In Phoenix Action v Czech Republic, the claimant, Phoenix Action, drew strongly-worded criticism from an ICSID tribunal for the "rearrangement of assets within a family, to gain access to ICSID jurisdiction to which the initial investor was not entitled" which it characterised as an "abusive manipulation of the system of international investment protection under ICSID." On this basis, the tribunal accepted the Czech Republic's challenge to jurisdiction and ordered Phoenix to pay the Czech Republic's costs. The decision has also drawn considerable comment because, in examining the Salini criteria which are often-cited in determining whether an investment exists for the purposes of Article 25 of the ICSID Convention, the tribunal adopted certain modifications and additions.
Phoenix Action is an Israeli company wholly-owned by a Czech national, Mr Beno. In 2002, it purchased two Czech companies, known for the purposes of the arbitration as BG and BP, which were ultimately owned by Mr Beno's wife and daughter respectively. At the time of the purchase, both BG and BP were embroiled in domestic proceedings in the Czech Republic, with a private party and the Czech fiscal authorities respectively, the latter of which extended to allegations of tax evasion being made against Mr Beno, as Executive Officer of BP, and had led him to flee the country for Israel in 2001. In early 2003, some two months after Phoenix's purchase of BG and BP, and before those purchases had been registered, Phoenix presented the Czech Republic with notification of an investment dispute. Phoenix alleged that the Czech Republic had breached the Israeli-Czech BIT, claiming that the protracted nature of the private proceedings against BG, and the freezing and seizure of BP's funds as a result of the allegations against it, constituted a denial of justice and a breach of the requirement to accord it fair and equitable treatment. In 2008, with the ICSID proceedings in respect of these complaints still pending, Phoenix sold BP back to its original owner for the same price paid in 2002.
The Salini criteria for determining the existence of an investment for the purposes of the ICSID Convention are: (i) a contribution of money or other assets of economic value; (ii) a certain duration; (iii) an element of risk; and (iv) a contribution to the host State's development. The tribunal took issue with the fourth criterion, deeming it impossible to ascertain, and proposing in the alternative that the approach to be adopted should centre on the contribution to the economy of the host state. It added that this element was normally inherent in the first three criteria and should therefore be presumed in principle if those three criteria were satisfied. The tribunal then added two further criteria: (v) assets invested in accordance with the laws of the host State; and (vi) assets invested bona fide. The purpose of the international mechanism of investment protection through ICSID could not, in its view, be to protect investments falling foul of those requirements.
Although the tribunal acknowledged that, at first sight, the purchase by Phoenix of BG and BP appeared to be an investment, and found that the first five limbs of the test it had set down were, with varying degrees of satisfaction, met, it found that numerous factors converged to demonstrate that the apparent investment was not protected. In particular, the timing of the investment (following protracted domestic proceedings), the substance of the purchase (between family members) and the true nature of the operation (no business activity was either planned or launched after the purchase), convinced the tribunal that the manifest purpose of the investment was to render purely domestic disputes subject to the protections of the BIT and was not bona fide.
While the result of this award has not been questioned, the manner of reaching it has attracted considerable comment. While the tribunal accepted that careful scrutiny of all six elements of its test would not always be necessary in cases where some were obviously satisfied, and while it advocated a broad approach to the fourth criterion, some have noted that its overall approach is nevertheless more rigid than that taken in recent cases such as RSM v Grenada and Biwater v Tanzania. Others have queried whether the challenge might not have been better addressed by examining the bona fides of the ICSID proceedings rather than those of the underlying investment. Whether the tribunal might then have determined that it had an inherent power to decline jurisdiction on the basis that the proceedings were abusive therefore remains open to debate.
(Phoenix Action Ltd v The Czech Republic (ICSID Case No ARB/06/5)