Over the past decade, aggrieved foreign investors distrustful of the Czech courts have queued in growing numbers to bring allegations of governmental wrongdoing before international arbitration panels.
However, not all such claims are open and shut cases.
Recently, the Czech government has been on a winning streak. Already this year, the Czechs have won three separate arbitration battles with Israeli, Dutch and Luxembourg-based investors.
The most interesting case is probably the one that is (currently) shrouded in the most secrecy. Dutch company Invesmart turned to arbitration in 2007, accusing the Czech government of having reneged on promises to provide state aid to a struggling Czech bank in which Invesmart owned a stake.
So far, neither side has released a copy of the arbitration ruling. However, the arbitrators have determined that the Czech authorities had not promised aid to the failing bank. Consequently, Invesmart could not establish that the denial of state assistance amounted to “unfair” or “inequitable” treatment – either of which would have breached an investment protection treaty between the Netherlands and the Czech Republic.
Arbitration observers have been keenly awaiting the outcome of the Invesmart banking dispute, as it could herald other crossborder claims to arise in the fallout of the global financial crisis.
Indeed, in an earlier arbitration involving the Czech Republic, authorities were found to have mistreated a subsidiary of the Japanese bank Nomura, leading to a $230m liability.
The arbitration ruling in the Nomura case provides some cautionary lessons to governments dealing with failing financial institutions.
Nomura bought into the Czech banking sector in the 1990s, taking a 46% stake in local bank IPB. However, IPB, along with several other recently privatised banks, was saddled with a large number of non-performing loans and struggled to stay afloat.
Unfortunately for the Czech Republic, banking regulators handed out financial lifelines to Nomura’s competitors while leaving the Japanese firm high and dry.
Because the Czech Republic meted out starkly different treatment to locally owned banks, a panel of arbitrators ruled that the authorities had failed to provide “fair and equitable treatment” as obliged by aforementioned bilateral investment protection treaty.
In a 2008 interview, Peter Turner of the law firm Freshfields Bruckhaus Deringer, who acted for Nomura, emphasised that the tribunal gave some leeway to governments acting to avert bank failures.
At the same time, arbitrators ruled that the Czech Republic was obliged under the treaty to ensure that policy interventions affecting foreign investors were carried out in a non-discriminatory manner.
It remains to be seen whether arbitrators in the Invesmart case will fully endorse the approach taken in the Nomura case. However, government regulators and policymakers will surely be paying closer attention to the promises made to foreign investors, and ensuring that financial assistance is meted out in an even-handed fashion.
Luke Peterson is the editor of Investment Arbitration Reporter (www.iareporter.com) a legal news, analysis and intelligence service.