fail without the provision of state assistance.302

The Tribunal's analysis