Ascom and others v. Kazakhstan (SCC Case No. V 116/2010)
Summary by Natalia Charalampidou, citation details below.
The final award in these proceedings was issued on December 19, 2013. Respondent filed an application to the Svea Court of Appeal with the request to invalidate or, alternatively, set aside the final award in its entirety or in part on March 19, 2014. The judgment that dismissed the application in its entirety was rendered on July 10, 2014.
Invoked instruments, purported breaches & administering institution:
This was an arbitration under the ECT, arising out of an alleged breach of the standards of expropriation (Art. 13 of the ECT), fair and equal treatment, full protection and security, reasonable and non-discriminatory measures, the umbrella clause (Art. 10(1) of the ECT), exhausting domestic legal remedies (Art. 10(12) of the ECT) and the obligation to permit the employment of key personnel of the claimant's choice (Art. 11 of the ECT) (¶ 102(a)-(e)). The dispute was submitted to a SCC arbitral tribunal according to Art. 26(4)(c) of the ECT.
Any third parties or parallel proceedings:
Claimants in these proceedings were two individuals and two juridical persons. Claimants Mr Anatolie Stati and Mr Gabriel Stati, the latter being the son of the first, were natural citizens of Moldova and Romania (¶¶ 205-206). Claimant Ascom Group S.A. ("Ascom") was a joint stock company incorporated under the laws of Moldova with operational subsidiaries in Kazakhstan (¶ 207). Claimant Terra Raf Trans Traiding Ltd. ("Terra Raf") was a limited liability company incorporated under the laws of Gibraltar (¶ 208). Respondent was the Republic of Kazakhstan ("Kazakhstan") (¶ 204).
Two Kazakh companies had central role in this dispute. These were: Tolkynneftegaz LLP ("TNG"), a domestic company that owned the subsoil use rights to the Tolkyn field and the Tabyl Block according to Contracts 210 and 302 on "Exploration and Extraction of Hydrocarbons at the Tolkyn Deposit and the Tabyl Block" executed between the competent authority of the respondent and TNG on August 12 and July 31, 1998 respectively (¶ 211); and Kazpolmunay LLP ("KPM"), a domestic company that owned the subsoil use rights to the Borankol field according to Contract 305 on "Exploration and Extraction of Hydrocarbons at the Borankol Deposit" executed between the competent authority of the respondent and KPM on March 30, 1999 (¶ 212). A number of share transfers took place, the majority of which required consent or permission, as controlling stake was being acquired. Nevertheless, permission was generally not given (¶¶ 223, 235-237, 239), but for a single exception (¶ 226). Alongside these, the legality of the share purchase of December 9, 1999 was disputed by respondent (¶¶ 223, 240). Following these transfers Terra Raf acquired all interest in TNG by May 12, 2003 (¶¶ 239, 253), notwithstanding a disputed allegation of Ascom owning TNG on September 15, 2004 (¶ 243), and Ascom acquiring all KPM's shares by November 2004 (¶¶ 222, 223, 244). Immediately following these, a statutory change in domestic law gave the state a pre-emptive right over certain transfers of subsoil users (¶ 246). A further statutory change took place in 2008 that amended the laws regarding the payment of export taxes imposing a USD 109.91/ ton duty. In July 2008 KPM was prohibited from exporting crude oil without paying said tax (¶ 277), despite an exception for exported crude oil that had been extracted under the subsoil use contracts (¶ 269).
In 2006 TNG and KPM were serving as guarantors for Tristan Oil Ltd. ("Tristan"), a BVI company (¶ 4.59.3) under claimants' control, to issue three traches of bonds at the EURO MTF Market of the Luxembourg Stock Exchange with maturity of January 1, 2012 for a total amount of USD 531 million. This was called the "Bonds Project" (¶ 254). The first tranche was issued on December 20, 2006 (¶ 255), the second on June 14, 2007 for USD 120 million (¶ 262) and the third on June 19, 2009 for USD 111.11 million (¶ 464).
In summer 2008, the sale of TNG and KPM, along with an LPG plant (¶¶ 250-251), but for Contract 302 properties, was explored by claimants. This was nicknamed the "Project Zenith" (¶ 278). The sale was facilitated through Renaissance Capital (¶¶ 280, 285, 286). By October 1, 2008, eight non-binding offers were submitted to claimants (¶ 290), but later in same month Mr Anatolie Stati decided not to proceed to the firm bidding phase (¶ 300). In January 2009 Project Zenith entered a second phase (¶ 365), which was unsuccessful (¶¶ 462, 476, 478).
In the first week of October 2008, the President of Moldova wrote a letter to the President of Kazakhstan alleging that one of the claimants, Mr Anatolie Stati, was using proceeds from respondent's mineral resources to invest in areas subject to UN sanctions, thus funding terrorist groups. Claimants utterly denied these allegations asserting that they constituted false and defamatory personal accusations (¶ 291). Ten days later, in a temporal (¶ 296) and causal (¶ 950) correlation to the aforementioned letter, the President of Moldova instructed the Deputy Prime Minister and the head of the Financial Police to "thoroughly investigate" all of claimants' business activities in Kazakhstan (¶ 296). Thereafter the Financial Police ordered comprehensive and complex audits of KPM and TNG (¶ 297), involving actions of the Customs Police (¶ 298), the State of Kazakhstan Ministry of Energy and Mineral Resources (¶ 301), the Geology Committee, the Ecology Committee, the National Bank of Kazakhstan, the Tax Committee, the Ministry of Emergency Situations (¶¶ 306, 313, 340), the Tax Committee (¶ 314) and the Customs Committee (¶¶ 316, 320), whereby the Financial Police insisted on being included in the inspections (¶¶ 306, 988). Further, the Financial Police proceeded with the interrogation of KPM and TNG's employees (¶ 350), summoning and questioning KPM's General Manager, Mr Cornegruta (¶ 356), as well as the then-Deputy Manager General for Finance of KPM and TNG (¶ 357), and the General Manager of TNG (¶ 388), requesting and seizing documents, including corporate documents and original corporate documents (¶¶ 358, 378, 379, 402, 408, 419, 431, 446), on-site investigation at the Borankol and Tolkyn Fields (¶ 361), ordering an expert report for the classification of a pipeline (¶ 392), issuing attachment orders to said subsoil use contracts (¶¶ 437, 446), bank accounts (¶ 525), motor vehicles (¶ 337) and pipelines (¶ 554), ordering seizure of claimant's equity interests (¶ 447), conducting unscheduled inspections (¶¶ 442, 529, 532, 587) and overnight office searches (¶ 443). In the same period, one of the claimants, Mr Gabriel Stati, was arrested in Moldova amid allegations of organizing and financing civil unrest and attempting to overthrow the government and was extradited from the Ukraine (¶ 425). During this period, ratings agencies were reporting downgrade reviews of Tristan due to the criminal investigation of KPM (¶¶ 370, 372, 400, 409) and later, following many of the aforementioned actions of the Finance Police, due to weak corporate governance standards (¶ 474).
Most investigations resulted into finding KPM and TNG's compliance (¶¶ 308, 318, 449), not without objections (¶ 337). Albeit, the main issue was the imposition of back tax obligations (¶¶ 394, 407, 506) and a 18km pipeline constructed by KPM that was per se initially approved (¶¶ 233, 234, 238, 249). Yet its qualification as a "trunk" or "main" pipeline (termini used interchangeably throughout the award) was strongly disputed (¶¶ 275, 325, 329, 333, 336, 341, 343, 450, 456), along with it being the object of numerous expert's opinions (¶¶ 367, 368, 369, 389, 429, 450, 473, 483, 484, 542). The operation thereof without a license for "trunk" pipeline gave rise to criminal investigation and prosecution (¶¶ 318, 345, 430, 432, 454, 459, 460, 463, 468, 475) and subsequent imprisonment of Mr Cornegruta (¶ 511) as well as a court order instructing KPM to pay illegal revenue of approximately USD 145.5 million (¶ 492). During criminal prosecution the Finance Police went so far as to chase Mr Cornegruta's attorneys and his wife, while driving after and filming them from their car (¶ 480). The respondent did mention more than once that claimants' possession of confidential and internal letters pointed to serious corruption on behalf of the claimants (¶¶ 296, 389, 487, 493, 495).
In early 2010, the Ministry of Finance commenced bankruptcy proceedings against KPM (¶¶ 539, 541), whereas the competent enforcement authorities issued an order that resulted into KPM being unable to deliver oil from its gathering system to the main pipeline operated by KazTransOil (¶ 548). In July 2010, the state terminated Subsoil Use Contract 305 and Subsoil Use Contract 210 (¶ 611), whereas a notice of termination was sent for Contract 302 that allegedly had already expired in March 2009 (¶¶ 616, 619). This termination lead to all products produced being transferred to the ownership of the state from July 23, 2010 onwards (¶ 620). At the same time, ownership of the LPG plant was transferred, an action that the claimants portrayed as expropriation, and the respondent viewed as a mere transfer to trust management of a Kazakh company (KMG) (¶ 613).
Claimants purported that the above was a "playbook" of harassment to coerce investors (¶ 635), which involved the Financial Police, the involvement of the judiciary (¶ 637) and the renegotiation of a contract or the sale to a Kazakhstan-owned company. They argued that the same tactic was equally used against four other investors in the oil and gas sector (¶ 638). Respondent explained that this allegation was a mere conspiracy theory (¶ 658), whereas claimants had purported nothing more than a conjecture (¶ 673).
The tribunal, in expressing preliminary considerations and conclusions, was not convinced by respondent's linguistic analysis of the ECT (¶ 707), whereby it was purported that SCC lacked jurisdiction due to the Russian text of the treaty referring to the Arbitration Institute of the ICC (¶ 697). Thus, it confirmed its jurisdiction under Art. 26 of the ECT and the Rules of the SCC (¶ 709). Thereafter, the tribunal was convinced of the prima facie proof of nationality of claimants under Art. 1(7)(i) and (ii) of the ECT, through identification cards, passports (¶ 743) and certificates of incorporation (¶ 745). The argument put forward, suggesting that the tribunal did not have jurisdiction over Terra Raf since it was a company incorporated in Gibraltar, where the ECT does not apply, was unsuccessful. The tribunal accepted that the ECT does apply to Gibraltar on the basis of the latter being a part of the then European Community, which is itself party to said treaty (¶ 746). Then it examined its jurisdiction ratione materiae and in view of the explicit definition of "investment" in Art. 1(6) of the ECT, which stands in contrast to the ICSID Convention, decided not to use the Salini test for the definition of investment under said treaty (¶ 806). Further, based on same definition, it affirmed that the ECT does protect investments indirectly owned or controlled (¶ 811), whereas it refused to examine at this preliminary stage the illegality of the investment, as no such requirement is set out in the ECT, quoting Saba Fakes (¶ 812).
Thereafter, the tribunal explained that, according to Art. 22(1) of the SCC Rules and Art. 26(6) of the ECT, the applicable law was the ECT and the applicable rules and principles of international law (¶ 851), while domestic law was relevant only to a limited extend (¶ 852). Turning to the standard of fair and equitable treatment (Art. 10(1) of the ECT) the tribunal found that to a large extent, the parties seemed to be in agreement regarding its abstract definition and scope. More specifically, they agreed that the host state has to act in a manner that is consistent with the legitimate expectations of investors (¶ 941). They equally agreed that same standard had to be considered against all of the factual circumstances (¶ 944). The tribunal, after describing the events that unfolded after the letter of the President of Moldova to the President of Kazakhstan in October 2008 and were valued to be relevant for the alleged breach of the fair and equitable treatment standard (¶ ¶ 948-1084), it reached the following conclusions. Said events and actions seen cumulatively in context to each other, along with the difference of treatment after the order of the President of Kazakhstan to the Financial Police of October 2008, only allowed for the conclusion that they constituted a string of measures of coordinated harassment by various institutions of Kazakhstan (¶ ¶ 1086, 1095). The tribunal found that the unscheduled inspections constituted undue harassment (¶ 1092), parallel to the state being influential over agreements failing to be signed (¶ 1094). Regarding the contention of expropriation (Art. 13 of the ECT), the tribunal reviewed once more the relief sought by claimants that being violation of the ECT and international law along with compensation for all suffered damages (¶ 1202), repeated its finding of violation of the fair and equitable treatment (¶ 1203), which actually resulted into taking (¶ 1207). Thus, it concluded that the first relief sought was already granted. Therefore, it reserved the examination of any breach of the expropriation standard in relation to damages other than the ones caused due to the fair and equitable treatment standard, when evaluating causation and quantum (¶ 1206). The other contentions (¶¶ 1230, 1231, 1254, 1255, 1280-1281, 1313-1314, 1322-1323) were treated in the same manner.
With reference to the element of causation, the tribunal affirmed that claimants bear the burden of demonstrating that the claimed quantum of compensation was caused by respondent's conduct according to Arts. 36 and 39 of the ILC Articles (¶ ¶ 1330, 1452). Equally, claimants' conduct had to be taken into account in determining compensation (¶¶ 1331, 1452). Yet, it accepted that the burden may shift to respondent to state that an intervening event caused the argued damage, unless the injury can be shown to be severable in causal terms from that attributed to respondent, as decided in CME (¶¶ 1332, 1452). Thus, the tribunal concluded that the burden of proof shifted to respondent to show that claimants caused or contributed to the damages that incurred to claimants' investment. The tribunal then noted that respondent failed to provide sufficient proof in this regard (¶¶ 1454, 1458).
In determining quantum, the tribunal took guidance from Art. 13(1) of the ECT and ruled that damages for a breach of the ECT shall not be lower than what the ECT prescribes for an unlawful expropriation (¶ 1461). With reference to the calculation of damages, the tribunal clarified that the starting point is the formula applied in the Chorzów award (¶ 1527). Yet, it declined to rely on decisions of other tribunals, as none of these decisions dealt exactly with a situation as the one on the current dispute (¶ 1528). It proceeded with stating that its award should include cash flows of the assets taken (¶ 1531), minus debts for which claimants are no longer liable (¶¶ 1532, 1535, 1542). It then decided that the correct valuation date was April 30, 2009 (¶ 1616) and considered that claimants provided sufficient proof for three kinds of damages: (a) KPM and TNG lost revenue that they would have earned from their planned production; (b) the gap in the development efforts depressed the production curve at Tolkyn and Borankol more than it would have been, if claimants had been able to develop the fields without respondent's breaching conduct; and (c) claimants were unable to sufficiently respond to the watering issues at the Tolkyn field (¶ 1619). Yet, the tribunal was not convinced by claimants' calculation report and instead it chose the one conceded by respondent that lead to a combined asset value of USD 277.8 million (¶ 1625). Thereafter, it examined separately the quantum on Contract 302 and found no difficulty in accepting the investment of out-of-pocket expenses of USD 31.3 million paid by claimants in exploring and analyzing this property (¶ 1686). Still, it did not accept claimants' alleged damages for lost profit or lost opportunity, which had a high factual and legal threshold (¶ 1687) and was not supported by sufficient proof. It affirmed that an investor claiming such damages must meet a high standard of proof especially due to the degree of economical, political and social exposure of long-term investment projects (¶¶ 1691, 1688). With reference to the quantum on the LPG plant, the tribunal was not convinced by respondent's arguments of it being a failed project with negative value, mainly due to respondent having been ready to invest further in its completion after taking control of it (¶ 1745). It then decided to base the valuation on the offer made for it in the accepted period of the valuation date by a state-owned company, which amounted to USD 199 million (¶ 1747). Following that, the tribunal addressed the Tristan Notes and accepted that insofar as claimants remain responsible for this debt, enterprise value was the correct measure of damages (¶ 1769). Regarding moral damages, the tribunal affirmed that they are justified in very exceptional circumstances (¶ 1781), where claimants have the burden of proof and must meet a very high threshold to show liability for such (¶ 1782). In this particular dispute, although respondent's treatment of the claimants was severe, intentional and multi-faced (¶ 1783), the tribunal concluded that claimants failed to fulfil the burden of proof. Thus, it did not order moral damages (¶ 1786). Also, it did not deduce claimants' tax obligations (¶ 1801), as argued by respondent. It repeated that back tax obligations were a major part of the string of measures established to be in breach of the ECT (¶ 1799), whereas KPM and TNG prevailed in their court challenges of the tax assessments (¶ 1800). Finally, the tribunal agreed that interest was due (¶ 1852). In view of the damages being awarded in USD, it considered that the rates of six months U.S. treasury bills over the relevant period were in this case the appropriate rate (¶ 1854).
This dispute concerned corporations that owned subsoil use rights in Kazakhstan. These corporations were subject to overzealous inspections by state authorities, imposition of back tax obligations as well as imprisonment and fines for operating a pipeline without license. Respondent terminated the contracts providing said subsoil use rights and commenced bankruptcy proceedings against one of the corporations. The tribunal noted parties' agreement on the definition and scope of the fair and equitable treatment standard, that of a state acting in a manner consistent with the legitimate expectations of investors. It then examined this standard against the facts of this case and found that respondent was in breach thereof. It reserved the examination of any breach of the expropriation standard ( Art. 13 of the ECT ) while evaluating causation and quantum. It treated in a similar manner the claims of respondent's provision of domestic remedies (Art. 10(12) of the ECT) and obligation to enable employment of key personnel of investors' choice (Art. 11(2) of the ECT) and breaching the standards of full protection and security, reasonable and non-discriminatory measures and the umbrella clause (Art. 10(1) of the ECT). It then calculated damages on the basis of the Chorzów award, but awarded none for lost profit or loss of opportunity due to insufficient proof. It reached the same conclusion on the requested moral damages.
This summary comes from the following paper:
The paper is part of the joint OGEL/TDM/ArbitralWomen Special Issue:
TDM 7 (2018) - OGEL/TDM/ArbitralWomen - Strategic Considerations in Energy Disputes