Caratube v. Kazakhstan Contributes to the Definition of Investment Debate

We reported earlier that in June 2012 an ICSID tribunal dismissed Caratube International’s USD 1 billion claim against Kazakhstan on jurisdictional grounds. The full text of the award has now been released and is discussed in this article.

The dispute centred around the termination of Caratube’s licence to an oilfield in Kazakhstan and allegations that Caratube and its managers and owners had been continuously harassed by the authorities.  The claimant argued that this was a result of a fallout between Kazakhstan’s President and his former son-in-law, who was also a relative of the claimant’s owner. Kazakhstan in turn claimed that Caratube had repeatedly failed to perform its obligations which eventually led to termination of the licence agreement.

The tribunal did not address the parties’ cases on the merits and decided the case on jurisdictional grounds.
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Since Caratube is a Kazakh company it was required to prove that it was under foreign control (Article 25(2)(b)) and an investment of a US national (Article VIII of the US-Kazakhstan BIT). The tribunal found that the claimant had failed to satisfy the last condition, because it had failed to produce evidence that Mr Hourani, the alleged US investor, had invested anything in Caratube.

Definition of Investment

Under the ICSID Convention a company incorporated in the respondent state may bring a claim against that state if the latter agreed to treat it as a foreign investor “because of foreign control”. In the present case Caratube relied on Kazakhstan’s consent given in the US-Kazakhstan BIT, where the latter agreed to treat as foreign investors any Kazakh companies that constituted an investment by a US national. The tribunal concluded that to rely on this provision Caratube had to establish that it was an investment owned or controlled by a US national.
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The relevant BIT is based on the 1984 US Model BIT, which defines investment as any kind of “investment” before going on to list examples of assets that may form part of an investment. The tribunal found that the repetition of the word “investment” in the definition meant that the parties intended to import into the definition the ordinary meaning of this concept, which includes such elements as contribution, duration and risk.

To support its analysis the tribunal relied on domestic materials originating from the US, which indicated that the intention of the US government was to extend protection only to such projects that constitute investments, as well as to the 2004 US Model BIT, where repeated reference to “investment” was replaced by a more explicit list of characteristics of a project.

In this respect the award follows a line of cases which subject BIT definitions of “investment” to closer scrutiny and hold that not every asset listed in a definition would necessarily constitute an investment unless it has characteristics inherent to the corresponding economic notion. This approach was famously spelt out in Romak S.A. v. Uzbekistan and appears to have been endorsed (at least partially) by the recent awards in Abaclat v. Argentina and Malicorp v. Egypt.

What really sets the award apart from earlier decisions is the requirement of an economic link between the investor and his investment. That is the tribunal found that it is not sufficient that an investor owns shares of the company for the company to constitute an investment, but the investor must establish what he contributed to the company. The tribunal based this interpretation on the preamble to the BIT, which refers to the flow of capital between the states. Hence only those investments that result in such a flow are covered.

Applying this criterion to Caratube, the tribunal found that it had failed to substantiate that Mr Hourani, (its US shareholder) had made any such contribution. The tribunal found that the company was financed by loans made by a Lebanese company.
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Although Mr Hourani had provided a personal guarantee to the lender it was limited and possibly cancelled by the time the dispute had arisen. The tribunal further found that the claimant had failed to prove that Mr Hourani contributed his knowhow as there was no evidence that he in any way participated in the management of the claimant or had experience in oil exploration and exploitation.  Finally the tribunal found that Mr Hourani had acquired his shareholding for a token sum, which could not represent his investment.

The Tribunal’s Decision Potentially Motivated by Suspicions as to the True Role of the Alleged Investor

Kazakhstan argued that Caratube was not a bona fide investment and therefore not covered by the ICSID Convention. The reason for this, according to Kazakhstan, was that Mr Hourani was not a true investor, but rather a nominee for his brother, a Kazakh national and a Lebanese national. Kazakhstan relied on the fact that Mr Hourani had acquired the interest in the company only after the Kazakh authorities had first invoked Caratube’s failure to perform its obligations under the contract, and that there was no evidence that he had paid anything for the shareholding nor that he had subsequently controlled the company or been able to finance its operations.

The tribunal refrained from ruling on this objection stating that it had been made irrelevant by its finding that Caratube was not Mr Hourani’s investment under the BIT. At the same time it is notable that the tribunal restated the objection and the facts relied on by Kazakhstan in detail. This perhaps indicates that the tribunal drew additional comfort in reaching its eventual conclusion to deny jurisdiction on the basis of this evidence.

It is understood that Caratube submitted an application for annulment of the award on the basis of Article 52(b), (d) and (e) of the ICSID Convention. Caratube argues that the tribunal manifestly exceeded its powers when it failed to recognise a US national’s shareholding in Caratube as his investment. Furthermore, Caratube claims that it was denied the right to be heard with respect to the definition of investment issue and the tribunal failed to state reasons.

The full text of the award is available here.

Sergey Usoskin

About the Author:

Sergey Usoskin is an advocate (member of the Russian bar) and a senior associate at Ivanyan&Partners. He has experience advising clients on and representing them in commercial and investment arbitration matters as well as before the Russian court (including the Supreme Commercial Court). He is a graduate of St Petersburg State University, Faculty of Law and University College London Faculty of Laws.

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