Paris Court of Appeal, No. 08/15877

Paris Court of Appeal, 17 December 2009, No. 08/15877

THE CZECH REPUBLIC
Vs. MR. C Z

On 5 August 2008 The Czech Republic, represented by its Ministry of Finance, lodged an annulment appeal against the final ad hoc arbitral award, rendered in Paris on 10 July 2008 by Mr. M. S and B, arbitrators, H, president, who have decided on the basis of the Agreement on the Promotion and reciprocal investment protection (‘BIT’) concluded on 5 March 1996 between Croatia and the Czech Republic.

The arbitral tribunal stated that:

(1) The Czech Republic shall pay to Mr. C Z 19,297,776 CZK within 15 days from the date of the notification of the award. (2) The Czech Republic shall pay interest to Mr. C Z on the amount allocated in point 1. At the rate of 5% from 17 July 2004 until delivery of the present award. Interest shall be compounded annually. (3) The Czech Republic shall pay interest to Mr. C Z at a rate of seven percentage points higher than the national basic rate published by the Czech National Bank on the N°1 amount, within 15 days from the notification of the present award to the Czech Republic until full payment. The reference rate in force on first calendar day of the semester at issue will apply for the next six months. (4) The Czech Republic shall withdraw, and refrain from filing, any action for unjust enrichment by Mr. C Z or ZIPimex s.r.o. for the use of the premises No. 1035, Prague 1, Na Porici 4 between 20 December 1996 and the 16 July 2004. (5) The Czech Republic will pay to Mr C Z 434,719.41, increased by 93,474.15USD and reduced by CZK 283,769.69 for arbitration costs. (6) The remainder of the claims are rejected.

On 5 February 2007 a partial award issued according to which the arbitral tribunal had said that the Czech Republic had failed to fulfil its obligation under the Treaty, to ensure a fair treatment for investments, income from investors, and investors of the other Party, in this context Mr. C Z, and assumed that the Czech Republic was consequently held to compensate him for the damage suffered on account of this failure. On 25 September 2008, the claimant’s action for annulment against this partial sentence was rejected by a court decision.

The Czech Republic filed an appeal for annulment of the final award and requested the conviction of Mr. C Z to pay the amount of EUR 30,000 under Article 700 of the Code of civil Procedure. In support of claimant’s action, it raises three grounds for annulment, the absence of an arbitration agreement (Article 1502-1 of the Code of Civil Procedure), failure by the arbitral tribunal to comply with its mandate (Article 1502-3 of the Code of Civil Procedure), the disturbance of international public order (Article 1502-5 of the Code of Civil Procedure).

Mr C Z, of Croatian nationality, claims that the judgment should be dismissed, and that the Czech Republic should be convicted to a civil fine pursuant to Article 559 of the Code of Civil Procedure, which amount will be decided appropriately by the court and to payment of EUR 80,000 in application of article 700 of the code of civil procedure.

UPON WHICH

On the first ground for annulment: the arbitral tribunal has issued without an arbitration agreement (article 1502-1 of the Code of Civil Procedure)

The Czech Republic argues that the arbitral tribunal, by ordering it to withdraw any action brought to against Mr. C Z or ZIPimex on the basis of unjust enrichment and to refrain from introducing new ones, has ruled without arbitration agreement for the company ZIPimex. The arbitral tribunal has actually ruled on the rights held by the ZIPimex company with regard to the lease contract or the Czech law, although the company wasn’t bound by the arbitration agreement nor was it a party to the dispute.

It claims to have disputed from its earliest pleadings before the arbitral tribunal the jurisdiction of the latter to hear the dispute opposing it to Mr. C Z on grounds that ZIPimex did not have standing on the basis of the BIT, while it was a necessary party to the proceedings, on the other hand that it was absent from the case when it was regarding the pronunciation on the rights of Mr. C Z that basically concerned the rights ZIPimex company.

It further states that the arbitral tribunal, by ordering the withdrawal of the action for unjust enrichment brought against ZIPimex company, has delivered a decision in favour of the latter who was not part of the proceedings, and that neither the terms of the BIT or the UNCITRAL arbitration rules contain a mechanism for the company established under local law, i.e. to the subsidiary under local law, to be directly involved in the arbitration and to obtain compensation for damages it has suffered.

Given that Mr. C Z claims in vain that the Czech Republic would have waived its right to use the ground since it has contested it in the course of the proceedings, whereas on 5 July 2006, the Czech Republic claimed, in response to Mr. C Z’s requests for withdrawal of claims brought against the company ZIPimex and payment of compensation equivalent to the profits that would have been made by the company, that ‘the tribunal cannot rule on these requests without encroaching on the rights of ZIPimex’;

Given that by ordering the Czech Republic to withdraw its action for unjust enrichment against ZIPimex, the arbitral tribunal who was careful to recall in its award that (§133) ‘the applicant may assert his rights independently of those that the ZIPimex company could hold in relation to the subject matter of the dispute’ and that (§134) ‘the applicant has standing under the BIT in the event of a violation affecting his investment in ZIPimex’, has not granted indemnification for personal damages directly suffered by the latter yet restricted its ruling to implement the rights to a fair treatment that Mr. C Z benefits from the Treaty related to his investment in the Republic Czech Republic, by an injunction which has the effect of protecting his rights as a shareholder in a local company, in order to avoid a worsening of damages resulting from their violation and any new failure contrary to Mr. C Z’s legitimate expectations; that, consequently, the arbitral tribunal did rule according to an arbitration agreement and the first ground of annulment is rejected;

On the second ground for annulment: the arbitration tribunal has failed to abide to the mandate conferred to it (Article 1502-3 of the Code of Civil Procedure)

The Czech Republic essentially argues that the arbitral tribunal has exceeded its mandate by judging that Mr. C Z had been indirectly expropriated from his investment; notwithstanding his withdrawal of this claim.

Given that in the present case, the mandate of the arbitrators, who had jurisdiction under the bilateral Treaty on investment between Croatia and the Czech Republic of 5 March 1996, is determined by the subject matter of the dispute as defined by the claims of the parties.

Given that the partial award states that Mr. C Z (§ 246) ‘expressly withdrew his initial application’ that it should be declared that [the Czech Republic] has also violated Article 4 of the TBI. Irrespective of whether this request was admissible, no decision is required for this respect';

That in this partial award the arbitral tribunal explained about a possible violation of Article 4 of the BIT, which prohibits expropriation measures or those having equivalent effect that (§244) ‘in view of the conclusion reached in the above submissions concerning the Defendant’s violation of standards of a fair treatment prescribed in Article 3 of the BIT, it is not necessary for the Arbitral Tribunal to consider this issue’ and that (§245) ‘According to the Tribunal, Article 4 of the BIT only provides for compensation that would be open to the Claimant on account of violation of Article 3" ;

That the arbitral tribunal reproduced the same line of argument that was used in the final award: (§123) ‘as regards the conclusion reached on the defendant’s infringement of standards of a fair treatment as prescribed by Article 3 of the BIT, the Arbitral Tribunal did not address the issue of the whether the actions of the defendant have also constituted a violation of the Article 4 of the BIT’;

That the award does not contain any provision on compensation for the violation of the obligation of Article 4, while grievances on which the Czech Republic is basing its ground are exclusively located in part 3 of the award final entitled ‘Standard of compensation for the breach of legitimate expectations’; that the arbitral tribunal after having set out the opposing positions of both sides - the Czech Republic claimed that the violation only entitles the victim to compensation for negative interest, while Mr. C Z argued that he is entitled to full compensation for his damages and not only to the recovery of his expenses"-had explained in a very didactic way that the violation of legitimate expectations only occurred when the Czech Republic has taken legal action against ZIPimex and that consequently Mr. C Z (§167) ‘must be placed in the situation that would have existed in the absence of the said legal action and not in a situation that would have existed in the absence of the legitimate expectations’; that the case that the arbitrators have, in paragraph (§168), in order to base their reasoning on the standard of compensation for breach of legitimate expectations, used reasoning by analogy upon referring to this very standard provided for cases expropriation by Article 4 of the BIT with assess the intensity of the consequences of the Czech Republic’s actions, does not characterise the lack of compliance with their mandate; that the second ground for annulment is therefore rejected;

On the third ground for annulment: the recognition or enforcement of the award violates international public policy (1502-5 of the code of civil procedure)

The Czech Republic claims that the award breaches procedural international public policy on the one hand, and substantial international public policy, on the other hand. It explains, on the first branch of ground, that by judging it has indirectly expropriated Mr. C Z’s investment and by ordering it to withdraw and refrain from introducing any action for unjust enrichment against Mr. C Z, the arbitral tribunal has violated procedural international public policy, undermining the fundamental principles of fair trial, which consist of the authority of res judicata, the termination of the arbitrators’ power or the unavailability of the dispute; that the tribunal has indeed contradicted its partial sentence of 5 February 2007 in which it stated not having to examine the issue of the existence of expropriation, concluding that the effect of the actions of the Czech Republic is equivalent to expropriation.

The Czech Republic claims, in the second part of the ground, that the Arbitral Tribunal violated substantial international public policy by ordering it to withdraw and refrain from introducing any action for unjust enrichment against Mr. C Z or ZIPimex, whereas the paid rent was much lower than the rent the one the latter should have paid under normal market conditions; that the decision to withdraw the action of unjust enrichment is tantamount to forcing the Czech administration to violate its own public policy, by depriving it from the application of Article 14 of the law Czech No. 219 2000 Coll. on State Property requiring administrations to implement all legal measures to protect the rights of the owner State, which the French legal system also does not allow. It adds that the violation of international public policy is obvious, concrete and effective in that it results in depriving the Czech administration from the amount of rent that it should have received for the rental of the premises, which were thirty times higher than those actually received.

Given that on the first branch of the ground that, as aforementioned, the final award did not the issue of whether or not the Czech Republic had also violated the article 4 of the BIT, the ground regarding a contradiction between the two awards and thus a violation of procedural public policy is unfounded.

Given that, on the second branch of the ground, the Czech Republic cannot claim that its administration was deprived of the right to implement legal grounds when it is no longer in a position to do so due to its condemnation for violating of Article 3 of the bilateral Treaty investment and that it is bound, unless annulled, to enforce the award under this Agreement. It should finally be noted that, despite the mandatory obligations it is invoking, the Czech Republic withdrew the action for unjust enrichment it had brought on 22 June 2009 before the Municipal Court of Prague against ZIPimex; that the last ground and hence the claimant’s request for annulment are rejected;

On the application for a civil fine and Article 700 of the code of civil procedure

Whereas Mr. C Z does not establish any particular circumstances that have abused the Czech Republic’s recourse from, there are grounds for rejecting the application for a civil fine brought by Mr. C Z on the basis of Article 559 of the civil procedure Code;

That the Czech Republic succumbing, it is convenient to convict it to the costs of the proceedings and to pay to Mr. C Z the sum of EUR 30,000 under Article 700 of the French Code of civil procedure;

FOR THESE REASONS

Dismisses the claimant’s appeal for annulment,

Rejects the request made by Mr. C Z on the basis of Article 559 of the Code of civil Procedure,

Condemns the Czech Republic to pay to Mr. C Z the sum of EUR 30,000 in accordance with article 700 of the civil procedure code,

Orders the Czech Republic to pay the costs of the proceedings, and admits Maître Gilbert THEVENIER, avowed, for the benefit of Article 699 of the Code of Civil Procedure.