Pawlowski v. Czech Republic

This case concerns a dispute submitted to the International Centre for Settlement of Investment Disputes ("ICSID" or the "Centre") on the basis of the Agreement between the Czech and Slovak Federal Republic and the Swiss Confederation on the Promotion and Reciprocal Protection of Investments signed on October 5, 1990, which entered into force on August 7, 1991 (the "BIT" or "Treaty"), and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, which entered into force generally on October 14, 1966 (the "ICSID Convention"), and entered into force for the Swiss Confederation and the Slovak Federal Republic on June 14, 1968 and June 26, 1994, respectively.

Claimants are represented by

Prof. Felix Dasser, Kirstin Dodge J.D. and Dr. Nicole Cleis
Homburger AG
Prime Tower, Hardstrasse 201
CH-8005
Zurich, Switzerland

JUDr. Jan Havlíček
Havlíček Law Offices
Masarykovo náměstí 110/64
CZ-58601
Jihlava, Czech Republic

Respondent is represented by

Anna Bilanová
Ministry of Finance of the Czech Republic
Letenská 15, 118 10
Prague, Czech Republic

Eduardo Silva Romero
Erica Stein
Audrey Caminades
Dechert (Paris) LLP
32, rue de Monceau, 75008
Paris, France

The Arbitral Tribunal is composed of

Mr. Juan Fernández-Armesto (President)
Armesto & Asociados
General Pardiñas, 102 8vo izq.
28006
Madrid, Spain

Prof. Vaughan Lowe
Essex Court Chambers
24 Lincoln's Inn Fields
WC2A 3EG
London, United Kingdom

Mr. John Beechey
Arbitration Chambers
Lamb Building
Temple
EC4Y7AS
London, United Kingdom

Article 9 of the BIT provides:

Article 9

Disputes between a Contracting Party and an investor of the other Contracting Party

1. For the purpose of solving disputes with respect to investments between a Contracting Party and an investor of the other Contracting Party and without prejudice to Article 10 of this Agreement (Disputes between Contracting Parties), consultations will take place between the parties concerned.

2. If these consultations do not result in a solution within six months, the dispute shall upon request of the investor be submitted to an arbitral tribunal. Such arbitral tribunal shall be established as follows:

a) The arbitral tribunal shall be constituted for each individual case. Unless the parties to the dispute have agreed otherwise, each of them shall appoint one arbitrator and these two arbitrators shall nominate a chairman who shall be a national of a third State. The arbitrators are to be appointed within two months of the receipt of the request for arbitration and the chairman is to be nominated within further two months.

b) If the periods specified in paragraph (a) of this Article have not been observed, either party to the dispute may, in the absence of any other arrangements, invite the President of the Court of Arbitration of the International Chamber of Commerce in Paris to make the necessary appointments. If the President is prevented from carrying out the said function or if he is a national of a Contracting Party the provisions in paragraph (5) of Article 10 of this Agreement shall be applied mutatis mutandis.

c) Unless the parties to the dispute have agreed otherwise, the tribunal shall determine its procedure. Its decisions are final and binding. Each Contracting Party shall ensure the recognition and execution of the arbitral award.

d) Each party to the dispute shall bear the costs of its own member of the tribunal and of its representation in the arbitral proceedings; the costs of the chairman and the remaining cost shall be borne in equal parts by both parties to the dispute. The tribunal may, however, in its award decide on a different proportion of costs to be borne by the parties and this award shall be binding on both parties.

3. In the event of both Contracting Parties having become members of the Convention of Washington of March 18, 1965 on the Settlement of Investment Disputes between States and Nationals of other States, disputes under this article may, upon request of the investor, as an alternative to the procedure mentioned in paragraph 2 of this article, be submitted to the International Center for Settlement of Investment Disputes.

4. The Contracting State which is a party to the dispute shall at no time whatever during a procedure specified in paragraphs (2) and (3) of this Article or during the execution of the respective sentence assert as a defense the fact that the investor has received compensation under an insurance contract covering the whole or part of the incurred damage.

5. Neither Contracting State shall pursue through diplomatic channels a dispute submitted to arbitration, unless the other Contracting State does not abide by or comply with the award rendered by an arbitral tribunal.

A hearing on jurisdiction, merits and quantum was held in Paris, France from 26 January to 30 January 2020 (the "Hearing"). The following persons were present at the Hearing:

Tribunal:

Prof. Juan Fernández-Armesto President
Mr. John Beechey, CBE Arbitrator
Prof. Vaughan Lowe, QC Arbitrator

Assistant to the Tribunal

Ms. Krystle Baptista Serna Armesto & Asociados

ICSID Secretariat:

Ms. Lindsay Gastrell Secretary of the Tribunal

For the Claimants:

Prof. Dr. Felix Dasser Homburger AG
Ms. Kirstin Dodge Homburger AG
Dr. Nicole Cleis Homburger AG
Mr. Marc Bircher Homburger AG
Dr. Jan Havlíček Havlíček Law Offices
Mr. Vojtěch Haman Havlíček Law Offices
Ms. Jessica Wiederhold Homburger AG (Assistant)
Ms. Julia Buess Homburger AG (Assistant)
Pawlowski AG and Projekt Sever s.r.o.
Mr. Sebastian Pawlowski
Mr. Peter Williams Interpreter

For the Respondent:

Mr. Eduardo Silva Romero Dechert LLP
Ms. Erica Stein Dechert LLP
Ms. Audrey Caminades Dechert LLP
Ms. Raphaelle Legru Dechert LLP
Ms. Juliana Pondé Fonseca Dechert LLP
Mr. Quentin Muron Dechert LLP
Mr. Panos Theodoropoulos Dechert LLP
Ms. Liana Cercel Dechert LLP
Ms. Ljubica Kaurin Dechert LLP
Mr. Ondřej Landa Ministry of Finance, Czech Republic
Ms. Martina Matejová Ministry of Finance, Czech Republic
Ms. Anna Bilanová Ministry of Finance, Czech Republic
Mr. Jaroslav Kudrna Ministry of Finance, Czech Republic
Mr. Martin Nováček Ministry of Finance, Czech Republic

Court Reporter:

Ms. Diana Burden

Interpreters:

Ms. Dalila Graffova Independent
Ms. Martina Parker Independent
Dr. Dominika Winterová Independent

During the Hearing, the following persons were examined:

On behalf of the Claimants:

Mr. Sebastian Pawlowski Fact Witness for Claimants
Mr. Milan Coller Fact Witness for Claimants
Dr. Robert Zugar Fact Witness for Claimants
Mr. Martin Langmajer Fact Witness for Claimants
Mr. (Ing.) Borek Votava Fact Witness for Claimants
Mr. Frantisek Nováček Fact Witness for Claimants
Mr. Marek Tichý Fact Witness for Claimants
Mr. Jaroslav Malčánek Fact Witness for Claimants
Claimants’ Legal Expert and Director of the Centre for Clinical
Prof. Dr. Veronika Tomoszková Legal Education at the Law Faculty of Palacký University in Olomouc, Czech Republic
Mr. Kai F. Schumacher Claimants’ Quantum Expert and AlixPartners GmbH
Mr. Clark Fraser AlixPartners GmbH

On behalf of the Respondent:

Ms. Věra Topičová Fact Witness for Respondent
Mr. Tomáš Hudeček Fact Witness for Respondent
Mr. Ondřej Boháč Prague Institute of Planning and Development
Mr. Matěj Stropnický Fact Witness for Respondent
Ms. Silvie Štěpánková Fact Witness for Respondent
JUDr. Stanislav Kadečka, Ph.D. Masaryk University, Faculty of Law
Mr. Jan Brož Trainee of JUDr. Stanislav Kadečka
Mr. Fernando Cuñado Garcia-Bernalt KPMG
Mr. Jiří Urban KPMG
Mr. Martin Staněk KPMG

"From the viewpoint of the interests protected by us, the change is inadmissible - the Botič - Milíčov natural park."²⁷

"[t]he possible development of the territory on the border of Prague Benice and Prague Uhříněves boroughs, i.e. the creation of a new residential complex surrounded by nature with the possibility of connecting it to commercial, cultural and sporting facilities in Prague Uhříněves and simultaneously within reach of the Čestlice - Průhonice commercial zone."³⁴

"[t]he prices agreed with the private land owners reflected an average price of CZK 1,250 per square meter, which was much higher than the price of farming land in the same area at that time due to the fact that the zoning process was in a very advanced stage."⁶⁰

- As a first step, the developer must obtain a planning permit from the competent building authority, which ensures that the project conforms to the zoning plan and that the proposed construction complies with legal requirements, including water, electricity, fire protection and other public health requirements;⁷⁸

- After obtaining the planning permit, a developer must secure a building permit, which describes the layout and technical details of the planned construction; once the developer has obtained the building permit, construction may start;⁷⁹

- Last, the completed construction requires inspection approval, which confirms that the construction complies with the building permit; once the inspection approval is granted, the buildings may be used for their planned purpose.⁸⁰

"Prague-Benice Borough stands by its original statement on the investment project from December 2008. In the minutes of the consultation of the borough’s comments on the zoning plan concept of 31.3.2009, it is stated that a request for low-rise construction up to 3 levels above ground will be accepted."⁹⁴

- (i) it had been issued in contravention of the law; and

- (ii) it lacked proper reasoning.

Decision of the Prague Supreme Administrative Court

"[t]he error is not in the official procedure [of the zoning change]; the error is that the Prague City Assembly ever approved it."¹³⁵

"If part of a zoning plan is annulled and there is no valid zoning plan in the given part of the city or territory, the assembly has to act without delay. That means that we have here the opinion of lawyers from the zoning plan division headed by Mrs. Engineer Cvetlerová. Based on this opinion I think that we really don’t have to deal with this situation now and consequently I won’t submit the prints either. I consequently will not second Doctor Blaežek’s motion."¹³⁹ [Emphasis added].

"Perhaps I even understand that you don’t like Mr Pawlowski. Personal feelings are a fundamental driving force of your actions, but that’s all right. You will happily play it down in six months’ time [...]"¹⁴⁰

- to re-procure the Zoning Plan Change (which would require amending the shortcomings established in the annulment judgement) or

- to confirm the annulment, in which case the previous zoning rules would apply.¹⁴³

"For the reasons set out in this Memorial, Claimants respectfully request that the Arbitral Tribunal grant the following relief:

1. Declare that the Czech Republic's actions and omissions at issue, including those of its instrumentalities for which it is internationally responsible, violated Articles 3 and 4 of the Bilateral Investment Treaty between Switzerland and the Czech Republic by failing to grant the necessary permits in connection with such investments, by failing to treat Claimants' investments fairly and equitably and by impairing Claimants' investments through unreasonable and discriminatory measures;

2. Declare that the Czech Republic's actions and omissions at issue, including those of its instrumentalities for which it is internationally responsible, constitute an indirect expropriation without prompt, adequate and effective compensation in violation of Article 6 of the Bilateral Investment Treaty between Switzerland and the Czech Republic;

3. Award compensation to Claimants, including pre-award interest as of July 31, 2020, in the amount of 4,950,382,717 Czech Crowns (CZK);

4. Award Claimants' all costs associated with these proceedings, including the costs and expenses of ICSID and of the arbitrators as well as fees and disbursements for Claimants' attorneys and experts;

5. Award post-award interest on all sums awarded from the date of the award until Respondent pays the award and all accrued interest in full, at the repo rate set by the Czech National Bank for the first day of the calendar half-year in which the default occurs plus eight percentage points (8%); and

6. Any further relief that the Arbitral Tribunal deems appropriate in the circumstances."¹⁵⁵

"For the reasons set out in this Memorial, Claimants respectfully request that the Arbitral Tribunal grant the following relief:

1. Declare that the Czech Republic's actions and omissions at issue, including those of its instrumentalities for which it is internationally responsible, violated Articles 3 and 4 of the Bilateral Investment Treaty between Switzerland and the Czech Republic (i) by failing to grant and uphold the necessary permits in connection with such investments, (ii) by failing to treat Claimants' investments fairly and equitably, and (iii) by impairing Claimants' investments through unreasonable and discriminatory measures;

2. Declare that the Czech Republic's actions and omissions at issue, including those of its instrumentalities for which it is internationally responsible, constitute an indirect expropriation without prompt, adequate and effective compensation in violation of Article 6 of the Bilateral Investment Treaty between Switzerland and the Czech Republic;

3. Award compensation to Claimants, including pre-award interest as of July 31, 2020, in the amount of 5,266,622,342 Czech Crowns (CZK);

4. Award Claimants' all costs associated with these proceedings, including the costs and expenses of ICSID and of the arbitrators as well as fees and disbursements for Claimants' attorneys and experts;

5. Award post-award interest on all sums awarded from the date of the award until Respondent pays the award and all accrued interest in full, at the repo rate set by the Czech National Bank for the first day of the calendar half-year in which the default occurs plus eight percentage points (8%); and

6. Any further relief that the Arbitral Tribunal deems appropriate in the circum- stances."¹⁵⁶

"- DECLARE that it has no jurisdiction over Claimant 1;

- DECLARE that it has no jurisdiction over Claimants' claims;

- In the alternative, DECLARE that the Czech Republic has not breached the Treaty and DISMISS all of Claimants' claims in their entirety;

- In the further alternative, DECLARE that the damages Claimants claim are not due; and

- In any event, ORDER Claimants to fully reimburse the Czech Republic for the costs it has incurred in defending its interests in this arbitration (plus interest)."¹⁵⁸

"For the foregoing reasons, the Czech Republic respectfully requests that the Tribunal:

- DECLARE that it has no jurisdiction over Claimants' claims;

- DECLARE that it has no jurisdiction over Claimant 1;

- In the alternative, DECLARE that the Czech Republic has not breached the Treaty and DISMISS all of Claimants' claims in their entirety;

- In the further alternative, DECLARE that the damages Claimants claim are not due;

- In the even further alternative, DECLARE that the damages Claimants claim should be limited to their sunk costs, quantified at CZK 28.9 million; and

- In any event, ORDER Claimants to fully reimburse the Czech Republic for the costs it has incurred in defending its interests in this arbitration (plus interest)."¹⁵⁹

"The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting state party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable."

Respondent submits that Claimants' claims and investments fall outside the jurisdiction of the Centre and the competence of the Tribunal, for the following reasons:

- Pawlowski AG does not qualify as a protected investor under Article 1(1)(b) or under Article 1(1)(c) of the BIT [Jurisdiction "Ratione Personae"] [VI.1];

- Both Pawlowski AG and Projekt Sever have failed to establish that their alleged investments are protected under the BIT and the ICSID Convention [Jurisdiction "Ratione Materiae"] [VI.2].

Claimants disagree. They insist that the Tribunal has jurisdiction for the following reasons:

- Both Pawlowski AG and Projekt Sever qualify as protected investors under Article 1(1) of the BIT;

- Pawlowski AG and Projekt Sever made investments that qualify for protection under the BIT; and

- Both Claimants have fulfilled all other obligations required under the BIT and the ICSID Convention.

Respondent argues that the Tribunal must decline jurisdiction ratione personae over Claimant 1 (Pawlowski AG), because Pawlowski AG does not qualify as a protected investor under Article 1(1) of the BIT.¹⁶¹ Respondent does not raise objections to the Tribunal's jurisdiction ratione personae over Claimant 2 (Projekt Sever).

According to Respondent, Pawlowski AG does not qualify as a protected investor under Article 1(1)(b) of the BIT, because it has neither real economic activities, nor its seat, in Switzerland [1.1],¹⁶² and it is not protected under Article 1(1)(c), because an investor that fails to qualify under Article 1(1)(b) cannot requalify as a protected investor under Article 1(1)(c) [1.2].¹⁶³

With respect to the company’s "seat", Respondent argues that a company’s "seat" must be interpreted as the effective place of management and administration of its business operations. Respondent notes that this was the definition adopted by the Alps Finance tribunal - which is the only other tribunal to have been constituted under the BIT and called upon to apply Article 1(1)(c).¹⁶⁹

- those which are Czech-registered but ultimately Swiss-controlled, and

- those which are registered in any country outside of the two Contracting Parties, yet are ultimately Swiss-controlled (Respondent notes that the reverse would be true in the case of a claim brought against Switzerland).¹⁷⁶

According to Claimants, the Swiss statutory seat of Pawlowski AG is sufficient to fulfill the BIT's requirement of a seat in Switzerland.¹⁸⁸ Claimants refer to case law for the proposition that a company's seat shall be interpreted by way of renvoi to municipal law.¹⁸⁹ Claimants assert that, pursuant to Article 56 of the Swiss Civil Code, the seat of a legal entity is located where its administration is carried out, unless its articles of association provide otherwise.¹⁹⁰

- The general meetings of shareholders are held in Switzerland;

- Corporate and accounting records are maintained in Switzerland;

- All administrative services, including bookkeeping and accounting, have been provided in Switzerland;

- At all material times, an active bank account has been maintained, and is still maintained, in Switzerland;

- The office in Zug is the only office worldwide, with substantive administrative work being done in Zuoz; and

- The auditors have always been companies with their seat in Switzerland.

Claimants argue that, regardless of the Tribunal's interpretation of Article 1(1)(b) of the BIT, Pawlowski AG separately and independently qualifies as an investor under the BIT under Article 1(1)(c), because Pawlowski AG is 100% owned and controlled by a Swiss national, Mr. Sebastian Pawlowski.¹⁹⁷

- legal entities that are controlled by Swiss nationals, and

- legal entities that are controlled by Swiss entities that also have real economic activities in Switzerland.¹⁹⁸

According to Claimants, the Tribunal has jurisdiction over Pawlowski AG in the present case by virtue of Mr. Pawlowski’s citizenship as a Swiss national and his ultimate control of Pawlowski AG.¹⁹⁹

Claimants reject Respondent’s argument that Article 1(1)(c) only applies to Swiss-controlled companies registered either in the Czech Republic or in any country other than Switzerland or the Czech Republic. According to Claimants, this argument goes against the terms of the BIT, particularly since the text of Article 1(1)(c) states that it applies to "legal entities established under the law of any country."²⁰⁰

Thus, according to Claimants, Pawlowski AG qualifies as an investor either if it

- has its seat, together with real economic activities in Switzerland (under Article 1(1)(b))

- or alternatively, if, in conformity with Article 1(1)(c), it is controlled by a Swiss national (under Article 1(2)(c)).

Claimants' position is that Pawlowski AG has demonstrated sufficient links to Switzerland to satisfy the conditions to qualify as an investor under both possible avenues.²⁰²

- Pawlowski AG does not qualify under Article 1(1)(b), because it has not established that it has real economic activities and its "seat" in Switzerland; and

- Pawlowski AG cannot requalify under Article 1(1)(c), because this clause is not intended to apply to investors who otherwise fail to meet the requirements under Article 1(1)(b).

- Projekt Sever is a company established in 2007 under the laws of the Czech Republic, registered with the Municipal Court in Prague under Company ID No. 278 61 503²⁰⁴;

- 100% of the shares of Projekt Sever have been held by Pawlowski AG at all times relevant to this dispute²⁰⁵; and

- Pawlowski AG is a Swiss established company²⁰⁶ fully owned and controlled by Mr. Pawlowski - himself a Swiss Citizen.²⁰⁷

"legal entities established under the law of any country which are, directly or indirectly, controlled by nationals of that Contracting Party or by legal entities having their seat, together with real economic activities, in the territory of that Contracting Party."

Projekt Sever is a legal entity established under the law of the Czech Republic. Projekt Sever also fulfills the additional requirements for protection under Article 1 (1)(c): it is a legal entity which is (i) controlled directly by the Swiss company Pawlowski AG through its 100% share ownership, and (ii) controlled indirectly by Mr. Pawlowski, who is a national of Switzerland.

"The purpose of the company is to acquire and manage all types of investments in domestic and foreign companies.

The company may acquire, hold and dispose of real estate and engage in all commercial, financial and other activities related to the purpose of the company."²¹⁰

- Besides its ownership and control of Projekt Sever, Pawlowski AG also owns 100% of the shares of the Swiss company Dmura AG;²¹¹

- Dmura AG, in turn, runs the Swiss hotels Parkhütte Varusch,²¹² Hotel Engiadina,²¹³ and Hotel Crusch Alva,²¹⁴ all of which employ significant numbers of personnel;²¹⁵

- Dmura AG is also active in the real estate business in Switzerland, having engaged in the construction and sale of apartment buildings, especially in the Canton of Graubunden;²¹⁶

- Pawlowski AG has also directly invested in the Lyceum Alpinum Zuoz, a well-known Swiss international boarding school, where Mr. Pawlowski serves as the chairman of the board of directors.²¹⁷

"(1) In the case of either Contracting Party, the term "investor" refers to:

(a) natural persons who are nationals of that Contracting Party in accordance with its laws;

(b) legal entities, including companies, corporations, business associations and other organisations, which are constituted or otherwise duly organized under the law of that Contracting Party and have their seat, together with real economic activities, in the territory of the same Contracting Party;

(c) legal entities established under the law of any country which are, directly or indirectly, controlled by nationals of that Contracting Party or by legal entities having their seat, together with real economic activities, in the territory of that Contracting Party." [Emphasis added]

"A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose."²¹⁹

The Tribunal does not see any language in the text of Article 1(1) of the BIT which suggests that a failure to qualify under one clause would prohibit qualification under the other. Thus, the Tribunal finds that Pawlowski AG may qualify as a protected investor under Article 1(1)(c) independently of the requirements of Article 1(1)(b).

Two elements are required for Pawlowski AG to qualify as a protected investor under Article 1(1)(c) of the BIT:

- First, it must be a legal entity established under the law of Switzerland; and

- Second, it must be controlled, directly or indirectly, by: (i) nationals of Switzerland, or (ii) legal entities which are seated and have real economic activities in Switzerland.

* * *

- Pawlowski AG invested in all the shares and capital of Projekt Sever;

- Projekt Sever, in turn, invested in 276,134 m² of real property in Prague in order to construct the Project; and

- Projekt Sever also invested capital in the planning process of the Project.

- the purchase of land;

- the capital spent on the planning process; or

- the expectation that the Project would finally be implemented.²²⁶

Claimants note that it is not in dispute that Pawlowski AG purchased 100% of the shares of Projekt Sever for CZK 200,000.²³² According to Claimants, this alone qualifies as an investment by Pawlowski AG under Article 1(2)(b) of the BIT, regardless of the amount paid for such shares.²³³ Claimants note that Pawlowski AG also made additional capital contributions and loans to Projekt Sever totaling CZK 649,027,000 as of 31 December 2018.²³⁴

- Pawlowski AG’s invested CZK 200,000.00 in purchasing its 100% shareholding in Projekt Sever;

- Pawlowski AG made capital contributions and loans to Projekt Sever for the purpose of purchasing the land for development of the Project;

- Projekt Sever invested CZK 343,693,031.00 in its purchase of 276,134 m² of real estate in Prague;²⁴¹ and

- Projekt Sever invested additional capital in the planning and designing of the Project.

"The seller paid his contribution of CZK 200,000,- to the company’s nominal capital in full. His share, which is determined by the ratio of his contribution to the company’s nominal capital, is 100%.

[...]

The seller assigns its entire share in the above-mentioned Company, corresponding to a contribution of CZK 200,000,-, to the Buyer [identified as Pawlowski AG].

[...]

The seller assigns its company share at a price of CZK 200,000,- (in words: two hundred thousand Czech crowns)."

- Equity contributions totaling CZK 414,707,000;²⁴⁴

- Loans totaling CZK 649,027,000.²⁴⁵

Article 1(2) of BIT provides the following definition of "investments":

"The term "investments" shall include every kind of assets and particularly:

(a) movable and immovable property as well as any other rights in rem, such as servitudes, mortgages, liens, pledges;

(b) shares, parts or any other kinds of participation in companies;

(c) claims and rights to any performance having an economic value;

(d) copyrights, industrial property rights (such as patents, utility models, industrial designs or models, trade or service marks, trade names, indications of origin), know-how and goodwill;

(e) concessions under public law, including concessions to search for, extract or exploit natural resources as well as all other rights given by law, by contract or by decision of the authority in accordance with the law." [Emphasis added]

"The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting state (or any constituent subdivision or agency of a Contracting state designated to the Centre by that state) and a national of another Contracting state, which the parties to the dispute consent in writing to submit to the Centre. When the parties have given their consent, no party may withdraw its consent unilaterally."

Article 1(2) of the BIT makes clear that "investments" includes "shares, parts or any other kinds of participation in companies."

"The Tribunal accepts that loans and financial instruments standing alone without any link to some economic venture intended to provide for the improvement of the State’s development would not be considered an 'investment ’."²⁴⁷

However, the Standard Chartered tribunal also noted that it had no doubt that such loans, when made in the context of financing the construction and operation of a facility, clearly carried inherent investment risks, thus satisfying the requirement of "investment risk" under Article 25 of the ICSID Convention. As noted by the tribunal in Standard Chartered, this finding has been confirmed by numerous other tribunals.²⁴⁸

In this case, Pawlowski AG assumed the legal and financial risk of being the 100% shareholder of the Czech company Projekt Sever. Pawlowski AG then contributed capital in the form of equity and loans extended to Projekt Sever in order to enable it to carry out entrepreneurial activity in the Czech Republic - consisting in the purchase of land for, and the design and planned development of, the residential project in Benice. The Tribunal thus finds that Respondent’s ratione materiae objections are inapposite; however "investment" is defined, there is no question that foreign direct investment, where the foreign investor directly owns and manages an enterprise situated in the host country, and where said enterprise carries out entrepreneurial activities in the host country, qualifies as such.²⁴⁹

* * *

- Pawlowski AG’s shareholding in, and its equity contributions to, Projekt Sever, and

- Projekt Sever’s land purchases and expenditure towards the design and development of the Project,

each qualify as protected investments under the BIT.

Claimants have made several claims under the BIT. Specifically, Claimants allege that:

- Respondent has violated the BIT's Article 4 obligations, including the requirements to provide fair and equitable treatment, to refrain from unreasonable, arbitrary and bad faith measures, and to refrain from discriminatory and less favorable treatment;

- Respondent has breached its obligation pursuant to Article 3 of the BIT to "provide the necessary permits" in connection with Claimants' investment; and

- Respondent's actions resulted in an indirect expropriation of Claimants' investment, in violation of Article 6 of the BIT.

"390. The BIT is an international treaty and should be interpreted in accordance with the principles of international treaty law, as codified in the Geneva Convention on the Law of Treaties. The Arbitral Tribunal derives its competence exclusively from the BIT and is not competent to decide how Czech law ls to be interpreted, this being a matter for the Czech courts. Consequently, the Tribunal cannot review the interpretation of domestic law in Czech court decisions. Nor can the Tribunal express an opinion on the interpretation of Czech law on matters which have not been decided by Czech courts.

391. However, in this arbitration Czech law is one of the factual elements which the Tribunal must take into account when establishing whether the Czech Republic has observed its undertakings in the Czech-German BIT. It is the Tribunal's task to examine whether Czech Law, as it was applied to the Claimant and his company CARGO, may have violated the obligations of the Czech Republic in the BIT. In other words, if it should be found that Czech law had such contents, or was applied in such manner, as to violate any of these treaty obligations, the Tribunal is competent to establish that a violation occurred and to draw the legal conclusions following from it. The Tribunal's examination may not only concern specific acts by the Czech authorities but also extend to general questions of whether the Czech legal system, including the availability of judicial and administrative remedies, was sufficient to provide the Claimant with adequate protection for his investment in the Czech Republic."²⁵⁶ [Emphasis added]

Second, Claimants note that they are not required to prove fault in the sense of intention to harm. Claimants quote Mondev, which found that "it is only the act of a state that matters, independently of any intention."²⁵⁸

Third, Claimants argue that a violation of a treaty obligation is not excused by the fact that the acts in question may have complied with the internal laws of the state.²⁵⁹

Respondent rejects all of the claims, arguing that Claimants not only misconstrue the legal standards applicable to Articles 3, 4, and 6 of the BIT, but also that they fail to demonstrate facts that could amount to a treaty violation; the claims, it says, are nothing more than alleged breaches of Czech domestic law.

Claimants’ principal claim is that the Czech Republic breached its duty to guarantee "fair and equitable treatment" ("FET") as required by Article 4(2) and the prohibition against "unreasonable or discriminatory measures" provided for in Article 4(1) of the BIT.²⁶⁵

"(1) Each Contracting Party shall protect within its territory investments made in accordance with its laws and regulations by investors of the other Contracting Party and shall not impair by unreasonable or discriminatory measures the management, maintenance, use, enjoyment, extension, sale and liquidation of such investments. [...]

(2) Each Contracting Party shall ensure fair and equitable treatment within its territory of the investments of the investors of the other Contracting Party. This treatment shall not be less favourable than that granted by each Contracting Party to the investments made within its territory by its own investors or than that granted by each Contracting Party to the investments within its territory by investors of the most favoured nation, if this latter is more favourable. [...]" [Emphasis added]

- The positive obligation is to accord within its territory FET to the protected investments of Swiss investors; and the standard applied must not be less than the treatment given to its own investors or those of the most favoured nation;

- The negative obligation is to abstain from impairing any protected investment through the adoption of measures which are either unreasonable or discriminatory.

- By adopting unreasonable measures [VII.1.2];

- By adopting discriminatory measures, which provided less favorable treatment to Claimants’ investments [VII.1.3.] and

- By violating Claimants’ legitimate expectations [VII.1.4.].

The first sentence of Article 4(2) of the BIT is a rule of laconic brevity and delphic obscurity: it simply obliges the Contracting States to ensure "fair and equitable treatment" to investments of protected investors.

- to the legitimate and reasonable expectations on which the investor relied, including the stability of the host State’s legal framework; and

- to the specific undertakings and representations proffered by the host State at the time when the investment was made.

- by the executive or administrative branch or its separate agencies by means of administrative acts that directly target the investment;

- by the State’s judicial system as a whole, when it is responsible for a denial of justice which affects the investment; or

- by the enactment of laws or regulations of general application, which radically modify the applicable legal framework to the detriment of the investment.

- whether the State made specific representations to the investor before the investment was made and then acted contrary to such representations;

- whether the State has failed to offer a stable and predictable legal framework, in breach of the investor's legitimate expectations;

- whether the host State has engaged in harassment, coercion, abuse of power, or other bad faith conduct against the investor²⁶⁶;

- whether the State has respected the principles of due process, consistency and transparency when adopting the measures at issue.

In evaluating the State's conduct, the Tribunal must balance the investor's right to be protected from improper State conduct against other legally relevant interests and countervailing factors. First among these factors is the principle that legislation and regulation are dynamic, and that (absent a treaty obligation to the contrary) States enjoy a sovereign right to amend their laws and regulations and to adopt new ones in furtherance of the public interest. Other countervailing factors affect the investor: it is the investor's duty to perform an appropriate pre-investment due diligence review and to conduct itself in accordance with the law both before and during the investment.²⁶⁷

Under Article 4(1) of the BIT, the Czech Republic has assumed the negative obligation to abstain from unreasonable or discriminatory measures affecting protected investments. A literal interpretation of the rule shows that for a measure to amount to a violation of the BIT it is sufficient if it is either unreasonable or discriminatory; it need not be both.

Arbitrariness has been described as "founded on prejudice or preference rather than on reason or fact";²⁶⁹ "[...] contrary to the law because: '[it] shocks, or at least surprises, a sense of juridical propriety'";²⁷⁰ or (in very similar terms) "willful disregard of due process of law, an act which shocks, or at least surprises a sense of judicial propriety";²⁷¹ or as conduct which "manifestly violate[s] the requirements of consistency, transparency, even-handedness and non-discrimination."²⁷²

"a. a measure that inflicts damage on the investor without serving any apparent legitimate purpose;

b. a measure that is not based on legal standards, but on discretion, prejudice or personal preference;

c. a measure taken for reasons that are different from those put forward by the decision maker;

d. a measure taken in willful disregard of due process and proper procedure."

And the EDF tribunal seemed to accept his definition in its analysis and ultimate rejection of the claim that Romania had adopted arbitrary measures.²⁷⁴

"wanted to prohibit themselves from implementing measures that affect the investments of nationals of the other Party without engaging in a rational decision-making process." [Emphasis added]

"Certainly a State that fails to base its actions on reasoned judgement, and uses abusive arguments instead, would not 'stimulate the flow of private capital’." [Emphasis added]

Article 4(1) of the BIT also prohibits the adoption by the Czech Republic of discriminatory measures against a protected investment. Article 4(2) provides an additional rule: the treatment must not be less favourable than the treatment granted to investments made by Czech investors, or by investors of the most favoured nation, if this latter treatment is more favourable.

"... start by looking at a narrow circle of comparators that are closest to the case at hand. In other words, the treatment of other investors in the same line of business will have to be looked at first. If there are clear indications of discrimination already on that basis, the matter may be regarded as settled. But the absence of discrimination within this narrow group is not necessarily conclusive. For instance, if the particular sector of the economy is small or is strongly dominated by foreign interests, it would not be sufficient for the tribunal to satisfy itself that no discrimination has occurred within that group of investors. The circle may be widened to a broader sector of activity that includes a variety of economic actors until a workable basis for comparison can be found."

Article 4(2) of the BIT defines the National Treatment ("NT") and the Most Favored-Nation ("MFN") standards:

"This treatment shall not be less favourable than that granted by each Contracting Party to the investments made within its territory by its own investors or than that granted by each Contracting Party to the investments within its territory by investors of the most favoured nation, if this latter is more favourable." [Emphasis added]