CME v. Czech Republic, Lauder v. Czech Republic

CME Czech Republic B.V. v. Czech Republic, UNCITRAL

Ronald S. Lauder v. Czech Republic, UNCITRAL

Awards available at https://www.italaw.com/sites/default/files/case-documents/ita0180.pdf (CME), https://www.italaw.com/sites/default/files/case-documents/ita0451.pdf (Lauder)

Keywords

Abuse of process, actionable measures, arbitrary and discriminatory conduct, broad dispute resolution provision, causation, expropriation, fair and equitable treatment, jurisdiction, multiple/parallel proceedings

Key dates

Lauder v. Czech Republic
Request for Arbitration: 19 August 1999[1]
Constitution of Tribunal: 5 November 1991
Award: 3 September 2001

CME v. Czech Republic
Request for Arbitration: 22 February 2000
Constitution of Tribunal: 21 July 2000
Partial Award: 13 September 2001[2]

Arbitrators

Lauder v. Czech Republic
Mr. Robert Briner (president)
Mr. Lloyd N. Cutler (claimant appointee)
Mr. Bohuslav Klein (respondent appointee)

CME v. Czech Republic
Dr. Wolfgang Kühn (president)
Mr. Stephen M. Schwebel (claimant appointee)
Mr. Jaroslav Hándel (respondent appointee)

Forum and applicable procedural rules

United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules

International Bar Association Rules on the Taking of Evidence in Commercial Arbitration

Applicable treaties

Lauder v. Czech Republic
United States–Czech Republic Bilateral Investment Treaty (BIT)

CME v. Czech Republic
Netherlands–Czech Republic BIT

Alleged treaty violations

  • Expropriation (Lauder & CME)
  • Fair and equitable treatment (Lauder & CME)
  • Full protection and security (Lauder & CME)
  • Obligation to treat investments in accordance with international law (Lauder & CME)
  • Obligation to not impair investments through arbitrary and discriminatory measures (Lauder & CME)

Other legal issues raised

  • Causation
  • Degree of scrutiny
  • Jurisdiction—broad dispute resolution provision
  • Jurisdiction—multiple/parallel proceedings

1.0 Case Summary

1.1 Factual Background

In October 1991, the Czech Republic passed legislation allowing private parties—domestic or foreign—to broadcast radio and television programs in the country. The law also created a “Media Council” to implement the law and issue broadcasting licences.

In January 1993, the Media Council granted a broadcasting licence (the “Licence”) to CET 21, a Czech company that claimant Ron Lauder, an American citizen, had agreed to invest in and finance. The Media Council’s decision, however, drew immediate political fire from those opposed to the significant and direct involvement by foreign capital in the Licence holder. To resolve the controversy, the Media Council, CET 21 and Mr. Lauder[3] worked to create an entirely new entity that would avoid Mr. Lauder’s direct participation in the Licence holder, CET 21. Under the new arrangement, instead of Mr. Lauder investing directly in CET 21, Mr. Lauder and CET 21 agreed to form a new Czech company, CNTS. In exchange for their respective ownership interests in that new company, CET 21 provided CNTS with “irrevocable and exclusive” rights to use the Licence, and Mr. Lauder provided CNTS with financing.

After the new company, CNTS, launched its television station using the CET 21 Licence, the station became extremely popular and profitable. Beginning in 1994, however, various government entities including the Czech Parliament, the police and ultimately the Media Council began to investigate and/or express concerns that CNTS was improperly broadcasting television without a licence. To address those concerns, throughout 1996 and 1997 CNTS and CET 21 made various amendments to their contractual relationship to clarify that CET 21 held the Licence and operated the broadcasting, while CNTS merely arranged services for CET 21’s broadcasting activities.

In 1999, disputes began to arise between CET 21 (97.5 per cent owned by its five original Czech investors) and CNTS (99 per cent held by Mr. Lauder’s company, CME) because CET 21 no longer wanted to contract exclusively with CNTS for broadcasting services relating to the Licence. In order to gain leverage and legal authority for its efforts to purchase services from third parties, in March 1999 CET 21 approached the Media Council and requested a letter from that body making clear that CNTS did not have exclusive rights to use or provide services related to the Licence. The Media Council supplied such a letter that same month, stating its belief that relationships between broadcasting operators and service providers are not exclusive.

The tension between CNTS and CET 21 continued to escalate. On 4 August 1999 CNTS failed to submit to CET 21 the “Daily Log,” which listed the programming for broadcast the following day. Based on that breach, on 5 August CET 21 terminated the contract with CNTS. Because CNTS’s services for CET 21 were essentially its only activities and source of income, CET 21’s action effectively destroyed CNTS’s once profitable business.

1.2 Summary of Legal Issues and Awards

Roughly two weeks after CET 21 terminated its contract with CNTS, Mr. Lauder initiated his arbitration action against the Czech Republic under the United States–Czech Republic Bilateral Investment Treaty (BIT). Six months later, CME (the Dutch company held by Mr. Lauder that owned 99 per cent of the interest in CNTS) initiated a separate arbitration action against the Czech Republic under the Netherlands–Czech Republic BIT. In each case, the claimant alleged the Czech Republic violated its obligations under the relevant treaty to (1) not expropriate investments without paying compensation, (2) accord investments fair and equitable treatment, (3) provide investments full protection and security, (4) treat investments in accordance with international law and (5) refrain from impairing investments through arbitrary and discriminatory measures. And in each case, the Czech Republic raised, among other defences, a jurisdictional defence that the tribunals lacked the power to hear the claims because Mr. Lauder’s attempt to seek the same relief from the two separate tribunals was improper and an abuse of process. Both tribunals rejected those jurisdictional arguments. Turning to the merits, the Lauder Tribunal rejected all of the claimant’s requests for relief; the CME Tribunal, however, found for the claimant on each of its causes of action.

2.0 Select Legal Issues

The facts set forth above gave rise to two separate investor–state arbitrations, Lauder and CME, as well as several domestic civil and criminal proceedings. This procedural aspect of Lauder and CME thus illustrates how, under international investment law as currently interpreted and applied, the same conduct by a single host state toward a single investment may cause the host state to have to concurrently defend itself in a number of different forums—a burden that could be especially weighty and yet one that host states might frequently have to bear.

The substantive aspects of the Lauder and CME cases are also significant for a number of reasons. Most obviously, these cases are notable because the two tribunals came to opposite conclusions regarding whether the Czech Republic should be held liable under the governing BITs. With respect to their interpretations of the facts, the Lauder Tribunal demonstrated deference to the governmental Media Council’s actions that stands in stark contrast to the CME Tribunal’s skepticism of the Media Council’s motives. And with respect to the law, although both tribunals often recited similar general statements regarding the meaning of the relevant treaty provisions, they diverged in certain key areas such as when setting forth and applying the elements of expropriation claims, examining whether there was an offending “measure,” and requiring proof of causation. Each of those issues has implications for governments’ abilities to implement and enforce their domestic rules and policies without exposing them to liability under international law; each is explained in more detail below.

2.1 Allowing investors to pursue actions based on the same conduct in multiple forums

In both Lauder andCME, the Czech Republic argued that the tribunal lacked jurisdiction because the claimant was seeking resolution of the same investor–state dispute involving the same parties before another arbitral tribunal. In each case, however, the tribunal rejected those arguments based on formalistic interpretations of what constitutes the same “dispute” and who are the relevant “parties” (Lauder 160–180; CME 412). More specifically, the tribunals held that the disputes were different from each other because, notwithstanding the same facts and “virtually identical claims” (CME 412), each dispute was covered by a different BIT (Lauder 160–180; CME 412). They also stated that the parties were different because Mr. Lauder was the claimant in one case, while CME was the claimant in the other (Lauder 165, 171; CME 412). Neither tribunal deemed it legally significant for purposes of jurisdiction that Mr. Lauder exercised control over CME (Lauder 77, 165; CME 412). Both tribunals, however, noted that the Czech Republic did not agree to consolidate the proceedings as requested by the claimants, a fact that might have influenced the tribunals’ receptiveness to the Czech Republic’s arguments on the jurisdiction issue (Lauder 173; CME 412).

If followed, the approach taken in CME and Lauder toward jurisdiction may similarly require other host states to have to defend the same acts in a number of different forums, causing them to incur what may be substantial defence costs while allowing investors to take multiple “bites at the apple.”

2.2 The scope of expropriation provisions: CME finds the Czech Republic liable, while Lauder rejects liability

The Lauder and CME cases also are significant due to their diverging interpretations of governments’ obligations not to unlawfully expropriate or deprive investors of their property. Beginning with Lauder, when assessing the claimant’s expropriation allegations, the Tribunal explained that three elements must be satisfied for such a claim to succeed: (1) there must be an action or measure taken by the state, (2) for the benefit of the state, (3) that seriously interfered with the investor’s property rights (Lauder 202). The Lauder Tribunal then found that the facts of the case did not establish any of those elements. The first and the third elements failed because, according to the Tribunal, it was the private company with which CNTS had contracted, CET 21, not the Czech Republic that seriously interfered with Mr. Lauder’s property rights when it terminated the contract. Any prior interference by the Media Council or other government officials was not severe enough to constitute a taking (id. at 202). Moreover, according to the Lauder Tribunal, even if it could be said the Media Council’s actions were the cause of Mr. Lauder’s losses, those actions would not support an expropriation claim because they “did not benefit the Czech Republic or any person or entity related thereto, and [were] not taken for any public purpose” (id. at 203).

The CME Tribunal likewise stated the general rule that an expropriation will only be found if the state has substantially interfered with or deprived the investor of the value of its investment (CME 150). As compared to Lauder, however, the CME Tribunal interpreted what constitutes a substantial interference or deprivation much more broadly, holding that the requisite level of interference was satisfied when the Czech Republic “coerced” CNTS to give up its contractual protections and legal certainty and thereby caused a “substantial devaluation of the Claimant’s investment” (CME 599).The CME Tribunal also differed from Lauder by stating that, when determining whether an expropriation has occurred, it is “immaterial whether the State itself…economically benefits from its actions” (CME 150).

It is important to note, however, that the CME Tribunal’s broad interpretation of the expropriation provision—an interpretation that could expose a wide range of government actions to investor challenges—may have only limited application in future investor–state disputes. This is because the CME Tribunal based its reading of the scope of the obligation on the specific language of the governing Dutch–Czech BIT, which “track[ed] the broadest expropriation provisions in bilateral investment treaties, specifically, and in international law, generally” (CME 150) (emphasis added). The CME Tribunal noted that the BIT did not even use the term “expropriation,” but instead stated that neither “…Contracting Party shall take any measures depriving, directly or indirectly, investors of the other Contracting Party of their investments” (CME 149) (emphasis added).

2.3 The causation requirement: A barrier to liability in Lauder but not in CME

Another issue that impacts the extent to which host states may be liable for actions impacting foreign investors, and on which the CME and Lauder tribunals again diverged, is the issue of causation. As a general rule, before holding a host state accountable for damages suffered by an investor, the investor must not only show that the state breached its obligations under the treaty, but also prove that the state’s actions actually caused the investor harm. Lauder illustrates the role this requirement can play in narrowing host–state liability. In that case, the Tribunal held that the Czech Republic acted discriminatorily and arbitrarily toward the claimant when, in response to political opposition, it required Mr. Lauder to invest in broadcasting activities by forming a new entity with CET 21 rather than investing directly in CET 21 as Mr. Lauder had originally intended (Lauder 222–232). The Lauder Tribunal then explained that in order to hold the Czech Republic liable for damages based on that breach of the BIT, Mr. Lauder was required to prove that the Czech Republic’s arbitrary and discriminatory conduct caused the harm he ultimately suffered (Lauder 234). According to the Tribunal, in order to establish the necessary causal link, Mr. Lauder had to show not only that the Czech Republic’s conduct was a “but for” cause of his harm (i.e., the harm would not have occurred “but for” the government’s conduct), but also that the wrongful conduct was a legal or proximate cause of the harm (i.e., the harm was foreseeable) (Lauder 234). Applying those tests of causation, the Tribunal held that, although the Czech Republic’s efforts to change the nature of Mr. Lauder’s investment were a “but for” cause of CET 21’s termination of the contract and Mr. Lauder’s resulting damages, they were “too remote” from the harm Mr. Lauder eventually suffered to qualify as the legal or proximate cause (Lauder 235). Accordingly, the Lauder Tribunal concluded that the Czech Republic was not liable for any damages based on its breach. The Lauder Tribunal then similarly cited the lack of causation as one of the factors supporting its rejection of Mr. Lauder’s other claims (Lauder243, 274, 288, 304, 313).

In contrast, the CME Tribunal concluded that the Media Council caused “the collapse of CME’s investment” by “coercing” CNTS to amend its legal agreement with CET 21 and by issuing the March 1999 letter (CME 575). Although it did not explicitly require that both “but for” and proximate causation be established, the CME Tribunal stated its belief that the Media Council “must have foreseen” that its actions would lead to CET 21’s termination of the contract and CME’s losses (CME 585). With respect to the issue of damages, the CME Tribunal looked to principles in tort law and decided that the Czech Republic would be “liable to pay for all of the harm…caused, notwithstanding that there was a concurrent cause of that harm and that another is responsible for that cause” (CME 581–582) (emphasis added).

2.4 The tribunals’ different awards and approaches: Exacerbating uncertainty for host states and investors

In addition to their respective interpretations of the causation requirement and holdings on each of the claimants’ five claims, CME and Lauder differ from each other in key areas and approaches, including:

  • The degree of deference accorded to host states’ justifications:

When evaluating the claimants’ allegations that the Czech Republic expropriated property, breached the fair and equitable treatment standard, and acted arbitrarily and discriminatorily, the two tribunals both stated that there is a difference between measures that violate those international law obligations and permissible “ordinary measures of the State and its agencies in proper execution of the law” (CME 503). Yet each tribunal came to significantly different conclusions regarding into which category the Czech Republic’s actions fell. The Lauder Tribunal accepted the Czech Republic’s characterization of the government’s actions as legitimate regulatory efforts to ensure compliance with the law (Lauder 253, 255, 264, 291, 296–99, 310–14). In contrast, the CME Tribunal conducted its own review of the documents and witness statements and concluded that the government did not have any legitimate concerns and was acting unlawfully in an attempt to pressure CNTS to give up its legal rights (CME 514, 515, 520, 534, 603, 611–614).

These divergent outcomes illustrate the different levels of deference the tribunals were willing to grant the Czech Republic’s justification of the government’s challenged actions.

  • What constitutes an actionable “measure”:

In Lauder, the claimant argued that the Czech Republic impaired its investment through various “arbitrary and discriminatory measures” including statements, reports and the March 1999 letter by the Media Council that questioned or were critical of CNTS’s activities (Lauder 216, 237). The Lauder Tribunal, however, held that none of those communications qualified as “measures” actionable under the BIT (Lauder 244–247, 275–288). In contrast, the CME Tribunal grouped all of the challenged actions and communications into one “course of dealing” that, together, supported liability (CME 170).

Due to these differences in reasoning and findings, CME and Lauder exacerbate uncertainty regarding what acts and measures host states can legitimately take without incurring liability under international investment law. This uncertainty also arguably tilts the investor–state dispute system in favour of investors, incentivizing them to file even questionable claims, especially given that there is no formal penalty for pursuing unsound or frivolous actions.


Notes

[1] For purposes of simplicity, “Mr. Lauder” refers both to Mr. Lauder, the individual, and CEDC, a German company over which Mr. Lauder had voting control.

[2] The award does not state the date on which the Lauder Tribunal was constituted. 5 November 1999 is the date that the Tribunal issued its first procedural order provisionally fixing the place of arbitration.

[3] Jaroslav Hándl filed a dissenting opinion criticizing various aspects of the Partial Award.