Liman Caspian Oil v Kazakhstan (ICSID Case No. ARB/07/14)
Summary by Natalia Charalampidou, citation details below.
The final award in these proceedings was issued on June 22, 2010. Only a redacted version is publicly available.
Invoked instruments, purported breaches & administering institution:
This was an arbitration under the ECT, arising out of an alleged breach of the standards of fair and equal treatment, minimum standard of treatment, including denial of justice, full protection and security, the umbrella clause (Art. 10(1) ECT) and indirect expropriation (Art. 13(1) ECT) (p. 2). The dispute was submitted to an ICSID arbitral tribunal under Art. 26(4)(a)(i) of the ECT.
Any third parties or parallel proceedings:
Claimants were Liman Caspian Oil B.V. ("LCO"), incorporated in an undisclosed country according to the public available excerpts of the award, and NCL Dutch Investment B.V. ("NCL"), also incorporated in an undisclosed country according to the public available excerpts of the award. NCL owned 90% of the shares in LCO and was in turn owned by a Canadian company "Z", in which the controlling interest was held by a Swiss national (p. 1). Respondent was the Republic of Kazakhstan ("Kazakhstan").
The dispute concerned a license to explore and extract hydrocarbons in Western Kazakhstan, which was granted by the state Investment Agency to a company incorporated in Kazakhstan in 2000. Two years later rights and obligations under this license were assigned to LCO according to the relevant agreement ("Assignment Agreement"). The minority shareholders of the Kazakh company made successful efforts to invalidate the Assignment Agreement before domestic courts (p. 1). However, in the meantime, the majority shares of same Kazakh company had changed hands. Yet, in May 2005 the initial majority shareholder was reinstated as the license holder and subsequently transferred the license to another company (p. 2).
The tribunal reaffirmed that the ECT is interpreted according to Arts. 31 and 32 of the VCLT (¶¶ 170, 171). Further, it noted that, contrary to Art. 38(1)(d) of the Statute of the ICJ, no express rule in either the ECT or in the ICSID describes, whether arbitral awards are of relevance to the tribunal's task. Yet, it decided that it is not precluded from considering arbitral decisions to the extent that shed any useful light on the issues arising in the present case. Still, it clarified that said decisions do not unfold a binding legal effect (¶¶ 172-173).
Turning to matters related to its jurisdiction, the tribunal examined the lawfulness of the investment. It distinguished between a transaction which is void or invalid, and a transaction which is merely voidable (¶ 181). Specifically, if the transaction here in question was in breach of the domestic law provisions, it would be merely voidable (¶ 182). Hence, claimant's investment did not fall outside the scope of respondent's consent to jurisdiction. The question of legality was relevant to the merits and did not have preclusive effect at the level of jurisdiction (¶ 187). In examining the argument of international public policy, the tribunal took the view that violation thereof makes an investment invalid without a legal action for invalidation and without a court declaration of invalidity having to be issued (¶ 193). It added that it had no jurisdiction over investments made in such violation, as long as fraud and bribery are proved by respondent that bears the burden of proof. This was not achieved in the present proceeding (¶ 194).
The tribunal, after having considered all jurisdictional issues, it proceeded with examining whether the respondent could invoke the right to deny the advantages of the ECT under Art. 17(1) of the ECT (¶ 215). Initially, it noted that undisputedly in order for a right to be reserved, it had to be exercised in an explicit way (¶ 224). Then such a right unfolds prospective, not retroactive, effect. This interpretation was supported by Art. 31(1) of the VCLT in combination with Art. 2 of the ECT, as well as the principle of legal certainty (¶ 225). In the present case, the tribunal rejected this argument, as respondent had invoked Art. 17(1) of the ECT for the first time one year after the filing of the request for arbitration (¶¶ 226, 249, 258).
Then, the tribunal addressed liability. It clarified that the ECT was intended to provide protection beyond the minimum standard of treatment under international law and therefore Art. 10(1) of the ECT differs from Art. 1105 of the NAFTA (¶ 263). It then considered that the international delict of denial of justice is an example of the standard of fair and equitable treatment under Art. 10(1), second sentence, of the ECT, without further dealing with their relationship in general (¶ 268). Furthermore, in determining the scope of denial of justice, it emphasized that an international arbitration tribunal is not an appellate body and its function is not to correct errors of domestic procedural or substantive law (¶¶ 275, 274, 325, 364), endorsing the Loewen award (¶ 278). Thus, it held that respondent could only be held liable for denial of justice if claimants were able to prove that the court system fundamentally failed, an assertion established mainly in cases of major procedural errors. Substantive issues could be relevant merely as an indication of lack of due process (¶ 279). Yet, at the present case, as both parties agreed, this was not sufficient to establish a breach of Art. 10(1) of the ECT (¶ 285). With reference to the standard of full protection and security, the tribunal noted that it aims to protecting the integrity of an investment against interference by the use of force and particularly physical damage. No such interference took place in the present case and thus the disputed actions were not covered by this standard (¶ 289). Regarding expropriation under Art. 13 of the ECT, the tribunal clarified that a measure constitutes an expropriation if it constitutes a substantial deprivation of property forming all or a material part of the investment, provided that the measure is attributable to the state (¶ 293).
With reference to the alleged breaches in the present case, the tribunal made the following findings. Regarding the fair and equitable treatment standard under Art. 10(1) of the ECT, the tribunal affirmed that domestic law was only considered to be relevant in so far as domestic court decisions are acts attributable to a state and must be assessed under international law (¶ 326). It stressed that the tribunal's task was restricted to examining whether the Kazakh court decisions had breached the state's obligations under the ECT (¶ 347). The Kazakh courts' conduct in the present case was not deemed to reach the threshold of judicial conduct which could be considered arbitrary, grossly unfair, unjust or idiosyncratic or involving lack of due process. Similarly, judicial propriety was not offended (¶ 348). Thus, the domestic court decisions were irreproachable from the perspective of international law and did not breach Art. 10(1) of the ECT (¶¶ 349, 365, 366). Especially with reference to the treatment of minutes by the Kazakh courts, the tribunal agreed with claimants that there might have been irregularities, albeit claimants failed to prove arbitrariness in this regard. Hence, they did not meet the burden of proving misapplication of domestic law (¶ 377). In addition, the tribunal acknowledged that it had no competence to control the application of domestic law by Kazakh courts and repeated that there was no evidence proving that the decision was arbitrary, grossly unfair, unjust or idiosyncratic or involved any lack of due process (¶ 383). Turning to corruption, the tribunal affirmed that this constitutes both grave violation of the standard of fair and equitable treatment and a serious allegation, especially in the context of judiciary. In this case, the high standard of proof was not met, as merely generalized allegations were expressed but not substantiated (¶¶ 422, 424).
The tribunal then proceeded with examining the claim of expropriation (Art. 13(1) of the ECT). It repeated its finding that the Kazakh court decisions were not arbitrary, grossly unfair, unjust, idiosyncratic, discriminatory or lacking due process. As a consequence, the invalidation of the transfer of the license by the Kazakh courts had to be accepted under both international law and the ECT (¶ 431), and these judicial decisions did not constitute an expropriation (¶ 432). It then affirmed that a governmental authority cannot be reproached for acting in accordance with a decision taken by the state's own courts (¶ 433). The domestic courts' decision not to order restitution of money paid for the transfer of the license in view of the poor evidence presented, equally did not constitute an expropriation (¶ 438).
The tribunal, before examining the allegation of breach of the umbrella clause (Art. 10(1) of the ECT), considered that claimant (LCO) was no party to the license. Thus, it had no rights arising from the same. Equally, it could not invoke any rights of the License Agreement or bring a claim for a breach of it or of the ECT. In view of that, the tribunal deemed unnecessary to consider the various issues raised in relation to the umbrella clause (¶¶ 443, 456). Then, in addressing the suggestion that the state was in breach of its domestic laws on investment and therefore in breach of the umbrella clause under the ECT, the tribunal explained that the wording of the relevant provision ("obligation") suggests the existence of a contractual or similar bilateral relationship. It accepted, that it could be argued that an abstract unilateral promise by the state in its national laws could be encompassed by the umbrella clause (¶ 448). Yet, it decided that it did not have to decide this issue, as the actions of the state in the present case were accepted to be in conformity with Kazakh law by the national courts. Claimants had not shown a breach of Kazakh law, which could trigger a breach of the umbrella clause (¶ 449).
Finally, the tribunal found the question of causation of the damage to be moot, due to the state being held liable under neither the ECT nor the license (¶ 460).
This dispute concerned judgments ordering invalidation of an agreement providing rights to explore and extract hydrocarbons in Kazakhstan. The tribunal examined the jurisdictional issue of legality of the investment. It clarified that an illegal investment is merely voidable and thus, it does not affect the tribunal's jurisdiction. Moreover, this issue is only relevant at the phase of the merits. It also noted that violation of public policy does deprive a tribunal of its jurisdiction, but here neither fraud nor corruption was established. The tribunal rejected the argument on the denial of benefits provision (Art. 17(1) of the ECT) as the right was exercised one year after the filing of the Request for Arbitration. Regarding denial of justice, the tribunal reiterated that it conditions fundamental failure of a court system, whereas expropriation conditions a substantial deprivation of property forming all or material part of the investment. In the present case, neither of these standards had been breached. The claim of breach of the full protection and security standard was not examined, as both parties agreed that no force was used, and no physical damage took place.
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