Title
ICSID Award of December 29, 2004, Ceskoslovenska Obchodni Banka A.S. v. The Slovak Republic, Case No. ARB/97/4, http://ita.law.uvic.ca/documents/Cesk-Slovakia-AwardDec2004.pdf
Content
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Ceskoslovenska Obchodni Banka A.S. v. The Slovak Republic

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26

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IV. THE MEANING AND SCOPE OF ARTICLE 3 CA

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B. The Rules of Czech Law Applicable to the Interpretation of Article 3 CA

1. In general

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84" Both Parties accept that to the extent that the CA may create rights for which CSOB has title to sue, the Czech Commercial Code applies to the CA. To construe the meaning of the relevant provisions of the CA, Section 266(3) of the Czech Commercial Code instructs the Tribunal as follows -

When interpreting a manifestation of will under subsections (1) and (2), due account shall be taken of all the circumstances related to the manifestation of will, including the negotiations about conclusion of the contract in question and the practice which the parties have introduced between themselves, as well as the subsequent conduct of the parties, if the nature of the case so permits.

Thus, all the relevant circumstances, including the context and purpose of the agreement, the history of the negotiation and the Parties' subsequent conduct, are relevant to reconstruct the Parties' intentions and to identify the meaning of their agreement.

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VI. CSOB's CLAIM FOR COMPENSATION

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C. The Claim Based on Interest Related to the Loan

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6. Capitalization of interest

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268" Before entering into this analysis, a preliminary issue needs to be clarified, that is the difference between "compound interest", i.e. the term often used by CSOB in the present proceedings, and "capitalization of interest", i.e. the term used by the Slovak Republic.

269" Under Slovak and Czech law, there is apparently a difference between "capitalization of interest" and compounding "interest on interest". Under the former, the outstanding interest is converted into the loan principal; under the latter, interest is charged on overdue and unpaid interest amounts. However, although both techniques are different, they have a similar effect. Consequently, for the present analysis, the term "capitalization of interest" will be used.147This semantic choice, however, does not prejudge the later discussion of CSOB's argument with regard to its title to charge interest on overdue interest amounts on SI's current account with CSOB.

270" Under Slovak law, which, it may be recalled, governs the LA, interest may only be capitalized with the agreement of the parties (Commercial Code, Section 502) or when it is a "common commercial practice in the particular line of business and is not contradicted by the agreement of the parties" (Commercial Code, Section 264).

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b. Capitalization as "common business practice"

279" The question has been raised whether there is a "common business practice" in banking loans to capitalize interest in the event of default.

280" For CSOB, the capitalization of interest after March 31, 1995 resulted moreover from Section 264 of the Slovak Commercial Code. Under this provision, "common business practices, generally observed in the particular line of business, have to be taken into account to determine contractual obligations, if they are not contradicted by the content of the contract". CSOB contends that capitalization was such common practice. CSOB and101SI had agreed not only on what the text of the LA explicitly states, but also on what the parties intended and what was customary trade practice.

281" For the Slovak Republic, no evidence was given that such practice existed in the Slovak banking world. At most, CSOB stated in general terms that capitalization was a general practice of the banking world at large.

282" For the Tribunal, CSOB did not submit convincing evidence as to the existence of a common business practice that was therefore by implied agreement also applicable to CSOB in its relationship to SI. Indeed, CSOB's own behavior towards SI has indicated that it did not consider capitalization the general rule that was also applicable to SI. As CSOB stated in these proceedings, interest capitalization was adopted by its accounting expert starting with the date of SI's default on June 28, 1996. This capitalization was thus introduced a posteriori, while it was not claimed at the actual time when interest were adjusted quarterly by CSOB and communicated to SI. This confirms that there was no "common business practice" to support interest capitalization in the instant case.

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D. Lost Profits and Interest on CSOB's Damage Claim

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2. Concrete or abstract lost profits

320" For CSOB, under Czech law, a claimant may base its profit claim either on the specific profit lost in a particular case (the so-called "concrete" lost profit) or on the profit attained in the line of business under conditions similar to those of the breached contract (the so-called "abstract" lost profit). Whether a claim is admitted on the basis of "concrete" or "abstract" lost profit depends upon the nature of the available evidence.

321" Section 381 Commercial Code specifies the "abstract" lost profit as the -

profit usually achieved in fair business practices on terms and conditions in the line of business in which the injured party engages, which terms and conditions are similar to those breached.

322" For the Slovak Republic, it is the average profit for the entire operations of a business without regard to the specific type of transaction.

323" For CSOB, this "abstract" profit is the transactional profit expected to be made on the performance of the contract at issue. CSOB argues that the language of Section 381 confirms that the abstract profit relates to the type of transactions involved. In business,113profit follows from transactions not from year-end accounting performances for the company as a whole. When money is received from a transaction, it is invested in a similar transaction. The money received by CSOB from lending to SI would have been used to provide loans to other clients.

324" The Tribunal agrees that the abstract profit has to be based upon the specific type of transaction involved, i.e. loans. However, should the profitability of the loan be assessed on the basis of the market in the Slovak or in the Czech Republic ?

325" For the Slovak Republic, only the profit on banking business in the Czech Republic should be considered, as the Czech Republic is the proper venue to assess the profits.

326" For CSOB, the potential profit made on re-lending the money from the SI loan to other customers has to be based upon the profit on loans in the Slovak Republic as this is the most appropriate country of reference. The loan was extended by CSOB's Slovak branch to a Slovak entity, was denominated in Slovak Crowns and was governed by Slovak law. The proceeds were intended to remain in the Slovak Republic and to be part of the Slovak CSOB spin-off. Under Section 737(1) Commercial Code, the abstract profit shall take account of "the rate of profits usually attained in the country where the entitled person has his registered seat, place of business or residence." For CSOB, this provision thus allowed CSOB to opt for the profit in the Slovak market. Through its Slovak branch, it was doing business in that country. Moreover, that Slovak branch had its registered office in the Slovak Republic.184

327" On the basis of this provision and the CA's goal to promote CSOB business activity within the Slovak Republic, the Tribunal accepts that the profitability within the Slovak market is relevant. The conversion by CSOB and SI of part of the loan in a Czech Crown portion does not affect the fact that the losses the Slovak Republic had to cover remained in Slovak currency and were considered as such by the Parties.

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4. Interest on CSOB's damage claim

338" CSOB recognized that providing interest on its damage claim is yet another solution to compensate for "lost profits" occurred and still occurring in respect of its damages accruing as from the time it formally requested the Slovak Republic, on April 10, 1997, to compensate CSOB for damages arising from the Slovak Republic's failure to cover Si's losses as provided for under Article 3(H)(5) CA.191 Such interest serve the purpose to let the damage claim accrue in such a way that full compensation is granted to the party entitled to it at the date of effective payment. Within this meaning, such interest can be considered, depending on the circumstances, as compensation for actual damage or for lost profits. However, as stated above, the Tribunal has not received evidence demonstrating that CSOB would have been in a position, had it received the Slovak Republic's payment promptly upon request (on April 10, 1997), to invest the respective amounts of money in a way to recover substantially more than the Bank was able to receive for credits extended on the relevant market. It is also to be noted that under Section 369(2) Commercial Code, the creditor is entitled to be compensated for damage caused by de-117lay in the rendering of performance on monetary obligation "only if such damage is not covered by the interest paid on the amount in arrears". This provision indicates that interest is the ordinary remedy in case of default on a monetary obligation.

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147Also CSOB has used the term capitalization, e.g. its Reply of August 31, 2001, p. 74; Expert Reply of T.H. Hart, No. 112; Reply Opinion of Professor Ovecková, No. 19.
184 TR, November 11, 2002, 91:11-16 (Dedic).
191The Tribunal understands that when CSOB presented its final submission on June 20, 2003 (supra, paragraph 39), stating that it claimed the sum referred to "as of March 31, 2003", it assumed that interest on "actual damages" is to be further carried forward from that date until the date of this Award. In other words, this final submission was not meant to withdraw the claim made in this respect in CSOB's preceding submissions.

Referring Principles
Trans-Lex Principle: IV.5.2 - Context-oriented interpretation
Trans-Lex Principle: VII.3.2 - Calculation of damages
Trans-Lex Principle: VII.7 - Right to charge compound interest
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