A.M.F. Aircraftleasing Meier & Fischer GmbH & Co. KG v. Czech Republic, PCA Case No. 2017-15
In an award dated May 11, 2020, an UNCITRAL tribunal considered claims brought by the German LLP AMF Aircraftleasing Meier & Fischer GmbH & Co. KG (AMF), under the Germany–Czech Republic BIT against the Czech Republic for acts of its bankruptcy administrators and its courts. The tribunal rejected the investor’s claims of expropriation under Article 4(2), breach of standard of FET under Article 2(1), breach of standard of full protection and security (FPS) by the respondent under Article 2(3), and breach of standard of non-arbitrary or discriminatory measures under Article 2(2).
Background and claims
Václav Fischer, a German business operator born in the Czech Republic, held a majority share in AMF and AVF Aircraftleasing Václav Fischer GmbH & Co. KG, (AVF). Fischer was also the founder of Fischer Air s.r.o. (Fischer Air). In 1997, HSH Nordbank (HSH) financed AMF’s and AVF’s purchase of one aircraft each (Aircraft 1 to AMF and Aircraft 2 to AVF) and also entered into separate loan agreements with Fischer and Meier for Aircraft 1 and with Fischer alone for Aircraft 2. After that, Fischer Air sold Aircraft 1 to AMF and Aircraft 2 to AVF by way of aircraft purchase agreements, and AMF and AVF both leased the aircraft to Fischer Air on a monthly rental basis. In 2003, Fischer sold Fischer Air to Kárel Komarek due to financial difficulties and thereafter lost his majority share in the company, the name of which was changed to Charter Air by Komarek. In 2004, AVF and AMF merged.
In March 2005, Fischer filed for personal bankruptcy in Germany, and insolvency proceedings were opened. However, in February 2005, Komarek’s company Atlantik IB filed a petition for involuntary bankruptcy against Fischer in the Czech Republic, and in April 2005 the Municipal Court opened bankruptcy proceedings against him. The aircraft owned by AMF were included in the Czech bankruptcy proceedings. This inclusion was challenged by both the claimant and Charter Air, but by the time a definitive pronouncement on the exclusion of the aircraft was made by Czech courts, their value had depreciated considerably due to deterioration, and they had to be sold at very low prices in 2010. After AMF’s claim for damages failed before the Czech courts, the claimant initiated arbitral proceedings under r UNCITRAL rules against the Czech Republic.
The EC submitted an amicus curiae brief as a non-disputing party in the proceedings on the issue of jurisdiction.
CJEU’s Achmea judgment and subsequent January Declarations are not applicable
The respondent opposed the tribunal’s jurisdiction, contending that in light of the Achmea judgment, the tribunal lacked jurisdiction over the dispute as it was brought under an intra-EU BIT. It was further contended that the Declaration of the Member States of January 15, 2019 (the January Declarations) constitute a subsequent agreement to Article 31 of VCLT as all EU-members declared arbitration clauses contained in intra-EU BITs to be inapplicable. In its amicus brief, the EC contended that the January Declarations following from the Achmea judgment led to partial termination of the relevant BIT by virtue of Article 59 of the VCLT.
However, the tribunal disagreed, finding that it had jurisdiction to preside over the dispute, as Article 10 of the BIT constitutes an unambiguous offer to arbitrate. Further, in the view of the tribunal, the January Declarations were mere statements of the political will of the member states to comply with the Achmea judgment. The tribunal further concluded the January Declarations do not constitute subsequent agreements on intra-EU BIT disputes under Articles 31(2) and 31(3) of the VCLT, and that it cannot be said that the BIT has been terminated under Articles 30 and 59 of the VCLT on the basis of the January Declarations. Further, even if it is accepted that they constitute subsequent agreements, they cannot be given a retroactive effect from the date when the Czech Republic became a part of the EU.
The tribunal concluded that EU law is a regional system of law; therefore, the Achmea judgment of the CJEU, which is a court within a regional sub-system of law, is not binding on the tribunal, which is international in nature. It further held that the Achmea judgment does not automatically invalidate Article 10 of the BIT, since the procedures to invalidate a treaty under the VCLT, as given in Article 46 through 53, were not followed. The condition of a manifest violation of internal law, as given under Article 46(2) of the VCLT, was not met by the alleged incompatibility between Article 10 of the BIT and Articles 267 and 344 of the TFEU.
The tribunal went on to reject several other possible jurisdictional hurdles raised by the respondent. First, the tribunal rejected the respondent’s argument that it lacked jurisdiction rationae personae because the claimant did not have a seat in Germany on the grounds that no real business activity was being undertaken by the claimant in Germany from its registered office address in Hamburg. Instead, the tribunal concluded that the claimant, a company with all of its activities in Germany, had made an investment in the Czech Republic by purchasing the aircraft from Fischer Air. On the issue of the tribunal lacking jurisdiction rationae materiae on the ground that the claimant’s investments are not protected by the BIT, the tribunal held that the lease agreements for the aircraft were entered into by the claimant on a long-term basis for 30 years, and the investment consisted of placing an income-generating asset in the territory of the Czech Republic which was subject to risk; the claimant’s investment, therefore, met the ordinary criteria of “investment” as formulated by the Romak v. Uzbekistan award and was thus protected under the BIT.
Attribution of acts of bankruptcy trustees and courts to the Czech Republic
The respondent argued that the acts of the bankruptcy trustees cannot be attributed to the Czech Republic under Articles 4, 5, and 8 of the Articles on Responsibility of States for Internationally Wrongful Acts (ARSIWA). The tribunal held that irrespective of Article 4 of ARSIWA, the acts of the Bankruptcy trustees are attributable to the Czech Republic by virtue of Article 5 of ARSIWA as they were acting as agents of the Czech Republic while performing public duties. However, the tribunal concluded that since they were performing these duties without specific directions from the state, there was no “overall control” by which the failure of courts to prevent the acts of bankruptcy trustees could be attributed to the Czech Republic.
Acts of the Czech bankruptcy trustees and its courts were not in breach of the BIT
With regard to liability, the claimant put forward several arguments attributing the conduct of the Czech bankruptcy courts to the state claiming these amounted to a violation of the BIT. With respect to the seizure of the aircraft, the tribunal held that the claimant failed to prove that the bankruptcy trustee had acted in bad faith and not in compliance with Czech national law by seizing the aircraft and including them in the bankruptcy estate of Fischer. Since the claimant failed to justify its claim for exclusion of the aircraft multiple times before the Czech courts, the tribunal held that the claimant was unable to demonstrate that the courts failed to carry out their supervisory functions in accordance with the law.
The claimant also alleged that there was a failure on the part of the bankruptcy trustees and the courts to prevent damage to the aircraft. The tribunal took note of the fact that multiple attempts were made by the bankruptcy trustee to lease the aircraft, but the negotiations were frustrated at separate stages by the claimant’s financing bank, HSH, and the claimant, as they refused to grant approval for leasing the aircraft, which led to a lack of funds for maintenance and insurance of the aircraft against continuing deterioration. On this basis, the tribunal held that the claimant did not provide sufficient proof that the bankruptcy trustee had acted in breach of his obligations, nor that there was a failure by Czech courts to exercise due supervision.
With respect to the delay in selling the aircraft and their subsequent low selling price, the tribunal held that besides the sale of the aircraft being carried out in accordance with the rules and regulations of Czech law, there was also no lapse on the bankruptcy trustee’s part in performing his duty to inform the claimant of the potential sale and seeking consent for it. The tribunal further held that there was no delay from the Czech courts in deciding the challenges put forth by the claimant against the bankruptcy process; therefore, the duration between seizure and sale of the aircraft did not amount to expropriation. The acts of the bankruptcy trustees, as a whole, were found by the tribunal to be in accordance with their legal obligations under Czech law and were without bad faith.
With regard to claims of expropriation, the tribunal, relying upon the Saluka and Binder awards, concluded that the temporary sequestration of the aircraft during the course of legitimate bankruptcy proceedings cannot amount to expropriation. The claimant failed to show that the sequestration was in bad faith or that the difference in their value between the time of their seizure and their lawful sale amounted to expropriation.
Next, the tribunal, while acceding to the claimant’s argument that an obligation of FPS goes beyond providing physical protection to include provisions of legal security, held that the Czech Republic was compliant with its due diligence obligations in maintaining a functioning judicial system which was repeatedly utilized by the claimant to redress its grievances. It further held that the Czech bankruptcy law does not fall below international law standards in providing FPS to investors, and thus its actions do not amount to a breach of the FPS standard under the BIT.
The claimant had alleged breach of FET obligations on account of denial of justice to the claimant, violation of claimant’s legitimate expectations, and arbitrary and discriminatory treatment by Czech courts and bankruptcy trustees. The tribunal concluded that the claimant has failed to demonstrate any of the above violations on the basis of the same facts that allegedly led to other breaches of the BIT. On the question of Czech law not meeting the FET standard under international law, the tribunal held that the claimant failed to demonstrate that if there are any other such standards in practice which include an additional obligation on the state to ensure a full effective remedy against deterioration of assets embroiled in contested ownerships claims so that they are returned unharmed to the ultimate owner, even when bankruptcy estates have insufficient funds to forestall deterioration.
Based on its findings, the tribunal finally dismissed all the claims of BIT violations of expropriation under Article 4(2), breach of FET standard under Article 2(1), breach of FPS standard under Article 2(3), and breach of standard of non-arbitrary or discriminatory measures under Article 2(2).
The tribunal decided that the parties bear half the cost of the arbitral proceedings and that each party shall bear its own costs.
Notes: The tribunal was composed of Pierre Tercier (presiding arbitrator, Swiss national), Stanimir Alexandrov (claimant’s appointee, Bulgarian natioanl) and Jean Kalicki (respondent’s appointee, United States). The award of May 11, 2020, is available at: https://www.italaw.com/sites/default/files/case-documents/italaw11589.pdf
Sujoy Sur is an associate at Trilegal, New Delhi.