|Dr Gavan Griffith QC (Presiding Arbitrator) Professor Robert Volterra Judge Janies Crawford|
|For the Claimant||For the Respondent|
|Dr Anthony Sinclair Mr Epaminontas Triantafilou Mr Philip Devenish Quinn Emanuel Urquhart & Sullivan LLP||Ms Karolina Horakova Mr Libor Moravek Mr Ivan Cisar Mr Pavel Kinnert Weil, Gotshal & Manges s.r.o.|
|Mr Robert Nemec Mr Michal Sylla PRK Partners Witnesses||Mr Arif H. Ali Ms Erica Stein Mr David Attanasiou Dechert LLP Ms Marie Talasova Ms Anna Bilanova Mr Tomas Munzar Ministry of Finance of the Czech Republic|
|Neal Mizrahi FTI Consulting Inc,||Michal Bakajsa Tomas Uvira|
|David Dearman Mazars LLP|
|Tribunal Secretary Fedelma Claire Smith|
|Court Reporter Trevor McGowan|
(1) Confirming the Tribunal’s jurisdiction to determine the present dispute;
(2) Declaring that the Czech Republic has breached the BIT and international law, and in particular Articles 2(3) and 5 of the BIT;
(3) Ordering the Czech Republic to pay monetary compensation or damages in a total amount of USD 90,000,000 or, in the alternative, USD 45,971,927, on the basis of the value that the Claimant expected to derive from its investment in Skoda Export;
(4) Alternatively, ordering the Czech Republic to pay monetary compensation or damages in a total amount of USD 65,000,000 on the basis of the purchase price the Claimant paid plus the additional value injected into Skoda Export after its acquisition, including the Tashkent project; or USD 30,176,737 if the Tashkent project is excluded;
(5) Alternatively, ordering the Czech Republic to pay interest on any amount awarded, at the Czech statutory rate or a reasonable commercial rate to be determined by the Tribunal, compounded annually, accruing from the dale of the Award until payment in full;
(6) Under (3), (4) and (5), ordering the Czech Republic to pay interest on any amount awarded, at the Czech statutory rate or a reasonable commercial rate to be determined by the Tribunal, compounded annually, accruing from the date of the Award until payment in full;
(7) Ordering the Czech Republic to pay all costs incurred in connection with the arbitration proceedings, including the costs of the arbitrators as well as legal and other expenses incurred by the Claimant on a full indemnity basis, plus interest thereon at a reasonable commercial rate to be determined by the Tribunal, compounded annually, accruing from the date of the Award until payment in full; and
(8) Granting any other relief as the Tribunal may deem just and proper in the circumstances.54
(1) Declare that the Tribunal does not have jurisdiction over any of the alleged breaches of the BIT, or alternatively declare that the Tribunal does not have jurisdiction over alleged breaches of Articles 2(2) and 2(3) of the BIT;
(2) Declare that the Czech Republic has not breached the BIT;
(3) Dismiss all of the Claimant’s claims in their entirety;
(4) Order the Claimant to pay the costs of these arbitral proceedings, including the cost of the Tribunal and the legal and other costs incurred by the Czech Republic, on a full indemnity basis; and
(5) order the Claimant to pay interest on any costs awarded to the Czech Republic, in an amount to be determined by the Tribunal.56
(1) To observe the provisions of the "specific agreements" concluded by the Czech Republic with respect to the Claimant’s investment (the "Umbrella Clause") (Article 2(3));
(2) To accord "fair and equitable treatment" and to refrain from "unreasonable or discriminatory measures" ("FET") (Article 2(2)); and
(3) Not to expropriate the Claimant’s investment or subject its investment to measures having effect equivalent to expropriation, except "for a public purpose related to the internal needs of that Party on a non-discriminatory basis and against prompt, adequate and effective compensation" (Article 5).57
(1) The Tribunal has no jurisdiction over any of the Claimant’s claims or alternatively, has no jurisdiction over any of the Claimant’s claims save for the expropriation claim under Article 5 of the BIT (the "Jurisdiction and Admissibility Objections");
(2) The information provided to the Claimant during the privatization process was accurate and sufficient, and the Claimant failed to carry out due diligence properly;
(3) The economic loss caused to Skoda Export after acquisition by the Claimant resulted from the Claimant’s mismanagement of the company;
(4) The terms on which the Claimant sought operational financing from the financing institutions were unreasonable;
(5) The financing institutions operated on commercial terms and did not exercise governmental authority such as to engage the responsibility of the Czech Republic;
(6) In any event, the Czech Republic took appropriate steps in response to the financial situation of Skoda Export; and
(7) Accordingly, the Czech Republic has complied with all of its obligations under the BIT.
(1) The arbitration clause of the BIT has been superseded by European Union ("EU") law; and
(2) Alternatively, the Tribunal lacks jurisdiction under the terms of the BIT save for the expropriation claim under Article 5 of the BIT.
Disputes between an investor of one Contracting Party and the other Contracting Party concerning an obligation of the latter under Articles 2(3), 4, 5 and 6 of this Agreement in relation to an investment of the former which have not been amicably settled shall, after a period of four months from written notification of a claim, be submitted to arbitration under paragraph 2 below if either party to the dispute so wishes.
(1) The single market provides complete protection to investors from one Member State investing in another Member State,59 hence the later treaties on which the EU is founded have superseded and terminated the BIT, as the earlier agreement; and
(2) The BIT establishes discrimination on grounds of nationality against investors from other EU Member States who do not benefit from the BIT. It is incompatible with EU law.60
Investors of one Contracting Party may conclude with the other Contracting Party specific agreements, the provision and effect of which, unless more beneficial to the investor, shall not be at variance with this Agreement, Each Contracting Party shall, with regard the investments of investors of the other Contracting Party, observe the provisions of these specific agreements, as well as the provisions of this Agreement,
The Claimant relies on the practice of the investment arbitration tribunals in Camuzzi International v. Argentina, Bayandir v. Pakistan, SGS v. Paraguay and Eureko v. Poland and the ad hoc committees in Vivendi v. Argentina and Enron v. Argentina, in support of the proposition that the existence of an exclusive jurisdiction clause in a contract between the claimant and the respondent state cannot operate as a bar to the application of the BIT standard.104
The meaning of Article 2(3) is that in the ordinary forum for disputes relating to "specific agreements" - which would either be the national courts designated by agreement or the applicable private international law rules - "all applicable laws, including the BIT, will be taken into account".113 The travaux to the BIT explicitly confirm this interpretation,114 as does the arbitral jurisprudence.115
The Czech Republic provided misleading and inaccurate information about Skoda Export122 by means of the following:
(1) The Information Memorandum dated 25 September 2007, prepared by Ernst & Young, which provided reasons for a prospective purchaser to acquire Skoda Export. The Information Memorandum stated that Skoda Export had 23 projects as of 30 June 2007 including three projects (the "Key Projects") which were "of considerably greater scale and importance in terms of the company’s role and projected profits".123 These were: (i) construction of the Balloki Power Plant, Pakistan, contract value CZK 3.42 billion; (ii) construction of the Muridke Power Plant, Pakistan, contract value CZK 2.74 billion; and (iii) construction of the Bhikki Power Plant, contract value CZK 3.11 billion.124
(2) The Data Room; The Data Room contained redacted copies of the original agreements under which the Key Projects were being carried out and contained expert valuations which placed the company’s full share value at approximately CZK 375 million and CZK 417 million respectively.125 Further information was added to the data room in response to detailed questions from the FITE due diligence team,126 which included a series of short summary documents setting out "basic information on the contracting parties, the contract values, the place of the projects, and the company’s expected profits" (the "Project Cards").127 The Project Cards "presented Skoda Export as a well-managed company with a portfolio of projects with total projected profits of approximately CZK 400 million".128
(3) Managerial presentations: The information in the Project Cards was "confirmed" by Skoda Export’s management in the management presentations on 29 October and 6 November 2007.129 During the presentation on 6 November 2007, Skoda Export’s management made statements concerning the expected profits of the company and of the Key Projects, which failed to disclose "substantial problems" already known to Skoda Export at the time, including in particular that the Bhikki Project would be abandoned130 and that the Balloki and Muridke Projects were "slated to produce substantial deficits".131
(1) The Information Memorandum: The Respondent asserts that the Information Memorandum provided a balanced high-level overview of the business of Skoda Export and described risks which were overlooked by the Claimant, including (i) that the company operated in a specific market segment "characterized by unevenness overtime and by long delivery times", meaning that "in individual years the financial results of the Company [could] be volatile and the profitability is influenced by contracts made in previous years";137 (ii) that the prevailing market conditions at the lime of tender represented an independent risk;138 (iii) that as an EPC contractor the company was dependent on the suppliers of key components of the projects in which it was engaged by its subcontractors, in particular Siemens Engineering and General Electric;139 (iv) that the Company’s dependence on outsourcing the technical design work on all of its projects to external providers was a specific risk potentially leading to "existential endangering of the Company".140 The Information Memorandum further alerted bidders to the impact of exchange rate fluctuations on the business results of the company and presented financial data showing exchange rate losses ranging from hundreds of millions to tens of millions of CZK.141
(2) The Data Room: The Respondent emphasizes that the Data Room was open for at least 9 hours on each business day from 16 October 2007 to 12 November 2007 and from 26 to 29 November 2007.142 Referring to the complete Data Room index,143 the Respondent contends that the documents presented in the Data Room included a full set of contractual documentation entered into by the company in respect to each project,144 subject to the redaction of commercially sensitive information and the consent of the counterparty to the relevant agreement.145 In respect of the Balloki and Muridke projects, the contractual documents available in the Data Room showed that the prices contracted with customers "were lump sum fixed prices denominated in USD which could not be increased either as a result of foreign exchange fluctuations during the life of the projects, or based on future increases in the costs of inputs in the realization phase of the projects".146 Accordingly, it was "fully disclosed to bidders" that the economic performance of those projects "was fully dependent on Skoda Export’s ability to enter into back-to-back price-fixed contracts... at or below the agreed ETC purchase price and to appropriately hedge any open foreign exchange exposure".147
(3) Managerial presentations: The Respondent notes that the summary information provided in the Project Cards "contained only a small fraction" of the information provided about the projects.148 With respect to the Balloki project, the response to a question asked by the bidder Skoda Holding during its management presentation "revealed that there were serious cost overruns in the assembly and construction part of that project and that these additional costs would burden the company, because they could not be passed on to the customer through a price increase".149 Accordingly, a potential investor could conclude that the minimum cost overrun on the on-shore part could be estimated at USD 11,482,438.150 The management of Skoda Export disclosed that finishing the Balloki and Muridke projects on their original schedule was a problem.151 The company’s strict financial liability under its EPC contracts was not matched by the liability of the subcontractor, Energoprojekt.152 Concerning other projects, the management presentations identified a number of small projects, including the Haripur project and the project in Uganda, which despite being originally planned as profitable were not expected to generate any profit.153
In light of the information provided during and after the management presentations, the Respondent contests the Claimant’s reliance on the "margin" disclosed in the Project Cards made available to FITE.154 According to the Respondent, FITE was put on notice that to the extent any of the disclosed risks materialized, they would negatively affect financial performance of the Balloki and Muridke projects.155 In relation to the Balloki project, FITE was in possession of a presentation dated 25 April 2008 which described the status of the Balloki project and precisely quantified the forecasted loss from the project at between USD 13.5 and 18.5 million.156
The true status of the Bhikki, NIPCCO and Rio Turbio projects was disclosed to the Claimant during the due diligence process. Concerning the Bhikki project, the written replies to bidders indicated that progress of this project into the realization phase was "extremely unlikely"; there was no final calculation for the project and Skoda Export had not entered into any subcontracts.157 The contract was only legally terminated on 24 March 2008, after the signature of the SPA.158 The fact that the NIPCCO project had been terminated by the potential customer was made clear in the Project Card which indicated that the Termination Notice had been served on September 27, 2007,159 and it was thus clear that the fate of the project was highly uncertain.160 Concerning the Rio Turbio project, the Project Card revealed that Skoda Export had been outbid by another bidder, ISOLUX ESUCO, and that Skoda Export was unlikely to win this project.161
(1) Under Clause 5.1(c) of the SPA, the MoF warranted that by entering into and performing its obligations under the SPA, it would not be acting in breach of any contractual or other obligation or duty to which it was subject.163
(2) Under Clauses 5.2(h), 8.2(h), 8.3, 10.1(c), 10.2, and 10.6 of the SPA, the MoF was obliged to ensure that no sale, transfer, lease or other disposal of any material party of Skoda Export’s assets or shareholdings occurred during the warranty period, i.e. from 31 August 2007 until 26 May 2008, subject to an exception for transactions in the ordinary course of business, such as the payment of debts to third parties as they fell due.164
(3) Under Appendix No. 2 to the SPA, the MoF "impliedly represented" to FITE that the projects listed in Appendix 2 to the SPA "were in fact ongoing projects that Skoda Export had been retained to implement."165
(4) The MoF gave FITE an "implied representation that the materials it had provided in the data room (including in particular the Project Cards) were true and accurate in all material aspects and presented a fair view of Skoda Export’s business, project pipeline, status, management, and affairs."166
(5) Under Clause 8.3 of the SPA, the MoF undertook to give FITE immediate written notice of any fact that would place the MoF in breach of warranty.167
(6) Under Clause 10.1(c) of the SPA, the truth, completeness and accuracy of the warranties given at Clauses 5.1 and 5.2 of the SPA was made a "Condition Precedent" to completion of FITE’s purchase of Skoda Export and under Clause 10.2 of the SPA, the MoF was required to notify FITE in writing that this Condition Precedent had been met.168
(7) Under Clause 10.6 of the SPA, each Party was obliged immediately to inform the other Party of the occurrence or existence of any fact that would make impossible the meeting of any Condition Precedent or the execution of a transaction contemplated by the SPA, or that could affect the validity or effectiveness of the SPA.169
The Non-Disclosure Agreement to be signed by potential investors required each investor (i) to acknowledge that Skoda Export was not responsible for the correctness, accuracy and completeness of any information provided to them in connection with the tender;171 (ii) to agree that neither Skoda Export nor its employees, advisors or representatives were liable for the use of information made available to them;172 and (iii) to acknowledge that neither Skoda Export nor its employees, advisors, or representatives were liable for the correctness, accuracy or completeness of any business plans, estimates or prognoses or for any mistakes, omissions or inaccurate statements made by any of them; Skoda Export was not obliged to provide further information or update previously provided information or correct its possible inaccuracies.173
Clauses 5 and 6 of the SPA are an exhaustive list of warranties, which were explicitly agreed to be the sole warranties made by the Czech Republic and the purchaser to each other.177 The purchaser of the shares explicitly warranted to the seller that in purchasing the shares it had not relied on any warranties given by the seller except for those explicitly made by the seller in the SPA.178 At Clause 5.1 of the SPA, the seller warranted that certain information relating to the shares of Skoda Export had not changed between 31 August 2007 and the closing date of the transaction, which was 26 May 2008.179 In Clause 5.2, the seller warranted that certain precisely defined events had not occurred.180 None of the warranties provided in the SPA guaranteed future economic or social performances of Skoda Export or required the Czech Republic to update potential purchasers on any developments of particular business cases between 31 August 2007 and the date of signing of the SPA.181
In mid-2008, Skoda Export transferred CZK 120 million to Rostrakoff Jewellery Ltd ("Rostrakoff"), the UK-registered parent company of a Czech jewellery company.194 According to the Claimant, this transaction was a commercial loan that was repaid in full and with interest in late 2008, and was an arm’s length transaction from which Skoda Export benefitted financially,195
(1) setting up a "Steering Committee" with Skoda Export and the company’s suppliers, ostensibly in order to assist with the management and oversight of the company and its projects, but instead used the confidential and commercially sensitive information acquired through the Committee to Skoda Export’s disadvantage;
(2) attending a secret meeting with PPF Bank (which had partially financed FITE’s acquisition of Skoda Export) in which CEB enquired as to a potential lien over Skoda Export’s shares and whether CEB might be entitled to acquire Skoda Export from FITE on grounds the acquisition loan had not been repaid;
(3) imposing onerous and unjustified requirements of additional security and demanding, a parent guarantee from CKD in exchange for further financing;
(4) requiring a charge over Skoda Export’s office building in central Prague in favour of CEB in exchange for extending its guarantees for one of the Key Projects, which would have prevented Skoda Export from securing the additional operating loans required to pay the company’s suppliers;
(5) increasing its fees ten-fold for extending Skoda Export’s bank guarantees, and offering only a two-month extension instead of granting the five-month extension that Skoda Export had requested;
(6) adopting the unrealistic position that additional financing would be available only after NEPRA had issued its decision on Skoda Export’s requested tariff increase, which was expected in late 2009, in circumstances where CEB was aware that the company could not survive that long without financial assistance;
(1) requiring a forensic audit of Skoda Export’s affairs as a further condition of providing finance for the Key Projects;
(2) preferential treatment of a select number of companies that presumably had appropriate connections in the Czech Government;
(3) colluding with HSBC to instigate a police investigation of Skoda Export on 22 April 2009 based on false charges, which led directly to an unjustified freeze of Skoda Export’s bank accounts by the Czech authorities;
(4) attempting at the beginning of June 2009 to purchase the debts owed by Skoda Export to one of its sub-contractors, ÚJV Rez, a. s. ("UJV Rez"), so as to expedite the enforcement of those debts against Skoda Export’s assets;
(5) treating Skoda Export officials disrespectfully, for instance by directing verbal attacks at Skoda Export officials in the presence of the company’s customers;
(6) making slanderous accusations to Skoda Export’s suppliers as part of a concerted smear campaign;
(7) refusing to execute Skoda Export’s payment orders in the ordinary course of the company’s business; and
(8) attempting to divert the Key Projects to a third party, BTG Energy ("BTG").
The CEB commissioned extraordinary audits of the Balloki and Muridke projects by SGS, an external specialist.254 The Respondent asserts that SGS was unable to deliver its regular quarterly audits in 2008 because, after its acquisition by FITE, Skoda Export stopped providing SGS with access to information.255 In February and March 2009, SGS completed its audit and confirmed that the Balloki and Muridke projects were only financially feasible if the accumulated cost overruns were reflected in the EPC contract price increases.256. On 3 April 2009, after meetings of its Board of Directors and Supervisory Board, CEB informed Skoda Export of its internal decisions and the financing that it was prepared to malee available.257 The Respondent denies the Claimant’s allegation that such terms were onerous or unjustified.258 According to the Respondent, CEB already had significant exposure to Skoda Export, whilst CKD had refused to provide any financial assistance to Skoda Export unless the requested financial aid was provided by the Czech Republic.259
The Claimant’s complaints of other alleged attempts to undermine Skoda Export - (i) debt collection proceedings by UJV Rez,273 (ii) alleged failure to execute payment orders;274 (iii) alleged preferential treatment of other credit applicants;275 and (iv) alleged harassment and intimidation276 - were unfounded and lacking in substance.
A legal act is invalid, if the person acting performed it by mistake caused by a fact that was decisive for the performance of the legal act and the person to which the legal act was addressed caused the mistake, or must have been aware of it. A legal act is also invalid where the latter person caused the mistake intentionally. A mistaken intention does not render a legal act invalid.278
The Respondent alleges that the Claimant abandoned the investment through the actions it took up to 24 April 2009, while the negotiations on financing were ongoing. These actions included (i) the resignation on 10 April 2009 of the Supervisory Board and 3 of the 4 members of the Board of Directors of Skoda Export;296 (ii) the attempt by Skoda Export to terminate the Balloki project on 22 April 2009;297 (iii) the change of control over Skoda Export by which Skoda Export ceased to be a member of CKD;298 (iv) the rescission of the SPA by FITE;299 and (v) the renaming of Skoda Export as CKD Export, a.s.300
The Respondent did not comply with its duties under Duties of Representatives of Ministry of Finance under Directive No. 1/2006.336 Under Article 5 of Directive 1/2006, Ministry representatives in corporate bodies are obliged to make sure that the business prospects, opportunities and risks are properly identified, scrutinised and evaluated.337 According to Article 5(7) of the Directive, representatives of the Ministry in the Supervisory Board "could and should have initiated an independent examination of the situation of Skoda Export, instead of referring back the matter to the Board of Directors".338
In its Statement of Claim, the Claimant refers, further, to the obligations of the Czech Republic under Sections 6(1) and 9(1) of Act No. 92/1991 Coll, (the Law on the Transfer of State Assets, or "Privatisation Act")342 and Section 6(1)(b) of Act No. 178/2005 Coll, (the "Act on Cancellation of the National Property Fund").343
The Respondent contends, further, that the Claimant’s claims would not be admissible because the Parties to the SPA have explicitly agreed on the exclusive jurisdiction of the competent courts in Prague, and moreover those courts have determined that no commitments pursuant to the SPA were breached.384 In terms of admissibility, the Respondent emphasizes that a party cannot claim breach of contract on the one hand and on the other disregard the contractually agreed dispute resolution mechanism in the contract.385 And in terms of substance, those decisions of the Czech courts are determinative in accordance with the principle of res judicata, both in Czech law and as a matter of international law.386
(1) To safeguard legitimate expectations;389
(2) To act in good faith;390
(3) To refrain from unreasonable and discriminatory measures;391
(4) To provide a stable legal and business framework;392
(5) To treat foreign investment in a manner that is consistent, predictable and transparent;393 and
(6) To treat foreign investors and their investment with due process.394
The Respondent contends that it did not breach any of its obligations:
(1) To safeguard legitimate expectations;408
(2) To act in good faith;409
(3) To refrain from unreasonable and discriminatory measures;410 or
(4) To provide a stable legal and business framework,411 treat foreign investment in a manner that is consistent, predictable and transparent,412 and treat foreign investors and their investment with due process.413
As to (4), the Respondent maintains that it treated the Claimant’s investment in a consistent, predictable, and transparent manner.428 Specifically, as well as denying the factual basis for the assertion that it "deliberately concealed information" relating to the actual financial condition of Skoda Export, creating a false impression of the company, and that it ignored warnings concerning the company’s impending losses on important projects,429 the Respondent adds that the Claimant "has not pleaded this claim with any particularity".430 The only legal authority proffered by the Claimant in relation to the requirements of consistency, predictability and transparency is the award in Tecmed, which relates to the transparency of the legal procedures and framework of the State.431 The Claimant makes the allegation not that the legal framework in the Czech Republic lacked transparency, but rather that the behaviour of the Respondent was outside the scope of this framework, and its allegation in this respect is unfounded.432
The Respondent notes inter alia that CEB operates as a bank subject to standard banking rules, while the state support of its activities is provided in the form of conditional subsidies of its income in the event that its commercial income is insufficient to cover expenses incurred in connection with the provision of export financing and in the form of guarantee of its financial obligations.464 CEB and EGAP operate closely in the provision of export financing.465 The business management of CEB is entrusted to its Board of Directors, and shareholders are not entitled to give instructions to the Board of Directors.466 Similarly, the business management of EGAP is entrusted to its Board of Directors, and as a matter of Czech law, shareholders cannot instruct the Board of Directors on matters concerning the business management of the insurer.467
Concerning responsibility for the acts and omissions of entities or persons exercising elements of delegated governmental authority, under Article 5 of the ILC Articles, the Respondent contends that there is a two-pronged test to be satisfied under this Article, which is confirmed by consistent BIT jurisprudence.469 The allegedly unlawful act must, first, be performed by an entity specifically empowered to exercise elements of governmental authority and, secondly, must itself be performed in the exercise of such governmental authority.470
The Respondent rejects the contention by the Claimant that CEB and EGAP are empowered to exercise governmental authority because they "perform state functions conferred on them by legislation".478 The Respondent emphasizes that CEB and EGAP perform the commercial functions of providing export credit and insurance, and invokes the "bright line rule" of international law that activity of a commercial nature that is typically engaged in by a private or commercial entity "can never be considered an exercise of governmental authority".479 Neither CEB nor EGAP holds any special authority to provide export financing or insurance that is unavailable to any other commercial bank or insurer.480 According to the Respondent, the Claimant "has not identified the governmental activities that CEB and EGAP purportedly carry out".481
The Respondent further denies that CEB or EGAP are empowered to exercise governmental authority on the ground that each is charged with implementing State policy under the Financing of Exports Act.482 The fact that commercial activities further State policy goals does not change their fundamentally private character.483 In addition to citing jurisprudence in support of its position, the Respondent considers that "the cases cited by Claimant confirm that governmental authority must, in fact, be distinctly governmental - not private or commercial - even when carried out in furtherance of State policy".484 The fact that there are references to CEB and EGAP in the policy document titled Export Strategy of the Czech Republic for 2006-2010 ("Export Policy") does not affect this position.485
The Respondent maintains that CEB and EGAP are not empowered to exercise governmental authority simply on the basis that they receive State financial support and are held accountable to the State for use of those finances by means of scrutiny by the Supreme Audit Office of the Czech Republic.486 The mere fact of stale financial support, subject to accountability through audits, is "entirely insufficient" to empower an entity that otherwise carries out purely commercial activities with governmental authority.487 The Supreme Audit Office audits not only CEB and EGAP but also all other commercial! companies in which the Czech Republic owns an interest and does not direct the activities of CEB or EGAP.488 The Respondent denies that the supervisory bodies of CEB and EGAP "consist of state officials" since they are not exclusively composed of state officials but also include various private individuals without state affiliation.489
The Respondent contends that all of the activities of CEB and EGAP which are at issue, namely, the assessment of credit and insurance applications, the proposed reallocation of projects, and the reporting of suspicious banking transactions are ordinary commercial actions within the finance and insurance sectors.490
In particular, as regards the alleged "mishandling" of credit applications, the Respondent emphasizes that the Claimant itself admits that it wanted to be financed on non-commercial terms, and its disappointment at not receiving such terms "confirms that CEB and EGAP made purely commercial decisions".491 The correspondence relied upon by the Claimant from the Deputy Minister of Finance and from the Minister of Finance does not constitute a promise of financing, nor is it relevant to the question whether the provision of financing is a governmental activity.492
The Claimant quantifies its primary damages claim as follows:518
(1) the value of Skoda Export’s Existing Projects, which the FTI Report has stated as USD 8,321,952;
(2) the value of Skoda Export’s Potential Projects, which the FTI Report has stated as USD 3,365,812;
(3) the value of the Transferred Projects, which the FTI Report has valued at USD 23,952,551;
(4) the value of the Additional Bids which the FTI Report has valued at USD 1,809,695; and
(5) the value of Skoda Export’s real estate, which the FTI Report has set at USD 15,477,849,
(1) the purchase price for Skoda Export which based on the exchange rate of the time the FTI Report has determined to be USD 13,020,297; and
(2) the value of Skoda Export’s Transferred Projects, which the FTI Report has valued at USD 23,952,551.
The Respondent contends that the primary calculation of damages made by FTI is fundamentally flawed. First, FTI does not quantify loss to the Claimant because it does not quantify the value of Skoda Export but instead merely quantifies Skoda Export’s cash flows, and even assuming cash flows were an appropriate measure of value, "they could only be so to the extent they were lost by Claimant, not Skoda Export", and any loss to the Claimant should be measured by the cash that would ultimately flowed up to the Claimant by way of dividends payable by Skoda Export.534 The value of any sums payable up to the Claimant as dividends would need to be calculated taking into account central office overheads, which the FTI Reports fail to take into account.535 Further, should the Claimant be correct in its allegation that the data on the Project Cards turned out to be misleading or false, "this would necessarily mean that those Project Cards cannot represent profits or cash flows that Skoda Export could have earned and therefore cannot represent Claimant’s losses",536 Finally, the calculation is flawed because the value of Skoda Export’s real estate is overstated and only that part of the premises which was not occupied by Skoda Export itself, amounting to 13 percent of the total office area, can be deemed an excess (redundant) asset whose value can be added to the damages calculated as the loss of cash flows.537
Alternatively, the rate of post-award interest should not be higher than Claimant’s own cost of funds, which the Respondent calculates at 1.98 percent per annum, based on the interest rate offered by PPF Bank at the time of the loan agreement dated 24 April 2009, 3 month PRIBOR (currently 0.29 percent) plus 1.69 percent per annum.550
Investors of one Contracting Party may conclude with the other Contracting Party specific agreements, the provision and effect of which, unless more beneficial to the investor, shall not be at variance with this Agreement. Each Contracting Party shall, with regard the investments of investors of the other Contracting Party, observe tire provisions of these specific agreements, as well as the provisions of this Agreement.
(aa) Physical persons deriving their status as United Kingdom nationals horn the law in force in the United Kingdom;
(bb) corporations, firms and associations incorporated or constituted under the law in force in any part of the United Kingdom or in any territory to which this Agreement is extended in accordance with the provisions of Article 12,
[E]very kind of asset belonging to an investor of one Contracting Party in the territory of the other Contracting Party under the law in force of the latter Contracting Party in any sector of economic activity...
Article 1(a) enumerates a non-exhaustive list of different types of asset.
The obligation to observe an undertaking is owed by the State that has given the undertaking. It is owed to the party to which the undertaking has been given. It is not a freely transferrable obligation, without the consent of the State that has given the undertaking (although such consent can be identified in different ways, including by way of a treaty or a contract governed by municipal law). The requisite elements of an undertaking to be observed under international law are a specific, clear and direct commitment from a State to an identified beneficiary. It is not sufficient, for example, that there be a general policy, a generic statement of principle, a general legal principle or a municipal law of universal application (which would not include a law specifically identified to provide foreign investment with protections or a law formalising a concession agreement).
In Azurix Corp. v. Argentina, the tribunal considered whether it had jurisdiction under the umbrella clause in the US/Argentina BIT to consider obligations arising from a concession agreement between the Claimant’s subsidiary and the Provence of Buenos Aires, The umbrella clause provided that "[e]ach Party shall observe any obligation it may have entered into with regard to investments." The tribunal held as follows:
The Tribunal finds that none of the contractual claims as such refer to a contract between the parties to these proceedings; neither the Province [of Buenos Aires] nor ABA are parties to them. While Azurix may submit a claim under the BIT for breaches by Argentina, there is no undertaking to be honored by Argentina to Azurix other than the obligations under the BIT. Even if for argument’s sake, it would be possible under Article II(2)(c) to hold Argentina responsible for the alleged breaches of the Concession Agreement by the Province, it was ABA and not Azurix which was the party to this Agreement.578
In Siemens v. Argentina, the tribunal held that: "to the extent that the obligations assumed by the State party are of a contractual nature, such obligations must originate in a contract between the State party to the BIT and the foreign investor.579 On this basis, the tribunal concluded that obligations in a contract between Siemens’ subsidiary and Argentina did not qualify under the umbrella clause in the BIT between Germany and Argentina.
In 2007, the Annulment Committee in CMS v. Argentina criticised the tribunal for its seemingly broad interpretation of the umbrella clause in the Argentina/US BIT,580 which gave CMS standing to enforce obligations in a licence agreement between Argentina and a company in which CMS was a minority shareholder. The Annulment Committee observed that there were "major difficulties" with this reading of the umbrella clause, including, inter alia:
(b) Consensual obligations are not entered into erga omnes but with regard to particular' persons. Similarly the performance of such obligations or requirements occurs with regard to, and as between, obligor and obligee.
(c) The effect of the umbrella clause is not to transform the obligation which is relied on into something else; the content of the obligation is unaffected, as is its proper law.
If this is so, it would appear that the parties to the obligation (i.e,, the persons bound by it and entitled to rely on it) are likewise not changed by reason of the umbrella clause.581
in Burlington Resources v. Ecuador, the tribunal determined that the claimant could not rely on the umbrella clause in the US/Ecuador BIT to enforce production sharing contracts entered into between the claimant’s wholly owned subsidiary and Ecuador. As with the umbrella clause in the US/Argentina BIT considered ra. Azurix and CMS, the US/Ecuador BIT required each state party to "observe any obligation it may have entered into with regard to investments."582 The tribunal articulated the following test to interpret the umbrella clause:
The word "obligation" is thus the operative term of the umbrella clause. The BIT does not define "obligation". The Parties agree - and rightly so - that the clause refers to legal obligations. This is of little assistance, however, to resolve the question of privity. To answer this question, the Tribunal relies primarily on two elements which in its view inform the ordinary meaning of "obligation." First, in its ordinary meaning, the obligation of one subject is generally seen in correlation with the right of another. Or, differently worded, someone's breach of an obligation corresponds to the breach of another's right. An obligation entails a party bound by it and another one benefiting from it, in other words, entails an obligor and an obligee. Second, an obligation does not exist in a vacuum. It is subject to a governing law. Although the notion of obligation is used in an international BIT, the court or tribunal interpreting the BIT may have to look to municipal law to give it content. This is not peculiar to "obligation"; it applies to other notions found in investment treaties, e.g. nationality, property, exhaustion of local remedies to name just these. In this case, the PSCs are governed by Ecuadorian law. It is that law that defines the content of the obligation including the scope of and the parties to the undertaking, i.e. the obligor and the obligee.583
In respect of the first element, it can be seen that the tribunal elaborates on the concept of reciprocity between "obligee" and "obligor" raised in CMS v. Argentina.
In Oxus Gold v. Uzbekistan, one of the grounds on which the tribunal decided that the claimant could not rely on an umbrella clause to import obligations from an exploration agreement was because "the parties to the PEA are Goskomgeology and Marakand and not the State and Oxus."584 Goskomgeology was a State Committee of Uzbekistan and Marakand was a subsidiary of Oxus.
Continental Casualty concerned the same US/Argentina BIT umbrella clause that was considered in Azurix and CMS. With respect to the umbrella clause, the tribunal observed:
Finally, provided that these obligations have been entered "with regard" to investments, they may have been entered with persons or entities other than foreign investors themselves, so that an undertaking by the host State with a subsidiary such as CNA is not in principle excluded.586
As to the terms "with regard to investments" also employed by the relevant BIT provision, they denote a "link between the obligation and the investment" as Burlington argued at the hearing. This is certainly in keeping with the object and purpose of the BIT, which are to encourage and protect investments. However, as Ecuador pleaded, this link "does not replace but qualifies" the notion of obligation. If there is no obligation in the first place, there is nothing to qualify. Nor can these qualifications create an "obligation" where there is none to begin with.590
The Claimant seeks to distinguish the present case from those considered above on the basis that the SPA "includes multiple warranties applying to FITE and its ‘Affiliates’, including WNC".591 It refers in this respect to EDF v. Argentina, where the tribunal held that it had jurisdiction to consider breaches of a concession agreement between a company in which the Claimants owned shares and the Government of Mendoza. The tribunal rejected Argentina’s privity objection on the following basis:
The Tribunal notes that Article 12 of the Concession Agreement makes explicit mention of shareholders. That provision prohibits shareholders from transferring EDEMSA shares without prior consent from EPRE, Respondent itself mentions at paragraph 231 of its Counter-Memorial that the Concession Agreement required authorization by the Executive Power for the transfer of EDEMSA's majority shareholding during the first 5 years of the agreement’s effective date.592
The Purchaser [FITE] warrants to the Seller on the Signing Date that all the below facts (the Purchaser’s Warranties) are true, complete and correct and undertakes to ensure that the facts remain true, complete and correct on each of the following days until and including the Settlement Date:
(h) neither the Purchaser nor any of its Affiliates are party to any judicial proceedings or any arbitration proceedings against the Czech Republic and/or the Company...593
It is apparent to the Tribunal that Clause 6.1(h) is a contractual promise made solely by FITE which does not bind the Claimant. As the SPA imposes no obligation on the Claimant, the Claimant and the Respondent cannot be said have a relationship of obligor and obligee. The Claimant has no standing to enforce any obligation under the SPA merely because it is referred to (in generic terms, i.e., as an "Affiliate") in certain provisions.
(a) violated an express warranty in the SPA that it had complied with its own legal obligations, including under Czech law;596 and
(b) breached "its implied contractual obligations of good faith under Czech law towards FITE in the negotiation, execution and performance of the SPA".597
entering into this Agreement or by the meeting of the Seller’s obligations under this Agreement will not result in any...breach of any valid legal regulation applicable to the Seller.
Each Contracting Party shall ensure that under its law investments or returns of investors of the other Contracting Party are granted treatment not less favourable than that which it accords to investments or returns of its own investors or to investments or returns of investors of any third State.
Disputes between an investor of one Contracting Party and the other Contracting Party concerning an obligation of the latter under Articles 2(3), 4, 5 and 6 of this Agreement in relation to an investment of the former which have not been amicably settled shall, after a period of four months from written notification of a claim, be submitted to arbitration under paragraph 2 below if either party to the dispute so wishes.
Any dispute that arises between the Parties based on or in connection with this Agreement shall be decided by the court in Prague having subject-matter jurisdiction, unless exclusive jurisdiction of a court is stipulated.