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In the mid-1990s Ronald Lauder, an heir to the Est�e Lauder cosmetics fortune, launched Central European Media Enterprises Ltd., a regional broadcasting company. In the Czech Republic, CME developed a successful television station, Nova TV. But in 1999 CME discovered that its local partner in the country, Vladimir Zelezny, had allegedly diverted some ad revenue to a private account. So Lauder fired him, according to lawyers from both sides. That wasn’t the end of things, however. Zelezny held Nova’s broadcast license, and he soon launched his own “Nova” station. He broadcast on the same frequency, with much of Nova’s programming. Without its prime asset, CME’s stock plunged from $37 to 69 cents on Nasdaq between 1998 and 2000. An irate Lauder took out a full-page advertisement in The New York Times in 1999 telling investors to keep away from the Czech Republic. But doing business in the country doesn’t always have to be so Kafkaesque. CME successfully brought arbitration claims against Zelezny and the Czech Republic. In 2001 an arbitration panel in Amsterdam ordered Zelezny to pay CME $27 million. Zelezny appealed and lost, and eventually CME got the money. (Zelezny’s lawyer, Constantine Partasides of Freshfields Bruckhaus Deringer’s Paris office, says his client’s actions were permitted by Czech law and the terms of the agreement with CME.) In March 2003 an international arbitration panel in Sweden ruled that the Czech government had to pay CME $355 million in damages, plus interest, for failing to protect the company’s investment. CME prevailed on the grounds that the republic hadn’t honored the commitment it made in a 1990 bilateral trade agreement with the United States guaranteeing “fair and equal treatment” to foreign investors, according to the arbitrators’ decision. The Czech government unsuccessfully appealed the decision. This past December, CME used the proceeds from the arbitration to re-gain control of Nova. “[The case] shows that as a new member of the European Union, the Czech Republic was willing to take its business and legal commitments more seriously,” says CME outside counsel John Kiernan, a partner at Debevoise & Plimpton in New York. From Prague to Bucharest, multinationals doing business in the region are increasingly looking to arbitration to resolve their legal disagreements. They are bypassing local courts in favor of private commercial dispute venues, such as the popular International Chamber of Commerce’s International Court of Arbitration, which has offices and arbitrators in nearly every big city in the region. According to Paris-based ICC, in three years the number of arbitration disputes in Eastern Europe has risen 66 percent, from 105 disputes in 2000 to 174 in 2003, the last year for which data is available. In fact, the region now accounts for 11 percent of disputes heard worldwide. That’s up from 7.5 percent in 2000. Lorraine Brennan, director of the ICA, says that the region is the fastest-growing in the world in terms of new arbitration claims. There are other forums for these disputes, too. When multinationals press arbitration cases against host nations, for example, they take their claims to such venues as the World Bank’s International Centre for Settlement of Investment Disputes (ICSID), headquartered in Washington, D.C., where they in-voke provisions in bilateral investment treaties. According to ICSID, they have eight cases pending against host nations in Eastern Europe. Foreign investors can also set up ad hoc arbitration tribunals, says Luke Peterson, an associate at the Winnipeg, Canada-based nonprofit International Institute for Sustainable Development. Last year Peterson was hired by the United Nations Conference on Trade and Development to compile a list of all publicly known investor-state arbitrations. Peterson says there are at least 30 of these cases currently in Eastern Europe (including the eight being handled by ICSID). “This type of arbitration is taking off [in the region],” says Peterson. There were fewer than ten investor-state arbitrations five years ago, he says. Why are companies so attracted to arbitration? Some say they like the flexibility of the process. ICC and ICSID have no set policies on arbitration procedures. The rules in these disputes depend on the language in treaties and individual contracts. Arbitration clauses can limit discovery and cross-examination, for example, and dictate whether a case is sealed. Typically, they are also enforceable in multiple jurisdictions, thanks to a 1958 international treaty signed by most Eastern European countries. Siegfried Schwung, vice president and general counsel�products of automaker DaimlerChrysler AG, says that the other primary benefit of arbitration is that companies get a choice of venue. “It’s somewhat politically sensitive,” Schwung says, referring to the fact that multinationals like to avoid the hometown advantage and pick foreign arbitrators and a neutral international venue instead. “But it’s a question of psychology. If you don’t accept my local court, why should I accept your local court?” Arbitration isn’t a cure-all for business disputes. It can be just as costly and time-consuming as bringing a lawsuit. Carol Welu, a partner in Squire, Sanders & Dempsey’s London office, says she never recommends arbitration proceedings to a client in the region unless the stakes are at least $5 million. “Arbitration can be almost as cumbersome as court,” Welu says. And some claims, such as CME’s, are also stirring political resentment in the former Communist states. Governments, including the Czech Republic and Poland, have blanched at the large damages they’ve been compelled to pay as a result of claims brought under bilateral treaties, and appear to resent having foreign arbitrators judge local actions. “Many of these countries negotiated these treaties by the bushel in order to attract investment,” says the International Institute for Sustainable Development’s Peterson. “In light of the recent surge in arbitration, these countries should review what they’ve signed. They may be surprised to find that they have made very far-reaching commitments to foreign investors.” Call it the downside of success. The fall of the Iron Curtain, as well as the entry of ten Eastern European countries to the European Union, has led to new commercial codes and laws throughout the region, including statutes that permit the use of arbitration to resolve disputes. At the same time, foreign investors have poured money into the former Communist states over the last ten years. The region now accounts for 40 percent of all new investment projects in Europe, according to a 2004 study by the U.K.-based research group Oxford Intelligence. But many multinationals still view commercial dealmaking in Central Europe as inherently risky. Investors fear that the local government (whose resistance to corruption is often still in doubt) will play dirty. And they worry that courts aren’t sophisticated enough to handle the disputes that arise. “Doing anything in the court system, where judges don’t have experience working on complex commercial matters, can be a nightmare,” says Michel Cloes, European counsel for auto- and truck-part supplier Dana Corp. His Toledo-based company has manufacturing plants in the Czech and Slovak Republics, Hungary, and Poland. As a result, Cloes says, his company “automatically” includes arbitration provisions when making large deals in the region — and has done so since the late 1990s — but hasn’t had to use them yet. Cloes also says that while arbitration clauses are often viewed as boilerplate contractual language, he’s trying to get his colleagues to take those provisions more seriously. “We made it a point to emphasize throughout our 25-lawyer department that from now on, everyone had to look at arbitration as the first approach to dispute resolution,” he says. Most of the biggest commercial disputes that wind up in arbitration have been between foreign companies and host countries. Noble Ventures Inc., a group of American investors based in Bethlehem, Pennsylvania, is pursuing an arbitration claim against Romania over the acquisition of a former state-owned factory. In 2000 Noble purchased Resita Steel Works, the country’s third-largest steel plant, for $85 million. Resita had some outstanding debt on its books, which Romania promised to cancel, according to Noble lawyer Barry Appleton. A name partner with Toronto’s Appleton & Associates International Lawyers, he specializes in cases stemming from treaty violations. But Romania’s lawyer, Francis Vasquez, Jr., of the Washington, D.C., office of New York-based White & Case, says that the country only promised to restructure the debt. Vasquez adds that Noble was supposed to put $60 million into improving the plant, but after the purchase, “it was soon clear that this company had no money to do this.” Romania retook control of the factory in 2001. Noble filed an arbitration case against the country with ICSID that year on the grounds that it failed to fulfill its investment treaty obligations with foreign investors. Last October the case was presented to an arbitration panel in Washington, D.C., during a six-day hearing; a decision is expected this spring. Noble may take heart from a recent victory against another former Soviet-dominated state. In 1993 the Czech Republic and Slovakia, after completing their “Velvet Divorce,” decided to split the assets and liabilities of the former state-run bank Ceskoslovenska Obchodni Banka (now a division of Belgium’s KBC Bank & Insurance Group). Four years later, CSOB took Slovakia to arbitration on the grounds that it failed to make good on the agreement. According to White & Case’s Vasquez, who represented CSOB in this matter, the Czechs agreed to pay two-thirds of the debt and the Slovaks agreed to assume one-third. Slovakia never paid, says Vasquez. According to Slovakia’s arbitration filing, the country disputed how much it owed. Delay and procedural wrangles followed over the next five years. First, Slovakia unsuccessfully challenged CSOB’s ability to take the country to arbitration. Then, in 2001, the arbitration proceedings began in Washington, D.C., but were delayed when the chairperson of the arbitration tribunal resigned. The parties spent another year finding a new chairperson. Finally, the hearing took place, but the panel took more than a year to make a decision. Last year the panel awarded CSOB more than $900 million. In February, Slovakia announced it wouldn’t challenge the decision. “It’s time to accept responsibility for the bad decisions of a past administration,” Slovakia finance minister Ivan Miklos told reporters. But not all multinationals are so fortunate. In 1994 the U.K.-based telecom giant Cable and Wireless plc and a Finnish telecom company, Sonera Corporation (later known as TeliaSonera AB), set up a joint venture, Tilts Communications A/S. Tilts inked a deal with the Latvian government: It agreed to modernize the country’s telecom infrastructure in return for 49 percent ownership of Lattelekom SIA, the state-owned telephone monopoly. The contract also contained a clause that Lattelekom would remain a monopoly until 2014. In 1998 Latvia applied for E.U. membership. As a condition of acceptance, the country agreed to deregulate its telecom industry. According to White & Case partner Paul Friedland, who represented Tilts in the subsequent arbitration, this ended Lattelekom’s monopoly and violated the terms of the contract. As a result, Tilts thought it was entitled to compensation, and “arbitration was the only way the client felt comfortable attaining it,” says Friedland. In 2001 Tilts filed a $1.1 billion arbitration claim in Stockholm. However, when the agreement was signed in 1994, all the parties were aware that Latvia would soon be applying for E.U. membership, and “there were serious issues” as to whether the contract provisions in question were even valid, says Robert Lambert, a partner in Clifford Chance’s London office who represented Latvia and Lattelekom in the case. Lattelekom fought back hard, counterclaiming that Tilts had never made the investments in modernization that it promised, which Tilts denies. Moreover, during procedural hearings, Lattelekom asked the ICC arbitration panel to name Tilts’s parent companies as parties in the arbitration claim. Soon after, say lawyers for both sides, the multinational companies started pursuing a settlement, which was finalized in March 2004. According to Cable and Wireless spokesperson Steve Double, Tilts agreed to pay Latvia nearly $2 million, and both sides dropped their respective claims. The march toward private justice, though favored by multinationals, is setting off a backlash in the region. Poland and the Czech Republic are both looking at ways to change the investor-state arbitration process. Poland is currently reexamining the bilateral investment treaties that give foreign investors the right to launch arbitration claims. Sarah Fran�ois-Poncet, a partner in Salans’s Paris office, says when countries signed these treaties, they did not realize the consequences. “When the [bilateral investment treaties] were signed, the reality that a country may have to pay a huge price had not hit home,” says Fran�ois-Poncet, who represented Poland in a recent (and pending) investor-state arbitration case in Brussels. “The increasing prevalence of these claims as well as the big awards has caught the attention of all these central Eastern European countries. They are taking a closer look now.” Paying $355 million hasn’t gone unnoticed in the Czech Republic either. Last year the Czech parliament appointed an independent panel to examine what went wrong in the CME dispute. According to Stanislav Krecek, chairman of the panel, the country should have sought to avoid arbitration by any means necessary. “Arbitration is the least suitable form of solution,” he says.

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