By 11 November, 2020 0 Comments Read More →

Gold Pool v Kazakhstan: the State is Not Bound by the Soviet Treaty

On July 30, 2020, an arbitral tribunal chaired by Albert Jan van den Berg, with David Williams and Gabriel Bottini as co-arbitrators, has rendered a unanimous award dismissing claims of a Canadian company, Gold Pool JV Ltd., against the Republic of Kazakhstan in international arbitration proceedings.

In its decision, the Tribunal held that Kazakhstan was not bound by the USSR-Canada 1989 bilateral investment treaty. Such a change in approach to treaty succession issue may restrain investors from challenging states by invoking Soviet treaties.

Background of the Dispute

The storyline of the case dates back to March 1996, when Gold Pool owned by a Toronto-based joint venture was entrusted to manage operations of the state-owned mining company in Kazakhstan in order to change the Kazakhaltyn JSC`s unsuccessful business strategy. However, Gold Pool failed to overturn a negative trend in mining operations: the gold mines did not function properly, necessary geological exploration work was not conducted, the debts of the enterprise to its employees and contractors have even increased.

It should be mentioned that the unsuccessful functioning of mines had a negative social impact. Local citizens suffered from a decrease in wages and coal supply, which subsequently led to poor heating during the winter season. And there were no evident signs of the situation could get better. These circumstances forced the Kazakh authorities to terminate the management contract with the Canadian company in August 1997.

As Canadian media reported, Gold Pool faced several force majeure events, including increased production costs, power shortages, and processing restrictions at the mines. Moreover, Gold Pool considered suspending operations as it deemed the project economically unviable.

Pursuant to the arbitration clause in the terminated management contract, Gold Pool filed an international commercial arbitration claim against its Kazakh counterparts but did not take any further steps to move the claim forward. In 2000, the statute of limitations of Gold Pool for a claim has expired as envisaged by the national law of Kazakhstan.

Nevertheless, in February 2014, Gold Pool decided to take the second attempt to sue the State and sent a notice of arbitration under the Canada-USSR Agreement for the Promotion and Reciprocal Protection of Investments of 1989 (BIT), allegedly applicable to Kazakhstan. In March 2016, the claimant initiated the arbitration proceedings administrated by the Permanent Court of Arbitration under the UNCITRAL Arbitration Rules. The total amount of the arbitration claims reached US$917 million.

Lawyers from Jones Day in Washington, DC, and London represented Gold Pool, while a team from Curtis Mallet-Prevost Colt & Mosle in Washington, DC, New York and Milan acted for Kazakhstan.

Jurisdictional Objection

Along with strong disagreement with the claim on its merits, Kazakhstan as a Respondent State raised a jurisdictional objection. The state argued that the Canada-USSR Agreement of 1989 did not apply to Kazakhstan. In order to prove that Kazakhstan was not bound by the said treaty, issues of legal succession, drafting history and development of bilateral relations between Canada and Kazakhstan were invoked.

As Kazakhstan’s Ministry of Justice mentioned in its press release, the work included the analysis of international treaties, locating and scrupulously studying archival documents of various ages starting from the country’s gaining its independence, diplomatic notes, statements at the intergovernmental level, correspondence and records of state bodies and officials. Thus, the Respondent State insisted on the absence of its legal succession to the Canada-USSR Agreement and, consequently, on dismissing the claim of Gold Pool due to the lack of jurisdiction.

The decision of the Tribunal

The hearing was held in June 2019 in Paris. The Tribunal rejected Claimant’s argument that Kazakhstan and Canada had reached a “tacit agreement” on the continuity of the Soviet BIT between them, which meant that Kazakhstan was not bound by the arbitration clause of the mentioned treaty. As a result, the claim of Gold Pool against Kazakhstan was dismissed due to the lack of jurisdiction. The tribunal also ordered the plaintiff to reimburse Kazakhstan for all the costs incurred in the arbitration process.

Interestingly, the Tribunal’s opinion in the Gold Pool case polarly differs from that previously made by another tribunal in an arbitration case initiated on behalf of Canadian company Worldwide Minerals Ltd., which similarly to Gold Pool was operating a mining facility in Kazakhstan in the mid-1990s (see also a publication about that case here – eds.). After the company`s bankruptcy and nationalization, the investor brought an arbitration claim against Kazakhstan in 2013 under the same Canada-USSR BIT 1989. In January 2016, the tribunal in this case found the claims admissible under the Canada – USSR treaty. While the Award on jurisdiction itself is confidential, the Tribunal dismissed all of Kazakhstan’s objections that the Canada – USSR BIT was not in force between Canada and Kazakhstan and that Worldwide had made no Treaty-protected investments in Kazakhstan.

One of the possible reasons why the Tribunal upheld its jurisdiction refers to the establishment of the Commonwealth of Independent States (CIS). The Council of Heads of State of the CIS signed a memorandum of understanding on issues of succession to treaties of the USSR in which they decided to recognize that all members of CIS gained a status of successors to the obligations of the Soviet Union. Thus, the former Soviet Republics, including Kazakhstan, acknowledged their willingness to comply with all the international commitments undertaken by the USSR, which would presumably include the Canada – USSR BIT.

Notwithstanding the fact that Claimant only partially succeeded in its claims on merits, the main takeaway of this case refers to the admissibility of investment claims against Kazakhstan under Canada-Soviet BIT 1989. However, the tribunal in the Gold Pool case has diverged from this approach.

Notably, the issue of treaty succession played in the Oleg Deripaska v. Montenegro case, with the tribunal holding that the Russia-Yugoslavia BIT cannot be applied to Montenegro as a former region of Yugoslavia.

Concluding Remarks

Central Asia possesses a considerable amount of natural resources, which partially explains an increasing number of investment arbitrations involving the mining sector over the past two decades. Foreign investors actively challenge Kazakhstan. 7 publicly known ISDS disputes against Kazakhstan arouse during the last decade. Considering the arbitral award in the Worldwide Minerals case and the fact that the Soviet Union concluded BITs with some other states (e.g. including Finland, France, Germany), the number of claims against Kazakhstan may increase in the future.

Kazakh officials believe that ISDS claims constitute an attempt “to make money in arbitration based on dubious facts”. On the other hand, the national legal framework needs improvement, as it exposes Kazakhstan to an increasing number of investment claims and does not offer legal certainty to the State or its investors. Thus, revision of current regulations of foreign investment in Kazakhstan seems rational.

About the Author:

Anton Tugushev is a Ph.D. researcher at the School of law, City University of Hong Kong. He holds his undergraduate and postgraduate degrees from the Russian Customs Academy with a specialization in law. Anton worked in the Ministry of the Development of the Russian Far East and had internships in the Hong Kong International Arbitration Centre (HKIAC) and the International Centre for the Settlement of Investment Disputes (ICSID). His current professional and research endeavors are focused on international investment law, trade law and dispute resolution. Specific topics of his strong attention are the special (free) economic zones and the theory of "law and development".

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