Ad hoc committee confirms that Kazakhstan is on the hook for US$ 125 million
By Elizabeth Whitsitt
April 8, 2010
An ad hoc committee, established pursuant to the ICSID Arbitration Rules, has rejected the annulment application of the Republic of Kazakhstan. The former Soviet Republic’s bid for annulment came after an ICSID tribunal ordered Kazakhstan to pay Rumeli Telekom A.S. (Rumeli) and Telsim Mobil Telekomunikasyon Hizmetleri A.S. (Telsim) US$ 125 million in damages for breaches of the Kazakhstan-Turkey BIT.
Problems between the parties began in the summer of 1998 when Rumeli and Telsim, through their 60% shareholding in Kazakh company KaR-Tel, won a bid to hold a license to operate the second mobile telephone network in Kazakhstan. Around October 1998, KaR-Tel started to negotiate with the State Committee on Investment an agreement that would grant KaR-Tel investment incentives.
Those negotiations led to the conclusion of an investment contract between KaR-Tel and the Kazakh investment committee some months later. The investment contract obliged KaR-Tel to make investments, to apply advanced technology and to provide the investment committee with regular and detailed information on the progress of its investment. In return, KaR-Tel was granted tax and other benefits, including a five-year total exemption from corporate and property tax, and reduced rates for the five years thereafter. The investment contract was to expire on July 31, 2009.
In 2001 various differences arose between the parties to the agreement, which culminated in the unilateral termination of the investment contract by the Kazakh investment committee. Challenging this maneuver, Rumeli and Telsim commenced arbitral proceedings in July of 2005.
Specifically, the claimants maintained that their agreement with the state investment committee was wrongful as they had met their obligations under the investment contract. According to claimants, once KaR-Tel’s success was assured, the respondent devised a scheme to orchestrate their expulsion from KaR-Tel in a definitive manner and to keep all of KaR-Tel for their sole benefit. Thus, Rumeli and Telsim argued that Kazakhstan had breached obligations it owed to foreign investors under international law and the Kazakhstan-Turkey BIT.
On July 29, 2008 an ICSID tribunal unanimously sided with Turkish claimants finding that: (i) it had jurisdiction over the dispute; (ii) Kazakhstan had breached its obligation to accord Rumeli and Telsim fair and equitable treatment; and (iii) Kazakhstan had expropriated Rumeli and Telsim’s investment.
Some three months later Kazakhstan sought an annulment of the tribunal’s award. Grounding its application on Articles 52(1)(b) and 52(1)(d) and 52(1)(e) of the ICSID Convention, the Republic argued that: the tribunal had manifestly exceeded its powers; there had been a serious departure from a fundamental rule of procedure; and the tribunal failed to state the reasons upon which its decision was based. Specifically, Kazakhstan took issue with the tribunal’s decision regarding: jurisdiction, collusion, causation and damages.
As seen in other annulment decisions*, the ad hoc committee in this case began its consideration of those arguments by clarifying the scope of its power to review decisions. Addressing the contradictory views of the parties on this point, the committee observed that “[a]n ad hoc committee should not be concerned with upholding the finality of an award or ensuring that the review of the award is as extensive as possible…but should simply act within the confines of the task devolved upon it by the ICSID Convention.” Moreover, the committee noted that its discretion to annul an award does not depend on whether an alleged breach of Article 52 is “trivial” or “determinative of the claim.”
The ad hoc committee, composed of Judge Stephen M. Schwebel, Professor Campbell McLachlan and Dr. Eduardo Silva Romero, then went on to reject all of Kazakhstan’s arguments for annulment. In so doing, the committee confirmed that the standard of review applicable to all of Kazakhstan’s arguments is very high, thus making successful annulment applications under the ICSID Convention extremely rare.
One example of the ad hoc committee’s reasoning in this regard can be seen in its consideration of arguments raised by Kazakhstan regarding the tribunal’s damage assessment.
Kazakhstan contended that the tribunal failed to give reasons for its decision on the quantum of damages awarded and that the award should be annulled on that basis. In particular, Kazakhstan asserted that the tribunal’s reasons “…were so erroneous, illogical, inconsistent and insufficient…” that it was impossible to determine how the tribunal had reached a damage amount of US$ 125 million. As support for this contention, the Republic took issue with a number of aspects of the tribunal’s analysis, calling into question the method and evidence used to value the claimants’ investment.
Citing previous arbitral awards, the ad hoc committee noted that annulment under Article 52(1)(e) is concerned with a failure to state any reasons with respect to all or part of an award, not the failure to state correct or convincing reasons. Additionally, the committee took note of the fact that damage assessments are “inherently uncertain” – a fact that results in tribunals being afforded a considerable measure of discretion in determining issues of quantum. Accordingly, the ad hoc committee went on to reject Kazakhstan’s bid for annulment.
In particular, the ad hoc committee considered that the tribunal’s award of damages was not a decision worthy of annulment “…since the [t]ribunal did not fail to give reasons for its award.” Thus, while the committee acknowledged that the tribunal’s damage amount was simply stated in the award without any explanation, it found that the tribunal did not “fail to give reasons” because the tribunal had “…set out reasons for its award in terms appropriate to the circumstances of the case and the evidence available to it.”
Having previously rejected Kazakhstan’s bid for annulment on every other ground, this decision falls in line with prior annulment decisions and confirms that a very high standard of review applies to ICSID annulment applications.
* See Previous ITN Reporting on annulment proceedings:
“Very High Standard of Review for ICSID Annulment Applications Confirmed,” By Elizabeth Whitsitt, Investment Treaty Newsletter, 6 December 2009 available here:
“Ad Hoc Committee confirms Argentina is on the hook to Azurix for US $165 million” By Elizabeth Whitsitt, Investment Treaty Newsletter, 2 October 2009 available here:
“Argentina must respect award despite ICSID finding that it has errors of law,” By Luke Eric Peterson, Investment Treaty News, 15 October 2007, available here:
http://www.IISD.org/pdf/2007/itn_oct15_2007.pdf
Sources:
Decision of the ad hoc committee in Kazakhstan v. Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon Hizmetleri available here: