Czech Republic Hit With Massive Compensation Bill in Investment Treaty Dispute

By Luke Eric Peterson, Investment Law and Policy Weekly News Bulletin, 21 March 2003

It wasn’t “Shock and Awe”, but it certainly focused the minds of Czech Politicians.

Last week, a Stockholm-based arbitral Tribunal awarded record damages, of some 350 million US Dollars, to Central European Media (CME) in its investment treaty dispute with the Czech Republic.

The damages dwarf by at least a factor of ten, those in any other known investment treaty arbitration, and were based upon the Tribunal's estimate of the losses incurred by CME in 1989 when it was deprived of its stake in TV Nova, a popular English language television station in Prague.

For an Administration already running a record budget deficit of some 360 million dollars (US), the Tribunal's decision threatens to double the Czech Republic's budget shortfall this year. As the government scrambles for solutions, one proposal mooted by some officials is for an increase in value-added tax on goods and services which would see all taxpayers absorbing the cost of the investment treaty arbitration.

CME's multi-pronged legal strategy has thus far proved successful in its long-running battle with the Czech Republic. A separate arbitration brought by CME's major shareholder Ronald Lauder under the US-Czech Republic bilateral investment treaty (BIT) had come up empty, when a London-based arbitral Tribunal ruled that the Czech Republic had not violated most of the key commitments made in that agreement.

Despite having been vindicated in that case, the Czech Republic was not off the hook. CME managed to convince a second Tribunal, this one based in Stockholm, that the same actions by the Czech Republic had constituted multiple violations of a BIT concluded with the Netherlands.

The Czech Republic now clings to a last hope that the Stockholm Tribunal's ruling on the merits of the case (and which paved the way for last week's damages award) will be overturned on appeal. A challenge is currently pending before a Stockholm Court, as is the perogative of a losing party in arbitrations operating under the UNCITRAL rules of arbitration. (see “Czech Broadcasting Dispute Heading Towards Final Damages, and Appeal in a Swedish Court”, INVEST-SD Bulletin, Feb.21, 2003)

In the mean time, both sides have toned down their rhetoric in relation to the damages claim. In recent weeks, CEO Fred Klinkhammer had appeared to relish the opportunity to extract compensation from a possibly recalcitrant government, but this week he suggested that the Czech Republic could deposit the amount owing into a special bank account which would only be tapped after the Stockholm Court rules on the Czech Republic's appeal later this Spring.

Meanwhile, Czech media report that most Czech politicians accept that any damages owed will need to be paid. Foreign Minister Cyril Svoboda has said that prompt payment is a must in order to safeguard the nation's “reputation abroad”

In recent years, CME shareholder Ronald Lauder, a former US ambassador to Austria and heir to the Estie Lauder fortune, had conducted a very public campaign to discredit the Czech Republic for its treatment of CME, running full-page advertisements in major US newspapers alleging that the Czech Republic was a dangerous place in which to invest.

In addition to any negative publicity generated by its public spat with Mr. Lauder's firm, the Czech Government has also spent more than 10 million US dollars on legal fees in its defence of the two BIT arbitrations mounted against it.

Sources:

“Czech Republic Unlikely to Avoid Paying to CME—Politicians”, CTK National Newswire, March 15, 2003

“Czech Republic to Pay Billions to US Media Company”, BBC Monitoring International Reports, March. 15, 2003

“Czech Minister Advocates Immediate Settlement of TV Arbitration Fine”, BBC Monitoring International Reports, March. 17, 2003

“Money for CME Could be Raised Through Special Tax—KDU-CSL”, CTK Czech News Agency, March 18, 2003

“Govt Spending on Lawyers in Nova Case Tops KC 300M”—Press”, CTK Business Newswire. March 20, 2003