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

Award

I. INTRODUCTION

1.
The Claimant is WNC Factoring Limited ("WNC" or the "Claimant") a company organized under the laws of England and Wales. It is represented in this arbitration by Messrs Stephen Jagusch, Anthony Sinclair, Epaminontas Triantafilou and Philip Devenish of Quinn Emanuel Urquhart & Sullivan, LLP, and Messrs Robert Nemec and Michal Sylla of PRK Partners S.R.O. Advokátní Kanceláf.
2.
The Respondent is the Government of the Czech Republic (the "Czech Republic" or the "Respondent", and together with the Claimant, the "Parties"). It is represented in this arbitration by Ms Karolina Horakova and Messrs Libor Moravek, Iván Cisár and Pavel Kinnert of Weil Gotshal & Manges, Ms Erica Stein and Messrs Arif Ali and David Attanasiou of Dechert LLP, and Ms Maria Talasová of the Ministry of Finance of the Czech Republic.
3.
The dispute between the Parties concerns WNC’s investment in the acquisition of the company SKODAEXPORT, a.s., ("Skoda Export"), a Czech state-owned supplier of turnkey capital equipment in the energy sector. The Claimant claims that the Czech Republic "provided bidders for Skoda Export with misleading and inaccurate information during the company’s privatisation," obstructed WNC’s attempts to restore the company to profitability, and eventually "forced Skoda Export into insolvency and caused the complete devaluation of WNC’s investment in the Czech Republic."1 According to the Claimant, "the Czech Republic is responsible as a matter of international law for the wrongful treatment to which WNC was subjected" under the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Czech and Slovak Republic for the Promotion and Protection of Investments, signed on 10 July 1990, with Protocol, as amended by Exchange of Notes on 23 August 1991 and 24 October 1991 (the "BIT").2

II. PROCEDURAL HISTORY

A. Commencement of the Arbitration and Constitution of the Tribunal

4.
The Claimant commenced these proceedings by Notice of Arbitration dated 26 September 2014 pursuant to Article 8(2)(a) of the BIT and the Arbitration Rules of the United Nations Commission on International Trade Law as adopted in 1976 ("UNCITRAL Rules").3
5.
The Claimant appointed Professor Robert Volterra as arbitrator on 26 September 2014. The Respondent appointed Professor James Crawford as arbitrator on 27 October 2014. The co-arbitrators appointed Dr Gavan Griffith QC as presiding arbitrator on 6 January 2015. Professor Crawford was subsequently elected to the International Court of Justice but continued to serve as arbitrator in the present case.
6.
On 9 February 2015, the Tribunal and the Parties signed Terms of Appointment, which, inter alia, designated the Permanent Court of Arbitration ("PCA") as registry for the proceedings.
7.
Following a procedural hearing held at The Hague on 9 February 2015 and the circulation of a draft for the Parties’ comments, the Tribunal issued its Procedural Order No. 1 dated 20 March 2015, which inter alia established a calendar for the proceedings, including the hearing on the merits ("Hearing").

B. Exchange of Written pleadings

8.
On 2 April 2015, the Claimant filed its Statement of Claim ("Statement of Claim").
9.
On 3 August 2015, the Respondent filed its Statement of Defence ("Statement of Defence").
10.
On 3 and 4 September 2015, the Respondent and Claimant respectively each filed its request for document production for the Tribunal’s determination in the form of a Redfern Schedule.
11.
On 26 September 2015, the Tribunal issued its Procedural Order No. 2, in which it ruled on the Parties’ requests for document production.
12.
On 9 October 2015, the Claimant requested a two-month extension for the filing of its Reply and a corresponding adjustment to the procedural calendar, including the dates of the Hearing. By letter dated 12 October 2015, the Respondent objected to the Claimant’s request.
13.
On 23 November 2015, following several exchanges of written submissions by the Parties, the Tribunal issued its Procedural Order No. 3 in which it granted the Claimant’s request for an extension of time for the submission of its Reply and adjusted the procedural calendar accordingly.
14.
On 12 January 2016, the Claimant filed its Reply Submission ("Reply").
15.
On 1 April 2016, the Respondent requested that the Tribunal order the Claimant to disclose the identity of its ultimate beneficial owner and provide evidence of its ability to pay an eventual order for costs.
16.
On 7 June 2016, after receiving comments from the Parties, the Tribunal issued its Procedural Order No. 4, in which it denied the Respondent’s request.
17.
On 11 June 2016, the Respondent filed its Rejoinder ("Rejoinder").
18.
By letters dated 14 and 16 June 2016, the Respondent and the Claimant respectively notified the Tribunal of the witnesses they wished to call for cross-examination at the Hearing,
19.
On 21 June 2016, the Tribunal issued further procedural directions for the conduct of the hearing.
20.
By letters dated 5 and 9 July 2016, the Claimant sought the admission of certain new documents in the record on grounds of exceptional circumstances.
21.
On 7 July 2016, the Parties filed their respective skeleton arguments ("Claimant’s Skeleton Argument" and "Respondent’s Skeleton Argument"). The Experts filed their joint statement of matters agreed and not agreed,

C. Hearing

22.
The Hearing was held at the Peace Palace in The Plague from 11 to 16 July 2016. The following persons were present:

The Tribunal
Dr Gavan Griffith QC (Presiding Arbitrator) Professor Robert Volterra Judge Janies Crawford
For the ClaimantFor 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
Expert Witnesses
Neal Mizrahi FTI Consulting Inc, Michal Bakajsa Tomas Uvira
Expert
David Dearman Mazars LLP
Tribunal Secretary Fedelma Claire Smith
Court Reporter Trevor McGowan

23.
By letters dated 5 and 7 July 2016, the Claimant informed the Tribunal that [REDACTED] would be unable to attend the Hearing due to illness and provided a doctor’s note confirming [REDACTED] ill health. Prior to the hearing, the Tribunal enquired whether [REDACTED] would be available to attend by video link.4 The Claimant indicated by e-mail on 10 July that [REDACTED] would not be able to give evidence "by video link or otherwise" due to her ill health.5
24.
By letter sent on 8 July 2016. former Minister Kalousek informed the Tribunal that he would be unable to attend the Hearing because the Czech Parliament was sitting during the same week and he was required to attend as the leader of one of the two major opposition parties. The Tribunal enquired as to the availability of Mr Kalousek to give evidence by video-link "at any time during next week (11 through 16 July 2016)."6
25.
During the hearing, the Tribunal heard submissions from the Parties concerning the circumstances of [REDACTED] and Mr Kalousek not being produced for examination upon their statements.
26.
The Tribunal confirmed that as a valid reason had been provided for [REDACTED] failure to appear, falling within the exception in paragraph 7.8 of Procedural Order No, 1, her statement would not be excluded.7
27.
Following the Respondent informing the Tribunal that Mr Kalousek would not be produced for examination in person or by video link,8 the Tribunal ruled to exclude his statement as not falling within the exception of paragraph 7.8 for non-appearance.
28.
During the hearing, the Tribunal also ruled not to admit the new documents referenced in the Claimant’s letter of 5 July 2016.9
29.
On 30 September 2016, each Party filed its submissions on costs ("Claimant’s Costs Submission" and "Respondent’s Costs Submission"). On 14 October 2016, the Respondent filed its Reply Submission on Costs.
30.
By letter dated 18 January 2017, the Tribunal invited each of the Parties to make a final supplementary deposit on costs, with the final amounts for fees and expenses of the Tribunal to be limited to the balance of the final deposit.
31.
On 7 February 2017, the Respondent submitted a Supplemented and Updated Summary of Costs and Expenses Incurred by the Czech Republic (the "Supplemented Summary of Costs") in which it claimed additional expenses resulting "mainly from invoices which Respondent received and processed after 30 September 2016 for work performed prior to that date by Mazars LLP, Weil Gotshal & Manges and Dechert LLP." By letter dated 9 February 2017, the Claimant objected to the additional expenses claimed in the Supplemented Summary of Costs. On 11 February 2017, the Tribunal declined to allow the Respondent’s claim.
32.
By agreement of the Parties’ positions the issues of the Respondent’s Objections to Admissibility and Jurisdiction, as pleaded and summarized in Part V, were not bifurcated for preliminary determination. Nonetheless, the Tribunal will consider these as matters pleaded in defence at paragraphs 293 to 364 below, and then engage the continuing live merits issue in Part VI.B., at paragraphs 365 to 403.
33.
It follows that it suffices for the factual background to be briefly summarized In short following Part III, with relevant detail being picked up under the following Parts of the Award. As will become apparent in these reasons, in the result many of the factual issues raised and on which the Parties joined issue do not fall for determination as they are not material to the sole continuing live merits issue of expropriation. In the same way, given the dispositive Award dismissing the entire claim, as set out on page 135 below, the entire issues of Damages and Quantum, summarized in Part V.D below, also cease to be relevant for determination.

III. SUMMARY OF FACTUAL BACKGROUND

34.
The Respondent’s decision in May 2007 to privatize its ownership interest of Skoda Export in August 2007 was followed by public tender process for the sale of its shares ("Tender Procedure").10
35.
WNC participated in the Tender Procedure through its subsidiary, the Czech company CEX, a.s., incorporated on 28 December 2005, renamed FITE Export, a.s. ("FITE") on 12 August 2008.11 At the time of the privatisation of Skoda Export, FITE formed part of a wider group of WNC subsidiaries in the Czech Republic known as CKD Group ("CKD"),12 engaged in the Energy, Power and Construction ("EPC") business.13 [REDACTED]14
36.
The Tender Procedure comprised a qualification round followed by an information process and tender for price.15 FITE was successful in the first round as a qualifying participant and therefore was provided with an Information Memorandum ("Information Memorandum")16 and access to a due diligence process within the "data room" at Skoda Export’s registered offices (the "Data Room").17
37.
The team which carried out the due diligence on behalf of FITE at the Data Room was led by [REDACTED] between 23 October and 28 November 2008,18 Some of the available information and documents were redacted. Further information requested by [REDACTED] and other qualifying participants and other additional information was added to the Data Room from time to time.19
38.
FITE submitted its tender application on 12 September 2007 for the price of CZK 210,016,800.20
39.
Thereafter, the management of Skoda Export delivered presentations to each of the qualifying participants in the Tender Procedure, including to FITE on 6 November 2007.21 The minutes of each management meeting were made available to other participants.
40.
On 2 January 2008, FITE was informed that its bid was successful.22 On 25 February 2008, the Respondent formally approved the sale of its shares in Skoda Export to FITE.23 The sale of the shares was settled on 26 May 2008.
41.
On 7 December 2007 and 29 February 2008, respectively, FITE and the Ministry of Finance of the Czech Republic ("MoF") signed the Agreement for the sale and purchase of all shares in Skoda Export (the "SPA").24 The purchase price of the shares under the SPA was CZK 210,016,800.25
42.
On 27 May 2008, Skoda Export concluded an agreement with CKD for the use of the established CKD name for a monthly fee of CZK 4 million.26 The Board of Directors was changed to comprise [REDACTED] and [REDACTED] And [REDACTED],with [REDACTED] as Chairman.27 Skoda Export was renamed CKD Export, a.s. on 9 June 2008 and was further renamed as PA Export, a.s. on 14 May 2009.28 (For ease of reference, the Tribunal will continue to refer to the company as Skoda Export.)
43.
By letter to FITE dated 26 May 2008, the First Deputy Minister of Finance, Ing. Iván Fuksa, confirmed that "all the statements of the Seller are on the Date of the settlement in all substantial aspects truthful, complete and correct."29 Commencing in May 2008, FITE carried out an internal post-acquisition audit of Skoda Export30 and concluded that the forecasted profits fell materially short of the levels it had expected from the information made available during the Tender Procedure.31
44.
Some months later, by letter dated 22 September 2008, [REDACTED] informed Mr Kalousek, the Minister of Finance, that "we found that the [acquired] projects show significantly worse economic results than those presented during the Due Diligence, namely in terms of absolute value CZK 860 million worse than the officially confirmed data presented by the former management of [Skoda Export] in the Data room."32 [REDACTED] warned of the risk of "a significant loss by [Skoda Export] and its inability to perform its liabilities towards all national and in particular foreign contractual partners, including the state."33
45.
By letter in reply dated 10 October 2008 on behalf of the Respondent, Ing. Tomás Uvira stated: "I would like to assure you that the Ministry of Finance is ready to provide cooperation [in resolving the situation]" and requested "a list of those projects including a specification of the disproportion as compared to the Due Diligence for each project and the demonstration of such facts through the relevant documentation."34
46.
By letter dated 4 November 2008, [REDACTED] proposed the provision of substantial state guarantees to the benefit of the Czech Export Bank, a.s. ("CEB") and requested operational financing to Skoda Export for the duration of the implementation of loss-making projects.35
47.
On 22 December 2008, Minister Kalousek stated that it would be "difficult" for the MoF to provide state guarantees and recommended "that you directly contact the [CEB], and potentially also the Export Guarantee and Insurance Corporation" ("EGAP").36
48.
On 2 December 2008, Skoda Export submitted to CEB an application for credit in the amount of CZK 1 to 1.3 billion, credit maturity 2 year’s, at Commercial Interest Reference Rates ("CIRR"), for the purpose of pre-export financing of two projects for the delivery of the Balloki and Muridke gas/steam power plants in Pakistan and the hydroelectric power stations in Uganda and Thailand.37
49.
By further letter dated 16 January 2009, [REDACTED] sought the cooperation of Ing. Ivan Fuksa, the First Deputy Minister of Finance and Chairman of the Supervisory Board of the CEB, requesting his opinion of the submitted credit application, the assignment of a responsible individual at the bank to work on the application, and an independent audit to verify CKD’s findings about the actual state of the projects accepted by the company.38 By letter in reply dated 16 February 2009, Ing. Fuksa stated that the request for support had been assigned to the general manager of CEB and stated "I envisage that your requests will be complied with by [CEB] and [EGAP]."39
50.
On 15 December 2008, FITE filed a petition with thè Municipal Court in Prague for the payment of CZK 1,080,333.000 "with appurtenances", against the MoF of the Czech Republic, for repayment of the purchase price paid for the shares in Skoda Export on grounds of the Respondent’s breach of the "duty stipulated in Section 596 of Act No. 40/1964 Coli., the Civil Code, as amended, which stipulates that if a thing as any defects that are known to the seller, the seller is obliged to notify the buyer of such defects during negotiations of the purchase price",40
51.
On 23 April 2009, the Chairman of the Board of Directors of CEB, Mr Luhomir Pokorny, convened an extraordinary meeting of the Board of Directors, "to discuss and approve further steps in relation to the Balloki project."41 The Board unanimously approved a resolution, inter alia, taking steps: (i) "to prepare an agreement on termination of the project, so the project is protected against the potential insolvency of Skoda Export"; (ii) "to complete negotiations with Skoda Export, a.s. regarding an agreement on terms of the extension of guarantees"; and (iii) "to prepare documents and initiate cooperation with the Czech Ministry of Finance in the preparation of interim measures that will block the removal of assets and the possible damage to creditors by Skoda Export, a.s. - this includes blocking the CEB account, preventing disposal of assets, blocking other accounts and securing other assets."42
52.
By letter dated 24 April 2009 to Mr Uvira, FITE and [REDACTED] gave notice of its "withdrawal" from the SPA and requested repayment of the purchase price within the period stipulated in Article 12.3 of the SPA; and stated that it was prepared to take care of the operation of Skoda Export during that period.43 By separate letter of 24 April 2009,[REDACTED] informed CEB of the resignation of the entire board of Skoda Export on 22 April 2009 and of FITE’s rescission of the SPA on 24 April 2009.44

Banking Transactions

53.
Following the implementation by Skoda Export of certain banking transactions, on 24 April 2009, the Tax and Money Laundering Section of the Money Laundering Department of the Police of the Czech Republic issued a resolution seizing the funds of Skoda Export on suspicion that "the funds on the above accounts are intended for the commission of a crime", which had the effect of freezing its bank accounts.45
54.
By letters dated 18 and 22 May 2009 from [REDACTED] to Mr Lubomir Pokorny, Skoda Export, appealed to Mr Pokorny to cooperate with the police so that the investigation could be completed and the accounts unfrozen.46 Mr Pokorny responded by letter dated 29 May 2009, stating: "The actions of state authorities, which at their own discretion not only commenced criminal proceedings and, within the framework of the criminal proceedings, decided on the seizure of the funds on the accounts, already took place outside the competency of the creditor banks and fully confirmed the legitimacy of these concerns,"47
55.
On 5 June 2009, the attachment of the cash funds of Skoda Export was lifted by a ruling of the District State Attorney’s Office for Prague.48

Insolvency

56.
On 17 June 2009, Siemens Engineering, a.s. ("Siemens Engineering") commenced insolvency proceedings against Skoda Export for payments due under contracts for work on the Balloki 200 MW project with a contract price of USD 11,581,000 and work on tire Muridke 234 MW project with a contract price of CZK 277,950,000.49 The petition referred to failure to pay individual invoices and "uncertainty as regards the main shareholder of the debtor’s company".50
57.

By resolution of the Insolvency Court on 14 September 2009, [REDACTED].51 On 16 November 2009, the bankruptcy of Skoda Export was declared.52 On 21 February 2011, the Municipal Court in Prague approved the sale of the business of Skoda Export to ROAD Investments, a.s.53

IV. THE PARTIES’ REQUESTS FOR RELIEF

58.
The Claimant’s Statement of Claim requested an Award:

(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

59.
In its Reply, the Claimant amended its alternative claims for monetary compensation to "USD 71,581,414 or, in the alternative, USD 62,269,398, on the basis of the value that the Claimant expected to derive from its investment in Skoda Export" or "USD 46,898,664 on the basis of the purchase price the Claimant paid plus the additional value injected into Skoda Export after its acquisition."55
60.
The Respondent’s Requests for Relief are that the Tribunal:

(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

V. THE PARTIES’ ARGUMENTS

61.
The Claimant’s case is that the actions and inactions attributable to the Czech Republic in relation to Skoda Export during the privatization tender and after its acquisition by the Claimant, caused significant loss to the business of Skoda Export, which obliged the Claimant to withdraw from the SPA, and thereby deprived the Claimant of the entire benefit of its investment in the Czech Republic.
62.
The impleaded actions and inactions of the Czech Republic are claimed to constitute separate breaches of its obligations under the BIT:

(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

63.
The Respondent’s answering position is that:

(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.

A. The Respondent’s Objections

64.
The Respondent contends that the Tribunal lacks jurisdiction to hear any of WNC’s BIT claims on the grounds that:

(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.

1. Admissibility: The intra-EU BIT jurisdictional objection

65.
Article 8(1) of the BIT provides:

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 Respondent’s position

66.
The Respondent contends that Article 8(1) has been superseded by EU law,58 on the grounds that:

(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

67.
The Respondent invokes the recent decisions of the European Commission ("EC") both to investigate the award rendered by the tribunal in the Micula case and to initiate formal and informal procedures with EU Member States on the grounds that maintaining intra-EU BITs contravenes EU law.61 On 18 June 2015, the EC confirmed its position that intra-EU BITs are incompatible with EU law.62 Member States of the EU are asserted to "have fallen in line behind the Commission in this regard".63
68.
For these reasons, the Tribunal must give primacy to EU law, firstly because this is part of international law applicable between the Contracting Parties to the BIT,64 and secondly because the BIT is incompatible with EU law as both cover the same subject matter.65

(2) The Claimant’s position

69.
The Claimant argues that EU law has not superseded the arbitration clause of the BIT because the EC Treaty and the BIT do not cover the same subject-matter.66 A treaty is only to be considered as terminated by the conclusion of a later treaty if both relate to the same subject matter, according to Articles 59(1) and 30(3) of the Vienna Convention on the Law of Treaties.67 The later EU law does not provide for the type of investor protections embodied in the BIT.68
70.
The arbitral tribunals in Eastern Sugar v. Czech Republic, Eureko v. Slovakia, and EURAM v. Slovakia accepted that the EU treaties and the EU law adopted under those treaties do not relate to the same subject matter as BITs or multilateral treaties for the protection of foreign investment.69

2. Jurisdictional objections

(1)Umbrella Clause and "specific agreement" - Article 2(3)

71.
Article 2(3) provides that:

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,

(a) The Respondent’s position

72.
The Respondent’s second jurisdictional objection is that the Umbrella Clause in Article 2(3) of the BIT does not apply to the SPA because this is not an agreement between the Czech Republic and the Claimant, but is an agreement between the Czech Republic and FITE.70 The ordinary meaning of "specific agreement" under Article 2(3) would be an agreement between the Czech Republic and WNC.71 As an agreement between the Czech Republic and FITE, the SPA is not a "specific agreement" between the Claimant and the Czech Republic.72
73.
The Respondent further contends that Article 2(3) of the BIT does not concern provisions of general legislation addressed to the general public.73 Accordingly, the Tribunal does not have jurisdiction over the alleged breach of Article 2(3) in respect of alleged violations of applicable Czech legislation.74 In any event, to be covered by Article 2(3), a legislative obligation must be specific and directed at the investment and the investor at issue.75 Here, the Claimant has not invoked any legislative or regulatory provision specifically addressed to itself or its investment in Skoda Export but rather, "invokes only general statutory and regulatory duties imposed by Czech commercial law on any seller/owner of the shares".76
74.
The Respondent adds that the Claimant has not identified any contractual breaches elevated to the BIT level,77 and asserts that there are no "obligations" under the SPA or Czech law that are capable of being elevated to the BIT level through Article 2(3).78

(b) The Claimant’s position

75.
The Claimant argues that there is no privity of contract requirement in Article 2(3) and it is immaterial for purposes of Article 2(3) whether the investor concludes the specific agreement with the State directly, or through an investment vehicle,79 Whereas the Respondent’s interpretation would permit it to circumvent the BIT by requiring domestic incorporation as a precondition of investment - as it did in the present case through Clause 6.1(a) of the SPA80 - the object and purpose of the BIT and the principle of resolving uncertainties in favour of the investor militate in favour of a broad reading of Article 2(3) and of qualifying the SPA as a "specific agreement".81
76.
The SPA includes multiple warranties applying to FITE and its "Affiliates" as defined in Clause 6.1(h) of the SPA, including WNC.82 The non-compliance of FITE’s shareholders with the requirements stipulated in the SPA would have triggered the liability of FITE towards the Respondent.83 Further, the Respondent itself treated WNC’s investment "as a unity".84

(2) Articles 2(3) and Article 3(1)

(a) The Respondent’s position

77.
There must be privity between the investor and the host state of the investment in respect of the specific obligation in order for the claim to fall under the scope of any of the umbrella clauses which the Claimant seeks to import under the most favoured nation ("MFN") clause of the BIT.85 Hence the BIT’S MFN clause in Article 3 cannot remedy the fact that there is no privity between WNC and the Czech Republic under the BIT.86
78.
Consequently, any alleged failure to observe Czech legislation is not a ground to invoke Article 2(3) of the BIT.87

(b) The Claimant’s position

79.
For the reasons set forth in the foregoing section, the Claimant asserts that the SPA qualifies as a "specific agreement" under Article 2(3).88
80.
In the alternative, the Claimant invokes the MFN cLause in Article 3(1) of the BIT to rely on more favourable umbrella clauses in other treaties concluded by the Czech Republic, which dispense with any privity requirement.89
81.
The Claimant relies on investment treaties concluded by the Respondent containing clauses which cover "any obligation" with regard to or in connection with investments, namely, Article 11(1) of the Czech Republic-Paraguay BIT, Article 10(2) of the Czech Republic-Lebanon BIT, and Article 15(2) of the Czech Repubiic-Singapore BIT.90 None of the aforementioned provisions require that the State’s "obligation" or "commitment" is owed directly to the foreign investor.91
82.
The Claimant refers to the decisions in EDF v. Argentina and Continental Casualty v. Argentina in support of the proposition that umbrella clauses may apply to obligations in force between the State and a subsidiary of the claimant.92 Accordingly, Article 2(3) of the BIT, read in conjunction with the MFN clause in Article 3(1), requires that the Respondent observe its obligations under the SPA and Czech law, and the Tribunal has jurisdiction to hear disputes concerning obligations under the SPA and Czech law.93

(3) Courts’ exclusive jurisdiction under Clause XIV of the SPA

83.
Clause XIV of the SPA provides: "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."

(a) The Respondent’s position

84.

Even if the SPA were held to be a "specific agreement" within the meaning of Article 2(3), the claims are inadmissible because the parties to the SPA agreed that all such claims would be heard by the Czech courts.94

85.
Clause XIV of the SPA tracks Section 89a of the Czech Code of Civil Procedure, which at the time the SPA was concluded allowed parties to choose territorial jurisdiction in selected commercial matters.95 Hence, once territorial jurisdiction is agreed, it is exclusive. FITE accepted this position on filing its SPA claims against the Respondent before the courts in Prague.96
86.

Other investment arbitration tribunals have recognized similarly formulated choice-of-court clauses as exclusive jurisdiction clauses.97 The court decisions cited by the Claimant concern courts whose jurisdiction was not subject to waiver, agreement or option.98

(b) The Claimant’s position

87.
The Claimant denies that Clause XIV of the SPA is an "exclusive" jurisdiction clause.99 Clause XIV, according to the Claimant, is a "residual" jurisdiction clause. The function of Clause XIV is not to provide exclusive jurisdiction, but only to indicate that the default rules of the Czech Civil Procedure remain applicable unless another forum is selected. Since by submitting its claim WNC perfected its arbitration agreement with the Respondent, the residual jurisdiction clause under Clause XIV is no longer applicable.100
88.
Even assuming that Clause XIV is an exclusive jurisdiction clause, the Claimant contends that in any event, its BIT claim under Article 2(3) is not subject to Clause XIV of the SPA because it is not a contractual claim.101 The function of Article 2(3) is to guarantee compliance with an underlying contractual agreement as well as with the provisions of the BIT itself.102 Article 2(3) allows the investor to invoke the SPA and the BIT in parallel and enjoy the combined protection of both instruments.103
89.

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

(4) Res judicata and estoppel arising from Czech Court decisions

(a) The Respondent’s position

90.
The principles of issue estoppel and res judicata preclude these claims in so far as they concern matters finally determined in proceedings before Czech Courts.105
91.
The decision by the City Court of Prague in 2011 made a number of factual findings and reached legal conclusions regarding the obligations of the Respondent under the SPA and Czech law with respect to the sale of Skoda Export, holding that "the Czech Republic did not breach its contractual obligations nor violate Czech law".106 This decision is now final, having been confirmed on appeal before the High Court in Prague and the Supreme Court of the Czech Republic.107
92.
The Tribunal must recognise the res judicata effect of these decisions of the Czech Courts and is therefore estopped from considering the Claimant’s claims under Article 2, paragraph 2 (the FET claim) and paragraph 3 (the Umbrella Clause claim).108

(b) The Claimant’s position

93.
The litigation before the Czech courts concerned different claims to those made in this case. It says that the decisions of the Czech courts "do not address the legal arguments presented before this Tribunal, including the Respondent’s breaches of its warranties and obligations under the SPA, or violations of Czech law in conducting the Tender".109 The Claimant submits that the courts merely concluded that the SPA could not be invalidated on the basis that FITE had entered the agreement as a result of an error induced by the Respondent.110

(5) Relationship of Article 8(1) limitations with Article 2(3)

(a) The Respondent’s position

94.
The Respondent argues that the BIT provisions listed in Article 8(1) are exhaustive: if Article 2(3) is activated by the existence of a "specific agreement", the words '"as well as the provisions of this Agreement" at the end of Article 2(3) cannot have the effect of extending the Tribunal’s jurisdiction to all substantive obligations in the BIT.111 It would be nonsensical, and would violate the principle of effet utile to interpret Article 2(3) to permit the arbitration of all claims under ail of the provisions of the BIT when the dispute resolution clause in Article 8(1) expressly limits each Contracting Party’s consent to specifically enumerated provisions.112
95.

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

96.
Article 8(1) of the BIT does not allow claims under Article 2(2) to be arbitrated, and the Tribunal "cannot allow Claimant to introduce those claims by sneaking in, abusively, through the back door of Article 2(3)".116

(b) The Claimant’s position

97.
According to the Claimant, the Tribunal has jurisdiction over ali of the Claimant’s BIT claims because Article 8(1) establishes arbitral jurisdiction over disputes "concerning an obligation of the [Respondent] under Article 2(3)" and Article 2(3) provides that "[e]ach Contracting Party shall, with regard to the investments of investors of the other Contracting Party, observe the provisions of these specific agreements as well as the provisions of this Agreement."117
98.
In response to the counterargument that the last sentence of Article 2(3) of the BIT cannot "extend" the jurisdiction of the Tribunal to other BIT standards, it is the plain text of the BIT which confers jurisdiction on the Tribunal over claims arising under Article 2(3) and the Claimant does not request any relief beyond the scope of Article 2(3).118 The Respondent’s proposed interpretation of Article 2(3) would render inoperative the term "as well as the provisions of this Agreement" in violation of the principle of effet utile.119
99.
The cases cited by the Respondent were concerned with applicable law clauses, whereas Article 2(3) is a clause setting out substantive obligations under the BIT.120 The cases cited by the Respondent included claims running contrary to the plain text of the applicable treaties, which invoked provisions of the applicable treaties "to which the respective dispute settlement provisions made no reference at all", whereas the Claimant "invokes nothing more than the simple words of Article 8(1) of the BIT, conferring jurisdiction on the Tribunal for disputes concerning obligations under Article 2(3), including the obligation to observe the BIT in addition to the specific agreement in force".121
100.
The Tribunal first considers these Admissibility and Jurisdictional Objections in Part VI.A commencing at paragraph 293 below.

B. FACTUAL ISSUES

1. The pre-acquisition information process

(1)The Claimant’s position

101.

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

102.
The Claimant contends that it conducted a thorough due diligence on Skoda Export.132
103.
The Respondent failed to ensure that Skoda Export was properly managed during the due diligence process. The MoF failed to take steps in response to issues with the situation of the company and the conduct of [REDACTED] reported by [REDACTED], to Mr Tomás Uvira, Director of the Asset Administration Department of the MoF, in October 2007.133 instead of taking action to remove [REDACTED] from his position as [REDACTED] the MoF referred [REDACTED], concerns to the Board of Directors, which could not have taken the necessary remedial action, and allowed [REDACTED] and his deputy, [REDACTED] to take actions which harmed Skoda Export irreparably.134 Skoda Export’s Insolvency Administrator on 8 December 2009 claimed the sum of CZK 674 million for misconduct in relation to the Key Projects.135

(2) The Respondent’s position

104.
Sufficient information was provided during the due diligence process.136

(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

105.

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

106.

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

2. The pre-acquisition warranties and legal requirements in respect of information provided

(1)The Claimant’s position

107.
The MoF undertook a number of warranties and obligations in the SPA signed by FITE,162 including most importantly the following:

(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

108.
FITE’s decision to purchase Skoda Export "was explicitly taken in reliance on a legitimate expectation" that the MoF had complied with its obligations under legislation and regulations "to ensure it was fully informed and apprised of Skoda Export’s financial position and prospects, and that any decision to privatize the company had been taken on the basis of a reasonable belief that the company was ready to be transferred to the private sector".170

(2) The Respondent’s position

109.
The Respondent draws attention to the terms of the tender and of the SPA in respect of the information provided during the tender process.
110.

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

111.
The Information Memorandum "stressed that the decision about acquiring the shares in Skoda Export had to be made by each bidder independently, based on its own evaluation of risks associated with Skoda Export’s business".174 The financial projections contained therein were based on "the Seller’s estimates and assumptions and relate to circumstances and events which have not yet occurred";175 "no representations or warranties as regards to the feasibility and attainability of the projections included in the Memorandum or to the bases and assumptions on which the projections are based" were provided.176
112.

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

113.
Clause 8.1 of the SPA amounted to acceptance by the purchaser of all changes to the business of Skoda Export between the Signing Date and the Closing Date on the condition that they were the result of actions by the company "in the usual manner in accordance with its past business practice".182
114.
The SPA further provided for liability for damages arising out of or in connection with any breach of the SPA, including any breach of warranties, and limited maximum claimable damage to the amount of the purchase price paid for the shares.183
115.
In its comments on the draft SPA submitted on 19 November 2007, FITE inter alia requested that the Czech Republic provide explicit representations as to the accuracy, completeness and correctness of information provided about the company in the Data Room and during the management presentations.184 The Czech Republic rejected FITE’s request.185

3. The post-acquisition management of Skoda Export

(1)The Claimant’s position

116.
The acquisition of Skoda Export by FITE was completed on 26 May 2008.186 After FITE acquired Skoda Export it changed the company’s name to CKD Export, a.s.187 and sold the Skoda Export trademark to a company called REINTINDEN s.r.o, ("Reintinden") for CZK 5,000.188 Under a licensing agreement with CKD, Skoda Export was required to pay CZK 4 million per month to FITE for use of the CKD name and trademark.189 The CKD licensing fee was calculated in 2008 as "one percent of the anticipated annual revenues from Skoda Export"190 which was "unusually low by CKD standards".191 In response to allegations made by the Respondent, the Claimant denies that the licensing fee for use of the CKD name was a means by which Skoda Export was "saddled with FITE’s acquisition debt"192 or that the sale of the Skoda Export trademark was ill-advised.193
117.
The Claimant particularizes certain other transactions which are alleged by the Respondent to have been undertaken in mismanagement of Skoda Export.
118.

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

119.
In connection with its EPC contracts, in accordance with "standard practice" in the EPC industry, Skoda Export commissioned a range of contractors and consultants to provide services, including inter alia Sky Invest Technology Ltd ("Sky Invest"), engaged to assist in securing the project to modernise the Tashkent Thermal Power Plant in Uzbekistan (Tashkent Project");196 and Europe Technical Associates Limited ("ETAL") and Ashfield Financial Investment Limited ("Ashfield"), which provided consulting services in connection with the company’s Pakistani, Uganda and Thailand projects.197 The hiring of these consultants was standard EPC practice, was beneficial to Skoda Export’s operations, and was duly disclosed to the Czech Republic and CEB.198
120.
Once FITE gained access to the company’s books and records, FITE began an internal review of the company’s finance and projects, including reports on the key parameters and status of each project,199 and one-on-one meetings between [REDACTED] and the majority of the company’s 250 employees.200 According to the Claimant, FITE soon discovered "a lack of adequate planning and control mechanisms, poor technical implementation, disregard for cost overruns, and no focus on profitability".201 FITE discovered that the company was in a "far worse financial position" than represented during the privatisation process; that the Key Projects were slated to generate losses of approximately CZK 860 million, and that one of them, Project Bhikki, had been abandoned.202 Further, the MoF had failed to provide written notice of the termination of other projects, namely, Project NIPCCO in Nizampatnam, India;203 and the Rio Turbio project in Argentina.204

(2) The Respondent’s Position

121.
With regard to the post-acquisition management of Skoda Export, the Respondent draws attention to certain transactions which are not mentioned in the Statement of Claim.205
122.
In relation to the sublicensing agreement concluded by Skoda Export on 3 June 2008 with FITE regarding use of the name Skoda Export, the Respondent alleges that the reason for the sublicensing transaction and the amount of the sublicensing fee was the repayment of acquisition financing which FITE had arranged to finance the purchase of the shares.206 It was a condition of the relevant loan agreement with PPF Banka, a.s. ("PPF Bank") that FITE would obtain the cash for the quarterly repayments on the basis of the sublicensing agreement.207 In this way, Skoda Export "was saddled with FITE’s acquisition debt".208 The sale of the Skoda Export trademark for CZK 5,000 was "at a minimum, questionable" considering that the Skoda Export had in 2005 been independently valued at CZK 339,552,969.209
123.
In relation to the transfer of funds to Rostrakoff, the Respondent notes that this company at the time of the transactions was a dormant company whose [REDACTED] was publicly reported to simultaneously hold nominee directorships in at least 553 other companies around the world.210 The [REDACTED] the Czech subsidiary of Rostrakoff was [REDACTED] who is currently registered as [REDACTED]211. The Respondent contends that Rostrakoff is connected to CKD, and that the transfer of funds appears to lack any apparent purpose.212
124.
The Respondent also questions the purpose of agreements entered into by Skoda Export with Sky Invest Technology Ltd, Europe Technical Associates Limited and Ashfield Financial Investment Limited,213 under which Skoda Export simultaneously paid USD 3,314,000 to Ashfield and an additional CZK 169 million in the aggregate to FITE, Sky Invest and ETAL.214 The Respondent notes that none of those agreements was disclosed to the Czech Republic or to the CEB during the applications for additional financing of the Balloki and Muridke projects.215 These transactions deprived Skoda Export of cash at a critical time.216

4. The Claimant’s efforts to keep Skoda Export in business

(1)The Claimant’s position

125.
In its post-acquisition internal review of Skoda Export, FITE discovered that due to cost overruns and adverse currency movements "arising from poor technical decisions by the company’s prior management", Skoda Export would require substantial additional financing to continue operations.217 Once Skoda Export came under its control and the financial problems of Skoda Export became known, it took active steps to try to turn the company around and keep it in business.218 According to the Claimant, the serious problems discovered by FITE after the privatisation had been known to the MoF for a long time.219
126.
Following the post-acquisition internal review, FITE "immediately undertook diligent efforts to keep Skoda Export in business",220 To this end, FITE took the following operational steps: (i) implementing closer management of the company’s existing projects and strict cost-saving measures in the company’s daily operations; (ii) fixing the currency risks on the foreign projects by setting currency positions in accordance with CKD protocol and the recommendations of the financing bank, HSBC Bank pic ("HSBC"); (iii) meeting with customers on the Balloki and Muridke Projects in Pakistan, explaining Skoda Export’s possible inability to finish the projects due to cost overruns; (iv) filing a request with the Pakistani National Electric Power Regulatory Authority ("NEPRA") for the upward revision of power tariffs on the Balloki and Muridke plants; (v) entering negotiations with Pakistani customers for the possible extension of the Balloki and Muridke projects into second stages; (vi) negotiating a price increase on the hydropower plant project in Uganda; and (vii) referring or transferring additional projects to Skoda Export which were viable and profitable.221
127.
The projects transferred to Skoda Export included an oxygen plant in Russia ("Project MMK"); a power plant in Russia ("Project Tatarstan"); a steel mill in Slovakia ("Project SSM"); and an energy plant in Uzbekistan ("Project Tashkent"). Together these projects had projected cash flows of USD 37.5 million.222 According to the Claimant, these projects would not have been transferred but for the financial problems caused by the nondisclosure of the true financial state of Skoda Export.223
128.
FITE communicated the difficulties of Skoda Export to the MoF by: (i) a letter dated 22 September 2008, informing the MoF that it had discovered a difference of CZK 860 million between the projected profits from the Key Projects and the post-acquisition position, inviting the Ministry to appoint an auditor to verify its findings, and requesting the Ministry’s assistance in enabling Skoda Export to remain in business;224 (ii) a follow-up letter to the Ministry sent on 4 November 2008, providing a comprehensive report on Skoda Export’s financial situation and repeating its earlier requests;225 (iii) a letter to the Minister of Finance on 4 November 2008 stressing the real risk that bank guarantees would be called and that Skoda Export would be forced into insolvency if it failed to complete the projects it had contracted.226
129.
In order to maintain Skoda Export’s operations, CKD decided to request financing from CEB. CEB held a number of Skoda Export’s current accounts and had issued Skoda export with high-value export financing guarantees in respect of the Key Projects, which were insured by EGAP.227 On 2 December 2008, CKD applied to CEB on behalf of Skoda Export for a bridge loan of CZK 1 billion.228
130.
On 19 December 2008, FITE commenced proceedings against the MoF in the Municipal Court in Prague.229
131.
In January 2009, [REDACTED] And [REDACTED] the CEO of CKD, made a joint presentation at the Supervisory Board meeting of CEB and EGAP on their action plan for restructuring Skoda Export.230
132.
On 16 January 2009, Skoda Export sent a request for additional funding to Mr Iván Fuksa, who was both the First Deputy Minister of Finance and the Chairman of CEB’s Supervisory Board, and who redirected the request to the CEO of CEB, Mr Lubomir Pokorny.231
133.
Skoda Export issued a detailed request to CEB for a bridge loan on 17 April 2009.232

(2) The Respondent’s position

134.
As to the Claimant’s "diligent efforts" to keep Skoda Export in business, the Respondent states that none of those steps had the capacity to turn Skoda Export around.233 Indeed, financial disbursements were made from Skoda Export accounts to various third parties, which were not disclosed to the financial institutions when the Claimant was seeking assistance,234
135.
The petitions to NEPRA of 26 January 2009 and 4 February 2009 for an increase in the tariffs for the Balloki and Muridke projects were only filed 8 months after FITE had acquired Skoda Export, although the problems were known from November 2007, and the Respondent notes that the outcome of the petitions was always uncertain.235 The negotiation of future potential projects in Pakistan was "of no benefit to the company".236 The arrangements negotiated in relation to the Uganda project were "a continuation of the efforts underway before the privatization".237 The additional projects which were referred or transferred to Skoda Export, namely, Project MMK, the SSM Project and the Tashkent Project, were all in their initial phases, imposed immediate additional financing requirements on the company, and required dedicated teams of experts to run them, beyond the capacity of Skoda Export.238 The financial contribution of those projects was purely speculative.239 The Respondent contends that the SSM Project was not referred or transferred to Skoda Export by CKD, but rather was internally generated by Skoda Export prior to the closing of the purchase of the shares.240
136.
The terms on which the Claimant sought to secure additional financing for Skoda Export were unreasonable.
137.
The basis on which FITE sought assistance in its communications of 22 September 2008 and 4 November 2008 to the MoF was FITE’s calculation of the alleged loss on the individual projects based on a comparison of the estimated business margin contained in the Project Cards and the actual state of the projects estimated by Claimant as at August and October 2008.241 In its request addressed directly to the Minister of Finance on 4 November 2008, FITE requested the Minister to issue a state guarantee to Skoda Export to secure a 3-year operating loan to be granted by CEB, to be repaid not by Skoda Export but by the Czech Republic.242 On 2 December 2008, before the Ministry had responded, Skoda Export applied to the CEB for a loan of CZK 1 billion to be secured by and repayable through a state guarantee issued by the MoF.243 On 19 December 2008, informed the Minister of Finance that FITE had filed a claim against the Czech Republic in the Czech courts for CZK 1.08 billion in damages and that FITE was open to an out-of-court settlement in the form of a loan of CZK 1 billion backed by a state guarantee.244

5. The response of financial institutions to Claimant’s financing requests

(1)The Claimant’s position

138.
In response to the requests for assistance made by FITE, the Claimant submits that the MoF stated that it was willing to cooperate, and referred the Claimant to CEB and EGAP. Those financing institutions failed to respond appropriately to the Claimant’s financing requests.245
139.
According to the Claimant, throughout 2009, CEB "deliberately frustrated and obstructed" the Claimant’s attempts to put Skoda Export on a more stable footing, by the following actions:246

(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").

140.
Other alleged attempts to undermine Skoda Export included alleged harassment and intimidation of FITE and its staff, including harassment of Mr [REDACTED] personally.247

(2) The Respondent’s Position

141.
The line of communication between FITE and Respondent "clearly shows that the Czech Republic promptly responded to FITE, explained why its proposed solution was legally impossible, and suggested that to the extent Skoda Export wanted export financing from CEB, it needed to enter into direct negotiations with CEB and EGAP.248
142.
CEB and EGAP responded appropriately to the Claimant’s financing requests by offering financing on terms that were commercially reasonable in the circumstances.249
143.
The Respondent refers to the letter from FITE dated 22 September 2008; the information provided by FITE on 4 November 2008; the letter from FITE to the Minister of Finance dated 4 November 2008; the response by the Minister of Finance dated 22 December 2008; the letter from [REDACTED] dated 19 December 2008 regarding the commencement of legal proceedings; the reply by the MoF dated 15 January 2009; the letter from [REDACTED] dated 28 January 2009; the reply by the Minister of Finance dated 27 February 2009; the letter from [REDACTED] to the Deputy Minister of Finance dated 16 January 2009, and the reply of Mr Fuksa dated 16 February 2O 09.250
144.
The MoF informed FITE that its request for a state guarantee was impractical because state guarantees needed parliamentary approval under Czech law, and also needed to be vetted by the EC according to EU law on state aid.251 It advised FITE to approach the financial institutions directly.252
145.
The CEB informed FITE of its position by letter dated 2 March 2009, in which it indicated inter alia that pending resolution of the requested electricity tariff increase from NEPRA which would permit increase of the EPC contracts price of the Balloki and Muridke projects, it was prepared to discuss some form of bridge financing against appropriate security.253
146.

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

147.
The position taken by CEB, namely, that it was prepared to provide additional financing on condition of a guarantee by an acceptable entity from within the CKD and a mortgage over Skoda Export’s headquarters, was reasonable.260 The Respondent notes that HSBC took the same position.261
148.
On several occasions, Skoda Export informed CEB that the NEPRA decisions would be forthcoming.262
149.
The Respondent denies that the proposed use of the main office building of Skoda Export in downtown Prague as security for the extended guarantees would have prevented Skoda Export from securing the additional operating loans required to pay the company’s suppliers.263 The Respondent points to Skoda Export’s own offers to mortgage the building; to the participation of HSBC in communicating this requirement; and to the fact that the major part of the value of the building would still be left to secure the additional financing,264

The Freezing Orders

150.
Concerns were raised when on Friday 17 April 2009, Skoda Export simultaneously filed payment orders seeking to withdraw a total of approximately USD 7 million from four accounts with CEB and USD 2.4 million from an account with HSBC.265 Since the accounts with CEB were pledged as security for financing already provided, intended withdrawals would have deprived CEB of potential cash security at a time when the guarantees provided for the Balloki project could have been called at any time.266 Given that Skoda Export had not informed CEB of the withdrawals notwithstanding its ongoing communications, CEB had "serious concerns".267
151.
Because of the suspicious nature of the transactions, CEB and HSBC were under an obligation to report the transactions under the Anti-Money Laundering Act.268
152.
The Respondent denies that it was unreasonable of the CEB and HSBC not to retract the reports of suspicious transactions when the criminal investigation was pending.269 It points out that Skoda Export requested the cancellation or limitation of the freezing orders only on 29 May 2009, five weeks after the accounts were frozen and only a week before the freeze was lifted.270 The Respondent denies that the three-month duration of the criminal investigation into the reported transfers was unreasonable in the circumstances.271
153.

The responses of the financial institutions to the Claimant’s financing requests, including discussion of finalisation of projects by a third party contractor, BTG, were not unreasonable and fell well within the scope of their commercial discretion.272

154.

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.

6. The Claimant’s rescission of the SPA

(1)The Claimant’s position

155.
On 24 April 2009, FITE declared the SPA invalid by notice addressed to the MoF under Section 49a of Act No. 40/1964 Coll,277 which provides as follows:

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

156.
According to the Claimant, in direct response to the rescission of the SPA, the Czech Republic "retaliated" by freezing Skoda Export’s bank accounts on various pretexts, as explained below.279
157.
On 17 April 2009, for the purpose of improving the transparency and efficiency of its treasury and cash management operations, Skoda Export gave instructions for the balances on certain barde accounts held with CEB, HSBC and Ceskoslovenská obchodni banka, a.s. ("CSOB") to be consolidated into proposed main accounts held with CEB and CSOB.280
158.
Instead of giving effect to the transfers, on 22 April 2009, CEB and HSBC filed suspicious activity reports with the Financial Analytical Unit of the MoF (the "Financial Analytical Unit"),281 stating that the bank transfers gave rise to a reasonable suspicion of asset stripping and money laundering, from which they stood to iose payments owed by Skoda Export.282 On 24 April 2009, at the request of the Financial Analytical Unit, the Unit for Investigation of Corruption and Financial Crime of the Criminal Police and Investigation Service Taxes and Money Laundering Division (the "Police Authority") commenced a criminal investigation into Skoda Export’s bank transfers, and issued two resolutions (the "Freezing Orders") that froze seven of Skoda Export’s bank accounts containing a total of CZK 204 million.283
159.
Skoda Export fully cooperated with the Police Authority in the six weeks that followed the imposition of the Freezing Orders, despite the severe disruption of its business.284
160.
Skoda Export formally asked CEB on two occasions to notify the Financial Analytical Unit and Police Authority to retract the allegations made against Skoda Export.285 CEB refused to take any steps to correct the false information.286 On 29 May 2009, Skoda Export submitted a request to the District Prosecuting Attorney for Prague 1 (the "Prosecuting Authority") to lift the Freezing Orders. The Freezing Orders were lifted on 5 June 20 0 9.287
161.
The Freezing Orders had a severe negative impact on Skoda Export’s business288 through the constraints on Skoda Export’s liquidity and the reputational harm caused by news that it was under criminal investigation.289 According to the Claimant, the Freezing Orders were a direct cause of Skoda Export’s entry into insolvency.290
162.
The Claimant also alleges that in early 2009, during negotiations over the future of Skoda Export, CEB attempted to divert Skoda Export’s key assets to an entity named BTG, which "had no reputation or apparent experience in Skoda Export's field of business, but had a close relationship with CEB and the Ministry of 'Finance".291 The attempt to have BTG take over the Key Projects from Skoda Export continued after the insolvency proceedings had commenced, in breach of Section 111 of the Czech Insolvency Act, which prohibits transfers that have a substantial impact on the property or assets of the debtor.292 This attempt was made by CEB and Its controlling authority, the MoF, with the intention of bankrupting Skoda Export and transferring its key assets to favoured third parties.293 The attempt was unsuccessful because Skoda Export’s suppliers refused to transfer then-contracts to BTG due to BTG’s inexperience in the EPC sector.294
163.
The Respondent allegedly engaged in a number of acts designed to undermine Skoda Export and harass and intimidate its employees, including a police search of [REDACTED] at Prague Airport in April 2009; statements published in press articles by the daily newspaper Miada Fronta Dnes; certain e-mail communications by the CEB with Skoda Export and with third parties; and debt collection proceedings brought on 15 June 2009 by UJV Rez, a partly state-owned subcontractor of Skoda Export.295

(2) The Respondent’s Position

164.

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

165.
The Respondent denies that the Freezing Orders were imposed in retaliation for the rescission of the SPA. Suspicious transaction reports were filed by HSBC and CEB on 20 April 2009, whereas the letter from FITE rescinding the SPA was delivered subsequently, on 24 April 2009, which was on the same day the Freezing Orders were being written by the Police Authority,301
166.
According to the Respondent, following the rescission of the SPA, the financing banks continued to attempt to find a solution that would enable the completion of the Balloki and Muridke projects. The Respondent refers to a renewed request for additional financing made by Skoda Export on 29 May 2009, the response of CEB on 3 June 2009, and a proposal sent by CEB on 10 and 16 June 2009 concerning alternative strategies for the finalisation of the two projects,302 The proposals put forward by CEB counted on a third party finalising the projects.303 In this context, BTG contacted on 24 June 2009. The Respondent denies that BTG is an obscure company with no business record. According to the Respondent, BTG was a member of the BTG Group, a Slovak EPC contractor with significant experience and expertise.304 In its view the strategy of transferring the Balloki and Muridke projects to a third party would "almost certainly have kept Skoda Export solvent".305

7. Insolvency of Skoda Export

(1) The Claimant’s Position

167.
On 17 June 2009, Siemens Engineering filed a petition to place Skoda Export into insolvency proceedings (the Insolvency Petition), on the grounds that it was owed CZK 78,548,424.61 and USD 2,565,840 in respect of the Key Projects.306 Further bankruptcy petitions were filed on 29 June 2009 by CEB, EnerSys, s.r.o. ,("EnerSys") AE&E CZ s.r.o. ("AE&E") and Skoda Power.307 According to the Claimant, it is clear that the creditors were colluding together.308
168.
On 14 September 2009, the Insolvency Court [REDACTED].309 On 16 November 2009, the Insolvency Court declared Skoda Export to be insolvent,310 The effect of this declaration was that Skoda Export’s business and assets would be sold and the proceeds of sale distributed to Skoda Export’s creditors.311
169.
On 21 February 2011, the Insolvency Court gave approval for Skoda Export’s business and assets to be sold for CZK 274 million to ROAD, a privately owned Czech joint stock company with "obscure" ownership, leaving a substantial shortfall to Skoda Export’s creditors.312 The sale transaction was completed on 31 March 2011,313

(2) The Respondent’s Position

170.
According to the Respondent, the filing of the Insolvency Petition by Siemens Engineering was "hardly a surprise" given the failure of Skoda Export to address its overdue debts.314 The Respondent notes that Skoda Export had a substantial amount of "past due unpaid financial obligations to its suppliers on the Balloki and Muridke projects" and that since March 2009, before the Freezing Orders were in place, Skoda Export had stopped making payments to its suppliers.315
171.
In response to the allegation of collusion between the creditors and the CEB, the Respondent states that the dates and times referred to by the Claimant are the times of publication on the internet of the relevant filings, and that the actual filings were made by Siemens, CEB, EnerSys, AE&E and Skoda Power between 18 June 2009 and 25 June 2009,316
172.
In July 2009 the Respondent contends that "fnjo compromise looked achievable" since Skoda Export had rejected the provision of additional financing on terms deemed necessary by CEB to secure repayment and had refused to cede the projects to a third party.317
173.
In August 2009, after the Orient Power Company Limited had terminated the EPC contract for the Balloki project, CEB paid the guarantees for both projects in the aggregate amount of USD 63,645,109.318

C. BIT Breaches Alleged

1. Umbrella Clause

(1)The Claimant’s position

174.
The Clamant contends that the Czech Republic breached a number of warranties, representations and undertakings made in the SPA and breached its implied contractual obligations of good faith under Czech law.319

(a) Alleged breaches of the SPA

175.
According to the Claimant, by permitting Skoda Export to lose several valuable projects during the warranty period, the Respondent breached its obligations under the SPA.
176.
Asset Disposal without Disclosure: Specifically, the Respondent breached its obligations under Clauses 5.2(h), 8(h), 8.3, 10.1(c) and 10.6 of the SPA to ensure that no sale, transfer, lease or other disposal of any other material part of Skoda Export’s assets or shareholdings occurred during the relevant warranty period - i.e. from 31 August 2007 to 26 May 2008 - subject only to an exception for transactions occurring in the ordinary course of the company’s business.320 Specifically, the Respondent breached these obligations in relation to the Bhikki, Rio Turbio and NIPCCO projects, since these projects were abandoned without providing written information to FITE.321
177.
The Claimant maintains that the Bhikki, Rio Turbio and NIPCCO projects were a "material part of’ the assets and participation interests of Skoda Export and rejects the Respondent’s contention that the obligations under Clauses 5.2(h), 8.2(h) and 8.3 of the SPA do not apply to Skoda Export’s "business cases in progress".322
178.
Disclosure of issues affecting performance of obligations: The Claimant further contends that by failing to disclose information to FITE potentially affecting the performance of obligations under the SPA, the Respondent breached its obligation under Clause 10.6 of the SPA to inform FITE of the occurrence or existence of any fact that may make impossible or delay the execution of the SPA or that may affect the validity and/or effectiveness of the SPA.323 One of FITE’s core obligations under the SPA was to finish the "Business Cases in Progress".324 The Respondent’s failure to disclose updated and accurate information about ongoing "Business Cases in Progress" in relation to the Bhikki, N1PCCO and Rio Turbio projects, misinformed FITE about the actual scope, existence and possibility of performing its obligations under the SPA.325 The Claimant asserts that the Respondent had an obligation to provide accurate and correct information on the final fate of these projects, which was not satisfied by disclosing the risks concerning these projects.326
179.
Undertaking to comply with Czech laws and regulations: The Respondent breached its obligations under Clause 5.1(c) of the SPA to comply with its obligations and duties under applicable Czech laws and regulations, including under Acts Nos. 219/2000 Coll, 178/2005 Coll and Ministry of Finance Directive No. 1/2006.327 Contrary to the representation in Clause 5.1(c), the Claimant maintains that the Respondent refused to make use of any available means to investigate allegations concerning mismanagement of Skoda Export, to take steps to remedy the situation at Skoda Export and to provide information to FITE about emerging concerns.328
180.
Implied representations: According to the Claimant, the Czech Republic was obliged to abide by "the implied representations it gave to FITE, as a necessary corollary of the warranties and undertakings FITE gave to the MoF in relation to Skoda Export’s projects, the price FITE had agreed to pay for Skoda Export’s shares, and as to the extent of the due diligence it had conducted as pail of the bidding process" under Recital (C) and Clauses 6. l(o), 6.1(v), 6.1(w), 9.9 and 9.10 of the SPA.329
181.
Rulings of the Czech Courts: It is not in dispute that the Czech courts upheld the validity of the SPA.330 According to the Claimant, while the Respondent asserts that the Czech courts have ruled that "there has been no breach of the SPA," the issues raised in the proceedings before the Czech courts in respect of the SPA concerned different claims, based on different legal grounds, and hence the Czech courts have not considered the arguments raised by the Claimant in these proceedings.331 Moreover, rather than finding that FITE was not misled by the Czech Republic, as alleged by the Respondent, the Czech courts merely concluded that the SPA could not be invalidated on account of an error induced by the Czech Republic.332

(b) Alleged breaches of Czech law

(i) The Act on State Property, Act No. 219/2000 Coll.

182.
Under Section 14 of the Act on State Property, No. 219/2000 Coll ("State Property Act"), the State is required to exercise utmost diligence in preventing damages to State property and to make use of all available means in doing so.333 The Respondent breached this obligation in failing to take appropriate action in response to the information provided by [REDACTED] on 23 November 2007 concerning the mismanagement of Skoda Export by [REDACTED].334
183.
The Claimant argues that even if the Respondent could not have done more than exercising its rights as a shareholder under the Commercial Code, the Respondent "did not even attempt to use such rights".335

(ii) Directive. No. 1/2006 of the Ministry of Finance

184.

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

(iii) Czech Commercial Code, Section 265

185.
The Claimant further refers to Section 265 of the Czech Commercial Code, Act No. 513/1991 Coll,339 pursuant to which the exercise of a right "that is at variance with the principles of fair business conduct shall not be granted legal protection".340 According to the Claimant, the decision to proceed with the privatisation without sharing accurate and updated information at its disposal concerning the actual financial status and prospects of Skoda Export "fell short of the threshold of fairness".341

(iv) Other legislation cited by Claimant

186.

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

(c) Application of Article 2(3) of the BIT to the alleged breaches of the SPA and of Czech law

187.
The alleged breaches by the Respondent of its contractual obligations towards the Claimant amount to a violation of Article 2(3) of the BIT, according to which the Czech Republic is obliged to abide by the provisions of contracts into which it has entered with foreign investors in respect of investments.344
188.
In particular, under the SPA and related contractual instruments, the Czech Republic was obliged to: (i) ensure that no sale, transfer, lease or other disposal of any material part of Skoda Export’s assets or shareholdings occurred during the warranty period from 31 August 2007 to 26 May 2008, except for transactions occurring in the ordinary course of the company’s business; and (ii) abide by "the implied representations it gave to FITE, as a necessary corollary of the warranties and undertakings FITE gave to the MoF in relation to Skoda Export’s projects, the price FITE had agreed to pay for Skoda Export’s shares, and as to the extent of the due diligence it had conducted as part of the bidding process.345 In breach of those obligations, the Respondent (i) permitted Skoda Export to lose several valuable projects during the warranty period and (ii) breached the implied representations it gave to FITE in relation to the truth and accuracy of the information it had provided to FITE, by virtue of misrepresentations in relation to the Key Projects and shortcomings in the information disclosed during the due diligence process.346
189.
The Respondent breached its obligations under Czech law, including in particular its obligations under the State Property Act and Directive No. 1/2006. According to the Claimant, the Respondent breached: (i) its obligation under the State Property Act by remaining passive and refusing to conduct a proper audit in the face of warnings concerning financial problems at Skoda Export; (ii) its obligations under Directive No. 1/2006 by failure of its officials delegated to the management of Skoda Export to supervise the management of Skoda Export and to prevent the mishandling of Skoda Export’s assets; and (iii) its duty to act in good faith and in accordance with the requirements of fair business conduct by withholding the truth about Skoda Export’s situation contrary to its best knowledge.347
190.
The violation of Article 2(3) by the aforementioned breaches of the SPA and of Czech law "triggers the responsibility of the Czech Republic under the BIT and customary international law" and "elevates these breaches of the SPA and Czech law to the level of international law".348 As a result, the Respondent’s responsibility "entails its duty to provide compensation for WNC’s losses resulting from this breach, as a matter of public international law",349

(2)The Respondent’s position

191.
The Respondent contends that its conduct did not breach the SPA or Czech law.

(a) Alleged breaches of the SPA

192.
Asset disposal without disclosure: The Respondent denies that it breached Clauses 5.2(h), 8(h), 8.3, 10.1(c) or 10.6 of the SPA by the omission to notify FITE during the bidding or contracting process of the termination of the Rio Turbio, NIPCCO and Bhikki projects.350
193.
Of the relevant projects, "Rio Turbio was in the bidding stage, and the project terminated because a competing bid was selected; NIPCCO was subject to a Memorandum of Understanding, and terminated because it did not proceed to the contracting phase; Bhikki was subject to a contract that was signed, but not effective, and terminated because agreement on amended price and time schedule could not be reached".351
194.
In particular, the Respondent maintains that Clause 5.2(h) of the SPA is inapposite because all of these projects were "merely unconsummated business prospects". They "were not assets in any of the accounting sense, the legal sense under Czech law, or the general sense of the word"352 and as such were not capable of disposition.353 Further, the relevant events occurred "in the ordinary course of business" since the company’s business was to seek to win bids and to turn winning bids into effective contracts;354 and the alleged "asset disposition" did not fulfil the materiality requirement of Clause 5.2(h) of the SPA.355
195.
As regards its obligation under Clause 8.3 to inform FITE that the Bhikki, Rio Turbio and NIPCCO projects would not be consummated, the Respondent maintains that "sufficiently clear information about the fact that these projects were extremely unlikely to proceed beyond the bidding stage was made available to FITE during the due diligence process of the tender".356
196.
The Respondent notes that Clauses 10.1(c), 10.2 and 10.6 of the SPA are clauses regulating together the fulfilment of conditions precedent to the closing of the SPA, and require the Seller to confirm that all of the "Seller’s Warranties", which are set out in Clause 5.1, are true, complete and correct in all material aspects. The Claimant "does not allege a breach by Respondent of any of the warranties contained in Clause 5.1 of the SPA".357
197.
Disclosure of issues affecting performance of obligations: Concerning its obligations under Clause 10.6 of the SPA, the Respondent considers that Clause 10.6 of the SPA is inapposite. First, the obligation of FITE under Clause 6,l(v) of the SPA is not a condition precedent for the transaction contemplated by the SPA, and does not have to do with the validity or effectiveness of the SPA as a contract, and is consequently unrelated to Clause 10.6 of the SPA.358 Secondly, it was obvious that any number of the cases listed as "Business Cases in Progress" might not proceed to a final contract and execution.359 Thirdly, the Respondent contends that the Claimant had failed to abide by its "core obligations under the SPA".360
198.
Undertaking to comply with Czech laws and regulations: As regards the alleged breach of Clause 5.1(c) of the SPA, the Respondent first raises two defences in limine, namely, that (i) the temporal dimension of Clause 5.1(c) is limited to the period between the signing and settlement dates of the SPA; and (ii) whereas this warranty relates to the legality of Respondent having entered into the SPA and complying with the specific obligations under the SPA itself, the Claimant neither alleges that Respondent’s entering into the SPA would be illegal, nor that any one of Respondent’s obligations in the SPA, if observed, would be illegal.361
199.
Even if Clause 5.1(c) did apply to the allegations regarding the MoF’s reaction to the letter from [REDACTED] concerning [REDACTED] the Respondent maintains that its response to that letter was entirely appropriate in the circumstances and that the Claimant does not explain how its own suggested approach would have been superior to the response of the MoF, in which himself was instrumental.362
200.
Implied representations: Concerning the "implied representations" allegedly given to FITE, the Respondent points to the Parties’ agreement at Clause 5.3 of the SPA that the representations and warranties contained in the SPA are the sole representations and warranties made by the Czech Republic to FITE and the warranty by FITE at Clause 6. l(n) of the SPA that it had not relied on any other warranties except for those explicitly made by the Czech Republic in the SPA.363 The Respondent asserts that the Claimant’s claims based on alleged additional "implied" warranties "amounts to nothing else than a retroactive attempt to change the terms of the transaction".364
201.
Rulings of the Czech Courts: The Respondent contends that the Czech courts have already decided the Claimant’s claims under the SPA in legal proceedings initiated by FITE.365 According to the Respondent, FITE’s claims, as submitted in December 2008 and reformulated on 22 November 2010, were based on the same allegations as are now advanced by the Claimant in this arbitration, and were supported by the same evidence.366 On 27 May 2011, the first instance court issued its decision, concluding that in entering into the SPA, FITE was not intentionally or unintentionally misled by the Respondent.367 The court also held that there was no breach of the Czech Republic’s obligations under the SPA or applicable law.368 On 9 April 2015, on appeal by FITE, the High Court in Prague confirmed the dismissal of FITE’s claim.369 FITE appealed the decision of the High Court on 10 July 20 1 5.370 The decision of the High Court "is final and executable"371 and may only be reviewed on matters of law, not on the facts.372 The Supreme Court of the Czech Republic issued its decision rejecting FITE’s appeal on 26 November 2015,373

(b) Obligations under Czech law

(i) The Act on State Property, Act No. 219/2000 Coll.

202.
Concerning the alleged breach of the obligation under the State Property Act to "consistently use all available legal means to enforce and defend the State’s rights of ownership in Skoda Export", the Respondent notes that the only "legal means" were those prescribed by the Czech Commercial Code and the Articles of Association of Skoda Export adopted on the basis of the Commercial Code.374 The Act on State Property neither imposed any additional obligations on the joint-stock company towards the state as its shareholder or vice-versa, nor did it derogate from any of the provisions of the Commercial Code.375
203.
Concerning the regulation of the corporate affairs of Skoda Export as a joint stock company, the Respondent emphasizes that the applicable law is found in the Commercial Code of the Czech Republic and the Articles of Association of Skoda Export. These exhaustively list the rights of the Czech Republic as a shareholder in Skoda Export, as well as the responsibilities of the members of the individual corporate bodies of the company in their dealings with the company and with third parties, including company shareholders.376 The Commercial Code enumerates inter alia the limitations on the extent to which a shareholder is entitled to receive information about the business affairs of the company.377

(ii) Directive No. 1/2006 of the Ministry of Finance

204.

Concerning MoF Directive No. 1/2006, the Respondent notes that this is an internal document of the MoF, which could not change the generally applicable legislation. The Respondent contends that there was no breach of Directive No. 1/2006.378

205.
According to the Respondent, Directive No. 1/2006 provides that the MoF could unilaterally instruct corporate bodies where it exercised shareholder control, or their members, regarding matters of privatization only on the basis of a specific agreement on the exercise of corporate control entered Into between the MoF and the relevant controlled company. No such agreement had been concluded between the Czech Republic and Skoda Export.379

(iii) Other legislation cited by Claimant

206.
The Respondent notes that the Privatization Act required the Czech Republic to prepare a privatization project in connection with the privatization of Skoda Export, with the purpose of identifying the property to be privatized. It contends that the privatization project which was prepared in respect of Skoda Export was consistent with the requirements of this Act.380 The Respondent notes, further, that the Act on Cancellation of the National Property Fund, Act No. 178/2005 Coll, cited by the Claimant, does not impose any specific or additional obligations on the State.381

(c) Application of Article 2(3) of the BIT to the alleged breaches of the SPA and of Czech law

207.
The Respondent objects that the alleged breaches of Czech law and of the SPA are not covered by Article 2(3) of the BIT, and that the Tribunal accordingly lacks jurisdiction over such alleged breaches.
208.
But even if the Tribunal were to uphold its jurisdiction over the alleged breaches of the SPA or Czech law on the basis that the SPA was a "specific agreement" under Article 2(3) of the BIT, the Claimant "would still need to demonstrate that those obligations had been breached and would have to do so under the law that creates and sustains them, i.e. Czech law".382 According to the Respondent, as a matter of Czech law, the SPA has not been breached, nor is there any plausible basis for alleging it to have been breached.383
209.

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

210.
If the Tribunal were to find, irrespective of the foregoing arguments, that the SPA was breached, the 'Respondent contends that the amount of damages resulting from such breach of the SPA must be determined by the rules explicitly regulating this matter agreed in the SPA and in Czech law.387 In this regard, the Respondent asserts that Clause 11.3 of the SPA, which limits damages for a breach of the SPA to the purchase price paid for Skoda Export’s shares, is applicable in the instant case, being permissible under the Commercial Code in its present version and as applicable at the time of conclusion of the SPA, and as confirmed by the highest Czech courts.388

2. FET

(1)The Claimant’s position

211.
According to the Claimant, the obligation to accord FET includes, in particular, the obligations:

(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

212.
As to (1), the Claimant had a legitimate expectation that the Czech government would act honestly and lawfully as the administrator of the tender process for Skoda Export; would comply with its statutory and regulatory duties and obligations; would ensure that it obtained accurate information about Skoda Export’s financial position and prospects and would take decisions regarding Skoda Export with the interests of future shareholders in mind.395 Contrary to those expectations, the Respondent presented Skoda Export as a viable and profitable company during the privatisation process, without providing bidders with warnings about the significant financial losses that were forecast in Skoda Export’s project portfolio.396
213.
In addition, the Claimant legitimately expected that the Respondent would abide by the specific warranties and undertakings that it gave to FITE in the SPA and the Respondent frustrated those expectations by misrepresenting the financial condition of Skoda Export during the privatisation process, in violation of the SPA.397
214.
As to (2), the Claimant notes that State conduct that is carried out in demonstrable lack of good faith will, of itself, constitute a breach of the obligation to afford FET.398 The Claimant alleges that contrary to the requirement of good faith the Respondent "deliberately concealed, withheld and distorted information concerning the actual financial condition of Skoda Export, thereby creating a false impression of the company",399 Having received and chosen to ignore "multiple explicit warnings" on impending losses on important projects, the Respondent provided information to bidders which it knew to be false.400
215.
As to (3), the Claimant alleges that the destruction of Skoda Export was "triggered by the personal vendetta of high-ranking officials of the Respondent against [REDACTED], who orchestrated measures intended to inflict damage upon [REDACTED]'s business interests in the Czech Republic, including Skoda Export and CKD".401 Senior officials of the Respondent used "aggressive" and "bullying" tactics against [REDACTED] When [REDACTED] rejected those tactics, there was a verbal altercation with a senior official and "direct threats against [REDACTED] and his interests in the Czech Republic".402 The Freezing Orders on Skoda Export’s bank accounts were part of a "campaign of harassment and intimidation" by the Respondent.403 Such behaviour was unreasonable and discriminatory and violates the FET standard under the BIT.404
216.
As to (4), (5), and (6), by violating its own laws and regulations, the Czech Republic failed to ensure a stable legal and business framework in which to operate.405 By knowingly concealing or distorting material information, the Respondent breached the requirement to treat foreign investment in a manner that is consistent, predictable, and transparent.406 By the failure of the Czech Republic "and its instrumentalities, including CEB" to abide with their legal and regulatory obligations, combined with the "concerted efforts of the Ministry of Finance and CEB to bankrupt Skoda Export and distribute its assets" the State violated its obligation to treat WNC and its investment with due process.407

(2) The Respondent’s position

217.

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

218.
As to (1), the expectations protected by the FET requirement are "the basic expectations that were taken into account by the foreign investor to malee the investment, as long as these expectations are reasonable and legitimate and have been reasonably relied upon by the investor to malee the investment".414 The alleged expectation that the Respondent "would ensure that [the Claimant] obtained information about Skoda Export’s financial position and prospects and took decisions regarding Skoda Export with the interests of future shareholders in mind" is not basic but "outlandish" and could not have been reasonably relied upon by a prudent investor. An investor is obliged to conduct full and proper due diligence.415 The Respondent provided "fulsome information" regarding Skoda Export’s financial position and prospects and cannot be responsible for the lack of proper evaluation or due diligence by FITE.416
219.
The SPA and the information provided to the investor beforehand made it clear that no representation was being provided concerning the future performance of Skoda Export.417
220.
As to (2), the Respondent denies that it provided information which it "already knew to be false".418 The Respondent "acted in good faith to sell the shares in Skoda Export in a transparent tender where every interested qualifying investor had the same chance to investigate the business opportunity and to decide whether or not to bid on the offered terms".419 The Tender Rules and Data Room Rules provided that it was the management of Skoda Export that would provide relevant information to potential bidders and bidders were transparently advised that the information was being provided directly by the company without independent vetting or checking by the seller.420 The Respondent denies the allegation that its conduct in general violated the obligation of good faith.421
221.
As to (3), the obligation to refrain from unreasonable or discriminatory measures must be treated separately from the requirement of FET, since the BIT contains a separate, express provision in this respect in the second sentence of Article 2 (2),422 which provides: "Neither Contracting Party shall in any way impair by unreasonable or discriminatory measures the management, maintenance, use, enjoyment or disposal of investments in its territory of investors of the other Contracting Party."
222.
The Respondent treated the Claimant’s investment reasonably and in a non-discriminatory manner.423 Specifically, in response to the allegation that high-ranking officials conducted a "personal vendetta" against [REDACTED], the Respondent considers that this is a "conspiracy theory" which is implausible and has nothing to do with the rule of law or with any wilful disregard of due process.424
223.
Noting that discrimination may be measured generally when similarly situated foreign investors in the same economic sector are treated differently without reasonable justification, the Respondent contends that the only discrimination allegations made by the Claimant in this case, namely, that CEB’s treatment of Skoda Export’s requests for the extension of guarantees and additional credit for the Balloki and Muridke projects in 2009 differed sharply from its treatment of other credit applicants, "has not been pleaded with respect to this claim" and is unrelated to it.425
224.
The Respondent contends that it has not "impair[edj the management, maintenance, use, enjoyment or disposal" of the Claimant’s investment, and that the Claimant has not made any specific assertions in this regard.426 The Claimant has not made out a claim under the specific terms of Article 2(2) of the BIT on discriminatory treatment, and since the BIT malíes specific provision in this regard, such a claim cannot be made under the general requirement of FET.427
225.

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

3. Expropriation

(1)The Claimant’s position

226.
The Claimant alleges that the Respondent unlawfully expropriated its investment in breach of Article 5 of the BIT because (i) CEB and EGAP failed to provide critically needed financing for Skoda Export’s projects;433 (ii) CEB and EGAP attempted to divert Skoda Export’s projects to a third party contractor;434 and (iii) CEB acted to freeze Skoda Export’s bank accounts on false and unsubstantiated charges.435 On the basis of these acts and omissions, the Claimant contends that the Czech Republic’s unlawful expropriation engages its responsibility at international law.436
227.
The expropriation was unlawful because it did not meet the requirements of (i) just compensation, (ii) due process and observance of law, (iii) non-discrimination, and (iv) public interest.437 The measures taken by the Czech Republic, including the Freezing Orders, were unlawful, were targeted specifically at Skoda Export, and lacked any public interest justification.438 Further, the expropriation was rendered unlawful by the failure to pay compensation.439
228.
Additionally, in the alternative to its claim under Article 2(3) of the BIT, the Claimant contends that "the entirety of the Czech Republic’s acts in this case substantiate a case for expropriation under Article 5 of the BIT".440
229.
The Claimant responds as follows to the defences raised by the Respondent.

(a) Attribution of responsibility to the Czech Republic for the conduct of CEB and EGAP

230.
The Claimant maintains that the conduct of the CEB and EGAP is attributable to the Respondent under international law, pursuant to Article 5 of the ILC Draft Articles on the Responsibility of States for Internationally Wrongful Acts ("ILC Articles"), since CEB and EGAP are instruments of the state charged with performing governmental functions.441
231.
The Claimant asserts that CEB and EGAP have a primary role in implementing governmental export policies; perform state functions conferred on them by legislation; are publicly accountable for their conduct; conceive themselves as being State entities charged with providing State support; are owned and controlled by the State, with supervisory bodies consisting of State officials; and receive extensive support from the State budget and have their losses covered by fiscal resources.442
233.
The Claimant contends that EGAP, alongside CEB, is empowered by Czech law to exercise elements of governmental authority in the implementation of the foreign trade policy of the Czech Republic and is subject to the audit of the State Audit Office.445 Its funds for export credit risk are subsidized from the State budget.446
234.
The implementation of State policy by State entities qualifies as the exercise of governmental policy under the first element of Article 5 of the ILC Articles, citing numerous arbitral decisions to this effect.447
235.
The Claimant maintains that CEB and EGAP acted within the scope of their governmental authority in their conduct towards the Claimant’s investment in violation of the BIT.448 The support received by Skoda Export from CEB and EGAP prior to its privatization was a "dominant factor" in its decision to turn to CEB and EGAP for financial assistance once the post-acquisition audit revealed the poor condition of the company.449 The letters from the Minister and Deputy Minister of Finance confirm that Skoda Export’s relationship with CEB and EGAP fell within the ambit of their governmental mandate because when FITE approached the Ministry for assistance, the Ministry directed FITE to approach CEB and EGAP.450 According to the Claimant, the fact that FITE also submitted credit applications to other institutions is irrelevant, since those entities did not provide Skoda Export with the requisite financial support.451
236.
The Claimant asserts that CEB’s support for BTG fell within the scope of its public functions since the Balloki project was a top priority of CEB, and was discriminatory vis-à-vis Skoda Export.452

(b) Whether the Freezing Orders constituted a legitimate exercise of police powers

237.
In response to the defence raised by Respondent, the Claimant denies that the Freezing Orders constituted a legitimate exercise of police powers under international law.453 The Claimant acknowledges the Respondent’s right to regulate and exercise its police power in the interests of public welfare.454 It contends that "the record shows that CEB acted to freeze Skoda Export’s bank accounts on false and unsubstantiated charges" as evidenced by the finding of the Prosecuting Authority that the suspicious transaction reports were baseless and unwarranted and that CEB was aware of the negative impact that the Freezing Orders would have.455
238.
The Claimant maintains that the Respondent, through CEB, exercised its regulatory powers in bad faith, for a non-public purpose, and in a fashion that was both discriminatory and lacking in proportionality between the public purpose and the actions taken.456

(c) Whether the alleged conduct of the Respondent was the cause of Skoda Export’s insolvency

239.
According to the Claimant, Skoda Export’s insolvency was a direct and proximate cause of the Respondent’s unlawful conduct.457
240.
The Claimant denies that its own conduct in managing the business of Skoda Export was the cause of the company’s financial difficulties, referring to its own "diligent" efforts to keep Skoda Export in business.458
241.
The Claimant maintains that the terms on which CEB offered financing to Skoda Export were commercially unreasonable; CEB treated Skoda Export’s management disparagingly during meetings with customers on the Key Projects; and CEB gave preferential treatment to other credit applicants that presumably had connections with the Czech government.459
242.
The Claimant denies that CEB "proposed" the transfer of the problematic projects in a bona fide attempt to avert the insolvency of Skoda Export. Rather, Mr Pokorny "demanded" the transfer of the Key Projects to BTG, an "untrustworthy" operator which lacked the necessary experience to complete the projects.460 CEB conducted meetings with customers and suppliers in a "surreptitious and underhanded" manner, and attempted to "strong-arm" Skoda Export’s management into transferring the projects in a short period of time and under threat of death.461

(2) The Respondent’s position

243.
The Respondent denies that it has breached Article 5 of the BIT on the grounds that (i) the conduct of the CEB and EGAP is not attributable to the Respondent under international law; (ii) even if such conduct were attributable to the Respondent, the challenged conduct constituted a legitimate exercise of police powers under international law; and (iii) Skoda Export’s insolvency was not caused by the Czech Republic,462

(a) Attribution of responsibility to the Czech Republic for the conduct of CEB and EGAP

244.
According to the Respondent, none of the alleged conduct of CEB and EGAP is attributable to the Czech Republic, on the basis of Articles 4, 5, or 8 of the ILC Articles or otherwise.463
245.

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

246.
The Respondent argues that none of the actions of CEB and EGAP complained of by the Claimant, even if they could be established as wrongful, can be attributed to the Czech Republic, on the grounds inter alia that neither CEB nor EGAP exercised governmental authority towards Skoda Export or the Claimant in connection with the alleged misconduct.468
247.

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

248.
In relation to the "elements of governmental authority" under Article 5 of the ILC Articles, of which examples include the ability to regulate, license, and impose penalties, the Respondent contends that "mere ownership of shares in a corporation plays no role in the determination of whether an entity exercises elements of governmental authority or not".471 Neither CEB nor EGAP regulates the financing of export, provides their clients with any special prerogatives, licenses or permits, or imposes penalties except for contractual penalties.472 The activities of export financing and the insurance of export risks are business activities which may be performed by commercial entities.473 The only public element of CEB and EGAP is their entitlement to receive state support in connection with the provision of their financial and insurance services.474
249.
Neither the alleged failure to provide financing, the alleged attempt to divert Skoda Export projects to a third party, nor the actions taken to freeze Skoda Export’s bank accounts carried "even a trace" of governmental authority.475 Any bank would have been in a position to take such actions in such a situation, as in fact HSBC did in relation to the financing decisions and reporting of suspicious transactions,476 According to the Respondent, the allegedly wrongful conduct is therefore not attributable to the Czech Republic.477
250.

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

251.

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

252.

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

253.

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

254.

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

255.
The Respondent emphasizes that all commercial banks have a duty under EU and Czech law to report suspicions of improper transactions aimed at money laundering, asset draining, or other actions,493 and given that HSBC acted identically to CEB in reporting the "unusual and commercially irrational" transfer instructions received from Skoda Export on 17 April 2009, "the bright line rule from international law" to the effect that activity of a commercial nature can never be considered an exercise of governmental authority "is conclusive".494

(b) Whether the Freezing Orders constituted a legitimate exercise of police powers

256.
The Respondent contends that if the challenged conduct were attributable to the Czech Republic, such conduct constituted a legitimate exercise of police powers under international law.495
257.
The Respondent emphasizes that the burden of proving that the actions allegedly constituting expropriation were not a legitimate exercise of police powers because they were disproportionate, discriminatory, or in bad faith, falls on the Claimant.496 The Respondent responds to the two allegations made by Claimant in purporting to show that the suspicious activity reports and Freezing Orders were not legitimate exercises of police power, namely, the finding by the Prosecuting Authority that the reports were "baseless and unwarranted"; and the allegedly disproportionate nature of the CEB’s response in failing first to raise its suspicions directly with Skoda Export.
258.
According to the Respondent, the suspicious activity reports and the subsequent Freezing Orders were made in good faith fulfilment of legal obligations, under the Anti-Money Laundering Act and EU mandatory law, designed to prevent financial crimes.497 The Respondent notes that a payment can be suspicious without being illegal, and the Prosecuting Authority made no finding of bad faith.498 Concerning the alleged failure to communicate beforehand with Skoda Export, the Respondent notes that CEB was "legally obliged" not to report its suspicions to Skoda Export since this would undermine the purpose of the Anti-Money Laundering Act.499
259.
The Respondent asserts that the Claimant has put forward no evidence or allegation that the failure to provide Skoda Export with additional financing and the proposed transfer of the Balloki and Muridke proj ects were anything other than legitimate exercises of police powers.500 The Respondent notes that the decisions on the relevant credit applications were made on the basis of a risk assessment of the transaction in question, and the proposal to transfer those projects to a third party was part of a good faith attempt to find terms on which the projects could be completed and Skoda Export could be disburdened from the obligations it had incurred.501

(c) Whether the alleged conduct of the Respondent was the cause of Skoda Export’s insolvency

260.
The Respondent denies that Skoda Export’s insolvency was caused by the measures complained of by the Claimant, whether those measures are taken alone or cumulatively.502 Specifically, the Respondent denies that the insolvency of Skoda Export was caused by the failure to provide financing, the alleged harm to Skoda Export’s relationship with its customers and sub-contractors, or the issuing of the suspicious activity reports and the Freezing Orders.503
261.
The Respondent’s position is that the financial difficulties experienced by Skoda Export were caused by the Claimant’s own conduct in managing the business of the company, including in particular its refusal to accept financing on the terms offered by CEB and its refusal to accept transfer of the lossmaking projects to a third-party EPC contractor.504
262.
According to the Respondent, the suspicious activity report and Freezing Orders, which were in place for only 29 days, did not deprive the Claimant of any asset or have any substantial effect on Skoda Export’s financial situation or business conduct. Skoda Export had stopped paying its external subcontractors on the Balloki and Muridke projects at the beginning of 2009 and did not make any payments to its creditors after the Freezing Orders were lifted.505
263.
Concerning the transfer of projects to a third party, the Respondent observes that the Claimant has "failed to explain why getting rid of defaulted and underfunded projects and the obligations associated with them would cause Skoda Export’s insolvency".506
264.
The failure to provide financing did not constitute an expropriatory measure because no riskconscious creditor would have provided financing, given the dire financial condition of Skoda Export, without requiring changes that would have restored its minimal financial viability such as the transfer of the Balloki and Muridke projects, or requiring security for additional credit. By refusing to accept such measures when they were proposed, the Claimant effectively declined to accept credit that was potentially available to it.507
265.
The Respondent adds that failure to provide assistance which would have been contrary to EU state aid iaw to a company in difficulty cannot constitute an expropriatory measure or every single bankruptcy of a company would constitute expropriation and every collapse of a foreign-owned company could result in a BIT claim.508
266.
The Respondent distinguishes the investment BIT award relied upon by the Claimant, Eureko v. Poland, on the grounds that In that case, the state had created a legitimate expectation that it would act and did not do so, whereas in the present case the Claimant had no legitimate expectation to the additional financing it had requested on non-commercial terms from CEB.509

D. Damages and quantum

1. Quantum of damages

(1)The Claimant’s position

267.
The measure of damages claimed by the Claimant in the first instance ("Primary Damages Claim") is based on a comparison "between the actual cash flows realized by Skoda Export and the cash flows it would have realised "but for" the Respondent’s wrongful conduct.510 The damages calculated by the Claimant in respect of this claim consist of (i) the expected income from Skoda Export’s current and potential projects as represented to WNC during the privatization process, and (ii) lost profits from the additional projects that WNC arranged for Skoda Export to obtain after acquisition.511
268.
In the alternative, to the extent the Tribunal is minded to use the purchase price as a measure of the compensation due to the Claimant under Article 2(3) of the BIT, the Claimant claims the purchase price of the shares together with the value of the Transferred Projects ("Alternative Damages Claim").512
269.
In respect of its Primary Damages Claim, the Claimant claims that it is entitled to the reasonably expected value of Skoda Export’s existing and potential projects, plus the value of the Transferred Projects and Skoda Export’s real estate, so as to calculate the full value that the Claimant expected to realise from the acquisition of Skoda Export, subject to a discount reflecting the probability that the Claimant might not have won the bid.513 The value of Skoda Export as reasonably expected by the Claimant is calculated by applying a DCF analysis to each of Skoda Export’s projects as represented to the Claimant during privatisation, using the project-specific information available supplemented by "reasonable assumptions" based on standard EPC practice.514
270.
In respect of its Alternative Damages Claim, the Claimant contends that the purchase price must be subject to a reasonable interest rate to reflect the time value of the funds; and the Claimant must be compensated for the lost value of the projects that it transferred to Skoda Export, the value of which was "destroyed in its entirety" by the refusal of financing and the Freezing Orders.515
271.
In response to the Respondent’s critique of its damages methodology, the Claimant asserts that the Respondent and its expert have failed to recognise the underlying principles of the Claimant’s calculations. The Second FTI Report "makes clear that the applied method is the acceptable method of comparing the cash flows of Skoda Export’s projects "but for" the wrongful conduct of the Respondent with the actual cash flow".516
272.
In response to the allegation that Claimant’s damages calculations constitute "a calculation of a riskfree business with guaranteed cash flows" the Claimant notes that the authors of the Second FTI Report recognize and address the risks associated with the expected cash flows of the projects, and "consider that the expected cash flows of the projects are net of reserves for the risk of realization and reasonably represent the cash flows that the Claimant would have generated in the absence of the Measures".517
273.

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,

274.
The Claimant quantifies its alternative damages claim as follows:519

(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.

275.
The Claimant’s primary damages claim amounts to USD 71,581,414. The Claimant’s alternative damages claim amounts to USD 46,898, 664.520

(2) The Respondent’s position

276.
The Respondent’s position is that no damages can be awarded to the Claimant since the Respondent did not violate any provision of the BIT, Czech law, the SPA or any "specific agreement" alleged by the Claimant, and the losses allegedly incurred by the Claimant were not caused by actions or inactions for which the Respondent is responsible.521
277.
In the event of a finding by the Tribunal that the Claimant is entitled to damages, the Respondent maintains that the Claimant has not proved any damage from the purported violations of the Umbrella Clause or the BIT provisions on FET or unreasonable and discriminatory measures.522 In the alternative, the Respondent asserts that any compensation for violation of the Umbrella Clause must be calculated in accordance with the amount agreed in the SPA.523 At the time when the SPA was signed, Section 386(1) of the Czech Commercial Code prohibited only a total exclusion of damage liability, but not its limitation.524
278.
As to the calculation of the damages claimed by the Claimant, the Respondent asserts that the Claimant’s alternative claims in the amounts of USD 90,000,000 and 65,000,000 are not backed by any evidence.525
279.
The Respondent challenges the quantification of the amounts based on the report of Messrs Rosen and Mizrahi, contending that the 20 general assumptions adopted in the FTI Report, if inapplicable, can lead to a material change in the results of the valuation.526 According to the Respondent, the vast majority of the assumptions made in the FTI Report are unsustainable,527 including for instance assumptions regarding the projected profit margins applicable to each project and how such profit margins compare with those realised by other EPC contractors.528
280.
According to the Respondent, in estimating the damages allegedly sustained by the Claimant, the authors of the FTI Report "did not apply any commonly recognized method of valuing a business" and specifically "did not apply a discounted cash flow (DCF) method" despite the Claimant having referred to the DCF method as the appropriate method of quantification of damages.529 The Respondent characterizes the valuation in the FTI Report as "a valuation of a risk-free business with guaranteed cash flows" since it applies a zero discount rate to Existing Projects and Transferred Projects.530
281.
According to Dr David Dearman, to calculate the value of the company "but for" the alleged misrepresentations, the Claimant should have (i) made a best ex ante reliable cash flow forecast from all of the evidence available in the Data Room, not just the Project Cards; (ii) applied a discount rate to reflect the risk of these cash flows; and (iii) added to the resulting valuation the value of any excess assets, i.e. assets which Skoda Export did not need to run its business."531
282.
The Respondent asserts that the "future losses" claimed by the Claimant are speculative, uncertain, and hypothetical, by reason of the selection of the value of Skoda Export’s real estate as a proxy measure of future loss, which rests on the "inherently speculative" assumption that Skoda Export was going to be carried out on a profitable or break-even basis.532 Such losses are not recoverable pursuant to the settled principle of international law according to which only those damages that can be reasonably ascertained can be recovered.533
283.

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

284.
The Respondent contends that the alternative calculation made by FIT based on "the share purchase price paid for Skoda Export, cash flow generated from Transferred Projects... and a pre-Award interest"538 is flawed.539 In particular, the amount of the damages thus calculated based on the purchase price is inflated due to the use of an incorrect exchange rate,540 and the projects identified as "Transferred Projects" "either are not "Transferred Projects" or losses from them reasonably can be projected to be nil."541

2. Contributory negligence or fault

(1) The Claimant’s position

285.
The Claimant does not make any allowance in its written pleadings for any reduction in the amount of damages due to it for contributory negligence or fault.

(2) The Respondent’s position

286.
The Respondent alleges that the Claimant contributed directly to its alleged loss through its own actions, such as its insufficient evaluation of the information provided during the due diligence process, the price it offered to pay for the shares in Skoda Export, and its unreasonable actions following the acquisition of Skoda Export.542 Citing the rule of international law, as stated In Article 39 of the ILC Articles, that any damages awarded to a claimant must reflect its contribution to its own losses, the Respondent contends that any damages awarded to the Claimant must be appropriately reduced to reflect the Claimant’s contribution to its loss, in the Tribunal’s discretion.543

3. Interest

(1) The Claimant’s position

287.
The Claimant claims pre-award interest and asserts that "the applicable statutory interest, which comes into effect as at the date a demand for damages is made, is 8 percent plus the repo rate set by the Czech National Bank for the first day of the calendar half-year in which the default occurred", which currently stands at 8.05 percent.544 The Claimant contends that the same rate should apply after the rendering of the Tribunal’s award.545

(2) The Respondent’s position

288.
According to the Respondent, the interest claimed by the Claimant is unreasonable. The Claimant claims pre-award interest at "the risk free rate of US Treasury bills plus a premium of 3 percent" whereas the Respondent contends that the appropriate standard is the interest rate payable on the loan FITE obtained from PPF Bank to acquire Skoda Export, namely, "3 month PROBOR plus 1.69%".546
289.
With regard to post-award interest, the Respondent contends that the Claimant misinterprets Czech law by a defective translation of Regulation No. 351/2013 Coll. ("Regulation 351"). Regulation 351 sets out not "statutory interest" as contended by Claimant, but "default interest". The rate of statutory interest is found in Section 1802 of the Czech Civil Code, which refers to the "interest required on loans provided by banks in the place of residence or seat of the debtor at the time of entering into a contract".547 The Respondent contends that the purpose of the BIT would not be served by the application of the default rate established by Regulation 351, which is concerned with sanctions imposed on debtors to discourage future late payment of their obligations.548 Rather, as the award would constitute Respondent’s debt towards the Claimant, it would be "fundamentally unfair" to apply the interest rate of 8.05 percent as requested by the Claimant, and the proper post-award interest rate is nil.549
290.

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

291.

According to the Respondent, international and Czech law both require simple interest in connection with the payment of an arbitral award?551 Any interest granted to the Claimant should be simple and not compounded.552

VI. THE TRIBUNAL’S CONCLUSIONS

292.
In reaching its determination of the claims herein, the Tribunal has had regard to the entirety of each Party’s memorials, statements, exhibits and other filed documents and attachments and oral evidence, and written and oral submissions, including skeleton outlines, post-hearing briefs, aide memoires and transcripts of hearings.

A. JURISDICTION AND ADMISSIBILITY

1. The intra-EU BIT jurisdictional objection

294.
The Respondent objects to the Tribunal’s jurisdiction on the basis that the BIT has been superseded by EU law.553 It contends that the BIT has been terminated pursuant to Article 59(1) of the VCLT. Alternatively, it is not applicable to the present case under Article 30(3) of the VCLT. The objection has two limbs.
311.
Of course EU law was modified by the Treaty of Lisbon, and the EC has been developing its views of the legal questions involved with intra-EU investment treaties; the European Court of Justice has also expressed views about related questions of competence and will no doubt define its position more precisely in due course. The Tribunal recognizes that a different view may eventually prevail. However, this Tribunal is obligated under the BIT to decide this case based on the consent of the States parties as set out in the text of the BIT, and on the arguments presented by the Parties. This it has done.

2. Jurisdiction in respect of the SPA under the Umbrella Clause Article 2(3)

312.
The Respondent’s second jurisdictional objection relates to the SPA between FITE and the Czech Republic for the acquisition of Skoda Export. The Respondent contends that the Umbrella Clause in the BIT (Article 2(3)) does not apply to the SPA because the SPA is not an agreement between the Czech Republic and the Claimant, but between the Czech Republic and FITE.575 FITE is a Czech joint stock company, which is owned as to 70% by CKD Praha DIZ a.s. and as to 30% by CKD NOVE Energo a.s. The Claimant is an English holding company that was the majority shareholder of CKD during the privatisation. Accordingly, there is no agreement between a Contracting Party and an investor of the other Contracting Party as contemplated in Article 2(3).
313.
The Claimant seeks to refute the Respondent’s objection on the basis that the Umbrella Clause contains no privity of contract requirement.576
314.
It is first necessary to consider the relevant provisions of the BIT. Article 2(3) provides that:

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.

315.
"Investors" in respect of the United Kingdom are defined under Article 1 (c)(ii) to mean:

(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,

316.
"Investments" is defined in Article 1 (a) as:

[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.

(1) "Specific agreements" under BIT Article 2(3)

317.
Although "specific agreements" is not a defined term in Article 1, the Tribunal accepts that the first sentence of Article 2(3) applies to give the term definition. This much is apparent from the second sentence, which refers back to "these specific agreements", thus creating a renvoi to the scope given to "specific agreements" in the first sentence. Hence the ordinary meaning of the first sentence is that a specific agreement is one between an investor (as defined) and a Contracting Party.
318.
FITE is not an investor of the UK because it is incorporated in the Czech Republic, and there is no deeming provision giving it standing as a wholly-owned subsidiary.577 Therefore, prima facie, the SPA is not a "specific agreement" within the meaning of Article 2(3).
319.
The Claimant contends that, as there is no privity of contract requirement in Article 2(3), it is immaterial whether the investor concludes the specific agreement directly or through an investment vehicle. Put another way, there must be an express privity of contract requirement for the Umbrella Clause to be restricted to agreements between a UK investor and the Czech Republic.
320.
The Parties joined issue on the requirement of privity under umbrella clauses in general. But even if there is no requirement of privity under umbrella clauses couched in general terms (e.g. "any obligation entered into with regard to investments"), in contrast, the BIT uses quite precise language: it refers to "specific agreements" which are to be concluded between a Contracting Party and an. investor of the other Contracting Party. In the Tribunal’s view, in accordance with the governing principle of treaty interpretation, this language must be given effect, and it follows that the SPA is not a specific agreement for the purposes of Article 2(3).

(2) Observation of undertakings in international law

321.
The term "umbrella clause" is often used as a convenient shorthand for "observation of undertaking". That nomenclature does not expand the scope of the obligation to observe an undertaking under international law. An undertaking is a formal and legally binding pledge to do something. States are obliged under international law to observe their undertakings. This is, inter alia, part of the duty of good faith and the principle of pacta sunt servanda.
322.

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).

323.
An undertaking is likewise owed to the identified beneficiary of the undertaking. Under international law, merely because a State may owe an obligation to observe an undertaking given to a company does not mean that the State also owes that same obligation to observe the undertaking to that company’s shareholders. Of course, that principle is subject to any specific transfer provisions, such as in agreements to extend the benefit of the undertaking to shareholders, affiliates, heirs or assignees.
324.
The scope of the obligation to observe an undertaking is separate and distinct from other obligations under international law. Thus, it is not coterminous with the principles of FET. Although an entity might have legitimate expectations in relation to an undertaking, that does not convert it into the beneficiary of the undertaking. Nor does it expand the obligation of the undertaking State so as to make it beholden to anyone other than the beneficiary.

(3) Privity of contract under umbrella clauses

325.
The issue of the requirement of privity under umbrella clauses has been addressed in a number of investment BIT arbitrations. There is no consensus, but the dominant view is that in respect of contractual obligations, only parties entitled to enforce the obligation under the proper law of the contract may sue.
326.

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

327.

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.

328.

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

329.

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.

330.

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.

331.
Finally, it is necessary to consider Continental Casualty v. Argentina. This case has been raised by the Claimant in support of the conclusion that umbrella clauses apply to obligations between an investor’s subsidiary and a host state.585 The Claimant refers to Continental Casualty only in respect of its alternative submission that the Tribunal has jurisdiction under broader umbrella clauses in other BITs through the MFN provision in the BIT (discussed below). However, it is relevant to look at it here, in order to determine whether it impacts on the line of reasoning considered above.
332.

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

333.
This statement is seemingly in conflict with the cases considered above. However, there are a number of reasons why Continental Casualty should not upset the otherwise consistent jurisprudence on the privity objection. First, in making this statement, the tribunal was referring to obligations of the host state in general and not contractual promises in particular. Second, the tribunal did not ultimately pursue its investigation of whether contractual obligations of Argentina were justiciable under the umbrella clause because it had already decided Argentina could rely on the defence of necessity with respect to those obligations.587 As such, it did not need to conduct a full analysis of the issue or engage with cases that had resolved similar questions. Finally, it commented that the contracts in question "could,..be considered as guaranteed by the umbrella clause, subject to the caveat that they were not directed to foreign investors nor specifically addressed to their investments".588 Accordingly, it is not apparent that the contracts would have fallen under the umbrella clause even if the tribunal had taken this question to its conclusion.
334.
To summarise, the Claimant’s contention that there is no requirement of privity in relation to umbrella clauses finds no authoritative support in the case law of international investment tribunals. To the contrary, tribunals have rather consistently resolved that they have no jurisdiction under umbrella clauses to consider contractual obligations between host states and investors’ locally incorporated subsidiaries.
335.
If it were necessary to do so, the Tribunal would uphold the requirement of privity even for generally worded umbrella clauses, which are intended to give effect to legal commitments entered into by the host state with regard to investments, not to change their scope or content.
336.
This conclusion is reinforced by applying the reasoning of the tribunal in Burlington, which noted that tribunals may have to look to municipal law to give content to an obligation. The tribunal observed that "Burlington has not alleged, not to speak of established, that trader Ecuadorian law the non-signatory parent of a contract party may directly enforce its subsidiary's rights."589 Similarly, the Claimant has not suggested that Czech law would entitle it to enforce the rights of FITE under the SPA.
337.
The Burlington tribunal added:

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

338.

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

339.
It is apparent from this extract that the Concession Agreement in the EDF case imposed a positive contractual obligation on the claimant companies not to transfer shares without prior consent. In short, they were parties to the transaction, not merely beneficiaries. The SPA, however, does not impose contractual obligations on the Claimant. Rather, FITE assumes certain contractual obligations that extend to the conduct or state of affairs of the Claimant. This occurs in Clause 6.1(h) of the SPA, which provides:

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:

[REDACTED]

(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.

340.
The Claimant argues that a restrictive interpretation of Article 2(3) would enable the Respondent "to circumvent the BIT by prescribing domestic incorporation" as a condition of acquiring Skoda Export.594 It says that this "would lead to a manifestly absurd result and should be rejected".595 But as the seller in an open tender process, the Respondent was free to impose such a condition, and any potential bidder was free not to bid on those terms. It cannot be said that, if a foreign investor voluntarily enters into an agreement which is clearly excluded from the plain terms of an umbrella clause, there is a manifestly absurd result. This is all the more so because such an agreement would not preclude the investor from recourse to other protections open to it qua investor under the BIT,

(4) Conclusion

341.
For these reasons the Tribunal upholds the Respondent’s objection to jurisdiction in respect of the Umbrella Clause claims, insofar as they concern obligations under the SPA, on the basis that the SPA is not a specific agreement under Article 2(3) of the BIT.

3. Jurisdiction in respect of Czech law under the Umbrella Clause

342.
The Claimant invokes the Umbrella Clause not only in respect of alleged breaches of the SPA, but also for alleged violations of Czech law. It alleges that the Respondent:

(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

343.
The Respondent’s position is that the Umbrella Clause does not cover or concern provisions of general legislation addressed to the public,598
344.
The Claimant’s first allegation (a) relates to clause 5.1(c) of the SPA, by which the Respondent warranted that:

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.

345.
The warranty does not impose any new obligation on the Respondent. What it does do is provide FITE with a right to seek damages for a breach of domestic law by the MoF. But that right arises from the SPA and is only enforceable by FITE. Article 2(3) does not extend rights to the Claimant because the SPA is not a "specific agreement": see paragraph 320. Consequently, the Tribunal has no jurisdiction to consider the Claimant’s first allegation.

4. Article 3(1): Jurisdiction under the Umbrella Clause through the MFN clause

348.
The Tribunal has concluded there is no "specific agreement" under Article 2(3). But it must also consider the Claimant’s alternative argument that jurisdiction is established under more favourable umbrella clauses in other BITs to which the Respondent is party.601 The Claimant contends that it would be entitled to rely on more favourable umbrella clauses pursuant to Article 3(1), which provides:

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.

349.
The immediate problem with the Claimant’s reliance on the MFN provision is that, prima facie, the Tribunal has no jurisdiction to hear disputes arising under Article 3. The Tribunal’s jurisdiction derives from Article 8(1) of the BIT, which provides that:

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.

350.
This part of the Claimant’s case concerns a dispute as to the application and interpretation of the Article 3, which is not provided for in Article 8(1).
351.
The Claimant makes the argument that, because Article 2(3) of the BIT is activated by the existence of a "specific agreement", the second sentence of the Article applies to extend jurisdiction to all substantive obligations in the BIT.602 The Claimant makes this argument in order to bring its FET claim under Article 2(2) of the BIT within the Tribunal’s jurisdiction, but the argument could in principle apply with respect to Article 3(1). However, as the Tribunal has already resolved that there is no "specific agreement" under Article 2(3), that provision cannot be relied upon to expand the Tribunal’s jurisdiction. But even if the SPA. were a "specific agreement", for the reasons which follow, the Tribunal would not agree with the Claimant’s interpretation of the second sentence of Article 2(3).
352.
The ordinary meaning to be given to the second sentence of Article 2(3) is to be informed by the context of that sentence within wider text of the BIT, including Article 8(1).
353.
The meaning of Article 8(1) is clear. The only obligations that may be the subject of arbitration are those contained in the specified articles, including Article 2(3). If Article 8(1) did not exist, the effect of the second sentence of Article 2(3) might well be as the Claimant interprets it. But read in conjunction with Article 8(1), it is clear that it cannot be intended to extend an arbitral tribunal’s jurisdiction to all other substantive obligations in the BIT. If that were the case, Article 8(1) would be superfluous. In this respect, the Tribunal concurs with the Respondent’s effet utile argument.
354.
The second sentence of Article 2(3) must be read in the context of Article 2(3) in its entirety as well as the structure of Article 2 generally. Article 2 is divided into three parts; each imposes a substantive obligation on the Contracting Parties. The first relates to the admission of foreign capital, the second to FET and the third to investor-State contracts. The second sentence of Article 2(3) does not sit apart as a separate requirement. It is included in Article 2(3) and therefore the Tribunal would infer that its effect was intended to be limited to the Umbrella Clause.
355.
The Tribunal also does not consider that the Respondent’s interpretation is right. The Respondent’s view is that the second sentence is merely intended to ensure that national courts considering a specific agreement take into account all applicable law, including the BIT.603 But this cannot be correct because there is no reference to courts or what they need to consider. To the contrary, the obligation in question is imposed expressly on the Contracting Parties under the BIT.
356.
In the Tribunal’s opinion, the correct interpretation of the second sentence of Article 2(3) is that the Contracting Party has an obligation both to adhere to the specific agreement and to observe the BIT protections in so far as those protections are contained in the specific agreement. Thus, if a specific agreement contained a protection tantamount to the FET standard, a tribunal would have jurisdiction to consider a breach of that standard. This interpretation gives effect to the ordinary meaning of Article 2(3) when read in its context. It links with the idea in the first sentence of Article 2(3) that specific agreements might contain protections equivalent or superior to (but not less than) those contained in the BIT. It also has an effet utile in that it bars a respondent party from arguing there is no jurisdiction to hear a claim based on an obligation in a specific agreement where that obligation is mirrored in the BIT but not captured by Article 8(1).
357.
If the SPA is not a "specific agreement", then the Claimant cannot rely on Article 2(3) to expand the Tribunal’s jurisdiction. However, even if the Tribunal had held that the SPA was a "specific agreement", it does not contain protections commensurate with or superior to the protections in the BIT that are not covered by Article 8(1).
358.
On this basis, the Tribunal has no jurisdiction to determine the Claimant’s arguments based on the MFN clause,

5. Exclusive jurisdiction of Czech Courts

359.
The Respondent also contends that claims in respect of the SPA are inadmissible because Czech courts have exclusive jurisdiction over those claims.604 In its view, if the Claimant wishes to enforce the obligations in the SPA, it must comply with the modalities of enforcement of those obligations in the SPA.
360.
In the SPA, dispute resolution is addressed by Clause XIV, which provides:

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.

361.