By Damon Vis-Dunbar
20 April 2009
A three-member tribunal has disqualified a claim by the Israeli-based Phoenix Action LTD, concluding that its purchase of two Czech companies was solely a pretext for exploiting the Israel-Czech Republic bilateral investment treaty.
The jurisdictional award rendered on 15 April 2009 charges Phoenix Action with “an abuse of the international investment protection regime”, and orders the company to bear the full cost of the arbitration, including the Czech Republic’s legal costs.
Phoenix Action’s claim, lodged with the International Centre for Settlement of Investment Disputes (ICSID) in 2006, relates to its purchase in 2002 of two companies, Benet Praha and Benet Group, both of which were involved in the purchase and sale of ferroalloys (iron mixed with other elements, used in the production of steel).
Phoenix Action bought the two Czech companies while they were under a criminal investigation over alleged custom duty evasion. The Israeli company argued that lengthy litigation proceedings, which continued after it took ownership of the companies, amount to a denial of justice.
For its part, the Czech Republic characterized Phoenix Action has a “sham Israeli entity”, whose purpose was to gain access to international arbitration by way of the Israel-Czech Republic BIT. Indeed, the case represents “one of the most egregious cases of ‘treaty-shopping’ that the investment arbitration community has seen in recent history,” argued counsel for the Czech Republic.
Tribunal doubts investment was made in good faith
The Tribunal’s decision to nix the claim on jurisdictional grounds was linked to the revelation that one family remained in control of the Benet companies, despite their sale to different corporate entities.
According to the evidence presented to the Tribunal, the former Chairman of Benet Praha, Vladimir Beno, established Phoenix Action after fleeing to Israel under charges of tax evasion. Phoenix Action subsequently purchased Benet Praha from a company owned by Mr. Beno’s his wife for US$4000. In 2008, Phoenix Action sold Benet Praha back to Mr. Beno’s wife for the same price.
In light of these facts, the Tribunal concluded that Phoenix Action’s purchase of the Benet companies was “simply a rearrangement of assets within a family, to gain access to ICSID jurisdiction to which the initial investor was not entitled.”
“The unique goal of the ‘investment’ was to transform a pre-existing domestic dispute into an international dispute subject to ICSID arbitration under a bilateral investment treaty,” writes the Tribunal.
Tribunal weighs in on the concept of investment under the ICSID Convention
The Tribunal’s verdict is significant, in part, for its analysis of what constitutes an investment under the ICSID Convention.
Because the ICSID Convention does not define the concept of investment, tribunals and commentators have formulated their own criteria. The most common is the so-called Salini test, which sets four criteria for an ICSID investment: a contribution of money or other assets of economic value; a certain duration; an element of risk, and; a contribution to the host State’s development.
In this case, the Tribunal adopts the Salini test as its starting point, but takes issue with the fourth criteria, on the grounds that determining an investment’s contribution to development is “impossible to ascertain.” Instead, the Tribunal favours “a less ambitious approach”, and proceeds to consider if there has been a contribution to the economy of the host state.
In addition to restricting the scope of the Salini test’s fourth criteria, the Tribunal would consider two other criteria: were the assets invested in accordance with the laws of the host state and was there a bona fide investment of those assets?
Ultimately, Phoenix Action’s claim would fail to meet the Tribunal’s benchmark for of bona fide investment.
This conclusion was drawn in part because the company displayed no intention of engaging in actual economic activities (the Tribunal notes, for instance, the absence of a business plan, program of re-financing, valuations, etc).
The timing of the claim—served two months after Phoenix Action purchased the Benet companies—also served to bolster the Tribunal conviction that Phoenix Action was a vehicle designed to bring a domestic dispute to international arbitration.
Indeed, the Tribunal characterized the claim as “an abusive manipulation of the system of international investment protection under the ICSID Convention and BITs.”
This damning assessment led the Tribunal to order Phoenix Action to pay the full cost of the arbitration proceedings, amounting to some USD$356 000, in addition to the Czech Republic’s legal costs of some US$1 million. Phoenix Action estimated its own legal costs at some US$1.6 million.
Number of investment claims against the Czech Republic undisclosed
The prompt release of the Phoenix Action award—published by the Czech Republic a day after it was dispatched to the parties—stands in contrast with the secrecy that shrouds other investment treaty claims against the Czech Republic.
Indeed, the exact number of investment-treaty claims against the Czech Republic has not been disclosed. An official with the Czech Ministry of Finance declined to provide ITN with a list of investment treaty claims currently pending against the Czech Republic, explaining that it is “not a policy of the Czech Republic to actively support the public availability of that information.”
At least a few recent rulings in known claims against the Czech Republic, which are not in favour the country, remain confidential.
The award on jurisdiction in Phoenix Action, Ltd. v. Czech Republic, ICSID Case No. ARB/06/5 (Israel/Czech Republic) is available at: http://ita.law.uvic.ca/documents/PhoenixAward.pdf