ICSID Tribunal Refuses Jurisdiction in a Dispute Against Kazakhstan

According to the Kazakh Ministry of Justice, a foreign company which initiated a dispute against Kazakhstan has failed to establish that it was controlled by a national of a state party to the ICSID Convention.

The ICSID tribunal in Caratube International Oil Company v Kazakhstan decided that the claim was brought by a Kazakh company which failed to meet the necessary jurisdictional requirement under Article 25(2)(b) of the ICSID Convention and the applicable BIT.

The dispute centred around a concession for the exploration and exploitation of oil fields in the Caratube region of Kazakhstan which was terminated by the authorities in 2008. It appears from the publicly available documents that the authorities based their decision on an alleged breach by the concessionaire.

Caratube International argued that the decision was politically motivated and based on the association between the shareholders of the company and Mr Aliev – the then estranged former son-in-law of the President of Kazakhstan. Caratube International commenced ICSID proceedings in June 2008 seeking USD 1.

2 billion of compensation.

While the full text of the award is not available, it appears from various sources that the claimant failed to establish that it was controlled by a US national (a Mr Hourani), who was the registered shareholder holding 92% of its shares. In Kazakhstan’s counter-memorial (available online) it was suggested that the company was financed by a Lebanese national and Mr Hourani had acquired his interest for about USD 6,500.

Thus it may be possible that the tribunal found that he was only a nominee who did not exercise any actual control.

While Lebanon is also a party to the ICSID Convention, it is unclear whether a company controlled by a Lebanese national would have been able to invoke the US-Kazakhstan BIT (there is no BIT between Kazakhstan and Lebanon).

Tribunals Increasingly Engage in Assessment of Actual Control Over Investments

The last few years have seen an increasing number of cases where tribunals have found that they could not exercise jurisdiction because an investor did not fall within the ambit of the BIT it had invoked. This has ranged from awards being based on a local company not being controlled by a foreign national (TSA Spectrum v Argentina), bad faith restructuring of the investment to obtain jurisdiction (Phoenix Action v Czech Republic) and failure to satisfy unusual limitations imposed by the applicable BIT (Alps Finance v Slovak Republic and H.I.C.E.E. v Slovak Republic).

At the same time, in other cases, where claims are brought by foreign companies under BITs which do not require anything other than incorporation in a particular State, tribunals continue the line of jurisprudence normally associated with the award in Tokios Tokeles v Ukraine, namely that actual control over the investment is irrelevant (see recently Mobil v Venezuela).

The contrast between these two lines of jurisprudence is startling. But from a practical perspective what it suggests is that investors in foreign states would be well advised to consider available investment protections at the time the investment is made and take this assessment into account when deciding on a corporate structure.

Investment Arbitrations Against Kazakhstan

Kazakhstan is one of the most experienced CIS states in terms of investment arbitration. It is currently party to at least five such arbitrations (KT Asia Investment Group B.V. v Kazakhstan, AES Corporation and Tau Power B.V. v Kazakhstan, Turkiye Petrolleri Anonim Ortakligi v Kazakhstan (all ICSID), Ascom S.A. v Kazakhstan (SCC) and Ruby Roz Agricol v Kazakhstan (UNCITRAL)).

In the past it has obtained mixed results from the ICSID tribunals. It has lost two cases on the merits (AIG Capital Partners Inc and CJSC Tema Real Estate Company v Kazakhstan and Rumeli Telekom S.A. and Telsim Mobil Telekomunikasyon Hizmetieri A.S. v Kazakhstan). It has also prevailed on jurisdictional grounds in two other cases (Liman Caspian Oil B.V. and NCL Dutch Investment B.V. v Kazakhstan and Caratube International) and settled one dispute (Enrho St Limited v Kazakstan). Similarly according to the publicly available information Kazakhstan prevailed on the merits in one SCC arbitration (CCL v Kazakstan) and lost in the other (Biederman International Inc. v Kazakhstan).

Sergey Usoskin