ICSID Rejects Denial of Justice Claims against Kazakhstan in a Recently Released Award

Last week ICSID released a redacted version of a 2010 award in Liman Caspian Oil B.V. and NCL Dutch Investment B.V. v. Kazakhstan.  While both the facts of the case and the parties’ positions have been redacted, the remaining parts of the award provide illuminating analysis of such issues as legality of the investment as a condition of jurisdiction as well as the standard of denial of justice.

The Dispute

It appears that the dispute arose out of an acquisition of a hydrocarbons extraction licence gone bad.

The licence to explore and extract oil in the Liman region in Western Kazakhstan had originally been issued to a Kazakh company in 2000. In 2002, it assigned the licence to Liman Caspian Oil B.V., one of the claimants in the ICSID arbitration. The assignment apparently took place as part of the wider deal between the ultimate shareholders of Liman and the Kazakh company, with the latter acquiring an ultimate minority stake in Liman.

Minority shareholders of the Kazakh company challenged the assignment arguing that the director had failed to obtain necessary corporate approvals to enter into the transaction. The Kazakh courts granted the claim and the licence was reinstated to the Kazakh company.
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Liman had tried to recover the consideration paid for the licence from the shareholders, but the Kazakh courts rejected this claim.

Legality of Investment

In the ICSID arbitration Liman argued that the licence constituted its investment in Kazakhstan. Kazakhstan objected that since the assignment agreement was entered into in breach of Kazakh law and invalidated by Kazakh courts it was unlawful and therefore outside of the tribunal’s jurisdiction.

The tribunal disagreed for two reasons. Firstly, it noted that under Kazakh law a transaction entered into in the absence of necessary corporate approvals (for major transactions) was not void, but voidable. Accordingly, at the time the investment was made the agreement was valid. The tribunal accordingly was not required to decide on whether illegality of the investment would have deprived it of jurisdiction. However, it nevertheless went on to note that “it could be argued” that even an illegal investment would fall within the jurisdiction of a tribunal under the Energy Charter Treaty.

The latter conclusion is notable. The ECT, unlike many BITs, does not expressly require an investment to be made “in accordance with the law” to qualify for protection. However, in Plama v. Bulgaria the tribunal suggested that such a requirement may be deduced from the object and purpose as well as travaux preparatoires of the ECT. One cannot but note that the Liman tribunal appears to have had a certain misgiving about this approach, which is reflected, although in very cautious terms, in the award.

Next, the tribunal turned to the respondent’s international public policy argument.
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It agreed that it does not have jurisdiction over investments made in breach of international public policy, but found that the respondent failed to show any such breach. The award is not clear as to what the tribunal thought to be encompassed by this notion. Fraud and bribery clearly fall within it and a voidable transaction does not. However, the award appears to suggest that any investment based on a void transaction would be contrary to the international public policy.

Denial of Benefits

After the claimants commenced ICSID arbitration Kazakhstan purported to exercise its right under Article 17(1) of the ECT to deny to them the benefits under the treaty. However, clearly siding with an earlier award in Plama v. Bulgaria, the tribunal held that the withdrawal of benefits had no retrospective effect and was therefore irrelevant. The respondent claimed that it was unaware of the fact that a national of a third state controlled the claimant and therefore should be permitted to deny benefits retroactively. The tribunal noted that such an exception may indeed exist, but held that it need not decide whether it did. This was because Kazakhstan was aware of the third state national controlling the claimant long before it purported to deny benefits to the claimant.

Denial of Justice

The tribunal began its analysis with several basic points. First, it noted that the fair and equitable treatment standard under the ECT went beyond and was not limited to the minimum standard under customary international law. Second, it observed that the prohibition of denial of justice formed part and parcel of the fair and equitable treatment standard. On the other hand, it did not rule out the possibility that actions of state courts may breach the fair and equitable treatment standard even if they do not amount to denial of justice. The tribunal noted judicial corruption as an instance where the fair and equitable treatment standard would be infringed.

The tribunal next defined the delict of denial of justice as a fundamental failure of the court system and noted “[s]uch failure is mainly to be held established in cases of major procedural errors such as lack of due process. The substantive outcome of a case can be relevant as an indication of lack of due process and thus can be considered as an element to prove denial of justice” (para.279).

Next, the arbitrators considered individual instances of alleged denial of justice by Kazakh courts in the course of assignment agreement invalidation proceedings. They noted that a possible misapplication of Kazakh law on the approval of major transactions or refusal to consider an ambiguous statement made by a claimant in one set of domestic proceedings do not amount to denial of justice.

While the tribunal went through a number of alleged misapplications of Kazakh law one instance deserves specific analysis. One of the parties challenging the assignment was the new shareholder of the Kazakh company, which acquired the shares after the company had entered into the assignment agreement. It appears that as a matter of Kazakh law a shareholder may not challenge transactions the company entered into before it acquired the shares.

The tribunal noted that the decision of the courts to vest the right to challenge the company’s transactions on the new shareholder was not arbitrary or grossly unfair from an international perspective. This suggests that the outcome of the proceedings is the element that should be tested by the denial of justice standard. This may be correct in some instances, where courts adopt decisions which are unfair, though one may wonder whether this would be the case if the courts apply laws which were in force at the time the investment was made.

One also wonders whether the ultimate fairness of the result (from the arbitrators’ perspective) will justify egregious misapplication of national laws or procedural violations.
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Certainly, where the issue is unsettled one may argue that the decision of a court does not amount to denial of justice, especially if the ultimate result appears to be fair. Yet, fairness of the outcome or the rule the court chose to apply should not be determinative.

A redacted version of the award is available here.

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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