MEMORANDUM OF DETERMINATIONS

Claim of St. Michael Enterprises d.o.o for Wrongful Calling of a Bid Bond

Republic of Serbia

Contract of Insurance No. F360

Public Version

I. Claim

St. Michael Enterprises d.o.o., a company organized under the laws of the Federal

Republic of Yugoslavia and the Republic of Serbia and existing under the laws of the Republic

ofSerbia(“SME”),purchasedapolicyofbidguarantyinsuranceagainstthewrongfulcallingof

its bid bond in connection with the privatization of 70% ofthesharesofJelenDo(“JelenDo”),a

producer of lime and stone aggregates located in Jelen Do, Serbia.

SMEparticipatedintheprivatizationauctionprocess(the“Tender”)andpostedthe

requiredbidguarantyintheamountofUS$150,000(the“BidBond”).SMEwasselectedasthe

winner of the Tender, and entered into an Agreement for Sale and Purchase of the Jelen Do

shares(the“SPA”)thatrequired,amongotherthings,paymentofthepurchasepriceandthe

posting of performance bonds within 20 days of the execution of the agreement. Before the

termination of the 20-day period, SME sought a time extension to make the payment and post the

performance bonds; essentially, an amendment to the SPA. The request was refused, SME failed

to make the payment and post the performance bond, and the Privatization Agency administering

theTendercalledSME’sbidbondinaccordancewiththeTenderrulesandthetermsoftheBid

Bond itself.

SMEclaimsthatthePrivatizationAgency’sdenialofitsrequesttoamendthe SPA to

extend the period for paying the purchase price and posting the performance bonds was the

product of corruption and that, therefore, the Bid Bond was wrongfully called. Despite repeated

requests from OPIC to do so, SME has never articulated a theory as to how the Privatization

Agency’srefusal,forwhateverreason,toamendanSPAfreelyandknowinglyenteredintoby

SME, and its subsequent actions in accordance with existing agreements, constitutes a wrongful

calling under the terms of its OPIC insurance.

II. Factual Background

. . . SME [was formed] in 1991 to participate in the privatization opportunities becoming

available in the Republic of Serbia that, at that time, continued to exist with the Republic of

Montenegro as what remained of the Federal Republic of Yugoslavia. Jelen Do was one of a

number of socially owned –that is, state owned –enterprises to be wholly or partially privatized.
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Tender Process

The Privatization Agency of the Republic of Serbia issued its Public Invitation for the

Participation in a Tender Process for the Acquisition of a Controlling Interest in Jelen Do,

including,amongotherthings,its“InstructionstoBidders–TenderRules”(the“TenderRules”)

on September 16, 2002. In response, SME teamed with the Montenegran entity Luka Bar, the

“PortofBar”,withwhichSMEhadaconsultingrelationship,tosubmitabidtopurchaseJelen

Do. The bid provided for, among other things: (a) a 97% - 3% split between SME and Luka Bar

of the 70% of the Jelen Do shares to be purchased in the privatization; (b) a purchase price of

US$3,700,000 for the Jelen Do shares; (c) covenants to make certain investments in the

infrastructureoftheJelenDoproject(the“InvestmentCommitment”);(d)covenantstoenacta

defined socialprogramofworkerbenefits,includinghousing(the“SocialProgram”);and(e)the

posting of performance bonds to guaranty the performance of the Investment Commitment and

the Social Program, in amounts to be agreed upon at the time of execution of the SPA.

Bid Bond

Simultaneously with the submission of its bid, and in accordance with the Tender Rules,

SME submitted the Bid Bond. The Bid Bond was issued by Raiffeisen Bank Jogoslavija a.d. on

March 24, 2003. In keeping with the Tender Rules, the Bid Bond provided that Raiffeisen would

pay the Privatization Authority under the guaranty upon written request for payment and its

written confirmation stating that:

(i) [SME] has withdrawn its bid after the deadline for submission of

bids and during the specified period of bid validity; or

(ii) [SME] is liable under the Confidentiality Undertaking which it

signed as a condition of receiving the Tender Documents and

participating in the Tender; or

(iii) [SME] refuses to proceed with the Tender procedure, if selected

by the [Privatization Agency] to proceed in negotiations[; or]

(iv) [SME], after having been notified of acceptance of its Bid during

the period of bid validity:

a) has failed, or has refused to execute the [SPA], if

required[;] or

b) has failed to vote its share capital at a general assembly of

[Jelen Do] as required for closing of the [SPA]; or

c) has failed, or refuses to furnish the performance security

in accordance with the tender conditions; or
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d) has failed to pay the purchase price for the share capital in

accordance with the [SPA].

For the winner of the Tender, the Bid Bond would remain in force until the earlier of

either (a) the consummation of the Tender, including the closing of the SPA and the presentation

of a performance guaranty in accordance therewith; or (b) the termination of the unconsummated

SPA.

Winning Bid; Calling the Bid Bond

The Privatization Agency selected the SME-Luka Bar consortium as the winner of the

Tender. The parties entered into the SPA as of June 9, 2003, pursuant to which SME was

required to post performance bonds in the amounts of US$10,500,000 for the Investment

Commitment, and US$800,000 for the Social Program. The SPA provided that SME was to pay

the full purchase price of US$3.7 million and post performance bonds totaling US$11.3 million

not later than July 7, 2003.

[SME] has suggested that it was inappropriate, at least, for the Privatization Agency to

have insisted on performance bonds covering the full amount of the proposed Investment

Commitment and Social Program in negotiating the SPA. [It] asserted that no other winning

bidder in a privatization had been required to do so. That said, SME has presented no evidence

that this was any more than a matter of the Privatization Agency driving a hard bargain and SME

accepting it. SME knowingly entered into the SPA with those provisions, and there has been no

suggestion that the SPA itself is invalid.

On July 1, SME requested a 20-business day extension of the deadline for payment of the

purchase price and posting of the performance bonds. On July 7, the Privatization Agency

rejected the request for an extension. SME did not deliver either the purchase price or the

performance bonds on July 7 or at any time thereafter. On July 11, the Privatization Agency

called the Bid Bond.

Allegations of Corruption and Other Illegality

SME has asserted from the beginning that the decision to deny its request for an

extension was the result of corruption and other illegal maneuvering on the part of the

Privatization Agency officials tasked with responding to the request. The details of the

corruption allegations have changed over time. . . .

OnJuly22,2005,SME’scounselproducedtoOPICapackagethatincludedmore

specific allegations. The package included a written statement by the general manager of Jelen

Do, who was a member of the committee responsible for choosing the Tender winner (the

“TenderCommittee”).ThegeneralmanagerassertedthattheprocedureforvotingonSME’s

extension request was irregular and illegal and that, despite pressure exerted on him by the

director of the Privatization Agency, he did not vote on the matter. Nevertheless, the record of

the Tender Committee reflected that he had voted to oppose the requested extension, and his
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requeststohavetherecordcorrectedwereignored.SME’scounselreferstoadditional

information in support of the proposition that the Tender Commission did not deny the extension

request by a legal vote, and that the denial of the request was fraudulent and illegal.

For the purposes of its analysis of the SME claim, and regardless of the evolution of the

claimant’sassertions,OPICmayassumethatthefactsassetforthintheJuly22,2005package

are true.1

No Demonstration of Ability to Pay

. . . SME [informed OPIC that it had] requested the extension to purchase the Jelen Do

assets and post the performance bonds because [it] had not yet obtained the financing to fulfill

those obligations. There has been no subsequent communication to OPIC suggesting that SME

could have met those obligations either at that time or at any time thereafter.

SME Self Help

In communications between August 2003 and June 2005, SME informed OPIC that it

was taking various actions in Serbia, ranging from litigation to negotiation with government

authorities, to be made whole. Only in late 2006 did SME, through its counsel, inform OPIC that

SME’sselfhelpeffortshadbeenunsuccessfulandwereterminated,andthatitwasfinalizingits

claim under the insurance contract.

III. The Contract

SME and OPIC entered into OPIC Contract of Insurance No. F360, a policy of bid

guarantyinsuranceagainstwrongfulcalling(the“OPICContract”),asofMarch24,2003.

Scope of Coverage

The Scope of Coverage set forth in Section 2.01 of the OPIC Contract, as modified in

Section 6.01, provides that:

Compensationispayable,subjecttotheexclusion...,

limitations...,andadjustment...,ifthebidguarantyoranyportion

thereof is called by the buyer: 1) in violation of the terms and conditions

governing the posting and calling of the bid bond as set forth in the tender

rules...;and2)theInsuredisnotindefaultofitsobligationsunderthe

tender.

1 As will be made clear in Section IV, Determinations Under the Contract, OPIC may also assume that the original

allegations of corruption are true. Neither set of facts leads to the conclusion that SME has a valid claim under the

insurance contract.
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Exclusion for Inability to Pay

The following exclusion, set forth at Section 6.09 of the OPIC Contract, is of particular

relevance:

Notwithstanding any other provision in this policy to the contrary,

no compensation shall be payable under this policy if the bid guaranty or

any portion thereof is called by the buyer due totheInsured’sinabilityto

obtain financing for the project in the form or amount represented in the

offer at the date of submission.

Coverage Amount

The OPIC Contract provides for 90% coverage of the US$150,000 Bid Bond, with a

coverage amount of US$135,000.

IV. Determinations Under the Contract

A plain reading of the OPIC Contract demonstrates that SME is not entitled to

compensation from OPIC. The Privatization Agency was within its rights to call the Bid Bond

and,inanyevent,SME’sreasonfor seeking extension to close the SPA and post the

performance bonds –that it did not have the funds to do so –falls within the exclusion at Section

6.09 of the OPIC Contract.

No Wrongful Calling

SME knowingly and voluntarily executed an SPA that required it to pay a purchase price

of US$3.7 million and post performance bonds totaling an additional US$11.3 million by July 7,

2003. As the closing date approached, SME asked the Privatization Authority to amend the SPA

to postpone the closing date. The Privatization Authority refused to do so. After the passage of

the July 7 closing date without SME having made the required payments, the Privatization

Authority called the Bid Bond in accordance with Section 21 of the Tender Rules2and

corresponding provisions of the Bid Bond.

In its communications with OPIC, SME has suggested that the alleged corruption that

resultedinthePrivatizationAuthority’srefusalofSME’srequesttoamendtheSPAandextend

the closing date is the source of a valid claim. That does not appear to be the case. The

Privatization Authority was under no obligation to amend a valid contract merely because SME

askedthatitdoso.ItcouldhavedeniedSME’srequestforanyreasonorfornoreason,sothe

character of the PrivatizationAuthority’sinternaldeliberationsisirrelevant.Accordingly,even

2 Section21oftheTenderRulesreads,inpertinentpart,“TheBidBondshallbecashedonbehalfof the

[PrivatizationAuthority]accordingtothefollowingconditions:... theBidder,afterhavingbeennotifiedof

acceptanceofitsBidduringtheperiodofbidvalidity:... hasfailedtopaythepurchasepriceforthesharecapitalin

accordance with the [SPA].”
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if we assume that the allegations of corruption are true, the Privatization Authority was not

exceedingitsrightsorauthoritytocalltheBidBonduponSME’sdefault.Thepresence or

absence of corruption has no bearing on the analysis of this case.

It is worth noting here OPIC counsel has repeatedly asked both SME and its outside

counsel to address the specific argument that, since the Privatization Agency had no obligation to

amendtheSPAortojustifyitsdecisiontoSME,theallegedcorruptionisirrelevanttoSME’s

claim. Neither SME nor its counsel has ever responded directly to the request. It may be

appropriate to infer from those indirect responses that neither SME nor its counsel could identify

an answer that was helpful to its claim.

SME’sClaimisExcluded

The OPIC Contract explicitly excludes compensation in situations where the Bid Bond is

calledasaresultoftheinsured’sinabilitytopaytheamountsrequired under the SPA. SME

failed to pay and was unable to obtain financing for the purchase price and the performance

bonds required under the SPA on or before July 7, 2003. SME has failed to demonstrate, or even

allege, that it has been able to post those amounts at any time since then. The OPIC contract

does not require or permit compensation to SME under these circumstances.

V. Conclusion

ThePrivatizationAuthority’scallingoftheBidBonduponSME’sfailuretopaythe

purchase price and post the performance bonds, as required by the contract SME knowingly and

willinglyenteredinto,wasappropriate.SME’sclaimundertheOPICContractisinvalid,and

the request for compensation under the OPIC Contract is denied.

OVERSEAS PRIVATE INVESTMENT CORPORATION

[The original memorandum of determinations, executed by

OPIC’spresidentandchiefexecutiveofficeranddated

April 24, 2007, is on file at OPIC.]