Torched accord

Prague Post, Czech Republic

Torched accord

For 10 years, Slovakia has ignored an agreement with the Czech Republic to protect investments

By Markéta Hulpachová, Staff Writer, The Prague Post

9 May 2007

A recently spawned legal battle between Slovakia and Madeta, the Czech Republic’s largest dairy processor, has led to a discovery that, for the past 10 years, Slovakia has not honored a trade agreement signed between the countries during the Velvet Divorce.

Slovakia’s failure to recognize this bilateral investment-protection agreement eliminates one common route for Czech businesses seeking to resolve major grievances with the Slovak state, forcing them to enter drawn-out court processes within or outside the European Union.

The Czech and Slovak republics originally signed the agreement in 1992 as part of a series of preparations for the federation’s split the following January. But, when Madeta’s lawyers began researching the agreement as a possible means of resolving their client’s grievances, they found that Slovakia has not recognized the agreement since 1997.

“We found that the legal status of this agreement isn’t completely straightforward,” said Richard Wagner, one of the lawyers representing Madeta.

Madeta is suing Slovakia for revenue it allegedly lost when, earlier this year, Slovak food inspectors recommended that a Madeta-produced cheese, Niva, be pulled from store shelves due to risky levels of listeria bacteria. (This followed a 2006 scare in the Czech Republic that saw 80 cases of listeria-borne illness.) After the Slovak complaint, the Czech veterinary board sent a team of hygienists to Madeta. The team found that Slovakia’s allegations were false.
But the damage to Madeta was already done.

“Our client has certain reservations about the way Slovakia conducted these inspections and presented their findings,” Wagner said. “Because the whole process was publicized by the media, our client suffered major losses. It’s a question of tens of millions of crowns.”

Unilateral mistake

In 1997, Slovakia’s nationalist government, led by Prime Minister Vladimír Mečiar, announced that the state would repeal a 1993 law enacting the bilateral agreement with the Czech Republic. Slovakia had bungled in ever announcing the law, officials said.

“The announcement regarding the implementation of an investment protection agreement was publicized by mistake,” said Erika Ilkovičová, spokeswoman for the Slovak Finance Ministry.

Slovakia’s announcement in November 1997 was the direct result of an arbitration case held at the International Centre for the Settlement of Investment Disputes (ICSID), which commenced in Washington, D.C., in April of that year, Wagner said.

The ICSID tribunal convened at the request of Czech bank ČSOB, which was suing Slovakia for its failure to pay back the debt owed to the bank after its privatization. Slovakia initially agreed to the arbitration, which was based on the 1993 agreement.

“Slovakia complied with the investment-protection agreement in the tribunal’s first phases, but, over the course of the proceedings, it began to question its validity,” Wagner said. The arbitration wasn’t going well for the country, and that brought the whole process into question. By November of that year, Slovakia was so disenchanted that it renounced the whole agreement.

The Czech Republic honors the pact to this day, but this imbalance is not prompting Slovakia to return to the table.

“Slovakia does not intend to reinstate the agreement,” Ilkovičová said.

In 1999, the ICSID tribunal ruled in favor of ČSOB, ordering Slovakia to pay 19.4 billion Kč. In the end, Slovakia paid only 2.4 billion Kč.

In cases when a foreign investor like Madeta feels damaged by the state organs of the country in which it is investing, investment-protection agreements facilitate international arbitration to resolve disputes.

“Under an investment-protection agreement, a country is obligated to treat foreign investments fairly. If the investor feels that this obligation was broken, he has the right to sue the state directly,” Wagner said.

The agreements are common mechanisms frequently used for conflict resolution. Slovakia and the Czech Republic have bilateral investment-protection agreements with many EU and non-EU countries.

In Slovakia, Czech companies must find other means to resolve grievances.
An option, Wagner said, is to sue in a Slovak court, making the case subject to state law. Such a suit is less desirable for companies because it does not guarantee the same level of objectivity as arbitration.

“The magic of bilateral agreements lies in the fact that the decisions are made through arbitration,” Wagner said. “The proceedings are based on the laws of the given country, but in an international context. When that country is the defendant, an international arbitration can guarantee greater impartiality than a court.”

Madeta may also choose to ignore Slovakia’s position on the agreement and take its case to a third-party tribunal such as the ICSID.

Before the actual proceedings could start, however, the tribunal would first have to determine its own legitimacy, which would in turn compel it to decide on the validity of the original protection agreement. For Madeta, that would be a financially draining and time-consuming option.

“This is a relatively demanding process for [Madeta],” said Wagner. “Its outcome is uncertain and its practicality is questionable.”