Phoenix Action, Ltd. v. The Czech Republic, ICSID Case No. ARB/06/5, ICSID Case No. ARB/06/5

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Short Name:

Phoenix Action v. Czechia

Case type:
International Investment Agreement (Investor–State)
Applicable arbitration rules:
ICSID Convention - Arbitration Rules (2006)
Seat of Arbitration:
Washington D.C. (United States)
Investment treaty:
Israel-Czech Republic BIT (1997), Israel-Czechia BIT (1997)
Applicable legal instruments:
Czech Republic-Israel BIT
Economic sector:
Manufacturing
Outcome:
In Favour of Respondent(s)
Other remedy:
The Tribunal ordered Claimant to pay Respondent CZK 21,417,199.13 and USD 196,000.00 for its legal fees, expenses, and contribution to the costs of the proceedings.
See case mapped on Investor-State LawGuide

Available documents

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6 Apr 2007
Decision on Provisional Measures
Document Details:
PARTICIPANTS
Decision on Provisional Measures
Participants listed for this document only; this may not include all participants involved in the entire case.
Claimant appointee
Respondent appointee
Respondent appointee:
Juan Fernández-Armesto
Tribunal/Panel chair
Chair/President:
Brigitte Stern
Arbitrator(s)
Andreas Bucher
Sole Arbitrator
ICSID Annulment Committee president
ICSID Annulment Committee members
WTO Appellate Body members
WTO Appellate Body chair
Judges
Claimant's counsel
Respondent's counsel
Other counsel
Claimant's expert
Respondent's expert
Claimant's witness
Respondent's witness
Other witnesses
Tribunal secretary
Tribunal assistant
Country
Print reporter
Entities
Document Summary
Decision on Provisional Measures
This summary note is machine-generated. Always consult the original materials.

This Decision addresses the Claimant’s application for provisional measures pursuant to Article 47 of the ICSID Convention and Arbitration Rule 39. The Tribunal was asked to recommend three distinct measures: (i) an injunction to prevent the transfer of disputed lands and properties; (ii) the release of funds belonging to the Claimant’s subsidiary, Benet Praha, which were frozen in connection with a domestic criminal investigation; and (iii) an order granting access to classified Czech governmental archives.

The Claimant contended that these measures were necessary and urgent to preserve its rights, including access to justice, access to property, and the ability to substantiate its claims. The Respondent countered that the requests should be denied in their entirety. It argued that the measures sought would not preserve the *status quo* but would instead create new rights for the Claimant, particularly as the Claimant acquired its investment with full knowledge of the pre-existing asset freezes and ownership disputes. Furthermore, the Respondent asserted that the requests for the injunction and the release of funds were tantamount to seeking final relief, and the request for archive access constituted an impermissible “fishing expedition” into matters of national security.

The Tribunal denied all requested measures. It first articulated the governing legal standard, emphasizing that provisional measures are extraordinary remedies intended to preserve the respective rights of the parties from irreparable prejudice. The core purpose is to protect existing rights and maintain the *status quo*, not to grant relief that is equivalent to the final award or to improve a party's pre-existing position. Applying this standard, the Tribunal found that the injunction regarding the properties and the release of the frozen funds were both requests for final relief, not preservation. It reasoned that granting these measures would fundamentally alter, rather than preserve, the circumstances that existed at the time of the investment.

Regarding the request for access to governmental archives, the Tribunal re-characterized it as an application for document production rather than a proper provisional measure for the preservation of a right. It deemed the request overly broad and unspecific, analogous to a “fishing expedition.” While acknowledging its authority to order the production of evidence under Article 43 of the ICSID Convention, the Tribunal concluded that such a request, when framed as a provisional measure, must demonstrate that the evidence itself is at risk of being lost or jeopardized, a threshold the Claimant failed to meet. Accordingly, the Tribunal rejected the Claimant's application in its entirety for failure to demonstrate that its rights would be irreparably harmed absent the requested measures.
15 Apr 2009
Award
Document Details:
PARTICIPANTS
Award
Participants listed for this document only; this may not include all participants involved in the entire case.
Claimant appointee
Claimant appointee:
Andreas Bucher
Respondent appointee
Respondent appointee:
Juan Fernández-Armesto
Tribunal/Panel chair
Chair/President:
Brigitte Stern
Arbitrator(s)
Sole Arbitrator
ICSID Annulment Committee president
ICSID Annulment Committee members
WTO Appellate Body members
WTO Appellate Body chair
Judges
Claimant's counsel
O. Thomas Johnson, David Shuford, Pavel Klimeš, Matthew Adler
Respondent's counsel
George von Mehren, Stephen Anway, Rostislav Pekař, Ondřej Sekanina
Other counsel
Claimant's expert
Respondent's expert
Claimant's witness
Respondent's witness
Other witnesses
Tribunal secretary
Martina Polasek
Tribunal assistant
Country
Print reporter
Entities
Czechia, Covington & Burling, Demut Klimes Mader Law Office, Pepper Hamilton, Squire Sanders & Dempsey
Document Summary
Award
This summary note is machine-generated. Always consult the original materials.

Procedural Posture and Jurisdictional Issue

This Award addresses the jurisdictional objections raised by the Respondent, the Czech Republic, in an ICSID arbitration initiated by Phoenix Action, Ltd. under the Agreement between the Government of the Czech Republic and the Government of the State of Israel for the Reciprocal Promotion and Protection of Investments (the "BIT"). The Tribunal bifurcated the proceedings to resolve the jurisdictional questions as a preliminary matter.

Parties' Jurisdictional Arguments

The Respondent argued that the Tribunal lacked jurisdiction ratione materiae because the Claimant's acquisition of two Czech companies did not constitute a protected "investment" under either Article 25 of the ICSID Convention or the BIT. The Czech Republic characterized the transaction as an abusive act of "treaty-shopping," asserting that it was a sham arrangement orchestrated by a Czech national who had fled the country. The sole purpose, it argued, was to create artificial diversity of nationality to internationalize pre-existing, purely domestic disputes. The Respondent contended the transaction lacked genuine economic substance, contribution to the host state's economy, and was not made in good faith.

The Claimant maintained that its purchase of the shares in the Czech companies was a valid investment. It argued that any subsequent lack of economic activity was a direct result of the Respondent's own breaches of the BIT, such as the freezing of assets. Phoenix asserted that the Tribunal possessed jurisdiction over its claims, which it framed as arising from events post-dating the investment, including denial of justice and breaches of the fair and equitable treatment standard.

Tribunal's Analysis and Findings

The Tribunal conducted a comprehensive analysis of the requirements for a "protected investment," concluding that in addition to the typical criteria of contribution, duration, and risk, an investment must also be made with the purpose of developing an economic activity, in accordance with the laws of the host State, and, critically, bona fide.

While acknowledging that the transaction had the superficial characteristics of an investment, the Tribunal found that it failed the bona fides test. The Tribunal determined that the entire operation was an artificial transaction designed to gain access to ICSID. It based this conclusion on several factors: (i) the timing of the acquisition, which occurred after the underlying domestic disputes had fully materialized; (ii) the intra-family nature of the share transfers; (iii) the lack of any genuine business plan or subsequent economic activity; and (iv) the Claimant's initial (though later abandoned) attempt to frame its claim as an assignment of the Czech companies' domestic claims. The Tribunal held that the transaction's "unique goal" was to transform a domestic dispute into an international one, which constituted an abuse of rights and a "détournement de procédure."

Decision and Costs

The Tribunal unanimously concluded that the Claimant's purported investment was not a protected investment under the ICSID Convention or the BIT. Consequently, it found that it lacked jurisdiction over the dispute. Based on its finding that the initiation and pursuit of the arbitration constituted an abuse of the international investment protection system, the Tribunal ordered the Claimant to bear all costs of the arbitration, including the Respondent's full legal fees and expenses.
Case Summary
This summary note is machine-generated. Always consult the original materials.

Case Overview

In Phoenix Action v. Czechia, an ICSID tribunal declined jurisdiction over claims brought by an Israeli company under the 1997 Israel-Czechia Bilateral Investment Treaty (BIT). The tribunal found that the claimant's acquisition of two Czech companies was not a bona fide investment, but rather an abusive act of "treaty shopping" designed to bring pre-existing domestic disputes into an international forum. The case is a leading authority on the concepts of bona fide investment and abuse of process in investment arbitration. The claimant, Phoenix Action, Ltd., was an Israeli company wholly owned by Mr. Vladimír Beňo, a former Czech national who had fled the Czech Republic amidst a criminal investigation. In December 2002, Phoenix acquired two Czech companies, Benet Praha, spol. s.r.o. and Benet Group, a.s., which were previously controlled by Mr. Beňo and his family. At the time of the acquisition, these companies were embroiled in domestic legal disputes, including a freeze on Benet Praha's bank accounts and litigation over the ownership of key assets. Phoenix initiated ICSID arbitration, alleging that the Czech Republic's continued failure to resolve these issues post-acquisition constituted a violation of the BIT.

Procedural History

Phoenix Action submitted its Request for Arbitration on February 15, 2004, which was registered by ICSID on March 23, 2006. The Arbitral Tribunal was constituted on January 8, 2007, comprising Professor Brigitte Stern (President), Professor Andreas Bucher, and Professor Juan Fernández-Armesto. Early in the proceedings, the Claimant sought provisional measures, including an injunction to block the transfer of disputed properties and the release of frozen funds. Following a hearing in Paris, the Tribunal denied these requests in a decision dated April 6, 2007, finding they were not aimed at preserving the status quo but rather sought the final relief claimed. The proceedings were subsequently bifurcated to first address the Respondent's jurisdictional objections. A hearing on jurisdiction was held in Paris on September 1, 2008. The Tribunal rendered its final Award on April 15, 2009, declining jurisdiction and ordering the Claimant to pay the Respondent's costs.

Key Issues and Positions

The central issue was whether Phoenix's acquisition of the Czech companies constituted a protected "investment" under Article 25 of the ICSID Convention and the Israel-Czechia BIT. The Claimant argued that it had made a valid investment by purchasing the shares of the two companies and that the Czech Republic's subsequent actions and omissions, including denial of justice and failure to unfreeze assets, breached the treaty. It contended that its intent was to revive the distressed businesses, an effort frustrated by the State's conduct. The Respondent argued that the tribunal lacked jurisdiction because the transaction was a sham. It characterized the case as an egregious example of "treaty-shopping," where a national (Mr. Beňo) created a foreign corporate vehicle (Phoenix) for the sole purpose of gaining access to ICSID arbitration for pre-existing, purely domestic disputes. The Czech Republic asserted that the transaction was not a genuine, bona fide investment made to conduct economic activity, but an abuse of the investment treaty system.

Tribunal/Court Reasoning and Holdings

Jurisdiction

The Tribunal's analysis focused on the definition of a protected investment, applying a "double-barrelled test" requiring compliance with both the ICSID Convention and the BIT. It articulated a six-part test for a protected investment: (1) a contribution in money or other assets; (2) a certain duration; (3) an element of risk; (4) an operation made to develop an economic activity in the host State; (5) compliance with the laws of the host State; and (6) that the assets were invested bona fide. While acknowledging that the acquisition of shares could prima facie satisfy the first three criteria, the Tribunal found the transaction failed on the fourth and sixth elements. It concluded that the investment was not made for the purpose of engaging in economic activity, but for the sole purpose of bringing international litigation. The evidence demonstrated that the entire operation was an artificial transaction designed to gain access to ICSID. Key factors supporting this conclusion included the timing of the investment after the alleged harm had occurred, the fact that the transaction was a mere rearrangement of assets within the owner's family, the lack of any business plan or economic activity post-acquisition, and the Claimant's initial (and later abandoned) attempt to frame the claim as an assignment of pre-existing domestic claims. The Tribunal held that this constituted a "détournement de procédure" or an abuse of rights. It reasoned that the ICSID system was not designed to protect domestic investments disguised as international ones for the sole purpose of accessing the mechanism. Consequently, the transaction was not a bona fide investment and did not qualify for protection under the Convention or the BIT.

Costs

Based on its finding that the initiation and pursuit of the arbitration constituted an abuse of the international investment protection regime, the Tribunal applied the "costs follow the event" principle. It held that the Respondent had been forced to defend against an abusive claim and should not be penalized by bearing its own costs. The Tribunal ordered the Claimant to bear all ICSID costs and to reimburse the Respondent for its full legal fees and expenses.

Disposition / Relief

The Tribunal unanimously decided that the dispute was not within the jurisdiction of the Centre or the competence of the Tribunal. It ordered the Claimant, Phoenix Action, Ltd., to pay the Respondent, the Czech Republic, a total of CZK 21,417,199.13 and USD 196,000.00, representing the Respondent's legal fees, expenses, and its contribution to the costs of the proceedings.