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Phoenix Action, Ltd. v. The Czech Republic (ICSID)

Why it matters

This award is a landmark decision on the 'bona fide' test for investment protection. The tribunal held that a transaction designed solely to gain access to ICSID arbitration by converting a domestic dispute into an international one is an abuse of rights and does not qualify as a protected investment. It established that tribunals must look beyond the form of an investment to its purpose, preventing treaty shopping and abuse of the ICSID system.

Summary

Phoenix Action, an Israeli company, acquired two Czech companies (Benet Praha and Benet Group) on December 26, 2002, and shortly thereafter initiated ICSID arbitration against the Czech Republic under the Israel-Czech BIT. The dispute arose from actions by Czech authorities against the Czech companies before the acquisition, including freezing bank accounts and seizing documents. Phoenix claimed that the Czech Republic's treatment of its investment violated the BIT. The Czech Republic objected to jurisdiction, arguing that Phoenix's acquisition was not a genuine investment but a sham to gain access to international arbitration for a pre-existing domestic dispute. The tribunal agreed, applying a multi-factor test for the existence of a protected investment under the ICSID Convention and the BIT. It found that while there was a contribution, duration, and risk, the investment lacked the essential element of being made to develop an economic activity in the host state. Moreover, the investment was not made in accordance with Czech law and was not bona fide. The tribunal concluded that the entire transaction was an abuse of the ICSID system, designed to transform a domestic dispute into an international one. Consequently, it declined jurisdiction and ordered Phoenix to pay the Czech Republic's legal costs and expenses.

The detail

Parties: Phoenix Action, Ltd. v. The Czech Republic

Case number: ICSID Case No. ARB/06/5

Outcome: Tribunal declined jurisdiction; Claimant ordered to pay Respondent's legal fees and costs.

Quantum: CZK 21,417,199.13 and USD 196,000.00

Applicable law: ICSID Convention; Agreement between the Government of the Czech Republic and the Government of the State of Israel for the Reciprocal Promotion and Protection of Investments (1997); general principles of international law

Issues in play: The definition of 'investment' under the ICSID Convention and the BIT, and the requirement that an investment be made in good faith and in accordance with the host state's laws.

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