- Arbitral Award
- ICC International Court of Arbitration 9753
STATE CONTRACTS - LONG-TERM CONTRACTS - SERVICE CONTRACT - BETWEEN A UNITED KINGDOM COMPANY AND A CZECH STATE ENTITY - GOVERNED BY CZECH LAW – REFERENCE TO UNIDROIT PRINCIPLES IN SUPPORT OF SOLUTION FOUND IN DOMESTIC LAW.
AGREEMENT TO COOPERATE WITH A VIEW TO REALISING A PROJECT – BINDING NATURE OF SUCH AGREEMENT (SEE ARTICLES 1.3 AND 1.7 OF THE UNIDROIT PRINCIPLES).
Claimant, a United Kingdom company acting on behalf of a consortium of several companies, entered into an agreement with Defendant, a Czech State entity, for collaboration and further negotiation with the aim of realising a land development project. According to Claimant Defendant failed to perform its duties of cooperation and negotiation under the agreement.
Claimant filed for arbitration requesting the Arbitral Tribunal to declare the breach of contract and to order specific performance thereof or award damages. Defendant not only denied that it had breached the agreement, but also claimed that the agreement in question was not a legally binding commitment.
The agreement was governed by Czech law. However, in deciding the merits of the case, the Arbitral Tribunal referred not only to the relevant provision of the Czech Commercial Code but also to the UNIDROIT Principles.
Thus, in support of the binding nature of the agreement and the order to Defendant to continue its collaboration with Claimant with the aim of realising the project, the Arbitral Tribunal relied not only on Article 265 of the Czech Commercial Code setting forth the principle of fair business conduct but also on the general principles of pacta sunt servanda and of cooperation in good faith laid down in Articles 1.3 and 1.7 of the UNIDROIT Principles.
‘ The Claimant alleged that the Defendant did not meet its obligations under the Agreement and requested the Arbitrator to declare the breach of contract, to direct tile Defendant to specific performance or to oblige it to pay damages. The Defendant denied the breach of contract and requested dismissal of the claim.
 On. . . a meeting was held between the parties and doubts were raised by the Defendant as to the binding character of the Agreement and the status of the Claimant. The Claimant in a letter dated. . . sent to the Defendant referred to these doubts stating that “Clearly there are misunderstandings relating to the intent of the pactum de contrahendo in particular and its construction and obligation placed upon both parties.”...
 The Defendant’s general director in the letter dated . . . addressed to the legal representative of the Claimant stated: “[Defendant] consider[s] the above-mentioned “pactum de contrahendo” legally irrelevant, as the facts (matters) agreed to in the above-mentioned agreement were not fulfilled at the time given therein, and although not due to the fault of any of the parties this agreement is at the present time unenforceable. Following the successful procurement of the architectural study of locality, [Defendant] shall proceed in two stages. In the first stage it intends to seek by the form of a tender a suitable firm who shall prepare the project offering the best solution for the area and satisfying the needs of [Defendant] and the City of... In the second stage there would be a shorter form of tender which should result in the appointment of an investor. ... [Defendant] do[es] not exclude the cooperation with [Claimant] or its advisors in the process of fulfillment of the above-mentioned conditions.”
 During 1994 the legal representatives of the Parties tried to reach an agreement on the legal assessment of the Agreement of 1992 but without success. The Defendant expressed doubts whether the Agreement was binding. The letter dated . . . sent by the head of legal department of the Defendant to tile Claimant’s legal representative contained the following sentences: ‘What is new for [Defendant] is a note contained in the Memorandum to the effect that [. . .] Consortium as a party to the pactum has no legal personality under English law and that the member firms in such association agreed that [Claimant] (which is not a party to the pactum) would negotiate with [Defendant] on behalf of them. In accordance with Czech law a conclusion can be drawn on the basis of such fact that the pactum may not legitimately have come into existence for the party described therein lacks legal personality i.e. does not have any rights or obligations thereunder. The position of [Claimant] towards [Defendant] is the same. Tile firms associated in the [. . .] Consortium are not parties to the pactum either. If they authorized [Claimant] to represent their interests including conclusion of contracts, they will at first have to assess the quality of representation and services expected to be provided to them by [Claimant]. In spite of the views regarding the pactum de contrahendo not being shared in full, [Defendant] [is] still ready to continue the intended co-operation in commercial plans provided that the first step towards new cooperation should be reaching an agreement regarding legal opinion in respect of the pactum and looking to solutions both in legal and real terms”.
 The Parties could not come to an understanding on these points and negotiations stopped.
 The Defendant has confirmed several times its willingness to cooperate with the Claimant but it did not accept the validity and binding force of the Agreement referring to several problems such as the existence of the Consortium which was known to the Defendant since several years. This behaviour meant in reality refusal to cooperate. The Arbitrator has taken into consideration that under paragraph (1), section 264 of the Czech Commercial Code in determining the rights and duties arising from a relationship of obligations, account is also taken of the business practice (trade usage) prevalent in a particular field of business, unless these are contrary to the contents of the contract or to tile law. There are no special usages in the particular field of business but general principles of business practice have importance, too. Such general principles are pacta sunt servanda and to cooperate in good faith (articles 1.3 and 1.7 of the Unidroit Principles of International Commercial Contracts, Ph. Kahn, “Les principes généraux du droit devant les arbitres du commerce international”, Journal du droit international 1989 p. 327). Fair business conduct is one of the main principles of the Czech Commercial Code too (section 265).
On the basis of the above-said the breach of the agreement by the Defendant has been stated.
 According to section 365 of the Czech Commercial Code: “A debtor is in default if he fails to perform his obligation duly and in time until the obligation is duly performed, or until the obligation is discharged in another manner. However, the debtor is not in default if he is unable to perform his obligation due to the default by the creditor.”
 The Defendant alleged that the Claimant did not fulfill its obligation. However, taking into consideration the documents submitted by the parties it can be stated that the basic problem of the realization was in tile administrative field, in obtaining the necessary permits for the construction, the administrative conditions of the realization of the project were missing. The letters of the Defendant in . . . leading to the arbitration proceedings did not refer to any default by the Claimant but challenged the validity of the Agreement. Therefore, the Arbitrator considered that the allegation of the Defendant was irrelevant from the point of view of the present case.
 On the basis of the above points the Agreement is considered as valid and binding upon the parties. During the proceedings no one of tile parties has stated that the project has become impossible and there is no evidence of the impossibility in the documents submitted by the parties either.
 According to section 366 of the Czech Commercial Code: “Unless the law provides otherwise with regard to individual types of contracts, a creditor may insist on proper performance of an obligation by the debtor while the latter is in default on his performance.”
[l1] Consequently, tile Claimant is entitled to request performance of the obligation meaning in the present case continuation of collaboration and cooperation with the aim of realizing the project and is entitled to request preferences as specified by the Agreement. However, as it is decided above, the parties are not bound to conclude a contract as in the case of a pactum de contrahendo under the rules of the Czech law. The Defendant has referred to the statute of limitations with respect to the request concerning the conclusion of the future contract. The request for performance of the obligations to cooperate and to give preference are not statute-barred (sections 387,392,403 Czech Commercial Code).
 The Claimant presented its request for damages in an alternative way. As the Defendant is obliged to perform its obligations according to the first request of the Claimant, it is not dealt with whether the Defendant should be obliged to pay damages in accordance with the alternative request, presented in view of the possible dismissal of the first request.’}}
Excerpts of the award published in
ICC International Court of Arbitration Bulletin, Vol. 12, No. 2 (Fall 2001), 82-84.}}