International Centre for Settlement
of Investment Disputes
ICSID Case No. ARB/05/16
RUMELI TELEKOM A.S.
AND
TELSIM MOBIL TELEKOMIKASYON HIZMETLERI A.S.,
CLAIMANTS
V.
REPUBLIC OF KAZAKHSTAN,
RESPONDENT
AWARD
RENDERED BY AN ARBITRAL TRIBUNAL COMPOSED OF
STEWART BOYD, ARBITRATOR
MARC LALONDE, ARBITRATOR
BERNARD HANOTIAU, PRESIDENT
Date of dispatch to the parties: July 29, 2008
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TABLE OF CONTENTS
PAGE
CHAPTER I. THE PARTIES AND THE BACKGROUND OF THE DISPUTE ...........1
CHAPTER II. THE PROCEDURE....................................................................................5
I. INSTITUTION OF THE PROCEEDINGS .................................................................................5
II. PROCEDURAL RULES AND AGENDA: MINUTES OF THE FIRST SESSION..............................7
III. FIRST REQUESTS FOR PRODUCTION OF DOCUMENTS: PROCEDURAL ORDER NO. 1............8
IV. CLAIMANTS’ SUBSTANTIATED REQUESTS FOR PRODUCTION OF DOCUMENTS:
PROCEDURAL ORDER NO. 2.........................................................................................9
V. CLAIMANTS’ REQUEST FOR FURTHER PRODUCTION OF DOCUMENTS: PROCEDURAL
ORDER NO. 3 .............................................................................................................10
VI. SECOND REQUESTS FOR PRODUCTION OF DOCUMENTS: PROCEDURAL ORDER
NO. 4 .........................................................................................................................12
VII. EXCHANGE OF WRITTEN PLEADINGS ..............................................................................12
VIII.ORAL PLEADINGS...........................................................................................................14
IX. POST HEARING SUBMISSIONS ........................................................................................17
X. CLOSING OF THE PROCEEDINGS......................................................................................17
CHAPTER III. THE FACTS.............................................................................................18
I. UP TO THE TERMINATION OF THE INVESTMENT CONTRACT .........................................18
A. The foundation of KaR-Tel.......................................................................................18
B. The GSM license.......................................................................................................20
C. The Motorola loan.....................................................................................................21
D. The alteration of the participations in KaR-Tel........................................................23
E. The Investment Contract...........................................................................................23
F. The foundation of Telecom Invest and the introduction of Telsim ..........................24
G. The development of KaR-Tel’s Business .................................................................25
II. THE TERMINATION OF THE INVESTMENT CONTRACT AND ITS REPERCUSSIONS ...........26
A. The termination of the Investment Contract.............................................................26
B. The Extraordinary General Meeting of Shareholders of KaR-Tel............................26
C. The proceedings issued in Almaty City Courts ........................................................28
1. The Telecom Invest Claim....................................................................................28
2. The KaR-Tel Claim...............................................................................................29
3. The Consolidation of Telecom and KaR-Tel cases ..............................................30
4. The forensic examination of KaR-Tel ..................................................................30
D. The attempts to sell Telecom Invest’s participation in KaR-Tel..............................31
E. Mr. Seysembayev’s offer to purchase Claimants’ participation in KaR-Tel............32
F. Claimants’ complaints to Respondent ......................................................................32
G. The judgment of the Almaty City Court on June 6, 2003.........................................33
H. The appointment of a Working Group......................................................................34
I. Criminal investigation...............................................................................................35
J. The judgment of the Supreme Court of July 23, 2003..............................................36
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K. The judgment of the Supreme Court Presidium of October 30, 2003 - The
following restructuring of KaR-Tel – and the purchase of KaR-Tel by
VimpelCom...........................................................................................................36
1. The judgment of the Supreme Court Presidium ...................................................36
2. The restructuring of KaR-Tel................................................................................37
3. The sale of KaR-Tel to VimpelCom.....................................................................37
III. CLAIMANTS SEIZED BY TSDIF .......................................................................................37
CHAPTER IV. THE JURISDICTION OF THE ARBITRAL TRIBUNAL.....................38
I. CLAIMANTS’ POSITION ..................................................................................................38
A. Respondent consented to ICSID jurisdiction over this dispute ................................39
1. Claimants’ investments were fully legal...............................................................39
2. Claimants’ investments did not violate the principle of good faith, the
principle “nemo auditur propriam turpitudinem allegans,” or
international public policy.................................................................................43
B. Claimants have standing to bring this arbitration .....................................................44
1. Rumeli and Telsim are the proper Claimants in this arbitration...........................44
2. There was no assignment of Claimants’ claim to the TSDIF...............................49
3. The TSDIF was not subrogated to Claimants’ claims ..........................................49
4. There is no reason to pierce the corporate veil .....................................................49
5. Respondent’s allegation that Article 25 of the Convention imposes a
control test must fail ..........................................................................................50
6. TSDIF would satisfy the jurisdictional requirements of ICSID in any event.......52
C. Claimants have gone far beyond establishing a prima facie case on the merits.......53
D. Respondent is a proper party to this dispute.............................................................54
E. Claimants have standing to challenge the cancellation of the Investment
Contract.................................................................................................................54
F. The Foreign Investment Law is a valid secondary basis for establishing
jurisdiction ............................................................................................................55
II. RESPONDENT’S POSITION...............................................................................................56
A. Respondent did not consent to ICSID jurisdiction over this dispute........................56
1. Claimants’ investments were not legal .................................................................57
2. Claimants’ investments violated the principle of good faith, the principle
nemo auditur propriam turpitudinem allegans and international public
policy .................................................................................................................59
B. Claimants do not have standing to bring this arbitration..........................................61
1. The Turkish State is the real party in interest in this arbitration...........................61
2. The assignment of Claimants’ cause of action .....................................................67
3. The TSDIF was subrogated in Claimants’ claim..................................................67
4. Alter ego and piercing the corporate veil..............................................................69
5. “Control” and “incorporation” ...........................................................................69
6. The claim brought by TSDIF does not satisfy the jurisdictional
requirements of ICSID.......................................................................................72
C. No prima facie case ..................................................................................................76
D. Respondent is not a proper party to the dispute........................................................76
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E. Claimants do not have standing to challenge the termination of the
Investment Contract..............................................................................................77
F. The Foreign Investment Law is not applicable.........................................................77
G. Admissibility.............................................................................................................78
III. DECISION OF THE ARBITRAL TRIBUNAL........................................................................78
CHAPTER V. THE CLAIMS...........................................................................................86
I. OVERVIEW OF THE CLAIMS...........................................................................................86
II. THE PARTIES’ POSITION ON RESPONDENT’S PURPORTED SCHEME................................87
A. Claimants’ position...................................................................................................87
1. The general context...............................................................................................87
a) Claimants’ investment ..................................................................................87
b) The Republic of Kazakhstan and the involvement of President
Nazarbayev’s family.....................................................................................91
2. The termination of the Investment Contract.........................................................94
3. Telecom Invest and Respondent colluded to effect the illegal compulsory
sale of Claimants’ interest in KaR-Tel ..............................................................98
a) The KaR-Tel EGM .......................................................................................98
b) The Injunctive relief proceedings ...............................................................102
4. The actions of Respondent’s police authorities ..................................................103
5. The attempt to sell Telecom Invest’s participation in KaR-Tel..........................104
6. The actions of the Working Group .....................................................................105
7. The actions of Respondent’s Judiciary ...............................................................107
8. The attempts to pay Claimants to go away.........................................................111
9. The sale of KaR-Tel to VimpelCom...................................................................112
10. General observations on the hearing and on circumstantial evidence.............113
a) Observations on the hearing........................................................................113
b) Circumstantial evidence..............................................................................116
B. Respondent’s position.............................................................................................118
1. The general context.............................................................................................118
a) Claimants’ investment ................................................................................118
b) The Republic of Kazakhstan and the involvement of President
Nazarbayev’s family...................................................................................120
2. The termination of the Investment Contract.......................................................121
3. On the purported collusion between Telecom Invest and Respondent to
effect the compulsory sale of Claimants’ interest in KaR-Tel ........................126
a) The KaR-Tel EGMs....................................................................................126
b) The Injunctive relief proceedings ...............................................................129
4. The actions of Respondent’s police authorities ..................................................131
5. The attempt to sell Telecom Invest’s participation in KaR-Tel..........................133
6. The actions of the Working Group .....................................................................134
7. The actions of Respondent’s Judiciary ...............................................................138
8. The alleged attempts to pay Claimants to go away.............................................144
9. The sale of KaR-Tel to VimpelCom...................................................................146
10. The conspiracy theory......................................................................................147
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III. ON THE PURPORTED BREACHES BY RESPONDENT OF ITS
OBLIGATIONS......................................................................................................149
A. The legal framework...............................................................................................149
1. Claimants’ position.............................................................................................149
2. Respondent’s position.........................................................................................151
3. The applicable standards: Decision of the Arbitral Tribunal..............................152
B. Fair and equitable treatment....................................................................................154
1. Claimants’ position.............................................................................................154
a) The Standard...............................................................................................154
b) Application to the facts of the case.............................................................156
2. Respondent’s position.........................................................................................157
a) The standard................................................................................................157
b) Application to the facts of the case.............................................................161
3. Decision of the Arbitral Tribunal........................................................................161
a) The Standard...............................................................................................161
b) Application to the facts of the case.............................................................162
C. Denial of justice......................................................................................................165
1. Claimants’ position.............................................................................................165
a) The standard................................................................................................165
b) Application to the facts of the case.............................................................167
2. Respondent’s position.........................................................................................169
a) The standard................................................................................................169
b) Application to the facts of the case.............................................................170
3. Decision of the Arbitral Tribunal........................................................................172
a) The Standard...............................................................................................172
b) Application to the facts of the case.............................................................173
D. Full protection and security ....................................................................................174
1. Claimants’ position.............................................................................................174
a) The standard................................................................................................174
b) Application to the facts of the case.............................................................175
2. Respondent’s position.........................................................................................176
a) The standard................................................................................................176
b) Application to the facts of the case.............................................................177
3. Decision of the Arbitral Tribunal........................................................................177
a) The Standard...............................................................................................177
b) Application to the facts of the case.............................................................178
E. Unreasonable, arbitrary, or discriminatory measures .............................................178
1. Claimants’ position.............................................................................................178
a) The standard................................................................................................178
b) Application to the facts of the case.............................................................179
2. Respondent’s position.........................................................................................181
a) The standard................................................................................................181
b) Application to the facts of the case.............................................................181
3. Decision of the Arbitral Tribunal........................................................................181
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a) The Standard...............................................................................................181
b) Application to the facts of the case.............................................................182
F. Expropriation ..........................................................................................................183
1. Claimants’ position.............................................................................................183
a) The standard................................................................................................183
b) Application to the facts of the case.............................................................184
2. Respondent’s position.........................................................................................185
a) The standard................................................................................................185
b) Application to the facts of the case.............................................................186
3. Decision of the Arbitral Tribunal........................................................................186
a) The Standard...............................................................................................186
b) Application to the facts of this case............................................................189
CHAPTER VI. COMPENSATION AND DAMAGES ..................................................194
I. PRELIMINARY REMARKS ON CLAIMANTS’ CLAIM FOR DAMAGES...............................194
A. Respondent’s position.............................................................................................194
B. Claimants’ position.................................................................................................194
II. GENERAL PRINCIPLES ..................................................................................................195
A. The compensation in international law...................................................................195
1. Claimants’ position.............................................................................................195
2. Respondent’s position.........................................................................................196
B. Valuation standards.................................................................................................196
1. Claimants’ position.............................................................................................196
2. Respondent’s position.........................................................................................198
C. The valuation date...................................................................................................200
1. Claimants’ position.............................................................................................200
2. Respondent’s position.........................................................................................202
D. Causation.................................................................................................................203
III. CALCULATION OF DAMAGES AND QUANTUM .............................................................205
1. Claimants’ position.............................................................................................205
a) The position developed in Claimants’ Memorials......................................205
b) The position developed in Claimants’ Post-Hearing Memorial .................207
2. Respondent’s position.........................................................................................209
IV. DECISION OF THE ARBITRAL TRIBUNAL......................................................................214
A. The principles of compensation..............................................................................214
B. The calculation of the compensation and its amount..............................................216
V. COSTS........................................................................................................................226
AWARD .............................................................................................................................227
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CHAPTER I. THE PARTIES AND THE BACKGROUND OF THE
DISPUTE
1. Claimants in this arbitration are Rumeli Telekom A.S. (“Rumeli”) and Telsim Mobil
Telekomunikasyon Hizmetleri A.S. (“Telsim”), (collectively “Claimants”). Both Rumeli
and Telsim are telecommunications companies, incorporated in Turkey as an “anonim
sirket” (joint stock company). Both companies’ address is Mehmet Akif Mah/Inonu
Cad., Star Sokak No. 2, Ikitelli 34540 Istanbul, Republic of Turkey. Claimants are
represented in this arbitration by Mr. Hamid G. Gharavi and Ms. Brenda Horrigan,
SALANS, 9 rue Boissy d’Anglas, 75008 Paris, France.
2. Respondent in this arbitration is the Republic of Kazakhstan (“Respondent,” or the
“Republic”). It is represented in this arbitration by Mr. Timur Issabekov, Director of the
Department of International Law, Ministry of Justice of the Republic of Kazakhstan, and
by Mr. David Warne, Mr. Gautam Bhattacharyya and Ms. Chloe J. Carswell, Reed Smith,
Beaufort House, 15 St Botolph Street, London EC3A 7EE, United Kingdom. Respondent
was initially represented by Mr. John Emmott, Michael Wilson & Partners, Ltd, 5th
floor,
36 Samal-1 Almaty 050059, Republic of Kazakhstan and Ms. Azhar Kuzubayeva, Almira
& Co LLP, 50 Long Acre, London WC2E 9JR, UK.
3. On May 16, 1998, Rumeli and Investel, a Kazakhstan closed joint stock company,
entered into a Foundation Agreement for the creation of the joint venture KaR-Tel in the
form of a Kazakhstan limited liability partnership, for the provision of mobile
telecommunications services on the territory of the Republic.
4. At the creation of KaR-Tel, Rumeli owned 70% of KaR-Tel and Investel owned 30%.
The initial charter capital of KaR-Tel was 750,000 Tenge (equivalent to approximately
USD 10,000 at the time).
5. Immediately after the execution of the Foundation Agreement, KaR-Tel prepared to
participate in the auction for the second GSM 900 license issued in Kazakhstan (the
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“License”), held by the Ministry of Transportation and Telecommunications (“MTT”) of
the Republic.
6. The auction for the License took place on July 31, 1998 and KaR-Tel won the License
with a bid of USD 67,500,000. The License Agreement between KaR-Tel and the MTT
was signed on August 10, 1998. It set forth the conditions for the sale by the MTT to
KaR-Tel of “the right to use the radio-frequency spectrum for the creation and operation
of a GSM-standard communications network in the Republic of Kazakhstan” for a period
of 15 years.
7. Around October 1998, KaR-Tel started to negotiate with the State Committee on
Investment an agreement granting KaR-Tel investment incentives. On May 20, 1999,
KaR-Tel and the Investment Committee executed Contract N° 0123-05-99 (the
“Investment Contract”). The Investment Contract characterized the object of the
investment activity as “the creation and exploration of digital cellular radiotelephone
connection of the GSM (900) standard on the territory of the Republic of Kazakhstan.” It
granted KaR-Tel tax and other benefits. The term of the Investment Contract was set to
expire on July 31, 2009.
8. On December 31, 2000, Telsim acquired 15% of the partnership from Rumeli and was
officially registered as a participant in KaR-Tel on July 27, 2001. During this same
period, Investel’s participatory interest – which had increased from 30% to 40% in the
spring of 1999 – was transferred to Telecom Invest, a separate Kazakhstan limited
liability partnership.
9. Claimants allege to have undertaken important “investments” on the territory of the
Republic by means of establishment of KaR-Tel, by providing know-how and marketing
services in the field of telecommunications, by establishing a national administrative and
commercial network and by providing extensive financing and guarantees to KaR-Tel,
with the consequence that KaR-Tel became one of the leading GSM operators in the
Republic.
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10. According to Claimants, once KaR-Tel’s success was assured, the local partner’s
shareholders, themselves Kazakhstan officials and/or members of the empire of the
President of Kazakhstan, devised a scheme to orchestrate Claimants’ expulsion from
KaR-Tel in a definitive manner and to keep all of KaR-Tel for their sole benefit. It is
Claimants’ allegation that:
- the local partners exploited their political and personal ties with Respondent to
obtain from the Investment Committee the termination of the Investment
Contract;
- the local partners then alleged that Claimants were responsible for this
termination and that the latter caused significant damages to KaR-Tel;
- the local partners called a general meeting of the shareholders of KaR-Tel without
sending a notice to Claimants;
- at this purported general meeting, where Claimants could not have been present, it
was unilaterally decided by the local partners, that, because of the harm caused by
Claimants to KaR-Tel, Claimants’ shareholding had to be compulsorily
transferred to KaR-Tel to the final benefit of its remaining shareholders, i.e., the
local partners;
- this decision to sell Claimants’ 60% stake in KaR-Tel was taken in violation of
Kazakh law and was irregularly confirmed by the Kazakh Judiciary;
- the Kazakh Judiciary set the value of the shares at a mere USD 3,000, whereas,
less than a year later, the local partners (and other parties in interest) sold 100% of
KaR-Tel to another investor (VimpelCom) for the sum of USD 350 million.
11. Therefore, Claimants invoke Respondent’s collusion with the local partners and a
violation of international law, encompassing, inter alia, Respondent’s wrongful
termination of the Investment Contract, its resulting denial of Claimants’ right to
challenge the termination, its eviction of Claimants from KaR-Tel through the Judiciary
and its failure to grant Claimants adequate compensation.
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12. According to Claimants, these actions, together with further acts and omissions detailed
below, constitute breaches of Respondent’s obligations under international law, under the
Agreement between the Republic of Kazakhstan and the Republic of Turkey concerning
the Reciprocal Promotion and Protection of Investments, dated May 1, 1992 (the
“Bilateral Investment Treaty,” or “BIT”), and under the Law of the Republic of
Kazakhstan on Foreign Investments dated December 27, 1994 (the “Foreign Investment
Law” or “FIL”).
13. Claimants’ allegations are strongly denied and disputed by Respondent.
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CHAPTER II. THE PROCEDURE
I. INSTITUTION OF THE PROCEEDINGS
14. On July 20, 2005, ICSID received a Request for the institution of arbitration proceedings
under the ICSID Convention on behalf of Rumeli and Telsim against the Republic.
15. On July 21, 2005, The ICSID Secretariat (the “Secretariat”) transmitted copies of the
Request and of its accompanying documentation to the Republic.
16. On August 2, 2005, the Secretariat asked Claimants to provide their observations
concerning the text of the three versions (English, Russian and Turkish) of Article VII(2)
of the Bilateral Investment Treaty in relation to the issue whether the provision subjects
the recourse to arbitration to the pre-condition of recourse to local courts.
17. Claimants answered in a letter dated August 4, 2005, which was transmitted by the
Secretariat to the Republic.
18. In their letter, Claimants set forth that the Turkish language version of Article VII(2) of
the Bilateral Investment Treaty was the only one subjecting the recourse to arbitration to
the pre-condition of recourse to local courts and that the text of the other language
versions (English, Russian) did not. Claimants further alleged that even if recourse to
local courts was required, Respondent had, through its unfair, inequitable, arbitrary,
discriminatory and unlawful measures deprived Claimants of the possibility of
meaningfully exercising any such action, and Respondent therefore could not rely on any
such alleged obligation to resist jurisdiction. Claimants further submitted that they
additionally relied, through the Most Favorable Nation Clause contained in Article II of
the Bilateral Investment Treaty, on the other bilateral treaties entered into by Kazakhstan
that do not contain any such prerequisite to ICSID arbitration. Claimants finally
submitted that they relied on the Foreign Investment Law as an alternative basis for
ICSID jurisdiction.
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19. By letter of August 30, 2005, in accordance with Article 36 of the ICSID Convention, the
Secretary-General of ICSID registered the Request for Arbitration and, on the same day,
notified the parties of the registration, inviting them to proceed to the constitution of the
Arbitral Tribunal as soon as possible.
20. By letter of September 6, 2005, Claimants proposed that the Tribunal consist of three
arbitrators, one to be appointed by each party by September 30, 2005; if either party
failed to appoint its arbitrator within this deadline, such arbitrator would be appointed by
the Secretary-General of ICSID. Claimants further proposed that the third arbitrator, who
would be the President of the Tribunal, be appointed by agreement of the two partyappointed
arbitrators. If the two arbitrators failed to agree on the appointment of the third
arbitrator within fifteen days of the date by which both arbitrators had accepted their
appointment, the third presiding arbitrator would be appointed by the Secretary-General
of ICSID. Finally, Claimants proposed that the Secretary-General of ICSID be allowed
to appoint arbitrators outside the ICSID Panel of Arbitrators but only arbitrators who
would have experience in ICSID arbitration, whether as counsel or arbitrator.
21. By letter of September 29, 2005, Respondent agreed to Claimants’ proposal on the
method and timetable for the constitution of the Tribunal and requested the postponement
of the September 30, 2005 date proposed by Claimants for the appointment of the partyappointed
arbitrators.
22. By letter of September 30, 2005, Claimants agreed to postpone the date of the
appointment of the party-appointed arbitrators until October 21, 2005, subject to an
express confirmation of the method and timetable for the constitution of the Tribunal by
Respondent by no later than October 7, 2005.
23. By letter of October 6, 2005, Respondent expressly accepted Claimants’ proposed
method and timetable and requested the postponement to October 30, 2005 of the
October 21, 2005 date proposed by Claimants for the appointment of the party-appointed
arbitrators.
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24. By letter of October 7, 2005, Claimants agreed to postpone the date of the appointment of
the party-appointed arbitrators until October 30, 2005.
25. Thereafter, by letter of October 31, 2005, the Secretariat acknowledged receipt of a letter
of September 29, 2005 from Respondent informing that it had appointed Mr. Stewart
Boyd CBE Q.C., a national of the United Kingdom, as its arbitrator. In its letter, the
Secretariat also acknowledged receipt of a letter of October 30, 2005 from Claimants
informing that they had appointed Mr. Marc Lalonde P.C., O.C., Q.C., a national of
Canada, as their arbitrator. Both arbitrators accepted their appointment on November 2,
2005.
26. Following an extension of the time limit to appoint the third presiding arbitrator, on
December 9, 2005, the Secretariat informed the parties that Messrs. Boyd and Lalonde
had notified the Centre on December 8, 2005 of their appointment of Mr. Bernard
Hanotiau, a national of Belgium, as the President of the Tribunal. The Secretariat, on
behalf of the Secretary-General of ICSID, also informed the parties that, having received
from each arbitrator the acceptance of his appointment, the Arbitral Tribunal was deemed
to have been constituted, and the proceedings were deemed to have begun on December
9, 2005.
27. In accordance with ICSID Arbitration Rule 6, Mrs. Martina Polasek, Counsel at ICSID,
was designated to serve as Secretary of the Tribunal. On May 31, 2007, the Secretariat
informed the Arbitral Tribunal and the parties that Mrs. Polasek would be temporarily
replaced by Ms. Eloïse Obadia, Senior Counsel, from June 1, 2007. Mrs. Polasek
returned to her functions in this case on November 26, 2007.
II. PROCEDURAL RULES AND AGENDA: MINUTES OF THE FIRST SESSION
28. The first session of the Arbitral Tribunal concerning the procedural rules and the agenda
of the arbitration was held on January 30, 2006, by telephone conference among the
Members of the Tribunal and the Secretary of the Tribunal. The parties had agreed that
the Tribunal hold the first session without the parties.
8
29. The first session considered matters listed on an agenda circulated to the parties by the
Secretary on January 12, 2006, as well as the parties’ joint proposals of January 27, 2006
regarding these matters (attached to the Minutes as Annex 1). Counsel for Respondent
had by communication of January 29, 2006 added an observation to the parties’ joint
proposals which was equally taken into consideration.
30. Following the first session, by communications to the parties of January 31 and February
10, 2006, the Tribunal made certain proposals regarding items Nos. 2, 3, 4, 14 and 17 of
the agenda. The parties responded to certain of the proposals by a joint communication
of February 2, 2006 and individual communications of February 14, 2006 (from
Claimants) and February 14, 15 and 23, 2006 (from Respondent). The above-mentioned
communications were attached to the Minutes as Annex 2.
31. The Minutes of the first session, signed by the President and the Secretary of the
Tribunal, were transmitted to the parties on March 20, 2006.
III. FIRST REQUESTS FOR PRODUCTION OF DOCUMENTS: PROCEDURAL ORDER NO. 1
32. The agreed timetable of the arbitration provided for a first joint submission of requests
for production of documents to be submitted by March 17, 2006. On that date, the parties
filed a joint submission of their respective requests, including any objections to the other
party’s requests, in tabular form.
33. On March 17, 2006, Respondent informed the Arbitral Tribunal that it would file
additional remarks by Friday, March 24, 2006; however, the Tribunal did not receive any
remarks by that date.
34. On March 28, 2006, the Arbitral Tribunal granted Respondent until Friday, March 31,
2006 to file its additional remarks on Claimants’ request for production of documents;
Claimants were granted the possibility to comment on Respondent’s remarks by April 4,
2006.
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35. Also on March 28, 2006, Respondent supplied to the Arbitral Tribunal an English
translation of article 518 of the Tax Code of the Republic of Kazakhstan, requested by the
Arbitral Tribunal on March 27, 2006.
36. On March 31, 2006, Respondent filed with the Secretary-General of ICSID objections to
the jurisdiction of the Tribunal.
37. On April 3, 2006, the Arbitral Tribunal informed the parties that in accordance with
ICSID Arbitration Rule 41(3) and (4), the proceedings on the merits were suspended and
the parties were requested to file observations on whether the objections to jurisdiction
should be dealt with as a preliminary question or should be joined to the merits of the
dispute. Claimants were invited to file their observations by April 7, 2006, Respondent
was invited to file its reply observations by April 12, 2006 and Claimants their rejoinder
by April 17, 2006. The parties filed submissions according to the calendar.
38. The parties also filed additional remarks on production of documents on April 24 and 25,
2006.
39. On April 26, 2006, the Tribunal decided, in accordance with Rule 41(4) of the ICSID
Arbitration Rules, to join the objections on jurisdiction to the merits of the dispute.
40. In its Procedural Order No. 1 dated April 28, 2006, the Arbitral Tribunal allowed some of
the requests for production of documents. The Tribunal also reserved its decision on
other requests, considering that it was not sufficiently informed to make a reasoned
decision. It therefore invited Claimants to make additional submissions by May 4, 2006,
and Respondent to further comment on the issue by May 10, 2006.
IV. CLAIMANTS’ SUBSTANTIATED REQUESTS FOR PRODUCTION OF DOCUMENTS:
PROCEDURAL ORDER NO. 2
41. In accordance with Procedural Order No. 1, Claimants further substantiated their request
No. 11 for production of documents by letter dated May 4, 2006, and Respondent
commented on it by letter dated May 10, 2006.
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42. In accordance with Procedural Order No. 1, Respondent further substantiated its
objections to Claimants’ request No. 13 for production of documents by letter dated May
5, 2006 and Claimants commented on it by email of May 11, 2006.
43. In its Procedural Order No. 2 dated May 16, 2006, the Arbitral Tribunal ordered the
production of certain requested documents.
V. CLAIMANTS’ REQUEST FOR FURTHER PRODUCTION OF DOCUMENTS:
PROCEDURAL ORDER NO. 3
44. In their letter dated July 24, 2006, Claimants requested a further production of
documents. In their Request, they pointed out that on July 11, 2006, Respondent had
submitted an initial first list of 249 documents (“List 1”) representing the documents in
“its possession or custody or power” and responsive to Procedural Order No. 1. On July
12, 2006, Respondent retracted this list to replace it with a second list of 229 responsive
documents (“List 2”). When Respondent produced the documents responsive to
Procedural Order No. 1, on July 20, 2006, it then enclosed a third list of 229 documents
(“List 3”) which Claimants considered identical to List 2.
45. Claimants submitted that the documents removed from List 1 were exchanges between
various Ministries of Respondent as well as minutes of internal meetings of such
ministries. Therefore, according to Claimants, the disputed documents clearly fell within
the scope of the documents that Respondent was ordered to produce under Procedural
Order No. 1. Claimants therefore requested the Arbitral Tribunal to order Respondent to
immediately produce the disputed documents.
46. On July 28, 2006, in its letter in response to Claimants’ request, Respondent submitted
that the disputed documents were privileged by reason of the fact that they were
confidential documents passing between Respondent’s legal advisers (including internal
legal advisers) and Respondent (including its Ministries) for the purpose of seeking or
providing legal advice, and/or were created with the sole or dominant purpose of
litigation arising out of the matters underlying this dispute.
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47. In its Order of July 31, 2006, the Arbitral Tribunal decided the following in relation to the
disputed documents:
We are not satisfied from the description of the documents listed in Annex
3 attached to the Claimant's letter of 24 July 2006 that any of them are
privileged, but are prepared to allow the Respondents until 4 August 2006
to provide any further material in support of their claim for privilege, e.g.
by identifying in the case of each document the litigation (if any) for which
the relevant communication was prepared, and the legal adviser (if any)
by whom or to whom the communication was sent.
48. On August 5, 2006, the Arbitral Tribunal issued the following Direction:
1. With reference to paragraph 1 of the Tribunal's order of July 31, 2006,
the August 4, 2006 deadline for the Respondent's response is extended
until August 9, 2006. The Respondent should send its response directly to
the Claimants, all Members of the Tribunal and the Secretariat on August
9. No further extension will be granted.
2. The Tribunal will issue its decision on August 10, 2006.
3. The Claimants should be prepared to file their memorial by close of
business on August 11, 2006.
4. If the Tribunal were to decide that all or part of the documents are not
privileged and should be produced, it will order their immediate
production and will consider granting a very short extension for the filing
of the Claimants' memorial.”
49. On August 9, 2006, Respondent sent to the ICSID Secretariat a letter containing the
substantiation of its claim that the disputed documents were privileged.
50. In its Procedural Order No. 3 dated August 10, 2006, the Arbitral Tribunal, taking into
consideration the parties’ observations and comments, considered that certain documents
were privileged and ordered the production of certain other documents.
12
VI. SECOND REQUESTS FOR PRODUCTION OF DOCUMENTS: PROCEDURAL ORDER
NO. 4
51. The agreed timetable of the arbitration provided for a second joint submission of requests
for production of documents to be submitted within three weeks of the filing of
Respondent’s Counter-Memorial. This time period was subsequently extended.
52. The parties exchanged correspondence on this matter on January 10 and 12, February 5,
7, 12, 13, 15 and 27, 2007. On March 7, 2007, the parties filed a joint submission of their
respective requests in tabular form. Respondent filed an additional observation on March
7, 2007.
53. The Tribunal, in a Procedural Order No. 4 dated March 22, 2007, took note of the parties’
agreement on certain requests; it granted some of the parties’ further requests, and
dismissed others.
VII. EXCHANGE OF WRITTEN PLEADINGS
54. The timetable contained in the Minutes of the first session of the Arbitral Tribunal was
amended by letters dated March 28, 2006, April 26, 2006, August 10, 2006, September
12, 2006, December 6, 2006, May 7, 2007 and June 29, 2007. Each party filed its written
submissions pursuant to these amended directions.
55. Claimants filed a Memorial dated August 21, 2006, together with exhibits and legal
authorities.
56. Respondent filed a Counter-Memorial dated December 14, 2006, together with exhibits
and legal authorities.
57. Claimants then filed a Reply dated February 27, 2007, together with exhibits and legal
authorities.
58. Respondent subsequently filed a Rejoinder dated May 23, 2007, together with:
- exhibits;
13
- legal authorities;
- an expert report on Kazakh procedural law by Mr. Mukhamedshin;
- an expert report on Kazakh criminal law by Ms Suleimenova;
- an expert report on Kazakh civil law by Professor Kaudyrov and Professor
Klimkin;
- an expert report on quantum by Mr. Kaczmarek of Navigant Consulting; and
- an expert report on Turkish law by Mr. Erkam.
59. On June 29, 2007, the Secretariat of ICSID informed the parties that, in respect to the
letters from Claimants dated June 26, 2007 concerning the difficulty for Claimants to find
a Kazakh law expert willing to testify, and the letters from Respondent dated June 26 and
27, 2007 concerning Claimants’ response to Respondent’s case on jurisdiction, the
Arbitral Tribunal issued the following directions:
In relation to Kazakh law we invite counsel for the Claimants to appoint
themselves a non-Kazakh law expert. The report should be filed by July
31, 2007.
The Arbitral Tribunal also authorizes the Claimants to file an additional
submission strictly limited to jurisdiction, including a rebuttal expert
report on Turkish law limited to jurisdiction by July 31, 2007.
60. On August 3, 2007, Claimants filed:
- a Rejoinder on jurisdiction;
- witness Statements of Mr. Bora Agilönü and Dr. Yasar Akgun;
- an expert report of Professor Ziya Akinci onTurkish law; and
- an expert report of Professor A. P. Sergeyev on Kazakh law.
61. On the same date, Respondent filed witness statements of Mr. Mirbulat Abuov,
Mr. Aidan Karibjanov, Mr. Alexander Podporin, Mr. Imin Sabirov, Mr. Iskander
Yerimbetov and Mr. Vadim Zverkov.
62. On September 19, 2007 Claimants filed a request on some procedural issues. On
September 24, 2007, the Secretariat of ICSID informed the parties that, after careful
14
consideration of Claimants’ request and Respondent’s answer of September 21, 2007, the
Arbitral Tribunal had decided as follows:
1. (…)
2. The Arbitral tribunal takes note that the parties agree that Respondent
may file a witness statement by Judge Begaliev limited to the question of
bribery raised in Mr. Agilonu’s statement. The Tribunal decides that the
filing of this witness statement must take place no later than October 5
and that Claimants will have the right to file a rebuttal witness statement
by Mr. Agilonu, limited to the points covered by Judge Begaliev, no later
than October 16.
3. Respondent’s request No. 2 [permission to amend their Memorials to
include new allegations found in a witness statement filed by the
Claimants] is denied. Given the proximity of the hearings, the Arbitral
Tribunal finds more appropriate that the issue raised by Respondent be
dealt with in the course of the oral submissions and testimonies.
4. The Arbitral Tribunal takes note that Respondent has not made any
objection against the filing by Claimants of a witness statement by
Mr. Koksaldi. The Tribunal decides that the filing of this witness
statement must take place no later than October 5.”
63. On October 5, 2007, Respondent filed the witness statement of Judge Bakhytbek
Adilkhanovich Begaliev. On the same date, Claimants filed the witness statement of
Mr. Huseyin Koksaldi.
VIII. ORAL PLEADINGS
64. On September 11, 2007, the Secretariat of ICSID informed the parties that, after careful
consideration of the letters of August 21, September 7, and September 10, 2007 from
Respondent and the letters of August 10 and September 6, 2007 from Claimants, the
Tribunal had issued the following direction regarding the arrangements for the hearing
scheduled for October 19 and from October 22 to 26, 2007:
The Arbitral Tribunal has noted the agreement of the parties on the
following issues:
1. The hearing will take place in Paris. The venue will be
decided by ICSID.
15
2. The parties will not use livenotes. There will be daily
transcripts.
3. There will be post-hearing submissions, the time limit and
contents to be determined by the Tribunal after consultation with
the parties.
As far as the other disputed issues are concerned, the Arbitral Tribunal
has taken the following decisions:
1. The Arbitral Tribunal considers that written opening
submissions are not necessary since the opening submissions will
be transcribed by the court reporter.
2. The Arbitral Tribunal would like the parties to prepare a
common core bundle to be submitted to the Tribunal at the
hearing.
3. The Arbitral Tribunal has no objection to the submission of a
bundle containing the Kazakh legislation. For its preparation, the
parties should consult with each other as to its presentation and
contents.
4. The Arbitral Tribunal agrees that Mr. Prokofiev be retained as
translator/interpreter. The parties may retain additional
interpreters if they wish, in order to check the accuracy of Mr.
Prokofiev’s translations/interpretation.
5. The Arbitral Tribunal also invites the parties to inform them
whether there are at this moment other outstanding procedural
issues to be decided and/or discussed during a telephone
conference.
65. On September 19, 2007 Claimants filed a request on some procedural issues. On
September 24, 2007, the Secretariat of ICSID informed the parties that, after careful
consideration of Claimants’ request and Respondent’s answer of September 21, 2007, the
Arbitral Tribunal had decided as follows:
Pursuant to article 34(2)(a) of the ICSID Arbitration Rules, the Arbitral
Tribunal calls upon Respondent to produce as witness at the hearings,
Mr. Kulibayev and Mr. Orazbekov. Respondent is invited to inform the
persons concerned of the Tribunal’s decision and to ask them to attend the
hearings. On the other hand, the Arbitral Tribunal is also ready to send
16
itself a letter to these persons and, in that respect, requests their precise
address in Kazakhstan by return fax.
(…)
66. On September 24, 2007, the parties transmitted an agreed timetable and framework for
the hearing to the Secretary of the Arbitral Tribunal.
67. On October 10, 2007, the Secretariat of ICSID sent a letter, on behalf of the Arbitral
Tribunal, to Mr. Orazbekov inviting him to attend the hearing, in person or by video-link,
to serve as a witness.
68. On October 21, 2007, Respondent informed the Arbitral Tribunal that Mr. Orazbekov
was willing to give evidence to the Arbitral Tribunal by video link from Khazakstan.
69. The hearing took place at the World Bank’s offices, Avenue d’Iena in Paris, as
scheduled, on October 19 and from October 22 to 26, 2007. The hearing was audio
recorded and transcribed by a court reporter, Ms. Emma White, Boscen Reporting
Services.
70. The parties submitted an agreed core bundle at the hearing.
71. After opening statements by Counsel, the hearing was devoted to the examination and
cross-examination of the parties’ witnesses:
- In the first place, Counsel for Respondent cross-examined the following factual
witnesses of Claimants: Mr. Huseyin Koksaldi, Mr. Yasar Akgun and Mr. Bora
Agilönü on October 22 and 23, 2007.
- Subsequently the Turkish law expert, Mr. Coskan Erkam, was examined by
Counsel for Respondent and cross-examined by Counsel for Claimants on
October 23, 2007, and the Turkish law expert, Professor Ziya Akinci, was
examined by Counsel for Claimants and cross-examined by Counsel for
Respondent on the same date.
17
- Then, the hearing was devoted to the examination and cross-examination of the
following factual witnesses of Respondent: Mr. Alexander Podporin and
Mr. Karibjanov on October 23, 2007; Ambassador Vadim Zerkhov on October
23, 2007 and October 24, 2007; Mr. Kairat Orazbekov (by video conference), Mr.
Iskander Yerembetov, Mr. Imin Sabirov and Judge Bakhytbek Begaliev on
October 24, 2007 and finally, Mr. Mirbulat Abuov on October 25, 2007.
- The three Kazakh law experts were then cross-examined: Professor Aleksander
Sergeyev and Professor Tolesh Kaudyrov on October 25, 2007 and Professor
Rinat Mukhamedshin on October 25 and 26, 2007.
- Finally, on October 26, 2007, Professor Gulnar Z. Suleimenova, financial expert
for Respondent, was cross-examined by Counsel for Claimants. This was
followed by a presentation by Mr. Andrew Wright, financial expert for Claimants
and a presentation by Mr. Brent Kaczmarek, financial expert for Respondent and
their respective cross-examination.
IX. POST HEARING SUBMISSIONS
72. According to the directions of the Arbitral Tribunal given on October 26, 2007, and
pursuant to the deadline extension which was agreed by the parties on December 12,
2007, the parties filed their post-hearing memorials on December 19, 2007.
73. With respect to costs, pursuant to the directions of the Tribunal given on October 26,
2007, and the deadline extension which was granted on January 14, 2008, the parties’
post-hearing submissions on costs were filed on January 25, 2008.
X. CLOSING OF THE PROCEEDINGS
74. Pursuant to Arbitration Rule 38(1), the Arbitral Tribunal closed the proceedings on June
16, 2008.
18
CHAPTER III. THE FACTS
I. UP TO THE TERMINATION OF THE INVESTMENT CONTRACT
A. The foundation of KaR-Tel
75. Rumeli Telefon, the holding company of Rumeli, was created by members of the Uzan
family, namely: Kemal Uzan (20%), Hakan Uzan (24%), Cem Uzan (24%) and Aysegul
Akay (22%), to operate a small number of mobile telephony operations in Central Asia.
76. Telsim is Turkey’s second largest mobile telephone operator. It was created by Standart
Telekom, a company owned by Hakan Uzan, Cem Uzan, Aysegul Akay and Rumeli
Telefon.
77. In the first half of 1998, Rumeli and Telsim began investigating the possibility of
establishing a GSM network in Kazakhstan. To this end, they established a business plan
which covered the period from 1999 to 2008. At that time, Kazakhstan had no GSM
mobile telephony network on its territory. Kazakhtelecom, the state-owned
telecommunications operator, held a general license, according to which it had the status
of “the sole national operator ensuring [the] development, introduction, maintenance of
the Public switched Telecommunications Network (PSTN), and performing its functions
as the PSTN operator and exclusive operator of domestic long-distance and international
services” in Kazakhstan.
78. Investel was incorporated on February 11, 1998 as a closed joint stock company under
the laws of the Republic. It was founded by two Limited Liability Partnerships (“LLPs”)
created under the laws of the Republic: Almex LLP (“Almex”) and Giramat LLP
(“Giramat”), which took respectively 51% and 49% of the shares in Investel.
79. Investel was incorporated to act as a single purpose vehicle for the exploitation of
opportunities in the telecommunications sector in Kazakhstan and, in particular for the
proposed joint venture with Rumeli, to acquire and operate a mobile telephony licence in
the Republic.
19
80. On May 16, 1998, three months after the incorporation of Investel, Investel and Rumeli
entered into an agreement in writing to found a new Kazakh limited liability partnership
(LLP) to carry out their joint venture (the “Foundation Agreement”). This new LLP was
to be called KaR-Tel LLP. Rumeli held 70% of the shares and Investel 30%. The
Foundation Agreement was signed, on behalf of Investel, by Mr. Alexander Podporin.
81. Article 4.3 of the Foundation Agreement set out the respective roles and obligations of
Rumeli and Investel in respect of KaR-Tel. Rumeli was “[t]o make a lump sum
investment on incorporation of the company, and to make additional investments during
first operation years of the company” and “[t]o carry out marketing, to provide
assistance and know-how for operations of the company.” As for Investel, it was “[t]o
obtain necessary permissions and licenses from official bodies of Kazakhstan Republic
(Governmental Investment Committee, Kazakhtelecom etc.)” and “[t]o provide office
places and buildings for the company.”
82. Pursuant to Article 5.1 of the Foundation Agreement, KaR-Tel had three organs of
control: the General Meeting of Shareholders, the Board of Directors and the General
Manager. The General Manager was to have full day-to-day operational control of KaRTel,
but the General Meeting of Shareholders was the supreme organ of the partnership.
It was empowered to determine acceptance or removal of partners in KaR-Tel, as well as
appointing the Board of Directors.
83. The Board of Directors was comprised of three persons: two were nominated by Rumeli
and one, Mr. Podporin, was nominated by Investel. Although the General Manager was
initially appointed by the Board of Directors, this responsibility was subsequently
transferred to the General Meeting of Shareholders pursuant to an amendment to KaRTel’s
Charter on April 20, 2001 which included an abandonment of the Board of
Directors as an organ of the Company.
84. The position of General Manager was filled at all times until after the termination of the
Investment Contract (see below) by an appointee of Claimants: from May to July 1998
20
Mr. Sabri Fedai, from July 1998 to August 17, 1999 Mr. Hussein Köksaldi; from August
17, 1999 to April 2002 Mr. Bora Agilönü.
B. The GSM license
85. In February 1998, the MTT announced that it proposed to issue the first GSM license
which would be awarded following a competitive auction. On July 17, 1998, Rumeli
advanced to KaR-Tel USD 1,650,000 to pay for the guarantee required from all
participants in the auction for the License (the “Tender Guarantee”).
86. The auction for the License took place on July 31, 1998 and KaR-Tel won the License
with a bid of USD 67,500,000. KaR-Tel then turned to the negotiation of the terms of the
License agreement required for the acquisition of the License from the MTT. Investel
took the lead role on behalf of KaR-Tel in these negotiations.
87. On August 10, 1998, KaR-Tel and the MTT executed a License agreement (“the
License”) setting out, together with the annex to the License (the “Annex”), the
conditions and rights and obligations of the parties in respect of the grant of the GSM 900
frequency license. It was signed on behalf of KaR-Tel by Mr. Podporin.
88. The material clauses of the License were as follows:
- the License was granted for 15 years (clause 1.2);
- the cost of the License was USD 67,500,000, less the amount already advanced as
Tender Guarantee, payment of which was to be made within ten days (clause
2.2.1);
- within three calendar days after such payment, the MTT was required to issue the
License to KaR-Tel (clause 2.1.2);
- KaR-Tel was to ensure that the technical requirements laid out in Order No. 106
of the MTT dated May 22, 1998 were fulfilled (clause 2.2.2);
- the MTT was entitled to monitor the performance by KaR-Tel of its obligations
(clause 3.1.1);
21
- the MTT was entitled to terminate the License Agreement unilaterally if KaR-Tel
failed to fulfill its obligations set out in clause 2.2.2 (clause 3.1.2).
89. The Annex set out more specific details of the obligations of KaR-Tel:
- KaR-Tel had specific obligations for the extent of its network coverage at the end
of each of the first five years of the License (clause 2.1 Annex);
- KaR-Tel was to take all measures to provide for the use within its network and the
connection thereto only of terminal equipment which complied with the
respective international standards (clause 4.1 Annex).
90. It was also announced at the time of the bidding for the License that once the first GSM
license had been issued, the State telecommunications corporation, Kazakhtelecom,
would be entitled to acquire a second GSM license on identical terms from Respondent.
In September 1998, Kazakhtelecom did acquire such a license through a joint venture
which it formed for this purpose with a Turkish telecommunications joint venture,
FinTur. At the time, FinTur had two Turkish shareholders, Turkcell and Cukurova
Group, and the Finnish telecommunications company, Sorena. Turkcell was Claimants’
largest rival in the Turkish market and the joint venture brand name was K-Cell. K-Cell
thus began operating in the Republic after KaR-Tel.
91. On August 20, 1998, thanks to the money obtained through the Motorola Loan (below
C), the License fee was paid and the License was issued to KaR-Tel.
C. The Motorola loan
92. In the course of the summer of 1998, KaR-Tel focused its efforts on obtaining the
necessary financing to pay the License fee and to purchase telecommunications
equipment. Rumeli was able to obtain a loan from Motorola. In this context, it procured
a company subject to the same beneficial ownership and control, Telsim, to issue an
irrevocable and unconditional guarantee (the “Loan Guarantee”) to Motorola. At that
time, Telsim was not a participant in KaR-Tel.
22
93. By a loan facility agreement dated August 14, 1998, Motorola agreed to lend to KaR-Tel
up to USD 160 million in a series of tranches for the purposes of acquiring the GSM
license and then purchase equipment (the “Motorola Loan Facility”). It was clear at that
time that there would not be sufficient time to finalise the Motorala Loan Facility in order
to make the payment required of USD 65,850,000 by August 20, 1998. Consequently,
Rumeli and Telsim entered into a Memorandum of Understanding and KaR-Tel, by its
General Manager, Mr. Sabri Fedai, entered into a separate Bridging Loan Agreement
with Motorola to secure the payment by Motorola of USD 65 million on August 19,
1998. By these agreements, Motorola agreed to lend KaR-Tel USD 65 million, secured
by a Telsim guarantee for the same, to be used USD 60 million for the License fee and
USD 5 million for the purchase of equipment by KaR-Tel from Motorola.
94. The Motorola Loan was originally repayable on or before November 16, 1998 (clause
3.1), but that 90 days period could be extended by a further 90 days to February 15, 1999
(clause 3.2). As KaR-Tel missed the February 15, 1999 payment deadline, amendments
to the Motorola Loan were made starting on May 6, 1999, extending the repayment date
but also increasing the size of the Loan.
95. The final Loan Extension and Amendment Agreement was entered into on September 29,
2000 and extended the deadline for repayment until April 30, 2001.
96. KaR-Tel did not make any payment and on May 22, 2001, Motorola issued a notice of
failure to pay to KaR-Tel and demanded repayment in full within 10 days.
97. On August 15, 2002, Motorola served KaR-Tel with a final demand for immediate
repayment of the amount outstanding under the Motorola Loan: USD 107,461,784.14. In
the autumn of 2002, Motorola initiated proceedings in the Kazakh Courts to put KaR-Tel
into liquidation and recover its debt.
98. On February 12, 2003, a Kazakhstan Court refused to declare KaR-Tel bankrupt
considering that such an application was premature.
23
D. The alteration of the participations in KaR-Tel
99. On April 14, 1999, a General Meeting of Shareholders of KaR-Tel was held. At this
meeting, it was agreed and resolved that Rumeli and Investel’s participations in KaR-Tel
would be altered from the existing respective participations of 70% and 30% to 60% for
Rumeli and 40% for Investel.
E. The Investment Contract
100. On February 28, 1997, the Republic passed Law number 75 on State Support of Direct
Investment in the Republic of Kazakhstan (“the Investment Support Law”). Pursuant to
the Investment Support Law, a State Committee on Investment was created at ministerial
level under the office of the First Deputy Prime Minister to negotiate incentive contracts
with “investors contributing direct investments in the Republic of Kazakhstan.” These
contracts were intended to provide financial incentives for investors to invest in the
Republic, including reduction in, or exemption from, taxation.
101. It was in KaR-Tel’s interest to obtain the benefit of such an investment contract with the
Investment Committee. On May 20, 1999, KaR-Tel and the Investment Committee
executed Contract No. 0123-05-99 (“the Investment Contract”) pursuant to the
aforementioned legislation.
102. Clause 2 of the Investment Contract set out the reasons for its granting: “for the purpose
of providing different measures of stimulation and state support in the course of
investment activity in the sphere of wireless and cellular communications in rural areas.”
The incentives were granted by the Investment Committee in order to encourage KaR-Tel
to progress the development of its network quickly and to ensure that it provided its
network equally in the less profitable rural areas of Kazakhstan, as well as in the highly
profitable main cities. This was further particularized in the 5-year “Working
Programme” annexed to the Investment Contract wich set out the respective population
centres and areas of the Republic to which KaR-Tel’s network coverage had to extend
over the course of the five-year period.
24
103. 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 the investment programme. 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.
F. The foundation of Telecom Invest and the introduction of Telsim
104. On September 29, 2000, Almex and a Mrs. Elena Petrovna Gutova entered into an
agreement to found a new Kazakh LLP called Telecom Invest LLP (“Telecom Invest”)
with a minimum charter capital of 100,000 Tenge. The participatory interests were
divided as follows: 87.5% to Almex and 12.5% to Mrs. Gutova.
105. At a General Meeting of Shareholders of KaR-Tel held on October 10, 2000, the founders
of KaR-Tel resolved that:
- Investel be permitted to sell its participation in KaR-Tel to a third party for
300,000 Tenge;
- Rumeli be permitted to sell a part of its participation equivalent to 15% of the
total participation rights in KaR-Tel to a third party.
106. In late 2000, Investel transferred its participation interest in KaR-Tel to Telecom Invest
for 300,000 Tenge. On December 31, 2000, Rumeli sold a 15% participation in KaR-Tel
to Telsim. Pursuant to Articles 22(2) and 12 of the Kazakh Law on Limited and
Additional Liability Partnerships, Telsim became successor to Rumeli’s obligations under
the Foundation Agreement.
107. These changes necessitated the amendment of KaR-Tel’s Charter, which was approved at
a General Meeting of Shareholders on April 20, 2001. Further amendments were made
the same day:
25
- the registered capital was reallocated as follows: Telecom Invest (40%), Rumeli
(45%) and Telsim (15%);
- the Board of Directors was removed as an organ;
- as a result of the removal of the Board of Directors, the former powers of that
organ, and in particular the power to appoint or remove the General Manager of
KaR-Tel, was transferred to the General Meeting of Shareholders.
108. On September 9, 2001, Mr. Podporin was officially appointed the General Manager of
Telecom Invest.
G. The development of KaR-Tel’s Business
109. Claimants’ and Respondent’s position on the business development of KaR-Tel and on
the investments allegedly made by Claimants differ substantially.
110. In a nutshell, Claimants allege that by the end of the year 2001, KaR-Tel had a work
force of approximately 193 well-qualified employees, the number of subscribers and
revenues reached almost 160,000 and USD 60 million respectively; and that the number
of subscribers reached 380,000 by April 2002. Claimants further allege that this success
was the result of their very important efforts and investments.
111. According to Claimants, Respondent itself recognized and praised KaR-Tel’s
achievement in a letter of the Ministry of Transportation and Telecommunications of the
Republic of Kazakhstan dated May 11, 2000. Moreover, KaR-Tel was generating
positive EBITDA margins – i.e. generating a positive operating cash flow – in both 2001
and early 2002, when Claimants were suddenly evicted from KaR-Tel.
112. On the contrary, Respondent alleges that the level of subscribers and revenues was
grossly overstated and that there is no evidence that Claimants really invested in KaR-
Tel.
26
II. THE TERMINATION OF THE INVESTMENT CONTRACT AND ITS REPERCUSSIONS
A. The termination of the Investment Contract
113. On February 21, 2002, the Investment Committee took the decision to terminate the
Investment Contract. By a letter dated February 21, 2002, it gave KaR-Tel notice in
writing that, as a result of its repeated breaches of said Contract and more specifically on
the basis that KaR-Tel had not complied with its reporting obligations pursuant to the
Investment Contract, the Investment Contract would terminate 30 days later.
114. By letter dated March 27, 2002, the Investment Committee recorded the Formal Order of
Termination of the Investment Contract at a meeting on March 25, 2002 on the basis that
KaR-Tel had failed to comply in a timely manner with a requirement in the Investment
Contract to submit reports on the economic activities of the partnership and on the
implementation of the investment project.
B. The Extraordinary General Meeting of Shareholders of KaR-Tel
115. In view of this development, an Extraordinary General Meeting of the Shareholders of
KaR-Tel (“EGM”) was called by Telecom Invest. According to Respondent, Mr.
Podporin sent to Rumeli and to Telsim formal notices calling this EGM. These notices
set out that:
- an EGM of KaR-Tel would be held on April 11, 2002 at 18.00 at an address in
Almaty;
- in case Claimants’ representatives did not attend the EGM on April 11, the EGM
would then be adjourned to April 15 at 18.00 at the same address;
- if Claimants’ representatives failed again to attend the adjourned EGM on April
15, 2002, decisions on the proposed agenda for the meeting would be taken in
their absence.
116. The three points on the agenda for this meeting were: (1) consideration of the damage
caused to KaR-Tel by Rumeli and Telsim; (2) consideration of the compulsory
27
redemption of the participations of Rumeli and Telsim and their removal from the
partnership; (3) the temporary change of the General Manager of KaR-Tel.
117. With respect to the compulsory redemption of Claimants’ shareholding, Article 34 of the
Limited and Additional Liability Partnership Law (the “LLP Law”) provides that :
“1. When a participant of a limited liability partnership causes harm to a
partnership or its participants, they shall have the right to claim for
compensation of damages from such person.
2. In the event when material harm is caused, the limited liability
partnership aside from its claim to compensate damages and raising the
issue on forced purchase by the partnership of the participating interest of
the guilty participant who has caused the harm shall also have the right to
require his retirement from the participants.
3. The forced purchase of a participating interest shall be carried out in a
judicial procedure.”
118. In addition, Article 82 of the Kazakh Civil Code provides that:
“In the event a participant of the limited liability partnership fails to fulfill
its obligation towards the partnership, as established by legislative acts or
foundation documents, the partnership, in compliance with a decision of
the general meeting, may demand in Court the forced buy-out of the
participating interests owned by such participant at a price determined by
an agreement between the partnership and the participant. In the event an
agreement is not reached, the price for the share being forcedly bought
out shall be established by the court.”
119. Claimants, however, allege that they were not notified of these meetings, and that this is
why they were not present at the first meeting which took place on April 11, 2002 and at
the adjourned meeting which subsequently took place on April 15, 2002.
120. On April 15, 2002, Telecom Invest proceeded to consider the matters on the agenda in
Claimants’ absence. The following resolutions were passed:
- to prepare all necessary documents, including financial analyses, demonstrating
the damage caused to KaR-Tel by the activity and/or inactivity of Rumeli and
Telsim;
28
- to issue proceedings in the Almaty City Court for the compulsory redemption of
Claimants’ participation in KaR-Tel;
- to dismiss Mr. Agilönü as General Manager of KaR-Tel and to replace him
temporarily by Mr. Iskander Yerimbetov and to seek the Court’s approval of this
amendment.
C. The proceedings issued in Almaty City Courts
1. The Telecom Invest Claim
121. On April 19, 2002, Telecom Invest issued proceedings against Claimants in the Almaty
City Court (“the Telecom Invest Claim”) for the compulsory redemption of Claimants’
participation in KaR-Tel. Telecom Invest also sought an injunction to freeze the assets
and records of KaR-Tel.
122. On April 23, 2002, Mrs. S. G. Ivanovna, sitting as the presiding judge of the Almaty City
Court, considered Telecom Invest’s application for an injunction. Judge Ivanovna held
that in accordance with the Law on National Security, it was necessary to grant the
injunction freezing the partnership’s assets, property and records in order to ensure that
the performance of KaR-Tel’s network continued uninterrupted. At the time, the
Republic had only two mobile telephony networks and these were considered to be
critical strategic interests.
123. Judge Ivanovna ordered that, pending a decision on the merits of the case:
- all property of KaR-Tel be frozen to secure the claim;
- access to objects which ensured the uninterrupted operation of KaR-Tel’s cellular
network and to financial, technical and other documents and computer databases
was to be restricted to those with written permission of the temporary General
Manager Mr. Yerimbetov.
29
124. On the same day, April 23, 2002, the Court bailiffs took steps to ensure compliance with
the order of the Court. The bailiffs did this by attending at KaR-Tel’s premises with a
representative of Telecom Invest, Mr. Aidan Karibjanov, and with a security escort.
125. This first decision on injunctive relief was made ex parte. It was thus decided on the
basis of the application and without any hearing. Claimants appealed the decision to the
Supreme Court on May 2, 2002. On June 11, 2002, the Supreme Court set aside the
second part of Judge Ivanovna’s Order, requiring access to KaR-Tel to be restricted to
those with written permission from Mr. Yerimbetov.
2. The KaR-Tel Claim
126. In late May 2002, whilst Claimants’ appeal of the injunction to the Supreme Court was
still pending, KaR-Tel, acting through its new temporary General Manager, Mr.
Yerimbetov, commenced proceedings against Claimants in identical terms to those
brought by Telecom Invest.
127. On May 22, 2002, Mr. Agilönü called an EGM of the partnership. As soon as he was
notified of this, Mr. Yerimbetov, on behalf of KaR-Tel, applied to the Almaty City Court
for a further injunction preventing the holding of the intended EGM.
128. On June 3, 2002, the Almaty City Court granted the injunction and:
- suspended the EGM called by Mr. Agilönü for June 7, 2002;
- enjoined Mr. Agilönü from exercising the rights and performing the functions of
General Manager of KaR-Tel pending a decision on the merits of the case;
- enjoined Claimants from calling or holding any general meetings of KaR-Tel
pending a decision on the merits of the case.
129. Court bailiffs enforced the injunction by entering the conference room in which the
General Meeting of Shareholders was held at the AnKaRa Hotel on June 7, 2002 and
asked Mr. Agilönü and Claimants to stop the meeting.
30
130. Claimants appealed this second injunction before the Supreme Court of the Republic. On
or about August 1, 2002, the Supreme Court allowed Claimants’ appeal in part and set
aside part of Judge Ivanovna’s order insofar as it related to constraints on the action of
Mr. Agilönü, on the grounds that he was not a party to the proceedings. The Supreme
Court also dismissed as entirely without foundation Claimants’ allegation that the grant
of the injunction demonstrated bias and partiality on the part of the Almaty City Court.
3. The Consolidation of Telecom and KaR-Tel cases
131. One month before, by an order dated July 1, 2002, Judge Ivanovna of the Almaty City
Court had ruled that the proceedings brought by Telecom Invest and the proceedings
brought by KaR-Tel should be consolidated into a single proceeding, on the basis that the
claims were very similar and against the same defendants.
4. The forensic examination of KaR-Tel
132. On July 31, 2002, Judge Begaliev of the Almaty City Court issued a ruling appointing the
Forensic Examination Centre of the Kazakh Ministry of Justice to prepare an integrated
accounting and commercial forensic examination. The examination was to address the
issue of whether Claimants had caused significant damage to KaR-Tel by their actions,
and to assess the value of KaR-Tel as at April 2002. In this respect, Judge Begaliev
posed 6 specific questions to the Forensic Examination Centre:
- what is the annual turnover of KaR-Tel?;
- did KaR-Tel sustain a loss as a result of the cancellation of the Investment
Contract; if so, in what amount?;
- what was the average market value at the time of purchase of the equipment
purchased by KaR-Tel from Telsim; what price did KaR-Tel in fact pay to
Telsim; what is the difference, if any, between these two figures?;
- what was the average market value at the time of purchase of the telephone
handsets purchased by KaR-Tel from Telsim; what price did KaR-Tel in fact pay
to Telsim?;
31
- what is the total value of investments made by Rumeli and Telsim in the context
of their obligations under the Foundation Agreement; how were these investments
used?; and
- what is the balance sheet value of KaR-Tel and the shareholdings of Rumeli and
Telsim therein?
133. On or about August 9, 2002, Claimants appealed Judge Begaliev’s order. The Supreme
Court dismissed the appeal regarding the appointment of the Forensic Examination
Centre on September 19, 2002. It held that:
- it was normal and proper for Judge Begaliev to have appointed the Centre to
review those matters prior to holding a hearing on the merits;
- it was incorrect to allege that the claim was stayed due to the appeal of the
injunction;
- Judge Begaliev’s order did not go beyond the scope of the claims.
D. The attempts to sell Telecom Invest’s participation in KaR-Tel
134. In August 2002, Telecom Invest and Claimants entered into discussions concerning the
sale of Telecom Invest’s 40% in KaR-Tel to Claimants. A Stock Purchase Agreement
was negotiated and initialed by the parties on October 13, 2002, subject to the signature
of their highest executives.
135. The purchase price for Telecom Invest’s 40% stake was set at USD 12 million.
Ultimately, however, the agreement was not finalized.
136. In late autumn 2002, KaR-Tel’s General Manager, Mr. Yerimbetov, and a Kazakh
businessman, Mr. Margulan Seysembayev, approached Almex and Mrs. Gutova with an
offer to acquire KaR-Tel. The parties entered into discussions, and it was eventually
agreed to sell Telecom Invest itself to Mr. Seysembayev.
137. The purchase, effected through 6 companies which were beneficially owned and
controlled by Mr. Seysembayev, was concluded informally by amendment of Telecom
32
Invest’s Charter at a shareholders meeting on December 19, 2002. This amendment was
registered on January 17, 2003 and was for nominal consideration.
E. Mr. Seysembayev’s offer to purchase Claimants’ participation in
KaR-Tel
138. In or about April 2003, Mr. Seysembayev, the owner of Telecom Invest, attempted to
purchase Claimants’ 60% interest in KaR-Tel. He indicated to Claimants that he was
prepared to offer them USD 12 million to USD 15 million for their participation.
Claimants refused this offer.
F. Claimants’ complaints to Respondent
139. On April 2, 2003, Rumeli wrote to the Prime Minister of the Republic and sent further
copies of the letter to the President, the Minister of Foreign Affairs, the Minister of
Transport and Communications, the Minister of Industry and Trade, the Minister of
Finance, the Chairman of the Investment Committee and the Turkish Ambassador to
Kazakhstan. On April 3, 2003, Telsim sent an identical letter to the same recipients.
140. These letters were complaints by Claimants that the termination of the Investment
Contract had been wrong because:
- KaR-Tel had complied with all of its investment obligations under the Investment
Contract;
- KaR-Tel had complied with all of its reporting obligations under the Investment
Contract;
- the Investment Committee had violated the contractual procedure for termination
“in that any termination could take place only if the Contract had been suspended
first and the investor failed to remedy the situation.”
141. Claimants also threatened to launch ICSID proceedings if their dispute with the
Investment Committee was not resolved to their satisfaction.
33
G. The judgment of the Almaty City Court on June 6, 2003
142. As explained above, on July 1, 2002, the Almaty City Court had ordered that the
proceedings brought by Telecom Invest and those brought by KaR-Tel be consolidated.
The claim was for the Court to order that Claimants’ participation in KaR-Tel be
compulsory redeemed. Claimants defended these proceedings with the assistance of local
counsel and engaged three Kazakh academics to provide expert evidence on the disputed
issues.
143. There were two central issues for the Almaty City Court to determine:
- the validity of KaR-Tel’s EGM resolution to bring the claim;
- whether the claim for compulsory redemption was made out.
144. With respect to the first issue, the Court:
- held that pursuant to Article 45(2) of the LLP Law, “if, despite requests by
members, the executive body does not convene a general meeting, it may be
convened by the members themselves,” where they hold more than 10% of the
total voting equity in the partnership;
- found as a fact that on the balance of the evidence Mr. Agilönü had indeed
received the requests in the form of letters dated March 4, 2002 and March 20,
2002; and therefore,
- held that the EGMs on April 11 and 15 were properly convened by Telecom
Invest;
- determined that the meeting on April 15, 2002 was quorate and that the
resolutions had been passed in a procedurally correct manner and with the
requisite quorums and majorities. The resolution was therefore valid and was
upheld.
145. With respect to the second issue, i.e. KaR-Tel’s claim for compulsory redemption of
Claimants’ shares, the Court found that Claimants had caused KaR-Tel to suffer harm in
the amount of USD 40,662,765, being the loss caused to KaR-Tel by the termination of
34
the Investment Contract and trough transactions with related companies. The Court
decided that this was indeed material harm entitling KaR-Tel compulsorily to redeem
Claimants’ shareholdings, which the Court then ordered.
146. It was recorded in the Court’s judgment that, pursuant to Article 32(3) of the LLP Law,
the value of the interest to be purchased was to be established by the parties in the first
place and that the Court would only make such determination in circumstances where the
parties would be unable to agree. The Court thus left the issue of the value of Claimants’
shareholding to be determined by agreement between Claimants and Telecom Invest.
H. The appointment of a Working Group
147. On June 9, 2003, the Investment Committee wrote to Claimants to inform them that
Respondent’s Government’s decision to establish an inter-departmental Working Group
to “conduct an audit on KaR-Tel LLP on the execution of the terms of the contract by
KaR-Tel LLP, including investments obligations.”
148. The Working Group reached a decision on July 17, 2003. Its findings were the
following:
- in breach of clause 6.2 of the Investment Contract, KaR-Tel had failed to use
advanced technologies in implementing the investment project. Instead, KaR-Tel
had imported second hand and outdated BTS base sections;
- in breach of clause 3 of the Investment Contract, between May 1999 and March
2002, KaR-Tel made direct investments of only USD 13,308,749. This equated to
only 11.7% of the pro-rated direct investment of USD 113,643,000 required under
clause 3;
- in breach of the Work Programme at Annex 1 to the Investment Contract and in
breach of clause 2.1 of the same, between 1999 and 2002, KaR-Tel had achieved
only 56% of the progress required under the Work Programme. In particular, the
rural areas of Kazakhstan had been largely without coverage;
35
- Article 13 of the Law on State Support for Direct Investments permits the
Investment Committee to terminate an investment contract where the investor
fails to comply with its obligations or breaches terms of the contract. There is no
provision in the Law for suspension of an investment contract prior to its
termination. Additionally, even under the terms of the Investment Contract, a
prior suspension of the Contract is a right rather than an obligation of the
Investment Committee;
- although the Investment Contract was terminated for KaR-Tel’s failure to submit
reports, the only reason why it was not terminated for the breaches set out above
was that the failures to report prevented the Investment Committee from having
information from which it could have identified the breaches;
- KaR-Tel itself had expressed to the Working Group that it did not dispute the
termination of the Investment Contract.
I. Criminal investigation
149. On June 24, 2003, Mr. Yerimbetov filed a criminal complaint against five former KaRTel
employees who would have signed expenses authorization forms in order to take
money directly from KaR-Tel’s petty cash reserve. The total sum so transferred was
27,053,748 Tenge, which at the time equated approximately USD 192,663. The
executives and employees concerned were:
- Bora Agilönü, KaR-Tel’s General Manager;
- Mustafa Bash, KaR-Tel’s Director of Sales;
- Erdal Osornec, KaR-Tel’s Finance Director;
- Bulent Gurel, KaR-Tel’s Chief Accountant; and
- Zhuldys Kaden, a secretary.
150. On July 1, 2003, Major Yun, a senior investigator in the Almaty police force, decided to
issue a criminal indictment against these employees. They fled the country. The
proceedings were suspended on September 1, 2003.
36
J. The judgment of the Supreme Court of July 23, 2003
151. On June 20, 2003, Claimants appealed the Almaty City Court’s judgment to the Supreme
Court of Kazakhstan. Claimants repeated the points on which they had relied before the
first Court, and requested the Supreme Court to:
- overturn the decision of the Almaty City Court;
- refuse KaR-Tel’s claim for compulsory redemption;
- invalidate the calling of the EGM on April 15, 2002 and all decisions adopted at
that meeting;
- discharge the injunctions dated April 23, 2002 and June 2, 2002.
152. KaR-Tel also filed an application to the Supreme Court to have the valuation exercise
conducted on Claimants’ participation in KaR-Tel.
153. The Supreme Court reviewed the Almaty City Court decision and left it unchanged. It
dismissed all of the appeals and the application filed by KaR-Tel to have the valuation
exercise conducted. It therefore remained for the parties to agree on a price for the
compulsory redemption of Claimants’ shareholding.
K. The judgment of the Supreme Court Presidium of October 30, 2003 The
following restructuring of KaR-Tel – and the purchase of KaRTel
by VimpelCom
1. The judgment of the Supreme Court Presidium
154. On September 15, 2003, KaR-Tel appealed the Supreme Court’s decision to the
Presidium of the Supreme Court (“the Presidium”), the highest instance for civil cases in
the Kazakh legal system. The purpose of KaR-Tel’s appeal was to ask the Presidium to
determine the valuation of Claimants’ participation in KaR-Tel.
155. The Presidium considered that it had jurisdiction to determine the price since it was
established that the parties, i.e. KaR-Tel on the one hand and Claimants on the other
hand, were not able to reach agreement. The Presidium then valued Claimants’
37
participation in KaR-Tel at 337,500 Tenge for Rumeli (approximately USD 2,281) and
112,500 Tenge for Telsim (approximately USD 760.43).
2. The restructuring of KaR-Tel
156. Shortly thereafter, on November 10, 2003, KaR-Tel’s Charter was amended to reflect that
the founders were Telecom Invest (40%) and Steiner and Zingermann JV LLP, a law firm
(60%). Steiner and Zingermann had purchased that shareholding from KaR-Tel
following Telecom Invest’s waiver of its right of pre-emption. They subsequently
transferred their shareholding to another of Mr. Seysembayev’s companies, Kertean LLP,
in January 2004.
157. Under its management, Mr. Yerembetov restructured the company. He made new
investments and started negotiations with Motorola to restructure the loan. In April 2004,
Mr. Yerembetov was finally able to reach a deal with Motorola whereby the loan would
be discounted to USD 35 million and repaid in full in the short term.
158. Mr. Yerembetov managed to persuade KazKommertz Bank to lend it the USD 35 million
required to repay Motorola.
3. The sale of KaR-Tel to VimpelCom
159. On August 27, 2004, VimpelCom announced that it had won a public tender to purchase
KaR-Tel for USD 350 million.
III. CLAIMANTS SEIZED BY TSDIF
160. In February 2004, the Turkish Savings Deposit Insurance Fund (the “TSDIF”), seized
control of over two hundred companies allegedly belonging to, or controlled by, the Uzan
family, among which Rumeli and Telsim.
38
CHAPTER IV. THE JURISDICTION OF THE ARBITRAL
TRIBUNAL
161. The first issue to be decided in this arbitration is the jurisdiction of this Arbitral Tribunal.
It is indeed disputed by Respondent, as is further explained below.
I. CLAIMANTS’ POSITION
162. According to Claimants, the requirements of Article 25 of the ICSID Convention and
ICSID Rule 2(1)(c) are fulfilled. Claimants have consented to the jurisdiction of ICSID
by virtue of their Request for Arbitration and the ICSID arbitration clause contained in
the BIT. Respondent has consented to ICSID jurisdiction on the date of entry into force
of the BIT, namely August 10, 1995 and/or on the date of entry into force of the FIL,
namely on December 28, 1994.
163. According to Claimants, the BIT states that two authentic copies (in four different
languages) of the BIT have been executed, “each in Turkish, Kazak [sic], English and
Russian.” There does not appear, however, to exist any Kazakh language version. There
is no requirement under the English or Russian versions of a prior submission of the
dispute to local Courts before initiation of arbitration proceedings before ICSID. On the
other hand, Article VII of the Turkish version contains such a requirement. According to
Claimants:
- no requirement of prior initiation and completion of local proceedings as a
prerequisite to ICSID arbitration should be imposed, as two of the three official
versions of the BIT do not provide for such a requirement;
- such a requirement would constitute a violation of the Most Favorable Clause
contained in the BIT, since it would create a barrier to arbitration not found in the
dispute resolution clauses of other BITs entered into by the Republic of
Kazakhstan;
- in any case, Respondent, through its behavior, has deprived Claimants of the
possibility of meaningfully exercising any such action.
39
164. It is finally Claimants’ position that none of Respondent’s objections to the jurisdiction of
this Tribunal has any merit.
A. Respondent consented to ICSID jurisdiction over this dispute
165. According to Claimants, Respondent’s consent to ICSID jurisdiction is contained in both
the BIT and the FIL. As far as Claimants are concerned, they first expressed their
intention to initiate arbitration in April 2003, when they wrote letters to Respondent
indicating that they had “the right to submit the dispute for final resolution to the
International Center for Settlement of Investment Disputes (ICSID) and have firm
intentions to do so if no agreement is reached with the Republic of Kazakhstan in the
nearest future.” Claimants completed their consent by filing their ICSID Request for
Arbitration on July 15, 2005. Thus, all parties have consented to ICSID jurisdiction over
this dispute by no later than July 15, 2005.
166. Nevertheless, nearly two years after the Request for Arbitration was filed, Respondent
alleges that it did not consent to ICSID jurisdiction over this dispute on the ground that
Claimants’ investments violated the laws and regulations of Kazakhstan. Claimants
consider that Respondent’s allegations are wholly without merit and should be dismissed
accordingly.
1. Claimants’ investments were fully legal
167. Claimants deny that their investments did not comply with Kazakhstan’s laws and
regulations. In any event, the standards that would need to be satisfied in this regard for
ICSID jurisdiction to be defeated are very high. Respondent, which bears the burden of
proof, has not advanced, let alone provided, evidence of any factual and legal support for
its allegations.
168. To defeat the Tribunal’s jurisdiction based on a BIT’s requirement that the disputed
investments be in conformity with the host State’s laws and regulations, a certain level of
40
violation is required. As determined by the Arbitral Tribunal in the LESI1
case, such a
provision will exclude the protection of investments only if they have been made in
breach of fundamental legal principles of the host country (“en violation des principes
fondamentaux en vigueur”).
169. Moreover, mere allegations are not enough. According to Claimants, Respondent does
not substantiate its allegations with any factual evidence of fraud. Nor does it invoke any
laws or regulations of Kazakhstan that Claimants’ investments would have supposedly
violated. Rather, Respondent relies upon an unrelated New York Court judgment
applying American law and refers to that Court’s assessment of acts and omissions that
took place in Turkey regarding separate transactions, to reach the conclusion that “[i]n
circumstances where the entire basis of the Claimants’ alleged investment in KaR-Tel
was to further their worldwide fraud, the investment was not in conformity with the laws
of Kazakhstan.”
170. Claimants submit that the Tribunal should rather follow the holding of Tokios Tokelés,2
where the registration of Claimants’ investments indicated that they had been made in
accordance with the laws and regulations of the host State. Similarly here, it is not in
dispute that Respondent registered KaR-Tel, granted KaR-Tel Kazakhstan’s second GSM
license through a free and transparent bidding process, and willingly registered all
corporate changes to KaR-Tel.
171. According to Claimants, Respondent’s attempt to try to link to KaR-Tel acts and
omissions in Turkey of the Uzan family, relating to third party transactions, is irrelevant.
The manner in which the Uzans conducted their business outside of Kazakhstan has no
relation to the case at hand. According to Claimants, the Uzans’ alleged fraud was
related to the T. Imar Bankasi TAS (the “ImarBank”) banking practices in Turkey. They
had nothing to do with Claimants’ investments in Kazakhstan. Similarly, Respondent’s
1
LESI, S.p.A. and Astaldi S.p.A. v. People’s Democratic Republic of Algeria (ICSID Case No.
ARB/05/3), Decision on Jurisdiction of July 12, 2006 [hereinafter LESI v. Algeria].
2
Tokios Tokelés v. Ukraine (ICSID Case No. ARB/02/18), Decision on Jurisdiction of April 29, 2004
[hereinafter Tokios Tokelés].
41
justification for depriving Claimants of their majority stake in KaR-Tel, which was based
on an alleged failure to file reporting documents, was unrelated to the Uzans’ fraud.
172. The only evidence put forward by Respondent in support of the proposition that
Claimants’ investments were fraudulent is a July 13, 2003 judgment rendered in the
United States against the Uzans. A judgment of a Court of first instance in New York
applying American law does not bind an arbitral tribunal dealing with claims under
international law. In any event, that judgment did not rule on the legality of Claimants’
investment in Kazakhstan.
173. The New York judgment could not have found evidence that KaR-Tel played a role in an
illegal scheme with respect to the Motorola loans as Respondent alleges. As noted in
Judge Rakoff’s findings of fact, two Motorola loans were made in relation to KaR-Tel:
- the largest loan was the USD 60,000,000 loan made on August 19, 1998. As it
did not cover the total price of the GSM License, Claimants paid the remaining
USD 5,850,000. Therefore, the Uzans obviously could not have used this loan for
illegal purposes;
- the second Motorola loan was for USD 13,723,00.99. But Judge Rakoff’s
findings of fact did not specifically conclude that this loan was used improperly
and not for the purchase of equipment from Motorola. Respondent has failed to
prove any fraud whatsoever in connection with this loan.
174. Claimants further allege that, with respect to Respondent’s allegation that Claimants
defrauded KaR-Tel itself by causing it to enter into transactions with Telsim at excessive
prices, no neutral expert has ever determined that these transactions with Telsim were in
fact at excessive prices. Rather, Bülent Ya!ci, a professor of the Istanbul Technical
University, reviewed the prices at which Telsim sold KaR-Tel equipment and found that
the “cost [was] reasonable.” He moreover determined that the prices were lower than
those of the market. In any case, sales at a high price do not constitute a violation that
42
would rise to the “violation of fundamental principles” standard needed to defeat
jurisdiction.
175. According to Claimants, contrary to Respondent’s allegations, the entire basis of their
investments in KaR-Tel was obviously not to further a worldwide fraud. They had only
one purpose: to create a profitable cellular telecommunications business in Kazakhstan.
In this respect, Rumeli and Telsim expended significant financial and human resources to
create and develop KaR-Tel’s operations and GSM network:
- they made significant investments in KaR-Tel. The bid process by which KaRTel
received Kazakhstan’s second GSM License was wholly legal. The License
was legally paid for;
- the telecommunications network that Claimants built was in compliance with the
local laws and technical regulations of Kazakhstan;
- in or around July 1998, Claimants’ managers flew to Kazakhstan with a team of
six or seven Turkish specialists from the Rumeli/Telsim group for the purpose of
developing KaR-Tel’s operations and GSM network;
- Rumeli conducted in-depth market research and analyses and established a tenyear
business plan for KaR-Tel;
- KaR-Tel’s success increased under Claimants’ management due to their
continued investments;
- Rumeli and Telsim made significant investments in KaR-Tel during the period of
1998-2002;
- in 2000, Claimants further invested approximately USD 13,000,000, and KaR-Tel
revenues reached approximately USD 11,000,000, with the number of subscribers
reaching over 57,000.
176. Therefore, Claimants allege that KaR-Tel was a legitimate business and a success story.
It was not a company set up to further a worldwide fraud, but rather a legitimate, growing
and dynamic telecommunications company in Kazakhstan. It was also a company of
significant value as its sale to VimpelCom in 2004 for USD 350,000,000 attests.
43
2. Claimants’ investments did not violate the principle of good
faith, the principle “nemo auditur propriam turpitudinem
allegans,” or international public policy
177. Claimants allege that their investments did not violate the principle of good faith.
Respondent’s argument in this respect is based on Respondent’s repetitive allegation that
the investment was part of a worldwide fraud, which is untrue and which Respondent has
failed to substantiate.
178. According to Claimants the Inceysa case3
relied upon by Respondent must be
distinguished from the present case. Indeed, the circumstances were very different in
Inceysa. Inceysa’s violations of the principle of good faith were shockingly clear:
Inceysa’s investment was the result of winning a bid, which Inceysa won only by
presenting wholly falsified information. On the contrary, no false information was ever
presented to Respondent with respect to Claimants’ investments in Kazakhstan.
179. Claimants’ investment did not violate the principle nemo auditur propriam turpitudinem
allegans. Once again, the Inceysa decision relied upon by Respondent is irrelevant since
the current arbitration does not remotely resemble the facts of the Inceysa case.
180. Claimants’ investment did not violate international public policy. Respondent again
invokes Inceysa, whereas Inceysa’s very investment was secured by fraudulent
misrepresentations. Again, Claimants allege that no false information was ever presented
to Respondent with regard to Claimants’ investments in Kazakhstan.
181. The World Duty Free decision4
invoked by Respondent to stand for the principle that no
jurisdiction is permissible where an investment violates public policy is also irrelevant to
the present case. Indeed, according to Claimants, in World Duty Free, Kenya alleged that
the agreement on which the claims in the arbitration were based was obtained through a
3
Inceysa Vallisoletana S.L. v. Republic of El Salvador (ICSID Case No. ARB/03/26), Award of August
2, 2006 [hereinafter Inceysa v. El Salvador].
4
World Duty Free Company Limited v. The Republic of Kenya (ICSID Case No. ARB/00/7), Award of
October 4, 2006 [hereinafter World Duty Free v. Kenya].
44
bribe. The tribunal agreed, and went on to hold that, since bribery is contrary to
international public policy, claims based on contracts obtained by corruption could not be
upheld by the tribunal. Here, by way of contrast, Respondent has made no case against
Claimants of any bribe.
182. Claimants finally point out that a mere presumption of fraud is insufficient. It has to be
positively proved. Moreover, the fraud must be particularized and must directly relate to
the precise issue at hand, namely Claimants’ investment in Kazakhstan.
B. Claimants have standing to bring this arbitration
1. Rumeli and Telsim are the proper Claimants in this
arbitration
183. ICSID’s arbitration mechanism was designed to protect investments of foreign nationals,
like Telsim and Rumeli. They are legal entities registered in Turkey and as such are
nationals of another Contracting State. Article 25 of the ICSID Convention defines a
“National of another Contracting State” as “any juridical person which had the
nationality of a Contracting State other than the State party to the dispute on the date on
which the parties consented to submit such a dispute to conciliation or arbitration.”
Rumeli and Telsim qualify as such because they were incorporated and headquartered in
Turkey both at the time the dispute arose and at the time of their consent to ICSID
arbitration.
184. According to Claimants, today, Rumeli and Telsim:
- remain legal entities incorporated in Turkey;
- remain commercially registered legal entities;
- have employees and own assets;
- have full legal capacity;
- pay social charges and taxes and are not immune from enforcement;
- are not owned, but merely managed by TSDIF.
45
185. Claimants further allege that they were never created for treaty-shopping purposes. Nor
did they become controlled by TSDIF for this purpose. At the time of Respondent’s
wrongful actions, Claimants were actively engaged in telecommunications operations
both in Turkey and abroad. When Telsim and Rumeli indicated that they would initiate
ICSID proceedings in April 2003, they were fully-operational telecommunications
companies. This was still the case when they perfected their consent to initiate
proceedings by filing their Request for Arbitration on July 15, 2005.
186. Claimants dispute Respondent’s allegation that Claimants are mere shell companies. In
any event, even if Rumeli and Telsim were indeed “shell” companies, this would not
constitute a bar to this Tribunal’s jurisdiction under either the ICSID Convention or the
BIT. Indeed, nowhere in Article 25 – nor in the ICSID Convention – is there a basis for
denying ICSID jurisdiction to a shell company. This has been confirmed by a recent
ICSID decision on jurisdiction. In Aguas del Tunari,5
Respondent, Bolivia, argued that
the claimant – a local company – could not claim that it was an entity “controlled directly
or indirectly” by “nationals” of the Netherlands because, inter alia, the ultimate Dutch
controlling corporation was a shell company actually controlled by an American
company. As is clear from the decision, the tribunal rejected Respondent’s position on
the basis that the Dutch corporation was not a corporate shell specifically set up to gain
ICSID jurisdiction over the dispute.
187. In the present case, even if Rumeli and Telsim are deemed today to be “shell” companies,
it cannot be seriously argued that they were created in 1993 for “treaty-shopping”
purposes, i.e. to gain ICSID jurisdiction.
188. Therefore:
- the fact that Telsim may or may not have substantial activities following the sale of
Telsim assets to Vodafone is irrelevant for jurisdictional purposes. If Kazakhstan
5
Aguas del Tunari S.A. v. Republic of Bolivia (ICSID Case No. ARB/02/3), Decision on Respondent’s
Objections to Jurisdiction of October 21, 2005 [hereinafter Aguas del Tunari v. Bolivia].
46
had wanted, as a condition for the BIT protection, that the Turkish corporate
investors have substantial activities in Turkey, from the first day of their investment
to the date of the rendering of an ICSID award, it could have included such an
exceptional condition in the definition of “investor” in the BIT. It did not do so;
- Rumeli which owned a larger stake than Telsim in KaR-Tel – has not sold its assets.
Consequently, the “shell” argument is not in any case relevant with respect to
Rumeli;
- finally, to allege, as Respondent does, that once an arbitration has legitimately
started, a company cannot sell its assets to another company, is simply wrong.
189. Moreover, according to Claimants, the BIT does not provide a basis for looking beyond
Rumeli and Telsim on the alleged basis that they are shell companies. Article I(1)(b) of
the BIT defines the term “investor” as “corporations…incorporated under the law in
force of either of the parties and having their headquarters in the territory of that party.”
Accordingly, the BIT adopts the State of incorporation and the State of the seat as criteria
for determining the nationality of a claimant. It does not exclude shell companies from
its scope of application nor requires a search beyond the designated claimant whenever it
is a shell company.
190. In this context, it is neither for Respondent nor for an arbitral tribunal to substitute its
views of the definition of the term “investor” to that of the Contracting Parties to a BIT.
This is the position recently adopted in Saluka.6
In that case, the arbitral tribunal decided
that the applicable BIT expressly gave standing to a legal person constituted under the
laws of the Netherlands and did not expressly empower the tribunal to add any other
criteria in this respect, irrespective of whether such a legal person was a shell company.
191. In addition, according to Claimants, the TSDIF’s appointment of managers at Telsim and
Rumeli did not in any way put an end to the corporate existence of Claimants or to
Claimants’ ownership of their claims against Kazakhstan. This is supported by decisions
6
Saluka Investments BV (The Netherlands) v. The Czech Republic (UNCITRAL), Partial Award of
March 17, 2006 [hereinafter Saluka].
47
such as in the Autopista case,7
where the respondent argued that, even if the parties to the
applicable agreement had agreed to treat the local company as a United States national
because of the majority shareholding, “the pervasive control by Mexican nationals over,
and involvement in the affairs of” the local company should lead the tribunal to decline
jurisdiction under Article 25 of the ICSID Convention. The tribunal rejected
respondent’s argument.
192. Claimants further allege that given the fact that Claimants brought the claim in their
names, the issue of what would have happened had TSDIF brought the claims itself is
purely academic.
193. Claimants also submit that Respondent’s attempts to imply that TSDIF already would
have brought a claim in its own name against Respondent and that this would confirm
that the real parties in interest would be TSDIF and the Turkish Treasury, is also
incorrect. In fact, the “proceedings” to which Respondent refers is merely a Payment
Order which was addressed to KaR-Tel and was issued by the TSDIF on October 7,
2004, shortly following the sale of KaR-Tel to Vimpelcom. Such USD 5.5 billion
payment order was sent to over 200 Uzan-associated companies in October 2004. This
was just an unsuccessful payment request by the TSDIF, not the institution of
proceedings in the name of Telsim or Rumeli against Respondent.
194. Likewise, Claimants submit that Respondent’s assertion that “it is telling that Motorola
brought its proceedings against the Republic of Turkey and the TMSF (TSDIF) and even
more telling that the Republic of Turkey and the TMSF settled those proceedings” is
irrelevant to the dispute at hand. Moreover, it is factually wrong. The settlement
agreement was entered into by Telsim, Rumeli, Bayindirbank A.S., Motorola Inc.,
Motorola Credit Corporation, Motorola Limited, and Motorola Komunikasyon Ticaret Ve
Servis Ltd. STI. Neither the Republic of Turkey nor TSDIF were signatories. Therefore,
according to Claimants, the fact that an arbitration initiated by Motorola against the
7
Autopista Concesionada de Venezuela, C.A. v. Bolivarian Republic of Venezuela (ICSID Case No.
ARB/00/5), Decision on Jurisdiction of September 27, 2001, para. 52 [hereinafter Autopista].
48
Republic of Turkey and TSDIF was settled in an agreement to which the Republic of
Turkey and the TSDIF were third parties, and which they did not even sign, cannot be
evidence that Claimants lack standing to bring this claim.
195. As for the letter of Dr. Ya"ar Akgün, Deputy Chairman of Rumeli, to VimpelCom stating
that Rumeli was now a “state concern,” it is by no means an admission of the
assimilation of Claimants’ Rumeli and Telsim to the Turkish State for purposes of
jurisdiction. Rather, it is a mere declaration that the TSDIF was naturally concerned as
the managing authority of Claimants.
196. Furthermore, according to Claimants, the issue of who is the beneficial owner of the
Rumeli and Telsim’s claim is also largely irrelevant. Not only would Claimants directly
benefit from any award, but the only ICSID decision to closely examine the question of
the beneficial owner of a claim, the CSOB decision,8
held quite clearly that beneficial
ownership of a claim was irrelevant to the issue of standing. This position is supported
by the expert witness statement of Professor Ziya Akinci, who confirms that the possible
ultimate transfer of proceeds of any resulting award to third parties, be they State entities
or private entities, would not in any event deprive Claimants of their commercial status.
197. Finally, Claimants allege that, with respect to ownership of the companies, neither
Claimant is owned by the TSDIF or the Republic of Turkey. Claimants’ shareholders
remain private individuals. In any event, even ownership of a claimant by a State does
not warrant examining the standing of the public entity that owns that claimant. The task
of an ICSID tribunal in such a case is, as decided in CSOB, limited to reviewing the
nature of the activities of the named claimant.
198. In sum, Claimants point out that they are neither the Turkish State nor the TSDIF, and
that Article 25 of the ICSID Convention and the BIT plainly grant this Tribunal
jurisdiction rationae personae to rule on the dispute.
8
!eskoslovenska obchodní banka, a.s. v. Slovak Republic (ICSID Case No. ARB/97/4), Decision on
Objections to Jurisdiction of May 24, 1999 [hereinafter CSOB].
49
2. There was no assignment of Claimants’ claim to the TSDIF
199. According to Claimants, they never assigned their claim to the TSDIF. The TSDIF was
granted the authority pursuant to Turkish laws to appoint Claimants’ management
following the ImarBank banking violations. While TSDIF did appoint Claimants’
management and played an instrumental role in the sale of the Uzans’ assets, it never
became the owner of Claimants’ claim against Respondent.
200. Therefore, Claimants retained ownership of their claim. As noted in Professor Ziya
Akinci’s expert witness statement, Rumeli and Telsim had and retain standing to sue
under Turkish law.
3. The TSDIF was not subrogated to Claimants’ claims
201. According to Claimants, Respondent’s allegation that the relationship between the TSDIF
and Claimants should be viewed as one of subrogation is equally artificial. There was no
subrogation and the economic consequences are entirely different from those of a
subrogation. Indeed, as noted by Professor Schreuer, in the case of subrogation, “the
insurer succeeds to all the rights of the beneficiary who has received compensation under
the insurance contract.” Here, however, there was no insurance contract between Rumeli
and Telsim and a national insurance agency, and Rumeli and Telsim received no
compensation under such an imaginary insurance contract. There has also been no
transfer of economic risk as in CSOB. In other words, nobody has compensated
Claimants for their losses.
4. There is no reason to pierce the corporate veil
202. According to Claimants, the Arbitral Tribunal should also dismiss Respondent’s claim
that Claimants’ corporate veils should be pierced.
203. In support of this position, Respondent relies on two cases, namely Barcelona Traction9
and Tokios Tokelés.10
It is true that in Barcelona Traction, the International Court of
9
Case Concerning The Barcelona Traction, Light and Power Company, Limited (Belgium v. Spain),
Judgment of February 5, 1970, I.C.J. Reports, p. 3 [hereinafter Barcelona Traction].
50
Justice held that piercing the corporate veil might be justified to prevent the misuse of the
relevant company’s legal personality in the case of fraud or malfeasance, to protect
creditors or purchasers, or to prevent the evasion of legal requirements or obligations.
However, none of these conditions is present here.
204. In Tokios Tokelés, the Tribunal rejected respondent’s arguments to pierce the corporate
veil on the basis that the claimant had made no attempt to conceal its national identity
from the respondent and had not created the claimant companies to gain access to ICSID
jurisdiction. Similarly, Claimants did not conceal their Turkish juridical identity from
Respondent and were clearly not created for the purpose of gaining access to ICSID
arbitration.
205. Moreover, nowhere in the ICSID Convention is there a basis for piercing the corporate
veil of a designated claimant. This has been confirmed in the ADC ICSID award11
where
the arbitral tribunal confirmed that the principle of piercing the corporate veil “only
applies to situations where the real beneficiary of the business misused corporate
formalities in order to disguise its true identity and therefore to avoid liability.”
206. In the present case, it cannot be seriously argued that the Turkish State or the TSDIF
“misused corporate formalities.” Rumeli and Telsim were incorporated in 1993, long
before the start of these proceedings, and conducted substantial activities in the
telecommunications sector for many years, both in Turkey and abroad.
5. Respondent’s allegation that Article 25 of the Convention
imposes a control test must fail
207. According to Claimants, the rule as to standing is clearly set forth in Article 25(1) of the
ICSID Convention: “The jurisdiction of the Centre shall extend to any legal dispute
arising directly out of an investment, between a Contracting State…and a national of
another Contracting State…” The general rule as to the meaning of “national of another
10
Tokios Tokelés, Decision on Jurisdiction of April 29, 2004.
11
ADC Affiliate Limited and ADC & ADMC Management Limited v. The Republic of Hungary (ICSID
Case No. ARB/03/16), Award of October 2, 2006, para. 335 et seq. [hereinafter ADC v. Hungary].
51
Contracting State” for legal entities, is set forth in the first clause of Article 25(2)(b),
which provides that a national of another Contracting State means “any juridical person
which had the nationality of a Contracting State other than the State party to the dispute
on the date on which the parties consented to submit such dispute to conciliation or
arbitration.” However, for legal entities, Article 25(2)(b) provides an exception. It states
that a national of another Contracting State also means “any juridical person which had
the nationality of the Contracting State party to the dispute on that date and which,
because of foreign control, the parties have agreed should be treated as a national of
another Contracting State for the purposes of this Convention.”
208. Therefore, according to Claimants, the control test provided under the second clause of
Article 25(2)(b), was specifically inserted to broaden the scope of ICSID jurisdiction, not
to limit it. It is precisely to fulfill this purpose in favor of jurisdiction that it has been
applied by ICSID tribunals, such as in SOABI.12
209. In this respect, Claimants allege that all the cases cited by Respondent, i.e. Vacuum Salt
v. Ghana, Letco v. Liberia,13
and others relate to the second clause of Article 25(2)(b) and
focus on the situation where the investor was an entity incorporated in the respondent
State, and where control in the context of the second clause of Article 25(2)(b) was
therefore relevant, which is not the case here.
210. Claimants finally allege that Respondent misstates the legal doctrine relating to the
second clause of Article 25(2)(b). Respondent misreads Mr. Amerasinghe’s article and
Mr. Broches’ statements to stand for the proposition that a flexible approach is taken
under the Convention to determine standing. In the Tokios Tokelés Decision on
12
Société Ouest Africaine des Bétons Industriels [SOABI] v. State of Senegal (ICSID Case No.
ARB/82/1), Decision on Jurisdiction of August 1, 1984, 2 ICSID Reports 175 [hereinafter SOABI v.
Senegal].
13
Vacuum Salt Products Ltd. v. Republic of Ghana (ICSID Case No. ARB/92/1), Award of February 16,
1994, 4 ICSID Reports 345 [hereinafter Vacuum Salt]; Liberian Eastern Timber Corporation v.
Republic of Liberia (ICSID Case No. ARB/83/2), Interim Award of October 24, 1984, 2 ICSID
Reports, pp. 349 -351 [hereinafter LETCO].
52
Jurisdiction,14
the arbitral tribunal strongly criticized that incorrect reading and
highlighted the limited circumstances where the use of a control-test is justified: “[t]he
second clause of Article 25(2)(b) limits the use of the control-test to the circumstances it
describes, i.e., when Contracting Parties agree to treat a national of the host State as a
national of another Contracting Party because of foreign control… ICSID Tribunals ...
have interpreted the second clause of Article 25(2)(b) to expand, not restrict
jurisdiction ....”
6. TSDIF would satisfy the jurisdictional requirements of ICSID
in any event
211. According to Claimants, even if TSDIF were somehow the “real party” to this dispute,
the tribunal would in all likelihood still have jurisdiction to hear it. Indeed, as stated by
Mr. Broches in his article, a state-owned entity qualifies as a national of another
Contracting State unless it acts as an agent for the government or discharges an
essentially governmental function.
212. In the only ICSID case were this situation was addressed, i.e. the CSOB case,15
it was
decided that the sole determining factor is the nature of the activities of the relevant
entity: “While it cannot be doubted that in performing the above-mentioned activities,
CSOB was promoting the governmental policies or purposes of the State, the activities
themselves were essentially commercial rather than governmental in nature.”
Furthermore, the CSOB tribunal went even further and reasoned that the standing of a
state-owned entity under Article 25 of the ICSID Convention should be reviewed not on
the basis of the acts and function of the state-owned entity in general, but rather on the
basis of its acts and function in connection with the actual dispute under review.
213. In this respect, Claimants point out that Respondent mischaracterized their position by
stating that “the test formulated by Broches and applied by the CSOB tribunal would be
quite meaningless if the question was whether it was an essentially governmental function
14
Tokios Tokelés, Decision on Jurisdiction of April 29, 2004, paras. 45-47.
15
CSOB, Decision on Objections to Jurisdiction of May 24, 1999, para. 20.
53
to bring litigation.” Indeed Claimants do not argue that the Broches test as applied by the
CSOB tribunal would grant the tribunal jurisdiction whenever a State agency brings
litigation. Rather, the point is that, following the ImarBank banking violations, the
TSDIF appointed managers to Rumeli and Telsim. These new managers continued to run
Rumeli and Telsim as telecommunications companies. In April 2003, as any commercial
entity would do when faced with the expropriation of a valuable asset, the previous
managers of Rumeli and Telsim wrote to Respondent stressing that they intended to
submit the dispute to the International Centre for Settlement of Investment Disputes.
When Rumeli and Telsim’s previous management was replaced by TSDIF appointed
management, the new managers simply carried out the previous managements’
commercial plans to submit Rumeli and Telsim dispute with Kazakhstan for final
resolution to ICSID. The TSDIF-appointed managers did not exercise any special
prerogatives in fulfilling the previous managements’ “firm intentions.”
214. According to Claimants, the Cayman Islands case TMSF v. Wisteria Bay cited by
Respondent in this context is totally irrelevant for the following reasons:
- in that case, the TSDIF was a party to the proceedings; and
- the TSDIF was exercising special privileges to confiscate assets.
215. Finally, and in any event, even if the TSDIF was acting in this arbitration pursuant to
public prerogatives, the closest analogy to its role would be that of a receiver. Bringing a
claim in such a circumstance is perfectly legitimate in all developed municipal legal
systems. To deny a receiver the right to bring such a claim would undermine any
possibility of protecting the rights of the insolvent company’s creditors through an
arbitration procedure.
C. Claimants have gone far beyond establishing a prima facie case on the
merits
216. According to Claimants, the Arbitral Tribunal cannot follow Respondent’s allegation that
Rumeli and Telsim have failed to establish a prima facie case on the merits so as to
satisfy the jurisdictional requirements for their claim. Indeed, according to Claimants, all
54
the measures that were implemented by the Republic of Kazakhstan and led to the
expropriation of Claimants’ property as well as their multiple violations of international
law are fully documented by Claimants and firmly establish their claim.
D. Respondent is a proper party to this dispute
217. Contrary to Respondent’s allegation, this dispute is not a dispute between two private
parties or related to contractual claims. Neither is it a dispute limited to the ownership of
KaR-Tel. Rather, Claimants’ claims are premised on Respondent’s collusion with the
local partner and violation of the BIT and international law, encompassing, inter alia,
Respondent’s wrongful termination of the Investment Contract, its resulting denial of
Claimants right to challenge the termination of said Contract, its eviction of Claimants
from KaR-Tel, its intimidation measures against Claimants’ executives, and its failure to
grant Claimants adequate compensation for what amounted to the expropriation of their
shares.
E. Claimants have standing to challenge the cancellation of the
Investment Contract
218. Claimants dispute Respondent’s allegation that:
- Claimants do not have standing to challenge the termination of the Investment
Contract because they were not parties thereto;
- even if Claimants had standing, such a claim would fall outside the scope of this
Tribunal’s jurisdiction since it would amount to a contractual claim which is not
encompassed by the jurisdictional provisions of the Investment Contract.
219. According to Claimants, none of these arguments are founded:
- this arbitration is not based on the Investment Contract;
- it is not solely related to the termination of the Contract;
- the wrongful termination of the Investment Contract is but one element of
Respondent’s wrongful conduct, and in fact is the catalyst and pretext for
55
Respondent’s ultimate expropriation of Claimants’ investment without adequate
compensation;
- this arbitration arises out of Respondent’s violation of the BIT and international law.
F. The Foreign Investment Law is a valid secondary basis for
establishing jurisdiction
220. According to Claimants, the Foreign Investment Law of the Republic of Kazakhstan
constitutes an alternative basis for the jurisdiction of this tribunal. Indeed, under Article
27(2) of the Law, a foreign investor is expressly permitted to choose ICSID arbitration as
the means for solving disputes with the Republic relating to its investments and, once that
choice has been made, the consent of the Republic of Kazakhstan is “presumed to have
been granted.”
221. Claimants also submit, contrary to Respondent’s allegation, that the fact that the Foreign
Investment Law was repealed as of January 8, 2003 does not have any impact on ICSID
jurisdiction as it was valid and effective at all times relevant to this dispute. Moreover,
Article 6(1) of the Law specifically grants foreign investors protection against adverse
changes in legislation for a period of ten years from the date they made their investment,
or for the entire duration of a contract exceeding ten years entered into with authorized
State bodies. Claimants meet both of these two alternative conditions. The relevant
investments were made by Claimants from 1998 to 2002, and the Investment Contract
dated May 20, 1999 between Claimants and Respondent was valid until July 31, 2009,
i.e. for a period of more than ten years.
222. Respondent consented to ICSID arbitration on December 28, 1994, the date of the entry
into force of the Foreign Investment Law, which remains applicable to the dispute
pursuant to its Article 6(1). As for Claimants, they have completed their consent to
ICSID jurisdiction by filing their Request for Arbitration.
56
II. RESPONDENT’S POSITION
223. According to Respondent, there are a number of grounds which demonstrate that this
Tribunal does not have jurisdiction to entertain or determine Claimants’ claims. In
substance, Respondent alleges that this case is an attempt by a foreign State, the Republic
of Turkey, through one of its agencies, to use the ICSID arbitration facility to render a
host State, Respondent, responsible for decisions made by its Courts in proceedings
between a private foreign investor and a privately-owned company incorporated in the
Republic of Kazakhstan and owned, controlled and operated at all material times by
private Kazakh citizens.
A. Respondent did not consent to ICSID jurisdiction over this dispute
224. It is Respondent’s case that its consent, as expressed either in the Turkey-Kazakhstan BIT
or the Foreign Investment Law, does not extend to this dispute because it was limited to
investments made in conformity with Kazakh law. The Tribunal must therefore analyze
the scope of Respondent’s consent and determine whether or not this dispute arises out of
an investment that falls within the scope of that consent.
225. In this respect, in the ICSID case Inceysa v. El Salvador,16
the arbitral tribunal found that
arbitral jurisprudence had developed three fundamental principles :
- absence of a presumption in favor of or against jurisdiction;
- the need for the identification of the will of the Contracting States; and
- an interpretation according to the principle of good faith.
226. Taking into consideration the above elements, Respondent alleges that both the BIT and
the FIL contain clear limitations in relation to Respondent’s consent. Article 1 of the BIT
limits the protection afforded by the BIT only to those investments made in conformity
with the laws and regulations of the Republic of Kazakhstan. The effect of this type of
clause was recognized by the Inceysa tribunal. The will of the parties to the BIT was to
16
Inceysa v. El Salvador, Award of August 2, 2006.
57
exclude from its scope of application and protection disputes arising from investments
which were not made in conformity with the laws of the host State.
227. In the same vein, the FIL refers in its Article 4(1) to: “any form of foreign investments
and activities which are associated therewith, which are not prohibited by the current
legislation of the Republic of Kazakhstan,….” This language has the same effect as the
language in the BIT. Consequently, investments which are contrary to Kazakh law are
outside Respondent’s consent and the Tribunal’s jurisdiction.
1. Claimants’ investments were not legal
228. Respondent alleges that its consent to arbitration has only been given to cases involving
legal investments. That is the reason why the context in which the “investments” of
Claimants took place in the Republic of Kazakhstan is highly material and more
specifically the Uzans’ fraud. Indeed, the Uzans’ actions constituted a systematic attempt
to commit a worldwide and wholesale fraud both on Motorola and Nokia, as well as on
the Uzans’ own companies around the world, including KaR-Tel.
229. On January 28, 2002, Motorola, together with Nokia Corporation, initiated legal
proceedings in the United States District Court for the Southern District of New York
against the Uzan family members and certain of their corporations. The claim alleged
acts of racketeering in breach of the US Racketeer Influenced and Corrupt Organizations
Act (RICO).
230. On July 31, 2003, the United States District Court for the Southern District of New York
gave judgment in favor of Motorola and Nokia for over USD 4 billion. The judgment
provides valuable insights into the modus operandi of the Uzan family and their
corporations which are relevant to the present proceeding. Amongst the findings of the
Court which are of relevance, the following points are highlighted by Respondent:
- the Uzans failed to disclose to Motorola that they intended to divert some of the
proceeds of the Motorola loan to KaR-Tel for non KaR-Tel purposes;
58
- Telsim was given a final repayment deadline of April 2001 in respect of USD 700
million of loans which had been granted to it;
- on May 22, 2001, Motorola issued a notice of default in respect of the USD 700
million that remained unpaid from April;
- the Uzans saw Motorola’s loans as a great opportunity to funnel vast sums into their
control and then divert them wherever they chose, whether to prop up other
companies in their far-flung enterprise or to simply launder monies into their own
pockets;
- at least USD 552 million was laundered into the control of Uzan-controlled
companies by the device of reimbursing them for fraudulently overstated expenses.
231. Respondent further points out that whereas providing funding was one of Rumeli’s
principal obligation under the Foundation Agreement, Rumeli did not in fact make any
investment at all, electing instead to burden KaR-Tel with huge debts.
232. In this context, the funds advanced under the Motorola loan, for which KaR-Tel had
assumed an obligation to repay, were never received by KaR-Tel. Rather, they were paid
directly to Rumeli, which paid the balance of USD 60 million to the Ministry of Finance
for the License. The remaining USD 5 million, which was subsequently increased to
over USD 17 million, was never received by KaR-Tel at all. Respondent understands
that these sums were retained and used by Telsim and/or Rumeli, despite KaR-Tel being
liable for the debt created thereby.
233. In the same vein, pursuant to clause 6 of the Investment Contract, KaR-Tel was obliged
to use advanced technology in developing its network in Kazakhstan. It emerges from
various audits and the Court-appointed forensic merchandising examination of KaR-Tel
by the Forensic Examination Centre of the Ministry of Justice during the course of the
Kazakh Courts proceedings, that Telsim had been selling obsolete second-hand
equipment to KaR-Tel at inflated prices. Indeed:
59
- between February 1, 2001 and April 25, 2002, Mr. Agilönü caused KaR-Tel to enter
into contracts with Telsim for the purchase of handsets for a total of USD 9,270,970.
An average market value for the handsets was approximately USD 4,395,556;
- by contract IEPA 29 dated May 10, 2000, KaR-Tel purchased from Telsim
telecommunications equipment for a total price of USD 5,840,797.74. These
products were available at the time from a different supplier for USD 1,898,728.
234. Therefore, according to Respondent, the reality of the situation appears to have been that
Claimants were pursuing with KaR-Tel precisely the same strategy that they had adopted
in relation to other mobile telecommunications ventures around the world. KaR-Tel was
merely a small part of the overall project. What made Claimants’ action towards KaRTel
worse was that they deliberately indebted it twice. Indeed, KaR-Tel was liable for its
borrowing from Motorola of USD 17 million, which it never received and which appears
to have been retained or used by Telsim and, in addition, was caused or procured by
Claimants’ executives who operated KaR-Tel to enter into further loan agreements with
Telsim for the provision of overpriced and obsolete equipment.
235. Therefore, it is Respondent’s allegation that in circumstances where the entire basis of
Claimants’ alleged investment in KaR-Tel was to further their worldwide fraud, the
investment was not in conformity with the laws of Kazakhstan. Respondent submits that
the Tribunal should adopt the same approach as the Inceysa tribunal, which identified
three general principles of international law against which the conduct of the claimant
must be compared: good faith, nemo auditur propriam turpitudinem allegans, and
international public policy.
2. Claimants’ investments violated the principle of good faith, the
principle nemo auditur propriam turpitudinem allegans and
international public policy
236. According to Respondent, being part of a worldwide fraudulent scheme, Claimants’
investment was made in violation of the principle of good faith. Therefore, Claimants did
not make their investment in conformity with Kazakh law.
60
237. Moreover, no legal system based on rational grounds would allow a party which has
committed an illegal act to benefit from it. Therefore, Claimants cannot enjoy the
protection granted by Respondent, such as access to international arbitration under the
ICSID system.
238. In the same vein, the Inceysa tribunal found that international public policy consists of a
series of fundamental principles that constitute the very essence of the State and the
essential function of which is to preserve the values of the international legal system
against actions contrary to it. One of those values is respect for the law. If the Tribunal
were to assume jurisdiction to resolve the dispute brought before it by Claimants, it
would recognize the existence of rights for Claimants arising out of their illegal conduct.
That would violate the respect for the law which is a principle of international public
policy.
239. Respondent finally sets forth that violation of international public policy was held to be a
self-standing ground for refusing to accept jurisdiction over a claim by the tribunal in the
World Duty Free case.17
There, the tribunal found that the contracts which formed the
basis of the investor’s claim had been procured by bribes. The tribunal then cited a
passage from the decision of Judge Lagergren in ICC Case No. 1110: “Jurisdiction must
be declined in this case… Parties who ally themselves in an enterprise of the present
nature must realize that they have forfeited any right to ask for the assistance of the
machinery of justice (national courts or arbitral tribunals) in settling their disputes.” 18
240. Fraud is contrary to the international public policy of most, if not all, States. It follows
that claims based upon investments which were part of a fraud, cannot be admitted by the
ICSID mechanism.
17
World Duty Free v. Kenya, Award of October 4, 2006.
18
Id., para. 148, citing ICC Case No. 1110, Award of 1963, [1994] International Arbitration at 277.
61
B. Claimants do not have standing to bring this arbitration
1. The Turkish State is the real party in interest in this
arbitration
241. According to Respondent, the nominal Claimants to these proceedings are not the real
claimants or the real parties in interest in this arbitration. The true claimant is in fact the
TSDIF, which is indisputably an agency of the Turkish State and does not itself have
standing to bring these proceedings.
242. Respondent points out that, on February 14, 2004, the TSDIF seized Claimants. Since
then, it cannot be argued that Claimants have existed as independent commercial entities
in any meaningful sense.
243. According to Respondent, this seizure of Rumeli and Telsim is part of the consequences
of the worldwide fraud committed by the Uzans and the collapse of their bank. The
TSDIF is an agency of the Turkish Government. Its Board of Directors is appointed by
the Turkish Council of Ministers. It is obliged to report its activities and financial
position to the Turkish Parliament and its budget is approved by the Turkish Treasury.
Membership of the TSDIF is mandatory for all banks operating in Turkey. The TSIDF’s
purpose is to guarantee deposits held in both domestic and foreign banks operating in
Turkey as to 100%.
244. If a Turkish bank collapses, the TSDIF’s function is to reimburse depositors for the full
amount of their deposits held by the bank. Prior to 1999, this role was undertaken
directly by the Turkish Government.
245. On June 12, 2003, the Turkish Ministry of Energy annulled the Concession Agreements
under which Çukurova Elektrik (“ÇEAS”) and Kepez Elektrik, the two most profitable
companies owned and managed by the Uzan family, supplied electricity in Turkey’s
Mediterranean region.
246. At the same time, the Turkish Banking Regulatory and Supervisory Board (the “BDDK”)
was becoming concerned about the activities of ImarBank, also owned by the Uzans.
62
The loss of ÇEAS and Kepez Elektik caused concern in the Turkish market and led a
significant number of depositors to remove their deposits from ImarBank. On July 3,
2003, the BDDK revoked ImarBank’s license and began an investigation into its
activities. Control over ImarBank then passed to the TSDIF.
247. According to Respondent, the ensuing investigation into the management of ImarBank by
the Uzan family revealed that the bank had under-declared its true level of deposits.
ImarBank had declared its deposits at around USD 600 million. It quickly became clear
that more than USD 5 billion had been deposited and concealed using a sophisticated
double accounting system. Consequently, in August 2003, warrants for the arrest of
Kemal Uzan and Hakan Uzan were issued, the two individuals having fled the country
shortly before the takeover of ImarBank.
248. The scale of the Uzans’ fraud on Imarbank meant that the TSDIF was unable to meet the
full extent of the bank’s liabilities so that the Turkish Treasury was forced, for the first
time since the TSDIF was established, to settle the depositors’ claims on ImarBank.
249. According to Respondent, this meant that action was taken by the Turkish Government to
seize every Uzan-related asset they could locate. At the end of July 2003, Law 4969 was
passed by the Turkish Government which extended the scope of assets that could be
frozen and therefore conserved to settle the debts owed by ImarBank and ultimately
borne by the Turkish State. Some 259 companies controlled by the Uzan family were
affected. In late 2003, a further law, Law 5020, was passed by the Turkish Government,
which provided for the transfer of management and control of companies owned by
affiliates and shareholders of ImarBank to the TSDIF. The TSDIF, on behalf of the
Turkish State, began reimbursing ImarBank depositors on January 23, 2004.
250. On February 14, 2004, the TSDIF exercised its powers under Law 5020 in respect of
Claimants in this Arbitration, Rumeli and Telsim. Within two days, the TSDIF had
appointed a new executive board of directors headed by Mehmet Tasaltin, a former
63
executive of Turkish Telecom, to administer all communication companies within the
Uzan group of companies.
251. Following Telsim’s seizure by the TSDIF in February 2004, Motorola and Nokia
demanded the TSDIF to settle their US judgment debt of over USD 2 billion.
252. During the course of 2004 and 2005, the TSDIF restructured Telsim in preparation for a
sale. On December 13, 2005, the Telsim brand, its assets and business were auctioned
with Vodafone successfully bidding a reported USD 4.55 billion to acquire them.
253. In October 2005, under the agreement reached with the TSDIF, Motorola was to receive
20% and Nokia 7.5% of the proceeds of the Vodafone sale, in settlement of their
judgment debt. The remaining 72.5% of the sale proceeds passed to the Turkish State to
reduce the loss it had suffered in paying back depositors of ImarBank.
254. Consequently, according to Respondent, since February 14, 2004, the TSDIF has been
the only entity with any real interest in Claimants. It is misleading to suggest that there
are genuine private shareholders of Claimants who exercise any function at all in relation
to Claimants. In this respect, the documents reluctantly disclosed by Claimants show that
the nominal shareholders continue to be the members of the Uzan family who are
fugitives from Turkish justice since 2003, two years before this arbitration was initiated.
255. Respondent further points out that TSDIF, with the assistance of the Turkish Treasury,
had already paid Motorola USD 500 million as an initial payment prior to the sale of
Telsim. This payment, together with the agreement to make further payments following
Telsim’s sale, was the settlement agreed in the ICSID proceedings Motorola brought
against the Republic of Turkey and the TSDIF, not Telsim or Rumeli. In that arbitration,
Motorola alleged that the TSDIF’s seizure of Telsim had expropriated Motorola’s
“investment” in Telsim, in the form of several billion dollars of loans that remained
owing to Motorola.
64
256. According to Respondent, it is telling that Motorola brought its proceedings against the
Republic of Turkey and the TSDIF and even more telling that the Republic of Turkey and
the TSDIF settled those proceedings. If the TSDIF’s assertions in this arbitration that
Rumeli and Telsim are the only and the true parties in interest were genuine, it is
surprising, to say the least, that the TSDIF and the Turkish State adopted the view that
they needed to settle the ICSID claim brought against them in respect of Rumeli and
Telsim by paying well over USD 1 billion to Motorola and Nokia.
257. According to Respondent, it is established by the above that:
- TSDIF is in total control of both Claimants;
- Telsim’s assets and business have been sold;
- Telsim, without any assets or business, is a mere shell;
- no part of the sums received in respect of the sale of Telsim’s business and assets has
been retained by Claimants themselves;
- nor has any part of the sums so received been paid to the official “shareholders” or
“owners” of Claimants;
- it is disingenuous for Claimants to attempt to perpetuate the fiction of private
ownership by the Uzans, who are reportedly fugitives from Turkish justice;
- the sole power over Claimants not held by the TSDIF, namely the right to receive
dividends, did not prevent it from removing all of the proceeds of sale of Telsim
from Claimants;
- in fact, the sums received by Telsim have been used by the TSDIF to satisfy
settlement terms agreed by the Republic of Turkey with Motorola and Nokia arising
out of their ICSID proceedings;
- the real parties in interest in this claim are not Claimants, but the TSDIF and the
Turkish Treasury.
258. The fact that the real parties in interest are the TSDIF and the Turkish Treasury is further
confirmed by the existence of proceedings brought by the TSDIF in its own name against
65
KaR-Tel in Turkey seeking to recover USD 5.5 billion in relation to the same subject
matter as this arbitration.
259. According to Respondent, none of the arguments set forth by Claimants to support the
allegation that Claimants are the proper parties to this arbitration, has any merit. In this
respect, Claimants point out that they are “commercially registered legal entities.”
However, Respondent does not dispute that Claimants continue to be in existence.
Rather, it disputes that they are in existence in anything other than a shell form and for
any other purpose than attempting to maintain standing for the purposes of this
arbitration. This is confirmed by:
- Respondent’s Expert Report on Turkish Law;
- the announcement by Mr. Yusuf Adigüzel after the sale of Telsim’s assets and
business that: “the aim of TSDIF is to sell the assets of the companies managed by it
to reduce the amount of public debt and to liquidate the companies. Telsim A.S. will
be liquidated in the near future.”
260. According to Respondent, Claimants’ argument that they have a number of employees
and own a number of assets including immovable property, credits and receivables, also
does not support Claimants’ position. Indeed, the fact that TSDIF may not yet have laidoff
absolutely all of Claimants’ employees or sold off all of their office buildings is
irrelevant to the issue of whether or not they are mere shell companies. Claimants’
reliance on Saluka and Aguas del Tunari misses the point. Both of those cases concerned
genuine commercial entities, with no hint of unusual conduct sufficient to justify piercing
the corporate veil. More importantly, in neither case was there any issue of State
involvement.
261. In the same vein, according to Respondent, Claimants’ allegation that they “have full
legal capacity and can thus commence legal proceedings or be sued before the courts” is
curious. Indeed, it is strange that other Court cases relating to Rumeli and Telsim are
brought by the TSDIF in its own name. It is also strange, in such circumstances, that
66
Motorola and Nokia issued ICSID proceedings against TSDIF and the Republic of
Turkey rather than commercial arbitration or Court cases against Claimants.
262. Respondent further submits that Claimants’ allegation that “the fact that Claimants may
or may not have substantial activity at this time neither bars them from taking up such
activity at a later stage, nor renders them shell companies” says everything. The
important point is that at the time of instituting these proceedings, the TSDIF had agreed
to sell the Telsim brand name, its business and all of its assets for USD 4.55 billion; both
Rumeli and Telsim had been completely under TSDIF control for well over a year and
neither Claimant had any material ongoing commercial activity.
263. As expressed by Dr. Yasar Akgün, a TSDIF appointee to Claimants’ boards, in two
letters to VimpelCom dated August 27, 2004, “our company is now a state concern.”
Accordingly, Respondent alleges that the reality is that Claimants’ existence is
perpetuated as vehicles for the TSDIF and the Turkish State to abuse the ICSID
arbitration mechanism and evade its clear jurisdictional requirements.
264. With respect to the CSOB case invoked by Claimants, Respondent submits that it is
substantially different from the present case. In CSOB, the tribunal considered that
standing in an international forum was determined by reference to the date on which
proceedings are instituted and noted that the assignments of the claims had taken place
over a year after the registration of the Request for Arbitration.
265. Respondent finally alleges that one of the strange features of this case is that Claimants
have failed to give any explanations about what was going on within their companies.
They know the facts, but they have declined to go into them on the basis that the Uzan
fraud has nothing to do with Kazakhstan. In this context, Respondent points out that in
his evidence before the Tribunal, Mr. Akgün admitted that the TSDIF had recently
decided to file a law suit in Turkey against Claimants’ former directors and auditors. Mr.
Akgün also stated that Claimants did not investigate the allegations made against the
Uzans in the US proceedings in relation to what was there termed the “KaR-Tel Scheme.”
67
2. The assignment of Claimants’ cause of action
266. Respondent submits that the TSDIF’s seizure is identical in legal and economic effect to
an assignment of Claimants’ cause of action.
267. It is a question of fact for determination by the Tribunal whether or not the terms of the
host State’s consent to ICSID arbitration extend to the assignee and/or permit assignment
of rights and obligations arising out of an investment relationship. As underlined by
Schreuer, where the host State is unaware of, or has resisted, an assignment, “it is
unlikely that a tribunal will decide that party status under the Convention has been
transferred.”
268. According to Respondent, even if it were possible to construe Respondent’s consent to
ICSID arbitration as extending to an assignee (which is not accepted), such consent could
not be deemed to extend to a State or State agency.
269. The legal and economic effect of the TSDIF’s seizure of Claimants is identical to an
assignment. Had the TSDIF received such a voluntary assignment, this Tribunal would
be bound to reject jurisdiction over this claim. According to Respondent, the TSDIF
cannot be placed in a better position because it seized Claimants and thereby forcibly
took over the alleged causes of action than if it had taken a voluntary assignment.
3. The TSDIF was subrogated in Claimants’ claim
270. According to Respondent, another way of viewing the relationship between the TSDIF
and Claimants is one of subrogation. Indeed, the economic consequences of the TSDIF’s
seizure of Claimants is the same as if it had been subrogated to their rights. On this
additional or alternative basis, Respondent submits that this Tribunal does not have
jurisdiction under Article 25 of the ICSID Convention.
271. During the negotiation of the ICSID Convention, the situation in relation to Stateoperated
investment insurance funds was considered. The possibility was explicitly
discussed of ICSID’s arbitration facilities being made available to a governmental
68
subrogee under such an insurance fund by virtue of an ICSID clause between the investor
and the host State. Ultimately, however, this possibility was removed as it was felt that it
might well lead to the Centre becoming a forum for inter-State confrontations.
272. On the other hand, if the subrogee were a private insurer and, like the investor, a
“national of another Contracting State,” there would appear to be no difficulty in it
appearing as a party in ICSID proceedings in place of the investor, assuming the host
State had consented to the subrogation. The position is markedly different where the
subrogee is a governmental or inter-governmental entity. Such an entity cannot avail
itself of the investor’s right to ICSID arbitration against the host State.
273. Professor Schreuer cites three main reasons for the denial of party status to a State-owned
investment insurance agency, each of which applies in this arbitration:
- the Convention provides for the settlement of disputes between States and nationals
of other States. The clear wording of Article 25(1) cannot be reinterpreted to cover
disputes involving States, State agencies or international organizations on the
investor’s side;
- one of the Convention’s objectives is to depoliticize disputes;
- the Convention’s ‘travaux préparatoires’ show that a conscious decision was made
to exclude States, State agencies or international organizations from access to ICSID
proceedings on the investor’s side.
274. Therefore, according to Respondent, an indemnifying State fund cannot take advantage
of the right the investor may have had under an appropriate ICSID clause. Further more,
the State Fund does not have the right to bring such proceedings in the investor’s name.
275. It is true that according to Broches, this general exclusion of a State fund would not
prevent that fund requiring an indemnified investor to pursue its remedies under the
Convention to offset the insurer’s net payments under the insurance scheme. However,
in such circumstances, a plea of non-admissibility might be invoked against the claim on
the basis that the investor has been indemnified. In this respect, Respondent points out
69
that Claimants have no interest whatsoever in the outcome of this arbitration. They are
not trading entities and they will not see the benefit of any sums recovered, which will
instead go directly to the Turkish Treasury.
276. Respondent finally submits that, under Turkish law, the TSDIF is much more than a
subrogate. It is granted the right to seize all assets of the shareholders of a collapsed bank
and pursuant to Article 12 of the Turkish Regulation Relating to Liquidation of
Companies Controlled by TSDIF, it is the legal successor in title to any of the companies
it seizes.
4. Alter ego and piercing the corporate veil
277. According to Respondent, there is another way of viewing the TSDIF’s undoubted
absolute control over and operation of the remaining shells of Claimants. The TSDIF is
effectively the alter ego of Claimants.
278. Another view would be to consider the bringing of this claim through the doctrine of
piercing the corporate veil: the filing of the claim by the nominal Claimants is a sham
designed to conceal the reality of a claimant which fails to satisfy the ICSID
jurisdictional requirements. These doctrines have been expressly held to be applicable in
the international law context by the International Court of Justice in the Barcelona
Traction case and by an ICSID tribunal in the Tokios Tokelés case.
279. If the corporate veil is pierced, what remains is a claim brought by, and on behalf of the
Turkish State. Such a case does not fall within the bounds of ICSID jurisdiction pursuant
to Article 25 of the Convention as a result and the claim should be rejected.
5. “Control” and “incorporation”
280. Respondent disputes that Claimants’ contention that Article 25 of the ICSID Convention
only requires the claimant to have the nationality of another Contracting State and that
the management of a designated claimant is irrelevant to the analysis under Article 25.
70
281. Respondent submits that under the ICSID Convention, a broad approach is taken which
looks at the reality of the position and is not based solely upon the outdated notion of
share ownership relied on in the pre-Barcelona Traction jurisprudence. In this sense,
Mr. Amerasinghe has stated that “[a] tribunal may regard any criterion based upon
management, voting rights, shareholding or any other reasonable theory as being
reasonable for the purpose. The point is that the concept of ‘control’ is broad and
flexible….” Mr. Broches, too, has written that, whilst the Convention begins from the
premise that incorporation determines nationality, an ICSID tribunal should take account
not only of formal criteria such as incorporation, but also of economic realities such as
ownership and control.
282. In contrast to the general principle that Claimants seek to derive erroneously from the
Autopista decision on jurisdiction, the tribunal in the Vacuum Salt case came to the
opposite conclusion. In Vacuum Salt,19
only 20% of the shares of Vacuum Salt were in
foreign hands. The tribunal proceeded to examine the other possible elements of control
over the company, and especially its management, but found that there was nothing
which dispelled the overall impression of Ghanaian control. The tribunal held that to
assume jurisdiction under those circumstances would have been contrary to the purpose
of the Convention.
283. In LETCO,20
the question of control did not raise any factual problem as there was 100%
share ownership by a juridical national of another Contracting State. Nonetheless, the
tribunal still found it appropriate to also base its finding on the company’s decisionmaking
structure and management.
284. In reality, there are a number of examples of ICSID tribunals having looked beyond the
signatories to an investment agreement to take account of the true parties in interest. In
19
Vacuum Salt, Award of February 16, 1994.
20
LETCO, Interim Award of October 24, 1984.
71
the Holiday Inns21
decision on jurisdiction, in order to find that the parent companies of
the investor, which were not themselves parties to the investment agreement, were proper
parties to the proceedings, the tribunal looked specifically to their actual participation in
the carrying out of that investment agreement. By the same token, in the Klöckner v.
Cameroon case,22
the tribunal found that it had jurisdiction over Klöckner for the
purposes of the government’s counterclaim even in relation to an investment agreement
which had been concluded between a company which was not Klöckner but in which
Klöckner had a majority interest, and the government. The basis for this finding was that
Klöckner had negotiated the investment agreement and was the real party in interest.
285. According to Respondent, and as suggested by Schreuer, the better approach would be “a
realistic look at the true controllers, thereby blocking access to the Centre for juridical
persons that are controlled directly or indirectly by nationals of non-Contracting States
or nationals of the host State.”23
This is the prevailing view adopted by ICSID tribunals.
286. According to Respondent, if such an approach is adopted in order to block claims which
can be qualified as abusive of the ICSID mechanism – because they are in reality brought
by nationals of non Contracting States or of the host State – the same approach must be
followed where claims are brought by another State.
287. It is true that in many of the cases cited, the issue arose because the investor was an entity
incorporated in the respondent State. However, according to Respondent, the principle is
of more general application. It is in ICSID’s interest to guarantee the continued
depoliticization of its system by blocking claims brought by one Contracting State against
another.
21
Holiday Inns S.A. and others v. Morocco (ICSID Case No. ARB/72/1), Decision on Jurisdiction of
May 12, 1974 [hereinafter Holiday Inns].
22
Klöckner Industrie-Anlagen GmbH and others v. United Republic of Cameroon and Société
Camerounaise des Engrais (ICSID Case No. ARB/81/2), Award of October 21, 1983, 2 ICSID
Reports 9, at 17 [hereinafter Klöckner].
23
Christoph H. Schreuer, The ICSID Convention: A Commentary, 2001, p. 318, para. 563 [hereinafter
Schreuer, The ICSID Convention].
72
288. It is also true that in the AMCO case,24
the tribunal held in general terms that it did not
consider an enquiry into the indirect controllers of an investor to be the correct approach.
However, the tribunal nonetheless accepted that the true nationality of the controller
would have to be taken into account where, for political or economic reasons, it matters
for the host State to know the nationality of the controller and where the host State, had it
known this nationality, would not have agreed to the arbitration clause.
289. Respondent alleges that in the present arbitration, it matters for Respondent and for the
Tribunal to know the true identity of the controller of Rumeli and Telsim. Had
Respondent known that Rumeli and Telsim had been seized by the TSDIF, it would not
have agreed to arbitrate a dispute arising between them before an ICSID tribunal. It is for
this reason that a distinct mechanism for the determination of disputes between the
Republic of Turkey and the Republic of Kazakhstan is provided for in Article VII of the
BIT.
290. According to Respondent, the facts lead therefore to the conclusion that control of
Claimants is relevant, and the circumstance that in the present case such control is
exercised exclusively by the Turkish State and its agencies for their sole benefit, means
that the case brought by Claimants is an action which seeks to abuse the ICSID
mechanism and should be blocked by this Tribunal.
6. The claim brought by TSDIF does not satisfy the jurisdictional
requirements of ICSID
291. According to Respondent, if it is accepted that the TSDIF is the true claimant in this
arbitration, it becomes necessary to address Claimants’ argument that the TSDIF would
satisfy the jurisdictional requirements of ICSID as a State-owned entity. Equally, if
Rumeli and Telsim are found to be the true claimants, it becomes necessary to consider
whether they are effectively State-owned corporations and whether, in consequence, they
themselves fall within the boundaries of ICSID jurisdiction.
24
Amco Asia Corporation and others v. Republic of Indonesia (ICSID Case No. ARB/81/1), Decision
on Jurisdiction of September 25, 1983, 1 ICSID Reports 396 [hereinafter Amco I].
73
292. In the Commentary to the Preliminary Draft of Convention, it was acknowledged that
State-owned corporations could be party to proceedings brought under the Convention.
This was not, however, repeated in the Executive Directors’ Report on the final
Convention text. Schreuer states that the best guidance on this issue is still that
formulated by Mr. Broches in his 1972 Hague Academy Course: “[I]n today’s world, the
classical distinction, between private and public investment, based on the source of the
capital, is no longer meaningful, if not outdated…for the purposes of the Convention a
mixed economy company or government-owned corporation should not be disqualified as
a ‘national of another Contracting State’ unless it is acting as an agent for the
government or is discharging an essentially governmental function.”
293. However, according to Respondent, Mr. Broches was writing during the cold war, when,
for a multilateral treaty to be effective, he needed to address the peculiarities of genuinely
commercial enterprises which happened to be State-owned for political reasons. He did
not have in mind the situation in which a State party seized a private company.
Respondent therefore submits that the test formulated by Broches has no application in
this arbitration. Even if it was applicable, Claimants and/or the TSDIF should still be
excluded from ICSID jurisdiction since they are agents of the Turkish government
discharging an essentially governmental function.
294. According to Respondent, the TSDIF is indeed an agency of the Turkish government.
This conclusion is supported by the following considerations:
- two letters dated August 27, 2004 which expressly refer to the TSDIF as a State
agency (Exhibits RM98 and RM99);
- the findings of the Court of Appeals of the Cayman Islands on the basis of
submissions made last year by the TSDIF itself in proceedings before that Court.
The TSDIF had seized a yacht which the plaintiff had purchased from the Uzan
family prior to the seizure of their assets by the TSDIF. An injunction was granted
by the Cayman Grand Court ordering the TSDIF not to sell the yacht. The TSDIF
relied upon the defense of sovereign immunity in relation to the plaintiff’s challenge
74
to its actions. The TSDIF argued that it was an agency of the Turkish State
performing governmental and sovereign acts. And, precisely, the Court of Appeals
of the Cayman Islands began its judgment by referring in the very first line thereof to
the TSDIF as “an agency of the Turkish government.”
295. The second, and alternative, ground formulated by Mr. Broches on the basis of which a
State-owned corporation or entity would be disentitled from using the ICSID mechanism
is where it discharges an essentially governmental function. Respondent emphasizes the
fact that Mr. Broches considered either ground to be sufficient alone to exclude an entity
from bringing a claim under the Convention mechanism. Respondent accepts that in
relation to the second ground, State-ownership, whilst important, is not determinative.
What matters is the nature of the functions carried out. According to Respondent, there is
no question that TSDIF’s activities in general, and in particular in seizing and selling off
the assets of shareholders of banks, are governmental functions:
- they are not functions that can be performed by any private person or organization;
- as Mr. Erkam states in his Expert Report on Turkish Law, property seized by the
TSDIF is regarded under Turkish law as State-property;
- this is confirmed by the statements made by the Mr. Akgün where he states: “our
company is now a state concern.”
296. According to Respondent, the test is thus whether the entity discharges in general a
governmental function and not as suggested by Claimants, whether the particular act in
question is of a governmental nature. To support their position, Claimants rely on a
passage from the CSOB25
decision on jurisdiction which states that: “Respondent has
failed to sustain its contention that the Centre lacks jurisdiction and the Tribunal
competence to hear this case on the ground that Claimant was acting as an agent of the
State or discharging essentially governmental activities as far as this dispute is
concerned” (emphasis added).
25
CSOB, Decision on Objections to Jurisdiction of May 24, 1999, para. 27.
75
297. According to Respondent, Claimants’ interpretation is untenable. The test would indeed
be meaningless if the question was whether it was an essentially governmental function
to bring litigation. The answer would, naturally, be the same in every case. Therefore,
the meaning of the phrase in CSOB is to reflect that tribunal’s previous observation that
the dispute in that arbitration related to investment banking transactions which it found to
be of a corporate nature. In the present arbitration, on the contrary, the function being
performed by the TSDIF is the attempted realization of funds from the seized property of
Turkish nationals charged with criminal offences.
298. Alternatively, Respondent submits that if it is not accepted that the TSDIF is the real
claimant in this case, and one takes into consideration the nominal Claimants,
Respondent’s case continues to be that in pursuing this claim, they are exercising a
governmental function. The claim is being funded by the Turkish State, directed by
officials of the Turkish State and is designed to recoup a large amount of foreign
currency for the Turkish Treasury. None of those things is a function carried out by a
private party. The recovery of State debts through litigation or any other means is plainly
not an act jure gestionis.
299. Respondent further alleges that there is a manifest difference between CSOB invoked by
Claimants and the present arbitration in that there is a difference between a State-owned
investment bank like in CSOB, and a defunct shell corporation seized by the State
pursuant to domestic criminal laws and operated for the purpose of recovering State
debts.
300. Ultimately, irrespective of whether the correct approach is to examine the nature and
function of the TSDIF or to take into consideration the nominal Claimants themselves, it
is clear that this claim is brought and driven by the TSDIF in an attempt to recover the
losses suffered by the Turkish State as a result of the Uzan family’s massive-scale
worldwide frauds. It is a claim which is brought by the TSDIF pursuant to its statutory
and sovereign powers and, as such, falls outside the requirements for jurisdiction set forth
by Article 25 of the Convention.
76
C. No prima facie case
301. According to Respondent, the fact that Claimants do not even have a prima facie case is
another obstacle to the jurisdiction of this Tribunal.
302. The onus is indeed on Claimants to demonstrate that they have such a case. They have
not discharged this burden. Indeed, they have not demonstrated a prima facie case of any
of the internationally wrongful acts that they allege against Respondent.
303. According to Respondent, Claimants’ case is only a string of unspecific and generalized
allegations that many diverse Kazakh parties and entities, with no apparent communality
of interest, conspired together – for no apparent reason – to mistreat them.
304. Furthermore, Claimants’ position that the Kazakh Courts grossly misapplied Kazakh law
is unfounded. The evidence on Kazakh law upon which Claimants rely is of limited
value. They indeed rely on opinions of Kazakh law professors, in particular those of
Professor Suleimenov and Professor Didenko, which the latter wrote in support of
Claimants’ position before the Kazakh Courts. However, neither of these experts has
provided a new expert report on these matters for the purposes of this arbitration. The
opinions they have given in the context of the Kazakh proceedings have no status in this
arbitration. Moreover, while having provided an expert opinion before the Kazakh
proceedings in favor of Claimants, Professor Didenko, shortly after the conclusion of the
proceedings, produced an academic article in which he expressly referred to those
proceedings and changed his position in relation to a number of important issues.
D. Respondent is not a proper party to the dispute
305. Respondent also alleges that it is not a proper party to these proceedings, as it is not
involved in the underlying dispute, which, in reality, is a dispute between private parties
as to the ownership of KaR-Tel.
77
E. Claimants do not have standing to challenge the termination of the
Investment Contract
306. It is moreover Respondent’s contention that Claimants were not parties to the Investment
Contract and therefore have no standing to challenge its termination. In addition, even if
they did have standing, such a claim would not fall within the jurisdiction of ICSID by
reason of:
- the fact that it is contractual claim and not a treaty claim;
- the express jurisdiction provisions of the Investment Contract.
307. According to Respondent, the Investment Contract does not permit ICSID arbitration as a
forum for disputes unless there have been written objections to consideration of the
dispute by the Courts of Kazakhstan. Furthermore, the Investment Contract expressly
restricts the right of action to the “investor” which is a term defined in Article 1.3 as
KaR-Tel LLP. Finally, if shareholders of an investor company have standing to bring
arbitration proceedings in respect of their investment, the specific contractual wording of
the Investment Contract does not permit Claimants to bring a treaty claim under it.
F. The Foreign Investment Law is not applicable
308. According to Respondent, Claimants’ purported reliance on the FIL as founding
jurisdiction for this Arbitral Tribunal is also misplaced. Indeed, the consent to arbitrate
disputes relating to foreign investment under the FIL was no longer effective at the time
of the commencement of these proceedings, as the FIL had been repealed. Claimants’
contention that the consent to ICSID arbitration survives this repeal by reason of Article 6
(1) FIL is misconceived. This is only true in the case where the investor has accepted the
offer of ICSID jurisdiction in writing whilst the legislation was still in force. In the
present case, the FIL had been repealed prior to the registration of the Request for
Arbitration, and cannot found jurisdiction for this arbitration.
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G. Admissibility
309. If the Tribunal finds that it has jurisdiction in this arbitration, Respondent submits that it
should deny the admissibility of Claimants’ claims on the ground that they constitute an
attempt by a Contracting State to abuse the ICSID arbitration mechanism.
III. DECISION OF THE ARBITRAL TRIBUNAL
310. Respondent challenges the jurisdiction of this Arbitral Tribunal on various grounds.
First, it contends that Respondent did not consent to ICSID jurisdiction over this dispute
because Claimants’ investments were not legal, violated the principle of good faith, the
principle nemo auditur propriam turpitudinem allegans and international public policy.
Respondent further alleges that Claimants do not have standing to bring this arbitration
because the Turkish State is the real party in interest, Claimants’ cause of action has been
assigned to TSDIF or TSDIF was subrogated in Claimants’ claim or at least can be
considered the alter ego of Claimants. They also allege that Claimants do not satisfy the
conditions of Article 25 of the ICSID Convention to the extent that they are controlled by
the Turkish State and its agencies for their sole benefit. Finally, Respondent submits that
Claimants were not parties to the Investment Contract and therefore have no standing to
challenge its termination, that in any case Respondent is not a proper party to the dispute,
which is a dispute between private parties as to the ownership of KaR-Tel. Moreover,
Claimants would not have a prima facie case.
311. As to the Foreign Investment Law, Respondent alleges that this Arbitral Tribunal has no
jurisdiction on the basis of the FIL since it was no longer effective at the time of the
commencement of these proceedings.
312. The jurisdiction of the Centre is based on the conditions set forth in Article 25 of the
ICSID Convention which provides:
“(1) The jurisdiction of the Centre shall extend to any legal dispute
arising directly out of an investment, between a Contracting State (or any
constituent subdivision or agency of a Contracting State designated to the
Centre by that State) and a national of another Contracting State, which
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the parties to the dispute consent in writing to submit to the Centre. When
the parties have given their consent, no party may withdraw its consent
unilaterally.
(2) “National of another Contracting State” means:
(a) any natural person who had the nationality of a Contracting
State other than the State party to the dispute on the date on which
the parties consented to submit such dispute to conciliation or
arbitration as well as on the date on which the request was
registered pursuant to paragraph (3) of Article 28 or paragraph
(3) of Article 36, but does not include any person who on either
date also had the nationality of the Contracting State party to the
dispute; and
(b) any juridical person which had the nationality of a Contracting
State other than the State party to the dispute on the date on which
the parties consented to submit such dispute to conciliation or
arbitration and any juridical person which had the nationality of
the Contracting State party to the dispute on that date and which,
because of foreign control, the parties have agreed should be
treated as a national of another Contracting State for the purposes
of this Convention.”
313. In this case, Claimants are companies incorporated and existing under the laws of
Turkey. Turkey has ratified the ICSID Convention on March 3, 1989. Claimants appear
therefore prima facie as nationals of a Contracting State in the meaning of Article 25.
314. Respondent is the State of Kazakhstan which has also ratified the ICSID Convention on
September 21, 2000 and therefore also qualifies as a Contracting State within the
meaning of Article 25 of the ICSID Convention.
315. On the other hand, the parties gave their consent to ICSID Arbitration in Article VII of
the Agreement between the Republic of Turkey and the Republic of Kazakhstan
concerning the Reciprocal Promotion and Protection of Investments of May 1, 1992.
Article VII entitled “Settlement of Disputes Between One Party and Investors of the
Other Party” indeed provides :
1. Disputes between one of the Parties and one investor of the other
Party, in connection with his investment, shall be notified in writing,
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including a detailed information, by the investor to the recipient Party of
the investment. As far as possible, the investor and the concerned Party
shall endeavour to settle these disputes by consultations and negotiations
in good faith.
2. If these disputes cannot be settled in this way within six months
following the date of the written notification mentioned in paragraph I, the
dispute can be submitted, as the investor may choose, to:
(a) the International Centre for Settlement of Investment Disputes
(ICSID) set up by the “Convention on Settlement of Investment
Disputes Between States and Nationals of Other States,” (in case
both Parties become signatories of this Convention)
(b) an ad hoc court of arbitration laid down under the Arbitration
Rules of Procedure of the United Nations Commission for
International Trade Law (UNCITRAL), (in case both parties are
members of U.N.)
(c) the Court of Arbitration of the Paris International Chamber of
Commerce, provided that, if the investor concerned has brought
the dispute before the courts of justice of the Party that is a party
to the dispute and final award has not been rendered within one
year.
3. The arbitration awards shall be final and binding for all parties in
dispute. Each Party commits itself to execute the award according to its
national law.
316. Claimants completed their consent by filing their ICSID Request for Arbitration on July
15, 2005.
317. By contrast with the Turkish version, the English and Russian versions of the Treaty do
not require a prior submission of the dispute to local courts before initiation of arbitration
proceedings before ICSID. The Arbitral Tribunal considers therefore that no such
requirement had to be fulfilled by Claimants before starting this arbitration.
318. Notwithstanding the above, Respondent alleges that it did not consent to ICSID
jurisdiction over this dispute on the ground that Claimants’ investment violated the laws
and regulations of Kazakhstan.
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319. Indeed, in order to receive the protection of a bilateral investment treaty, the disputed
investments have to be in conformity with the host State laws and regulations. On the
other hand, as was determined by the arbitral tribunal in the Lesi case, investments in the
host State will only be excluded from the protection of the treaty if they have been made
in breach of fundamental legal principles of the host country.
320. After careful examination of Respondent’s submissions, the Arbitral Tribunal has
reached the conclusion that Respondent did not prove that Claimants’ investment would
have been fraudulent or would have violated any laws or regulations of Kazakhstan. The
allegations of fraud perpetrated by the Uzan Family in Turkey and the judgment rendered
on July 13, 2003, in the United States against the Uzans in relation to Motorola loans, are
not evidence that the investment made by Claimants in Kazakhstan were themselves
fraudulent or illegal. As noted by Claimants (see above para. 173), the New York
judgment does not bring any evidence that the two Motorola loans made in relation to
KaR-Tel were used improperly or for illegal purposes.
321. Moreover, notwithstanding Respondent’s allegations, the record does not contain
conclusive evidence that Claimants defrauded KaR-Tel by causing it to enter into
transactions with Telsim at excessive prices.
322. From the record, it appears that Claimants made significant investments in KaR-Tel
during the period 1998-2002. They legally obtained the second GSM license and paid for
it; they developed a telecommunications network in compliance with the local laws and
technical regulations of Kazakhstan. Respondent’s allegation that Claimants’ investment
was fraudulent does not find any foundation in the record.
323. The Tribunal has also not found in the record any conclusive evidence that Claimants’
investment would have violated the principle of good faith, the principle of nemo auditur
propriam turpitudinem allegans or international public policy.
324. Respondent further challenges the jurisdiction of this Arbitral Tribunal arguing that
Rumeli and Telsim are not the real parties to this arbitration, that the real party in interest
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is TSDIF, that Rumeli and Telsim are just empty shells and that the benefit of this award,
if any, will go to the Turkish State.
325. We have noted that following the problems encountered by Imar Bank in Turkey, owned
by the Uzan family, the Turkish Parliament enacted various laws which empowered the
TSDIF, a State agency, to take over the control of companies previously controlled
directly or indirectly by the Uzan family and in particular, to take over the management
of these companies. It is on this basis that the TSDIF appointed managers to Rumeli and
Telsim. These new managers continued to run Claimants as telecommunications
companies. In April 2003, the previous managers of Rumeli and Telsim wrote to
Respondent stressing that they had intended to submit the dispute to ICSID. The new
managers carried out the previous management commercial plans and started ICSID
arbitration. The TSDIF is not however Claimant in this arbitral procedure. The case was
initiated by Rumeli and Telsim. They are the real Claimants in this arbitration.
326. Even if it is correct that Telsim’s assets have been sold to Vodaphone and that Telsim
may or may not have substantial activities since that sale, it is still a company
incorporated and existing under the laws of Turkey. So also is Rumeli which has not sold
its assets. Moreover, the companies have existed since 1993 and have certainly not been
created for treaty shopping purposes. The fact that Telsim is no longer an active
company in the field of telecommunications is no bar to ICSID jurisdiction. The BIT
does not provide a basis for looking beyond a company on the alleged basis that it would
be a shell company and does not exclude such companies from its scope of application
from the moment it is incorporated in another contracting State. The TSDIF’s
appointment of managers for Telsim and Rumeli did not in any way put an end to their
corporate existence or to Claimants’ ownership of their claims against Kazakhstan.
327. The record also confirms that the TSDIF is not the owner of Claimants’ shares. It is also
incorrect to state that if Claimants are successful, the Turkish State will be the only
beneficiary of the moneys allocated to Claimants by the award. The moneys will be used
to pay all Claimants’ creditors, according to the relevant rules of Turkish law. The role
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of the TSDIF may be compared to some extent to the role of a receiver or liquidator or
judicial manager. The presence of such an entity as manager of the company in
accordance with the law is no bar to the jurisdiction of the Centre. The Arbitral Tribunal
does not have to anticipate what would be the status of Claimants in case the two
companies would be put into liquidation, since so far no such decision of liquidation has
been taken.
328. The record also does not support Respondent’s allegation that Claimants’ claim was
assigned to the TSDIF or that the TSDIF was subrogated to Claimants’ claims.
Moreover, the Tribunal does not see any reason to “pierce the corporate veil” as
requested by Respondent. As pointed out by the ADC award, the principle of piercing the
corporate veil only applies to situations where the real beneficiary of the business
misused corporate formalities in order to disguise its true identity and therefore to avoid
liability. This is not the case here.
329. Finally, the Arbitral Tribunal also considers that Article 25(2)(b) stating that a national of
another contracting State also means “any juridical person which had the nationality of
the Contracting State party to the dispute on “the date on which the parties submitted the
dispute to arbitration” and which, because of foreign control, the parties have agreed
should be treated as a national of another Contracting State for the purposes of this
Convention” was inserted to broaden the scope of ICSID jurisdiction and not to limit it,
as evidenced by the awards invoked by Respondent, such as the SOABI, the Vacuum Salt
and LETCO cases.
330. Respondent’s final allegation that Claimants would not have standing to challenge the
termination of the Investment Contract because they were not parties thereto and that in
any case such a claim would fall outside the scope of this Tribunal’s jurisdiction since it
would amount to a contractual claim, which is not encompassed by the jurisdictional
provisions of the Investment Contract, are unfounded. Claimants’ request is not based on
the Investment Contract. It is not solely related to the termination of the Contract. The
wrongful termination of the Investment Contract is but one element of Respondent’s
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alleged wrongful conduct. Claimants’ Request for Arbitration and subsequent memorials
clearly establish that this arbitration arises out of Respondent’s alleged violation of the
BIT and international law.
331. The Arbitral Tribunal therefore considers that Claimants have standing to bring this
arbitration and that this Tribunal has jurisdiction to hear the dispute under Article 25 of
the ICSID Convention and Article 7 of the BIT.
332. The Arbitral Tribunal also considers that it has jurisdiction on the basis of the Foreign
Investment Law.
333. Under Article 27 of the FIL, a foreign investor is expressly permitted to choose ICSID
arbitration as the means for solving disputes with the Republic relating to investments
and, once that choice has been made, the consent of the Republic of Kazakhstan “shall be
presumed to have been granted” (Article 27(3)). The fact that the Foreign Investment
Law was repealed as of January 8, 2003, does not have an impact on ICSID jurisdiction.
The FIL was indeed valid and effective at all times relevant to this dispute. Article 6(1)
of the Law provides that “[i]n the case of a deterioration of the position of a foreign
investor, which is a result of changes in the legislation and (or) entering into force and
(or) changes in the provisions of international treaties, to foreign investments during ten
years the legislation shall be applied which had been current at the moment of making
the investment, and with respect to the investments which are carried out in accordance
with the long-term (more than ten years) contracts with the authorized State bodies, until
the expiry of the effect of the contract, unless the contract stipulates otherwise.” In other
words, Article 6(1) grants foreign investors protection against adverse changes in
legislation for a period of ten years from the date they made their investment, or for the
entire duration of the contract exceeding ten years entered into with authorized State
bodies. This is the case here. The relevant investments were made by Claimants from
1998 to 2002, and the Investment Contract entered into between Claimants and
Respondent on May 20, 1999, was valid until June 31, 2009, i.e., for a period of more
than ten years.
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334. Respondent has expressed its consent to ICSID arbitration on December 28, 1994, the
date of the entry into force of the FIL, and it remains applicable to the dispute pursuant to
Article 6(1). On the other hand, Claimants have consented to ICSID jurisdiction by filing
their Request for Arbitration. The Arbitral Tribunal has therefore jurisdiction under the
FIL.
335. Besides Article 6(1), it is also well established in international law that a State may not
take away accrued rights of a foreign investor by domestic legislation abrogating the law
granting these rights. This is an application of the principles of good faith, estoppel and
venire factum proprium.
336. The Arbitral Tribunal has therefore jurisdiction under the FIL. It notes however that the
FIL is invoked by Claimants only as an alternative basis for the jurisdiction of this
Tribunal. In this respect, the Tribunal has reached the conclusion that since the
protection granted to foreign investors by the FIL is fully covered by the provisions of the
BIT, it needs not refer to it to decide the claims submitted by the parties in this
arbitration.
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CHAPTER V. THE CLAIMS
I. OVERVIEW OF THE CLAIMS
337. According to Claimants, Respondent took the following actions, which were in breach of
its obligations under the BIT, international law and the Kazakh Foreign Investment Law:
- Respondent’s Investment Committee unlawfully terminated the Investment
Contract in breach of the suspension and early termination mechanism set forth
therein;
- Respondent’s Courts colluded with Telecom Invest by granting its request for
injunctive relief and thus ratifying Telecom Invest’s choice of General Manager;
- Respondent’s police authorities enforced the foregoing injunctive relief and
ousted Claimants’ representatives from KaR-Tel’s premises;
- Respondent’s Courts ratified Telecom Invest’s actions by ordering the
compulsory redemption of Claimants’ stake in KaR-Tel, in clear contravention of
Kazakhstan law;
- Respondent set up a Working Group over a year after the termination of the
Investment Contract to examine alternative grounds for the termination of the
Contract rather than to examine the legality of the grounds on which the Contract
was actually terminated in March 2002. Furthermore, Claimants were de facto
excluded from the meetings of the Working Group;
- Respondent initiated, under false pretenses and/or in a discriminatory/arbitrary
manner, criminal proceedings against Claimants’ executives, thereby forcing them
to leave the country;
- the decision of the Working Group validated the termination of the Contract on
entirely different grounds than those forming the basis for the termination;
- Respondent’s Courts ordered the compulsory redemption of Claimants’ 60%
stake in KaR-Tel for a mere USD 3,000.
338. According to Claimants, Article 4 of the Articles on the Responsibility of States for
Internationally Wrongful Acts (the “ILC Articles”) attributes to the State the conduct of
87
“any State organ…whether the organ exercises legislative, executive, judicial or any
other functions, whatever position it holds in the organization of the State….” Therefore,
Claimants allege that each of the above acts and omissions, individually and collectively,
constitutes a breach of each of Respondent’s international obligations, namely, its
obligations:
- to afford fair and equitable treatment;
- not to deny justice;
- to ensure full protection and security;
- not to impose unreasonable, arbitrary and/or discriminatory measures;
- not to expropriate absent certain specific conditions.
II. THE PARTIES’ POSITION ON RESPONDENT’S PURPORTED SCHEME
339. As pointed out above, Claimants allege that each of the acts and omissions allegedly
wrongfully committed by Respondent, individually and collectively constitute a breach of
Respondent’s international obligations. Before analyzing the various legal grounds
invoked by Claimants, the parties’ positions are hereinafter summarized.
A. CLAIMANTS’ POSITION
1. The general context
a) Claimants’ investment
340. Contrary to Respondent’s allegation, Claimants submit that they have made considerable
investments in Kazakhstan as per the terms of the BIT and of the FIL. Indeed, the BIT
provides that: “the term ‘investment’…shall include every kind of asset in particular, but
not exclusively: i) shares, stocks or any other form of participation in companies, ii)
returns reinvested, claims to money or any other rights to legitimate performance having
financial value related to an investment.” The FIL defines “investment” as “all types of
proprietary and intellectual values invested into objects of entrepreneurial activity with
the purpose of obtaining profit….” The FIL further specifies that “foreign investments”
are “investments made in the form of participation into an authorized capital of legal
88
entities of the Republic of Kazakhstan, as well as granting of loans (advances) to legal
entities of the Republic of Kazakstan, in which the foreign investors have the right to
control decisions adopted by such legal entities.”
341. According to Claimants, their combined 60% stake in KaR-Tel thus constitutes an
“investment” under the BIT and the FIL. Moreover, Claimants paid the entire initial
charter capital contribution of approximately USD 10,000 when they acquired a 70%
stake in KaR-Tel in May 1998 (which was subsequently reduced to 60%).
342. Claimants also granted lines of credit to KaR-Tel totaling up to USD 40 million and,
pursuant thereto, extended loans to KaR-Tel of USD 16,953,455.88 and USD 16,285,835
(by Rumeli and Telsim respectively). According to Claimants, although these loans
initially were to be subject to interest rate, this was immediately changed. In any event,
Claimants allege that even if the loans had been subject to interest, this would have no
bearing on the fact that the law considers such loans to constitute investments.
343. Claimants further allege that Rumeli pledged its own funds as security under loan
agreements between KaR-Tel and Bank Turan Alem. After Bank Turan Alem collected
USD 2,580,000 pledged by Rumeli, this latter became a creditor of KaR-Tel for this
amount, and this constitutes another investment.
344. Furthermore, according to Claimants, in light of Respondent’s forensic expert reports that
concluded that Claimants indeed provided more than USD 33 million to KaR-Tel,
Respondent’s allegation that there is “no evidence of alleged investment of USD 33
million” is no more than a misrepresentation of the facts.
345. Claimants allege that they were forced to structure their investments as loans and
commodity credits since the parties-in-interest behind Investel/Telecom Invest refused to
participate to capital increases. Claimants’ willingness to make investments in the form
of increased capital contributions is evidenced by article 2.7 of both Contracts on
Temporary Financial Support which provided that, after expiration of the repayment
89
term, the loans extended by Rumeli could be considered as additional capital contribution
by Rumeli to KaR-Tel upon a decision of KaR-Tel’s board of directors.
346. Claimants’ financial obligations pursuant to KaR-Tel’s Foundation Agreement were
limited to an obligation “to ensure provision of the investments,” i.e., to assist KaR-Tel in
negotiations with third parties to obtain financing. According to Claimants, given the
significant amount of the Motorola Loan and the Bank Turam Alem loan – the first
guaranteed by Telsim, the other pledged by Rumeli – Claimants obviously fulfilled their
obligations under the Foundation Agreement. In this context, it is Claimants’ position
that the circumstances surrounding the Motorola Loan are irrelevant to the question of
their investment.
347. Claimants further allege that Telsim, which guaranteed the Motorola Loan, was a highly
valuable company, with a value higher than its borrowings. This is confirmed by the fact
that Telsim ultimately honored its payment obligations towards Motorola and was sold
for USD 4.55 billion in December 2005.
348. Claimants also submit that Respondent’s attempt to challenge the existence of Claimants’
investments is absurd in light of the fact that the local partner in KaR-Tel – which did not
provide any monetary, management, or know-how assistance, nor the necessary office
space to KaR-Tel – was able to sell a 100% stake in KaR-Tel for USD 350 million.
349. Claimants further point out that:
- the Working Group established by Respondent itself recognized that Claimants
made millions of dollars of direct capital investment in KaR-Tel;
- they had no obligation under the Investment Contract, which was concluded
between the Investment Committee and KaR-Tel;
- KaR-Tel had no obligation to achieve any specific portion of the USD
184,405,000 investment mentioned in article 3 of the Investment Contract;
- in any case, the Investment Contract was terminated exclusively for the failure to
file reports and not for the alleged unsatisfactory level of investment.
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350. Moreover, Respondent’s allegation that KaR-Tel overpaid Telsim by over USD 8 million
for “obsolete” second-hand equipment and handsets does not withstand scrutiny:
- the equipment was advanced and fully met KaR-Tel’s operational and technical
needs;
- the expert, Mr. Bulent Yagci, testified in the Kazakhstan Court proceedings that
the second-hand base stations worked properly and satisfied KaR-Tel’s objectives
and were provided on favorable terms;
- Telsim provided guarantee services, spare parts, and training of KaR-Tel
employees to use the equipment.
351. By the same token, according to Claimants, Respondent’s allegation that Telsim sold
telephone sets to KaR-Tel at a price higher than the market is also unfounded.
Respondent’s Courts made such a finding solely on the basis of the conclusions drawn by
Respondent’s own forensic experts and wholly ignored the evidence adduced by
Claimants.
352. Finally, Claimants dispute Respondent’s challenge of the quality of the support, knowhow
and training provided by Claimants on the basis that KaR-Tel was allegedly
insolvent at the time that Claimants were ousted from Kazakhstan:
- Claimants did provide a great deal of this support, know-how and training, which
constitutes an investment;
- Respondent provides no evidence that such training or support was somewhat
inadequate;
- KaR-Tel – at the time that Claimants were ousted – was far from being insolvent.
353. In any case, Respondent’s conduct and various acts and omissions, in collusion with the
influential local partner, deprived Claimants of their investment for a derisory sum. Even
if the alleged wrongdoings of Claimants were somehow true, they could not justify the
expropriation of Claimants’ majority shares without compensation.
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354. It is therefore Claimants’ position that they made investments within the meaning of
Article 25 of the ICSID Convention and ICSID jurisprudence, their investments being
long term (the GSM License was granted for a renewable 15-year period and the
Investment Contract’s duration exceeded 10 years); they involved regularity of profit and
return; they were substantial, risky and strategic for the development of the Republic of
Kazakhstan.
b) The Republic of Kazakhstan and the involvement of
President Nazarbayev’s family
355. According to Claimants, Kazakhstan has not yet succeeded in breaking with the vestiges
of Soviet bureaucracy. Since 1989, the country is governed by President Nursultan
Nazarbayev, whose last election, with a purported 91.15% of the votes, failed to meet
OSCE and international standards for democratic elections. The Judiciary has limited
judicial independence. Moreover, corruption is prevalent at every stage and level of the
judicial process. The regime is hard with any kind of opposition and with the media.
356. According to Claimants, President Nazarbayev succeeded in concentrating most of the
powers in his own hands, but he also successfully established direct and indirect (through
his family and/or executives) control over the most important sectors of the Kazakhstan
economy.
357. According to Claimants, in this context, once KaR-Tel’s success was assured thanks to
Claimants’ considerable efforts and investments, the local partner’s shareholders devised
a scheme to orchestrate Claimants’ expulsion from KaR-Tel with the unconditional
support of Respondent. The local partners’ shareholders exploited their close personal
and political ties with Respondent to oust Claimants from their investments. In this
framework, Claimants allege that the following elements demonstrate that some
members’ of the President Nazarbayev’s empire were the real parties in interest behind
Investel/Telecom Invest.
358. First, Claimants’ initial local partner, Investel, was co-founded by Almex, a company
that was itself founded by President Nazarbayev’s brother, Mr. Bulat Nazarbayev. Other
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shareholders in Almex included President Nazarbayev’s second daughter, Ms. Dinar
Nazarbayeva, and her husband, Mr. Timur Kulibayev. During the course of their
investment, Claimants were also told that, in addition to Almex, the Minister of
Transportation and Telecommunications of the Republic of Kazakhstan, at the time
Mr. Serik Burkitbaev, was also a shareholder in Investel. By November 2000,
Mr. Kulibayev held 50% in Almex, with his wife holding a 20% stake therein and
Mr. Abuov (Mr. Kulibayev’s ‘right-hand man’) holding the remaining 30%. When
Telecom Invest replaced Investel, Almex remained the majority 87.5% shareholder of
Telecom Invest until the end of 2002.
359. Second, irrespective of whether he formally held an official position in Investel/Telecom
Invest, Mr. Kulibayev acted as executive director of Investel and later Telecom Invest:
- KaR-Tel’s successive General Managers met in person with him in that capacity
on many occasions;
- Mr. Agilönü sent monthly reports of KaR-Tel’s financial data to Mr. Kulibayev.
360. Third, the amendment to KaR-Tel’s charter with respect to the replacing of Claimants on
November 10, 2003 was registered by the Almaty District Division of the Ministry of
Justice the very next day. According to Claimants, this is not feasible for such a reregistration
to take merely one day, absent some extra influence such as Respondent’s
interest in the re-registration.
361. According to Claimants, Respondent’s allegation that there is no basis upon which a State
can bear legal responsibility for the actions of the President’s son-in-law oversimplifies
the present case. Indeed, Mr. Kulibayev is not only the son-in-law of the President, he
has also held, at various times, governmental functions both as a member of the
Investment Committee and as top executive of various State-owned energy companies.
According to Claimants, it is undisputed that Mr. Kulibayev maintained ties with the
Investment Committee and knew Mr. Zverkov, the Chairman of the Investment
Committee who terminated the Investment Contract. Therefore, his actions cannot be
93
viewed in a vacuum and cannot be dissociated from his privileged relationship with
Respondent.
362. It is also undisputed that the primary obligation of Telecom Invest/Investel in KaR-Tel
was precisely lobbying before the organs of Kazakhstan. The local partner did use that
influence at the outset and during the course of the project to secure and obtain, from
organs of the Republic of Kazakhstan, the License, the Investment Contract, the easy-toremember
‘333’ prefix and favorable treatment from Kazakhstan Customs Authorities. It
is also Claimants’ case that the local partner and Mr. Kulibayev could do and undo things
at the Investment Committee.
363. In this context, it is Claimants’ allegation that the fact that, by late 2002/early 2003,
Mr. Seysembayev, through some companies, and not Almex, was de jure the controlling
shareholder of Telecom Invest has no bearing on Claimants’ case. Indeed, a subsequent
change in ownership of Telecom Invest, does not somehow undo Respondent’s prior
collusion with the previous shareholders. Nor does such a change preclude Respondent
from continuing to collude even with the new owners.
364. Moreover, this change of ownership was for “nominal consideration,” which does not at
all exclude the likelihood that an arrangement may have been reached between Telecom
Invest’s prior owners and Mr. Seysembayev. Indeed, it is still unknown who received the
USD 350 million paid by VimpelCom.
365. Claimants further allege that even if Telecom Invest’s shareholders could be deemed to
be independent and private third parties, Respondent would still be liable for breaching
its international obligations. Indeed, collusion between the State, judicial authorities, and
the local party-in-interest can amount to a denial of justice, and a State can expropriate an
investment for the benefit of a third party.
366. Finally, even if there is no such a collusion, Respondent would still be liable for its acts
and omissions, namely the wrongful termination of the Investment Contract, the eviction
94
of Claimants from KaR-Tel by the police, the Courts’ decision that grossly misapplied
Kazakhstan law and the derisory compensation paid to Claimants.
2. The termination of the Investment Contract
367. According to Claimants, by mid-2001, the local partner took the decision to oust
Claimants from KaR-Tel. This is confirmed by Mr. Abuov. The task of identifying the
options to carry out this decision was entrusted to Mr. Karibjanov from Visor Investment
Solutions, who declared that his “involvement in KaR-Tel commenced at some point
between August and December 2001.” In the fall of 2001, Respondent set in motion the
impetus that would eventually result in the total expropriation of Claimants’ investment
in favor of President Nazarbayev’s family and empire.
368. On September 10, 2001, the Investment Committee, which was under the influence of
Mr. Kulibayev sent KaR-Tel a warning letter, requesting that KaR-Tel submit various
financial statements and information that it had not previously requested. Indeed, prior to
September 10, 2001, there had been no Investment Committee investigations or warnings
on this issue. Ambassador Zverkov’s testimony to the contrary is not supported by any
documentary evidence. From this point, Telecom Invest, Mr. Kulibayev and Mr. Abuov
suddenly became unreachable.
369. On February 21, 2002, Respondent’s Investment Committee sent KaR-Tel a notification
letter purporting to terminate the Investment Contract within thirty days on the alleged
basis that KaR-Tel had not complied with its reporting obligations pursuant to the
Contract. During this period, KaR-Tel challenged this abrupt termination, continued its
best efforts with the assistance of its auditors to comply with the filing requirements and
sought an extension of time. This extension was granted, at the very least, according to
Mr. Zverkov’s own admission, until March 23, 2002.
370. However, contrary to Respondent’s allegations, the Investment Committee Members
were not waiting at the Investment Committee premises on March 23, 2002 to receive
Claimants’ reports. Mr. Zverkov’s declarations in this respect are not credible since
95
March 23, 2002 was a Saturday, which is a day off in Kazakhstan. Moreover, the
Investment Committee was also closed on Friday, March 22, 2002 since it was Norouz, a
public holiday in Kazakhstan. It is therefore obvious that on March 23, a Saturday
immediately following a public holiday, the Investment Committee was also closed.
371. According to Claimants, it cannot therefore be disputed that, even assuming for the sake
of argument that Respondent granted Claimants an extension only until Saturday, March
23, 2002 for the filing of the requested reports, such extension extended automatically
until Monday, March 25, 2002, the very first working day after Norouz. Furthermore, as
confirmed by the documents and by Respondent’s own Ministry of Economy and Budget
Planning, KaR-Tel submitted the materials requested on March 25, 2002.
372. Claimants point out that the Investment Contract was terminated by the Investment
Committee on March 25, 2002 on the only basis of the alleged failure to submit reports.
Respondent seeks today to justify the termination of the Contract on the basis that, in any
event, it was justified on substantive grounds since KaR-Tel allegedly did not comply
with its investment obligations. However, as emphasized by the Amco I26
and II27
decisions, regardless of the examination of the substantive grounds relied upon by a State
agency in the framework of the revocation of a license, “the mere lack of due process
would have been an insuperable obstacle to the lawfulness of the revocation.”
Respondent’s attempt to justify ex post the termination of the Investment Contract is
unconvincing.
373. The Investment Contract was wrongfully terminated. It was terminated prior to the
expiration of the deadline for submitting the reports, which were filed on March 25,
2002, i.e. within the deadline. Moreover, even assuming, arguendo, that certain reports
were not submitted in a timely manner, the Investment Committee could only suspend the
Contract and not terminate it.
26
Amco I v. Indonesia, Decision on Jurisdiction of September 25, 1983.
27
Amco Asia Corporation and others v. Republic of Indonesia (ICSID Case No. ARB/81/1), Award in
the Resubmitted Case of June 5, 1990, 1 ICSID Reports 569, para. 70 [hereinafter Amco II].
96
374. Indeed, the early termination mechanism of the Investment Contract explicitly set forth in
the Contract provided that early termination could only occur on the basis of specific
grounds listed at article 19.3 (“refusal of the Investor to cure the reasons which have
caused the decision on the suspension of the Contract, or a failure to cure these reasons
during the term established by the Agency”). This basis presupposed that:
- there had been a suspension of the Contract in accordance with the terms of article
19.2; and
- the reasons for such suspension were notified.
375. According to Claimants, none of these conditions was satisfied, a fact which has been
recognized by Respondent itself in two letters dated May 14, 2003 from the Ministry of
Finance and from the Ministry of Economy and Budget Planning. Respondent tries to
downplay the significance of these letters. However, they were executed by viceministers
and are unequivocal in several respects.
376. As recognized by Respondent itself, the Investment Committee did not suspend the
Contract. Respondent alleges that the lack of formal suspension was in the interest of
KaR-Tel since the suspension of the Contract would have required KaR-Tel to make
ordinary tax payments until the suspension was lifted. However, according to Claimants:
- it is not for Respondent to decide what was in the interest of KaR-Tel; and
- in any event, had the investment Committee suspended the Contract, KaR-Tel
could have remedied any alleged breaches and the suspension would have been
lifted.
377. According to Claimants, Respondent’s further attempt to justify its failure to suspend the
Contract by relying on article 13 of the Investment Support Law is also unconvincing.
Indeed, although this Law grants the Investment Committee the right to terminate a
contract without first suspending the same, the express terms of each individual contract
can supplement this right. In the present case, the parties, as they were entitled,
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specifically conditioned in their Contract the right of the Investment Committee to
terminate a contract to the mandatory prerequisite of its prior suspension.
378. Even assuming, for the sake of argument, that article 13 of the Investment Support Law
does support Respondent’s position, a State cannot rely on its internal law to invalidate
its own undertakings. Moreover, Respondent’s position was discredited at the hearing by
its own expert, professor Kaudyrov, who agreed that a foreign investor in Kazakhstan
would have had a reasonable expectation that the terms of the Investment Contract, and
specifically the provisions calling for suspension, were valid.
379. Claimants further allege that Exhibit RM32 invoked by Respondent as another example
of a telecom company whose investment was terminated in the same conditions than
Claimants, is, on the contrary, clear evidence that some contracts must be suspended prior
to termination.
380. Finally, contrary to Respondent’s allegation, it was only KaR-Tel and not Claimants, who
had legal standing to challenge the termination of the Investment Contract. This was
confirmed at the hearing by Respondent’s own law expert, Professor Kaudyrov. In
addition, on April 22, 2002, KaR-Tel’s General Manager, Mr. Agilönü, indeed contested
the unlawful termination of the Contract. However, he was unable to pursue his recourse
since he was ousted from KaR-Tel. In this respect, even after the Supreme Court
amendment to the April 23, 2002 injunction requiring a written permission of
Mr. Yerimbetov to access KaR-Tel’s documents, Claimant continued in fact to be denied
access to KaR-Tel’s premises and documents.
381. Claimants finally point out that the local partner did not engage in any effort to assist
Kar-Tel in the Investment Contract control process. On the contrary, the local partner
vanished during the investigation process. In this respect, Mr. Abuov disingenuously
suggested that he might have disappeared during these key months because he was gone
on a particularly long business trip and was therefore unreachable. This was clearly false.
There can be no doubt that the local partner “strategically” disappeared.
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382. The reality is that, in February and March 2002, the local partner, with the help of
lawyers and of Mr. Karibjanov from Visor Investment Solutions, was trying to implement
its decision to get rid of Claimants.
383. In this context, the local partner colluded with the Investment Committee to terminate the
Investment Contract. That collusion was established by the testimony of Mr. Abuov and
by the evidence that Mr. Kulibayev had the power to cause the Investment Committee to
implement the local partner’s decision to get rid of the majority shareholders in KaR-Tel
through the cancellation of the Investment Contract.
384. According to Claimants, Mr. Abuov’s argument that the local partner had no reason to
terminate the Investment Contract simply does not stand. The local partner had two very
strong incentives to terminate this Contract. The first was the implementation of his plan
to get rid of Claimants. The second was to minimize the necessity of payment by KaRTel
for Claimants’ 60% shares.
3. Telecom Invest and Respondent colluded to effect the illegal
compulsory sale of Claimants’ interest in KaR-Tel
a) The KaR-Tel EGM
385. According to Claimants, Telecom Invest used the cancellation of the Investment Contract
as the pretext for calling an extraordinary meeting of KaR-Tel shareholders (EGM) to
remove Claimants from KaR-Tel. In this respect, Mr. Podporin of Telecom Invest claims
to have sent two letters to Mr. Agilönü on March 4, 2002 and March 20, 2002 requesting
Mr. Agilönü, as General Director of KaR-Tel, to call an EGM to discuss the cancellation
of the Investment Contract.
386. Mr. Agilönü testified that he never received these letters. Mr. Podporin, who was in
direct contact with Mr. Agilönü on a daily basis, admitted that he never followed up with
Mr. Agilönü, whether in person, telephone or other means, to determine whether the
letters were in fact received.
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387. On March 26, 2002 – the day after the Investment Committee issued its order terminating
the Investment Contract, but one day before such order was even sent to KaR-Tel –
Mr. Podporin allegedly sent notices to Claimants in Turkey to convene an EGM of KaRTel
for April 11, 2002. Therefore, according to Claimants, given the timing of this
“notice,” it is clear that Telecom Invest and its shareholders were, at the very least, privy
to the termination decision. Claimants did not receive these notices.
388. An EGM was then held on April 11, 2002. It is not disputed between the parties that the
April 11, 2002 meeting could not proceed and take decision without a quorum being
present. Otherwise, there would have had no need for the alleged follow-up meeting on
April 15, 2002. At the hearing, Mr. Podporin indicated that no decisions were taken at
this meeting because of the lack of quorum, in the absence of Claimants. This testimony
is contradicted by the evidence. Indeed, the resolution of the meeting dated April 11,
2002, which was signed by Mr. Podporin, indicates that the meeting did in fact proceed
on that date in the absence of a quorum. The resolution records that Telecom Invest, the
sole attendee and minority shareholder of KaR-Tel, voted at the April 11, 2002 meeting:
- to prepare all necessary documents, including financial analyzes, demonstrating
the damage caused to KaR-Tel by the activity and/or inactivity of Rumeli and
Telsim;
- to issue proceedings in the Almaty City Court for the compulsory redemption of
Claimants’ participation in KaR-Tel;
- to dismiss Mr. Agilönü as General Manager of KaR-Tel and to replace him
temporarily by Mr. Iskander Yerimbetov and to seek the Court’s approval of this
amendment.
389. According to Claimants, the resolution is thus invalid on its face since a non-quorate
meeting cannot take decisions. Nevertheless, on April 19, 2002, Telecom Invest filed a
claim based solely on the April 11, 2002 resolution, seeking a Court decision on the
forced buyout of Telsim and Rumeli’s interest in KaR-Tel. Neither the claim filed, nor
the Court’s April 23, 2002 decision granting injunctive relief mention anything about any
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postponement of the April 11 meeting or about any follow-up meeting on April 15 or any
other date.
390. According to Claimants, following an attempt by Mr. Agilönü to call a general meeting
of KaR-Tel shareholders for June 7, 2002 to discuss, inter alia, “the wrongfulness and
illegality of the April 11, 2002 KaR-Tel general shareholders’ meeting and resolutions,”
KaR-Tel separately petitioned the Court for an injunction prohibiting this meeting.
Claimants allege that, unlike the earlier Telecom Invest petition – which had been made
prior to any challenge by Claimants to the validity of the April 11, 2002 resolution – this
second KaR-Tel petition referred only to the resolution of a purported April 15, 2002
meeting. This meeting had not even been mentioned before. The resolution purportedly
adopted at this alleged follow-on meeting was virtually identical (other than the date) to
that of the April 11 meeting.
391. Claimants further point out that neither the purported resolution of April 15, nor the
petition to the Court based on that resolution, mentioned the fact that the April 15
meeting would have been called as a “follow-on” meeting after the failure of Claimants
to attend the April 11 meeting. Therefore, the April 15 resolution was also invalid.
392. In any case, according to Claimants, both April 2002 meetings were not validly
constituted and held, for the following reasons:
- Claimants were not notified of the meetings, contrary to article 46 (1) of the LLP;
- moreover, with respect to the notice issue, if there is no quorum at the original
meeting, a new general meeting is to be convened at least 15 days prior to the
repeated meeting. This is to ensure that there will be a second attempt by the
partnership to notify the participants. This was not the case since the notice of the
repeated meeting was included in the notice of the original meeting. As
confirmed by Professor Sergeev, the Kazakh Courts made a serious mistake when
considering that it is possible to notify the participants about two meetings in one
notice. Respondent’s experts’ position to the contrary: the allegation that a
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follow-up meeting could be held as little as two hours after the original nonquorate
meeting, is simply not credible. It violates the basic principle of the
provision related to notices, which is to ensure that the partners have the
opportunity to participate in the activity of the company;
- pursuant to the LLP Law, article 46, the 15-day notice period is triggered when
the participants have been notified rather than when the notice has been issued.
Therefore, even assuming that Claimants received the notices of the meeting on
April 1, 2002, the notice period for the original meeting (April 11, 2002) was
insufficient as the 15-day time period began on the date following receipt (April
2, 2002). Neither was the repeated meeting properly notified since there were
only 14 days between the alleged notice and the day of such meeting;
- article 47 (4) of the LLP Law provides that a general meeting can adopt decisions
only if there is a quorum, i.e. more than 50% of the total votes are present. If less
than 50% of the total votes are present, a general meeting can be convened again,
which is deemed to have a quorum regardless of the votes present (art. 47(5)). If
less than 50% of the votes are present, the meeting has the right to adopt decisions
only on questions which do not require a qualified majority vote or unanimity (art.
47(5)). As confirmed by Professor Suleimenov before the Kazakhstan Courts,
article 48(2) and 43(2)(9) of the LLP law provide that the compulsory redemption
of a shareholder’s interest requires a qualified majority of votes of three quarters
of the votes present and a quorum of two-thirds of the total number of votes.
Claimants’ presence – holding 60% of the votes – was thus required;
- pursuant to article 47(9) of the LLP Law, it is necessary to certify that there is a
quorum immediately prior to voting;
- in violation of article 34 of the LLP Law, the minutes of the April 15, 2002 did
not indicate that any evidence was presented of any significant damage to KaRTel
presumably caused by Claimants;
- although a shareholder whose shares are being redeemed may not participate in
the voting of its own compulsory redemption (art. 48(2) of the LLP Law), if a
general meeting contemplates the compulsory redemption of two of its
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shareholders, the presence of at least one shareholder whose interest is subject to
the redemption is required at the meeting. Even assuming that Respondent’s
Judiciary properly applied the LLP and that the presence of the participant whose
interest is being forcefully bought out is not necessary, there were here two
participants whose interests were bought out. Therefore, separate decisions
should have been taken. When the question of whether to buy out the interest of
the first participant is put to a vote, even if such participant cannot vote on this
decision, the second participant can vote, and vice versa;
- more generally, as stated by Professor Suleimenov, “on no conditions the sharer
which possesses the small interest of shares in the company may not bring up the
question about compulsory redemption of shares of the sharer which possesses the
majority interest in the share capital of the company. Otherwise the situation may
be carried to an absurdity: several sharers holding 10% of shares may determine
on the question about compulsory redemption of the share of sharers holding 90%
of shares in the share capital. It may be very suitable mechanism for usurpation
of companies.” Professor Sergeev reached identical conclusions.
b) The Injunctive relief proceedings
393. According to Claimants, Telecom Invest and its shareholders then sought the assistance
of Respondent’s judiciary to ratify their illegal conduct. In this context, they obtained, ex
parte, the injunctive relief of April 23, 2002 to secure the forced removal of Rumeli and
Telsim.
394. According to Claimants, the injunction was granted whereas the resolutions of the
shareholders meetings were blatantly in violation of the LLP law. In this respect,
Claimants emphasize, inter alia, that neither the claim filed, nor the Court’s decision
granting injunctive relief, mention anything about the April 15 meeting. It is undisputed
that there was no quorum at the April 11 meeting to take decisions so that the ex parte
decision rendered on April 23, 2002 was based on a resolution which was procedurally
and patently invalid on its face. Moreover, by appointing Mr. Yerimbetov, the very same
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General Manager that had been unilaterally appointed by Telecom Invest in the course of
the April meetings, and not an independent administrator – pending a decision on the
merits of the case – the Court effectively prejudged the merits while denying Claimants
the right to manage and benefit from their investment as well as to access data necessary
for the defense of their interests in KaR-Tel.
395. According to Claimants, the defects in the Court’s April 23 decision are so egregious as
to permit no other conclusion than one of bias and discrimination by the Court in favor of
Telecom Invest.
396. Finally, even if Claimants recognize that the April 23, 2002 injunction was subsequently
amended by the Supreme Court so as to remove the requirement of a prior written
permission of Mr. Yerimbetov for Claimants to access KaR-Tel’s premises and
documents, they in fact continued to be denied access, as evidenced by Claimants’
numerous requests to KaR-Tel and to the Court that remained unanswered.
4. The actions of Respondent’s police authorities
397. According to Claimants, by the end of the business day on April 23, 2002, the
Kazakhstan armed police – led by Mr. Aidan Karibjanov, a senior executive of the firm
Visor Investment Solution (consultant to Telecom Invest) – seized all of KaR-Tel’
offices. The police physically barred from access only KaR-Tel’s Turkish management
executives. Even after the amendment of the injunction in June 2002, they continued to
be denied access to the KaR-Tel premises.
398. According to Claimants, even if Respondent tries to make a distinction between its
unarmed Court bailiffs that enforced the April Injunction, and its armed police, its
remains that the seizure of KaR-Tel premises and the ousting of the Turkish employees
was executed by Court bailiffs who are State officials, a real organ of the State, and were
accompanied by a police escort. The mere presence of private security forces in KaR-Tel
was insufficient to give rise to a case of necessity justifying the presence of the police.
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399. Claimants also point out that they were not informed of the Court’s injunction or its
enforcement and were thus not invited to be present when Respondent’s Court bailiffs
and police seized KaR-Tel, in stark contrast to Telecom Invest who was represented on
the ground by Mr. Karibjanov.
400. In their Post-Hearing Memorial, Claimants further point out that, at the hearing,
Respondent’s witnesses confirmed that the Court bailiffs were accompanied by officers
from Kuzet Security Services (“Kuzet”), which is a specialized security subdivision of
internal affairs bodies of the Republic of Kazakhstan. Their guards wore uniforms and
carried weapons. Kuzet was acting pursuant to a contract with Telecom Invest. As this
contract could only have been formed on or before the April 23, 2002 injunction of Judge
Ivanovna, this means that Claimants’ local partner was privy to Judge Ivanovna’s
decision before it was made public.
5. The attempt to sell Telecom Invest’s participation in KaR-Tel
401. According to Claimants, after they were forcibly removed from KaR-Tel’s premises on
April 2002, Telecom Invest continued to exploit its privileged relationship with
Respondent to capitalize on its influence on Respondent’s various organs.
402. Indeed, the local partner and/or associated individuals sought to extract cash from the
partnership and its stake therein and asked Claimants to purchase its 40% stake in KaR-
Tel.
403. A Stock Purchase Agreement was negotiated. In this context, it appeared that the
Investment Committee continued to be under the influence of Telecom Invest which was
in a position to instruct the Committee to reinstate the Contract. However, Claimants
decided not to sign because:
- there was no guarantee that once the USD 12 million stipulated in the agreement
would have been paid, Telecom Invest would not further collude with Respondent
to extract more money from Claimants;
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- there was a risk that KaR-Tel had entered into transactions that were not in its
interest as a result of having been managed by Telecom Invest.
6. The actions of the Working Group
404. On June 9, 2003, Claimants were informed of the constitution of a Working Group in
charge of the examination of the termination of the Investment Contract. It was tasked
with seeing if there existed any grounds on which the Investment Committee could have
terminated the Contract. According to Professor Sergeev, this expansion of the scope of
its review was illegal: “the Working Group should have cancelled the order of
termination of the Contract. The question of compliance by the Investor with the terms of
the Contract and existence of grounds for its termination should have been determined by
the Committee in compliance with procedures established by the Contract.”
405. Claimants allege that several circumstances resulted in the de facto exclusion by
Respondent of Claimants from the meetings of this Group, preventing Claimants from
defending their position:
- they were only verbally invited to a meeting just two days before this meeting;
- the meeting was not to take place at a neutral place but at KaR-Tel’s offices
which were under the control of Telecom Invest;
- rumors circulated that Respondent had initiated wholly unfounded criminal
proceedings against Claimants executives on July 1, 2003 - i.e., the very same day
that it extended an informal invitation to attend the meeting.
406. With respect to these criminal charges, Claimants allege that:
- contrary to Respondent’s assertions, Mr. Ozonerk did not admit that the charges
were founded. He merely stated that the amounts at issue consisted of “working
advance payments” and had been approved by Rumeli’s management;
- the investigation related to mere cash advances totaling less than USD 200,000,
which are customary in emerging countries in a major business operation;
106
- the fact that the charges were also brought against Ms. Kaden, a Kazakhstan
national, only serves to support Claimants’ argument that the charges were
brought only against Turkish executives and for an ulterior purpose. Indeed, Ms.
Kaden was the assistant of KaR-Tel’s General Manager. The police thus wanted
to hold someone close to Claimants accountable in the event it would not be able
to sanction the Turkish nationals;
- the farcical nature of these criminal proceedings is obvious: Mr. Agilönü was
charged with “grand theft” on the basis that he was in arrears for 74,435 Tenge in
petty cash used for business expenses (approximately USD 580). The potential
sanctions for such charges, however, were very real. As acknowledged by
Respondent’s expert on Kazakh Criminal Law, the penalty for such charges could
“go up to 12 years in prison.”
407. The Working Group then validated the termination of the Contract, but it did it on
entirely different grounds than those forming the basis for the initial decision. Moreover,
it relied on the fact that KaR-Tel had not challenged the termination, which is ludicrous
given the fact that Respondent had placed KaR-Tel under the control of Telecom Invest,
which had no interest to challenge the termination.
408. Claimants further allege that Respondent’s attempt to validate the investigation of the
Working Group by asserting that it ultimately found that KaR-Tel had not complied with
its investment obligations is hopeless. Indeed, nowhere in the Investment Contract was it
required that KaR-Tel invest specific amounts on a yearly basis. The Contract only sets
forth a lump sum objective as investment obligation over ten years.
409. According to Mr. Sabirov, Chairman of the Working Group, a primary ground for the
termination of the Investment Contract was that KaR-Tel did not comply with the
timetable set out in the Working Program and had failed to make the required amount of
investments. Yet, the Investment Contract provides no timetable for making monetary
investments. When asked how the Working Committee found that Claimants had not
been making the requisite investments, Mr. Sabirov had no answer. When the Tribunal
107
questioned whether a timing requirement for investments under the Investment Contract
was imposed by article 278 of the Civil Code - on equal allocation of obligations over
time - Mr. Sabirov again had no answer. On the contrary, Professor Sergeev addressed
this question and established that article 278 would apply only where nothing is
stipulated by the Contract. Since the Contract attached a Working Program setting out
dates by which certain actions (rather than investments of amounts) had to be taken,
Professor Sergeev concluded that the requirement of article 278 did not apply.
410. In any event, irrespective of whether there may have been legitimate grounds for the
revocation of the Contract, the whole approach leading to its termination and the
confirmation thereof by the Working Group lacked in transparency and in due process.
411. Claimants finally allege that if the unlawful termination of the Investment Contract had
presumably caused enough damage to KaR-Tel to justify the compulsory redemption of
Claimants’ shareholding, it is surprising, to say the least, that Telecom Invest (through
KaR-Tel) did not seek to challenge the termination or to reinstate the Contract.
7. The actions of Respondent’s Judiciary
412. According to Claimants, Respondent’s Courts then continued to further the goals of the
local partner’s shareholders by rendering decisions in contravention of Kazakhstan law.
They culminated in a decision of the Supreme Court of October 30, 2003 which set the
value of the shares to approximately USD 2,281 for Rumeli’s 45% stake and to
USD 760.43 for Telsim’s 15% stake, granting Telecom Invest (with only 40% interest in
KaR-Tel) the necessary official judicial blessing to acquire Claimants’ 60% interest at
virtually no cost.
413. According to Claimants, the decisions of Respondent’s Judiciary were so grossly unjust
that no competent judge could have reasonably issued such decisions. This clearly
demonstrates the collusion between the Kazakh Courts and the individuals controlling
Telecom Invest.
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414. According to Claimants, the first outrageous misapplication of Kazakh law lies in the
Courts’ decision that the April 2002 resolutions of the Extraordinary General Meeting
were valid, whereas they were prima facie invalid.
415. Claimants submit that Respondent’s Judiciary misapplied the law in collusion with the
local partner through the delivery of the April 23, 2002 ex parte injunction.
416. According to Claimants, the next legal concept grossly misapplied by Respondent’s
Judiciary relates to the appreciation of the facts that allegedly gave rise to Telecom
Invest’s right to buy out Claimants’ shareholding. Indeed, the LLP Law allows the
forceful buy out of a participant only if such participant caused significant harm to the
partnership.
417. At the April 15, 2002 meeting, Telecom Invest discussed the potential harm that KaR-Tel
might suffer. At that time, no real harm existed. Respondent’s Judiciary ignored that
rule, concluding that there was a future loss.
418. The law also requires that there exist a causal link between the action or inaction of a
participant and the harm. The Courts ignored this requirement. Indeed:
- such link was not established since Claimants were neither a party to the
Investment Contract nor responsible for its termination, which resulted from KaRTel’s
alleged failure to file reports with the Investment Committee;
- rather, it is the local partner that failed to comply with its contractual obligations
in this respect. Pursuant to article 4.3 of the Foundation Agreement,
Investel/Telecom Invest – and not Claimants – assumed the obligation to assure
the relations with the Investment Committee;
- in any event, the local partner had equal access to all of KaR-Tel’s financial
information so that it cannot be said that Claimants were solely responsible for the
wrongful termination of the Investment Contract.
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419. The LLP and the Civil Code also require that all of the reasons to buy out a participant be
discussed at the General Meeting and does not allow the partnership to raise new reasons
during subsequent Court hearings. Indeed, it is the partnership, and not its participants,
that may bring a claim to forcefully buy out a participant. Therefore, the partnership’s
claim before the Courts must be based on a decision taken by the General Meeting. If the
partnership advances arguments that were not discussed, such arguments are ultra vires
and may not be reviewed and accepted by the competent Court. However, this clear
principle was ignored. The Courts based their decisions on the alleged lack of investment
by Claimants and the alleged overpricing of the equipment they supplied, neither of
which were the basis for the resolution purportedly adopted by the General Meeting.
420. According to Claimants, those outrageous violations of Kazakh law culminated in Judge
Begaliev’s decision dated June 6, 2003 ruling on Telecom Invest’s claim for expulsion of
Claimants from KaR-Tel and on the compulsory redemption of their shares.
421. In this respect, Claimants point out, inter alia, that, in his decision, and in total
contradiction with the documentary evidence, Judge Begaliev wrongfully concluded that
the termination of the Investment Contract was the result of Claimants’ non-performance
of their purported obligation to secure investments for KaR-Tel.
422. Judge Begaliev’s decision rejected Claimants’ counterclaim challenging the validity of
the April 11 and April 15 resolutions despite their glaring deficiencies. In this respect,
Claimants underline that it was not until this decision by Judge Begaliev on June 6, 2003,
i.e. more than one year after the April 23, 2002 injunction was first issued, that there was
mention in the Court’s decisions of the idea that the April 15 meeting was held as a
“follow-on” meeting arising from the lack of presence of a quorum at the April 11
meeting.
423. Similarly, Judge Begaliev’s decision that a secretive EGM called by minority
shareholders, calling for the compulsory redemption of Claimants’ majority stake, was
valid, was manifestly wrong as a matter of law.
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424. Claimants further stress as an example of the behavior of Judge Begaliev, his approach to
expert evidence, such as the legal opinion of Professor Suleimenov and others, which
were rejected on the basis that “the indicated individuals do not possess the right to
interpret the law.”
425. According to Claimants, the above mentioned defects in the Court’s decision are so
glaring that they can only be the result of bias, corruption and/or bad faith on the part of
Judge Begaliev. In this respect, Claimants submit the testimony of Mr. Agilönü, who
testified that Judge Begaliev had requested from him EUR 400,000 to rule in Claimants’
favor, but then had informed Mr. Agilönü that “he had received instructions from the
highest authorities to rule against us, and that ruling in [Claimants] favor would
jeopardize his and his family’s life.” Judge Begaliev denied that allegation in his
testimony. However, he had a clear personal interest in such denial, as he could be
imprisoned or lose his job if he admitted this discussion, whereas Mr. Agilönü had no
such personal interest.
426. Claimants finally submit that the decision of the Presidium of the Supreme Court
constituted the final step in the State-sponsored scheme to expropriate their investment in
KaR-Tel. Indeed:
- they were not given notice of the Presidium hearing and were thereby prevented
from making any submissions as to the valuation of their shareholdings in KaR-
Tel;
- the Presidium acted ultra vires even in considering the appeal since Telecom
Invest did not request in its claim or in any of the Court proceedings prior to the
June 6, 2003 decision of the Almaty City Court, that the Court decide on the
valuation of Claimants’ shares;
- the Presidium’s valuation of their shareholdings in KaR-Tel was “unjust and
outrageous,” particularly in light of the true value of the entire KaR-Tel company,
as evidenced by its resale price of USD 350 million. Moreover, the Court grossly
111
misapplied Kazakh law establishing a price by reference to the concept of “equity
interest” and not by taking into account “market price;”
- finally, Claimants allege that the conclusion of forensic experts that Claimants
made no investment is so grossly incorrect that no reasonable judge should have
accepted it.
8. The attempts to pay Claimants to go away
427. According to Claimants, several attempts were made by Respondent and/or various
members of President Nazarbayev’s empire to pay Claimants to go away.
428. KaR-Tel was first to offer to purchase Claimants’ combined 60% for approximately
USD 3,000 only. Claimants obviously refused.
429. Then, in April 2003, Mr. Seysembayev offered to purchase Claimants’ stake for USD 12
to 15 million. In the context of these discussions, he informed Claimants of the criminal
charges that had been raised against their personnel. Claimants refused the offer which
they considered too low.
430. In August 2004, as Claimants were preparing to commence the present arbitration, they
were contacted by the President of Altel, Mr. Zhanarbek Umirzhanov, to discuss the
purchase of Claimants’ 60% interest and the resolution of the difficulties faced by
Claimants in Kazakhstan. According to Claimants, Altel is ultimately owned and
controlled by the Republic. In this context, Claimants also met Mr. Kairat Orazbekov,
the Vice Chairman of Arlan (also referred to as Orlon by Respondent) Holding Company,
a company which was controlled by one of the daughters of President Nazarbayev.
Mr. Orazbekov stated that the Arlan/Altel Group was willing to purchase Claimants’ 60%
interest in KaR-Tel for USD 20 million.
431. According to Claimants, Respondent’s offer to purchase Claimants’ shares at USD 20
million is an admission that Respondent violated its international obligations. Indeed, by
making such an offer, Respondent implicitly recognized that the decisions of its Courts
would not stand international scrutiny and that Claimants still held a combined
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shareholding interest with significant value. Indeed, in light of the fact that KaR-Tel’s
charter had already been amended to remove Claimants as shareholders by early
November 2003, such a proposal from Respondent nearly a year later can only be viewed
as an admission of liability.
9. The sale of KaR-Tel to VimpelCom
432. On August 27, 2004, just three days after Claimants had answered negatively to the
USD 20 million proposal to purchase their stake, they learned that VimpelCom had
purchased 100% of KaR-Tel for USD 350 million.
433. In this respect, Claimants further point out that:
- in its Annual Report for the year ended December 31, 2004, VimpelCom seemed
to attach great importance to having a local partner with “local knowledge” in
connection with its investment in KaR-Tel;
- VimpelCom noted that it had “heard assertions regarding possible questionable
payments to government authorities in connection with certain legal proceedings
in which KaR-Tel was involved prior to our acquisition.”
434. Claimants submit that the USD 350 million price is in marked contrast with the Supreme
Court’s valuation of Claimants’ 60% stake at USD 3,000, less than a year before. In this
respect, Claimants dispute the arguments set forth by Respondent to support the idea of a
subsequent improvement of KaR-Tel’s situation that would have justified a much higher
valuation of the company:
- Claimants dispute Respondent’s allegation that Mr. Yerimbetov entered into
negotiations with Motorola and was able to reduce KaR-Tel’s debts by USD 72
million. Respondent produces no documents to support this statement;
- Claimants also dispute Respondent’s allegation that the reasons why
Mr. Yerimbetov was able to negotiate a reduction of the amount to be repaid to
Motorola were that the 3-year limitation period for bringing a claim was to expire
and Mr. Yerimbetov understood that Motorola had already written off KaR-Tel’s
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debt from its accounts. According to Claimants, the statute of limitations stops
and runs anew if a creditor files a claim, and the writing-off of a debt in one’s
books cannot constitute a waiver of its rights. Therefore, these reasons cannot
explain the purported reduction of the debt towards Motorola.
435. Claimants further point out that, as explained by Andrew Wright from Analysys, an
expert in the telecom business with nearly 20 years of experience, “it is inconceivable to
me that a company could go from zero value to an enterprise value of USD 450 million in
around about two years. It was never zero in the first place.”
436. In the same vein, Claimants make several comments on the argument raised by
Respondent that the USD 3,000 valuation of KaR-Tel by the Kazakh Courts was based
on the reports of independent experts and in particular PWC:
- those reports simply took information and assumptions presented by KaR-Tel’s
new management;
- in its report, PWC cautioned that “it did not verify the credibility” of the
information provided and that “a more detailed analysis is required to express an
opinion on the price”;
- it is clear from the PWC report that there were issues with the management
assumptions provided to PWC;
- PWC indicated in its report that it could not “make any guarantees or warranties
(direct or indirect) with respect to the accuracy, fullness or admissibility of this
report for any purposes.”
10. General observations on the hearing and on circumstantial
evidence
a) Observations on the hearing
437. Claimants make three general remarks on the developments that occurred at the hearing.
First, Respondent continued its pattern of obstruction of justice by refusing to produce as
a witness Mr. Kulibayev, despite the Arbitral Tribunal’s order dated September 24, 2007.
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Mr. Kulibayev and his wife, the daughter of President of Kazakhstan, owned a
controlling stake in Claimants’ local partner. He has exercised a variety of key, highlevel
State functions and is one of the leaders of a group of individuals that exercises
significant control and/or influence over the organs of the Republic of Kazakhstan.
According to Claimants, had Mr. Kulibayev come to the hearing, he:
- could have explained the precise role he played in the local partner’s decision of
mid-2001 to dissociate itself from Claimants;
- could have answered Claimants’ allegations of collusion with the Investment
Committee;
- could have explained why the Investment Committee, under Ambassador
Zverkov’s leadership, abruptly terminated KaR-Tel’s Investment Contract;
- could have explained why he did not satisfy his and his subordinates’ lobbying
obligations or good faith obligations as shareholders and partners to provide
assistance;
- could have explained how and why Visor Investment Solutions, a company that
he had tasked with getting rid of Claimants, promised Claimants in October 2002
to “cancel” the termination of the Investment Contract in order to facilitate the
sale of his company’s minority shares in KaR-Tel to Claimants; and
- could have explained whether the Republic of Kazakhstan ever contacted him to
provide testimony.
438. Second, Respondent did everything possible to avoid producing Mr. Orazbekov for
examination at the hearing. On September 24, 2007, the Arbitral Tribunal ordered
Respondent to produce Mr. Orazbekov as witness. Respondent did not comply, but,
instead, sent on October 5, 2007, a letter providing the Tribunal with an address of
Mr. Orazbekov. On October 10, 2007, the Tribunal wrote to Mr. Orazbekov asking him
to be present to give witness testimony. On October 12, 2007, Respondent produced a
very short letter from Mr. Orazbekov denying that he had ever discussed with anyone the
matter of purchasing Claimants’ stake in KaR-Tel and stating that he would not appear to
testify. Yet, Respondent suddenly shifted its position, after Claimants’ counsel protested
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against this obstruction of justice, indicated the questions that he would have put to Mr.
Orazbekov, and requested that adverse inferences be drawn from his absence.
439. Respondent then wrote a letter on October 22, 2007 stating that it had “obtained a
business address for him” (which made no sense as Mr. Orazbekov’s address had already
been provided) and that he would be available for cross-examination. At the hearing,
Mr. Orazbekov conceded that he had never been informed of these ICSID proceedings
prior to October 12, 2007. However, Respondent has denied, since the time of its
Counter-Memorial dated December 14, 2006 that any offers had been made to purchase
Claimants’ shares in August 2004. According to Claimants, it is simply unacceptable for
Respondent to have strongly denied such important facts without having contacted Mr.
Orazbekov beforehand.
440. Third, it is Claimants’ position that Respondent’s witnesses lied at the hearing:
- for instance, nearly all of Respondent’s witnesses and experts, including those
that did not have any direct knowledge of the facts alleged, included in their
statements the magic words – (Motorola) “loan,” (Uzan) “fraud,” “obsolete
equipment” and “amount supposed to be invested” in a clear attempt to bias the
Tribunal against Claimants and to find belated justifications for the wrongful
termination of the Investment Contract;
- Ambassador Zverkov refused at the hearing to even confirm what he said in his
own letter, namely that the Investment Committee granted an extension to file the
requested reports, at the very least until March 23, 2002. He also engaged in
conflicting justifications when confronted with the fact that March 23, 2002, the
day he claimed the Investment Committee members were waiting at the
Investment Committee to receive Claimants’ reports, was a Saturday, and that the
previous day was Norouz, a public holiday;
- Mr. Orazbekov admitted that Mr. Akgün and Mr. Salih Oktar, representatives of
Claimants, were invited by the State company Altel to attend a meeting with him
on March 24, 2004. Yet, Mr. Orazbekov claimed that these two gentlemen were
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not invited to be extended any offer for the settlement of their KaR-Tel claims,
but rather to discuss further business opportunities in Kazakstan. According to
Claimants, this is unconvincing: Mr. Orazbekov failed to describe, even in any
general fashion, much less to provide any specifics, the alleged business
opportunities the parties discussed at the meeting he attended. In any case, these
companies were undergoing crises in Turkey and had had their investment
expropriated in Kazakhstan. Therefore, the likelihood is slim that they would
have attended a meeting to discuss further business opportunities in Kazakhstan.
441. Claimants request that the Arbitral Tribunal draw adverse inferences as a result of these
multiple obstructions of justice, misrepresentations and improper conduct.
b) Circumstantial evidence
442. The Arbitral Tribunal asked Claimants to explain the weight that the Tribunal should give
to circumstantial evidence. In this connection, Claimants note that they rely primarily on
Respondent’s admissions in this arbitration and on the direct evidence that has been
produced to demonstrate Respondent’s breaches of the Bilateral Investment Treaty.
Some circumstantial evidence has also been advanced, however, particularly with regard
to the collusion between the powerful local partner and organs of Respondent. Claimants
request that the Arbitral Tribunal give full weight to the circumstantial evidence that has
been presented for the following reasons.
443. Article 34(1) of the ICSID Arbitration Rules provides that the Arbitral “Tribunal shall be
the judge of the admissibility of any evidence adduced and of its probative value.”
Therefore, the Tribunal is not bound by any legal system of procedure. It is free to
determine the probative value of any evidence that has been produced, be it
circumstantial or otherwise.
444. In general, international tribunals have given full weight to circumstantial evidence. Two
independent factors are considered by Arbitral Tribunals when assessing the weight that
should be given to such evidence:
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- the first factor is the party’s attitude in the proceedings. If a party, as was the case
with Respondent, does not comply with its obligations, for instance by refusing to
produce the requested documents and witnesses, the Arbitral Tribunal is
authorized to draw adverse conclusions from the party’s behavior. The same
applies when witnesses manifestly lack independence, as was the case with those
produced by Respondent;
- the second factor is whether direct evidence of fact is unavailable. In this respect,
the International Court of Justice decided in the Corfu Channel case that “[T]he
other State [the claimant], the victim of a breach of international law, is often
unable to furnish direct proof of facts giving rise to responsibility. Such a State
should be allowed a more liberal recourse to inferences of facts and
circumstantial evidence. This indirect evidence is admitted in all systems of law,
and its use is recognized by international decisions.”28
In AAPL v. Sri Lanka, an
ICSID Arbitral Tribunal listed the international rules regarding evidence and
concluded: “Finally, in cases where proof of a fact presents extreme difficulty, a
tribunal may thus be satisfied with less conclusive proof, i.e. prima facie
evidence.”29
445. In this arbitration, Claimants rely on circumstantial evidence primarily to show collusion
between the powerful local partner and the organs of the Republic of Kazakhstan. It is
undisputable that submission of direct evidence on these points is very difficult, and even
more so given that the Republic of Kazakhstan is a party to this dispute and has in
general not been cooperative in the fact finding procedure.
446. Furthermore, in some circumstances, the endemic nature of a fact alleged in certain
countries has been considered to be circumstantial evidence of the facts alleged. For
instance, in ICC arbitration No. 3916, the widespread nature of corruption in Iran was
28
Corfu Channel (United Kingdom of Great Britain and Northern Ireland v. Albania), Judgment of April
9, 1949, [1949] ICJ Report Rep. 4, para. 18 [hereinafter Corfu Channel v.Albania].
29
Asian Agricultural Products Ltd. v. Republic of Sri Lanka (ICSID Case No. ARB/87/3), Final Award
of June 27, 1990, (1991) 30 ILM 580, paras. 37-45 [hereinafter AAPL v. Sri Lanka].
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considered to be circumstantial evidence for the existence of corrupt practices.30
Similarly, in the case at hand, the international reports and widely published articles
submitted prove the two points on which circumstantial evidence is most relevant,
namely general lack of impartiality of the organs of Respondent and collusion between
powerful groups of the ruling family in Kazakhstan.
447. According to Claimants, there is no doubt that the two independent and alternative factors
described above for the use of circumstantial evidence are present. Additionally,
admissions have been secured and direct evidence submitted on related subjects that
reinforce the circumstantial evidence submitted in support of Claimants’ position on
collusion. Claimants also produced the witness statement of Mr. Agilönü who confirmed
that Respondent’s judiciary was not only corrupt in this matter, but also under the
influence of the powerful local partner against the interest of which it could not possibly
rule.
448. Therefore, Claimants allege that they have satisfied their burden of proof on collusion.
They finally allege that, in the event that the Arbitral Tribunal were to find otherwise,
that would have no impact on Respondent’s liability for breaches of the Bilateral
Investment Treaty since Respondent, independently of the issue of collusion, breached
multiple obligations under the Treaty, as proven by the admissions made by Respondent
and the direct evidence submitted in this arbitration.
B. RESPONDENT’S POSITION
1. The general context
a) Claimants’ investment
449. According to Respondent, there was nothing to expropriate since Claimants did not make
any investment. The highest Claimants are able to put their case is that they granted
KaR-Tel lines of credit or procured for KaR-Tel loans from third parties, and particularly
from Motorola. Respondent alleges that the only capital contribution not in the form of
30
ICC Case No. 3916 (1982), Collection of ICC Arbitral Awards 1974-1985, at 507.
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an interest-bearing loan is Rumeli’s partial contribution towards the charter capital of
KaR-Tel.
450. According to Respondent, it is not clear on what basis Claimants can allege that the loans
made to KaR-Tel constitute the investment they were obliged to make under the
Foundation Agreement and/or the Investment Contract. In any event, they were anything
but interest-free: they were subject to interest at LIBOR +2%.
451. Moreover, it appears that Rumeli deposited a sum in a bank account at Bank TuranAlem
in order to permit KaR-Tel to borrow further funds. Once again, rather than actually
investing in KaR-Tel, Rumeli further indebted the company.
452. It is also Respondent’s allegation that Claimants did not transfer equipment on very
favorable terms to KaR-Tel. On the contrary, they sold obsolete equipment to KaR-Tel at
a significant overvalue, in breach of the requirements of the Invetsment Contract to use
advanced technology.
453. Respondent accepts that Telsim guaranteed the Motorola Loan for KaR-Tel, but this
cannot be termed an investment by Claimants: it simply created further indebtness on
KaR-Tel and was done at a time when Telsim was not a shareholder of KaR-Tel. When
Motorola demanded repayment of the Motorola Loan from Telsim, that demand was not
met in whole or in part.
454. Respondent further submits that there is no evidence of the additional investment of
USD 33 million allegedly made by Claimants between 1999 and 2001 and, indeed, none
was provided to the Kazakh Courts nor found by the independent forensic experts
appointed by the Kazakh Courts or the leading auditors appointed by Telecom Invest or
KaR-Tel during the course of the proceedings in 2002 and 2003.
455. Finally, Respondent submits that the quality of the support know-how and training
provided by Claimants was not very good and that in the opinion of several leading
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auditors KaR-Tel was insolvent and unable to continue trading without significant
restructuring.
b) The Republic of Kazakhstan and the involvement of
President Nazarbayev’s family
456. According to Respondent, despite the repeated references to collusion and conspiracy and
acting in concert, Claimants do not provide any evidence of even a suspicion of collusion
or conspiracy.
457. Respondent further submits that no attempt is made by Claimants to link its generalized
allegations of corruption and dishonesty to the matters in dispute in this arbitration. For
instance, it is unclear which members of the President Nazarbayev’s family or “empire”
are said to have played a purported “active role.” The best Claimants are able to allege is
that two of the persons they mention, Mr. Kulibayev and his wife, might be participants
of a Limited Partnership called Almex that was itself a shareholder of Investel/Telecom
Invest, which were themselves participants in KaR-Tel.
458. Contrary to Claimants’ allegations, Mr. Kulibayev had no role whatsoever in the
negotiations with the Investment Committee and was at no time a director of Investel or
Telecom Invest.
459. On that extraordinarily tenuous basis, Claimants seek to allege that the Republic bears
responsibility for the dispute that arose between three private entities. However, there is
no basis on which a State can bear legal responsibility for the actions of its President’s
son-in-law.
460. Claimants are alleging that the conspiracy was between all of:
- Mr. Kulibayev, Mrs. Kulibayeva, Mr. Abuov and President Nazarbayev;
- numerous members of the Investment Committee;
- two judges of the Almaty Court;
- numerous Court bailiffs;
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- numerous members of the criminal prosecution office;
- all the members of the Working Group;
- Deloitte & Touche, PricewaterhouseCoopers and the other experts who produced
reports before the Kazakh Courts;
- three judges of the Supreme Court of Kazakhstan;
- nine judges of the Presidium of the Supreme Court of Kazakhstan.
461. According to Respondent, when viewed in that context alone, Claimants’ allegations
seem extraordinary. When one realizes that these allegations are unsupported by
evidence, Claimants’ case becomes offensive.
462. In particular, Claimants’ allegation that Respondent’s Judiciary acted improperly because
it was corrupted is wholly unparticularised. Moreover, Claimants fail to mention that
they filed appeals that resulted in first instance decisions being reversed.
463. According to Respondent, Claimants’ case theory was always flawed by one
incontrovertible fact. After January 2003, Mr. Kulibayev, Mr. Abuov and Mr.
Karijbanov had no role or interest in Telecom Invest or KaR-Tel. They had sold Telecom
Invest to Mr. Seysembayev. Therefore, any tenuous connection that might have existed
with Respondent prior to that sale extinguished six months before the first judgment in
the legal proceedings.
2. The termination of the Investment Contract
464. Respondent points out that clause 13 of the Investment Contract required KaR-Tel to
provide the Investment Committee with detailed information on the progress of the
investment programme on a quarterly and annual basis. This was to allow the
Committee, which does not have the power to carry out inspections or audits, to monitor
KaR-Tel’s compliance with the terms of the Investment Contract. In the period when it
was under the control of Claimants, KaR-Tel conspicuously failed to comply with these
obligations:
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- no annual reports were filed at all during the entire period of the Investment
Contract. Only one report was submitted, after the Investment Contract had been
terminated and it related to the year 2000;
- the deadlines for filing the quarterly reports were repeatedly missed. By way of
example, the reports for the first and second quarters of 2000 were filed together
at the end of August 2000 and the report for the third quarter of 2000 was not
filed until November 2000. The reports for the third and fourth quarters of 2001
were not filed until after the Investment Contract had been terminated.
465. According to Respondent, it subsequently became clear why KaR-Tel had failed to file
any annual reports: the reports had to be certified by an auditor and Mr. Agilönü could
not find an auditor who would certify them. For example, in July 2002, Deloitte &
Touche provided KaR-Tel with the results of an audit in the course of which they had
discovered material discrepancies between the information recorded on the partnership’s
balance sheet and its actual financial status. It is obvious that the reason why Claimants
did not file reports was to prevent the Committee from seeing that in reality KaR-Tel was
insolvent and heavily in default on the Motorola Loan.
466. The official notice dated September 10, 2001 sent by the Investment Committee set a
deadline of November 1, 2001 for KaR-Tel to cure its breaches. KaR-Tel did not comply
with this notice and asked for several extensions, which were granted. In any case, KaRTel
failed to file either of the requested annual reports or any other information at all.
The Committee then sent a letter dated February 21, 2002. There followed a meeting
between Claimants’ executives and members of the Investment Committee. These later
accepted that if the reports were filed within 30 days, it would be possible to stop the
cancellation of the Investment Contract. The formal order of cancellation was sent on
March 27, 2002. Given the multiple breaches of the Investment Contract in terms of
reporting, the Investment Committee clearly had the right to terminate the Contract.
467. According to Respondent, Mr. Agilönü’s evidence on the cancellation of the Investment
Contract was limited in scope and unreliable. The most incredible part of his evidence on
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this issue turned on the new allegations he made at the hearing that the filing of the
reports had always been the responsibility of Investel/Telecom and more specifically of
Mr. Podporin. This, the latter denied. And, upon closer examination, Mr. Agilönü’s new
allegations disintegrated. He was asked how Mr. Podporin, who was only the logistics
manager, could prepare the detailed financial reports required. Mr.Agilönü’s response
was telling. He replied that his team was responsible for preparing the reports, which
Mr. Podporin was then responsible for filing. However, in view of the fact that
Mr. Agilönü accepted that the 1999 and 2001 annual reports for KaR-Tel had never been
prepared, it is difficult to see what blame could possibly attach to Mr. Podporin, even if
Mr. Agilönü were correct. It is also to note that Mr. Agilönü’s acceptance of the failure
to file the reports for 1999 to 2000 is contrary to Claimants’ position as set out in their
Memorials.
468. Mr. Agilönü went even further in his evidence and stated that in September 2001, on
receipt of the Investment Committee’s warning letter, he had specifically asked
Mr. Podporin to resolve the problem. This is clearly a further lie. Mr. Podporin denied
this alleged conversation. Further, this allegation, together with Mr. Agilönü’s admission
that he spoke to Mr. Abuov in January 2002, contradicts the statement in Mr. Agilönü’s
witness statement that Mr. Abuov and Mr. Podporin disappeared after the letter of 10
September 2001 was received. In the same vein, Mr. Agilönü confirmed that he had not
attempted to contact Mr. Kulibayev at any stage in relation to the problem KaR-Tel was
facing with the Investment Committee, which contradicts Claimants’ allegation that they
knew that Mr. Kulibayev was a man of great influence in Kazakhstan.
469. According to Respondent, Claimants admitted that several extensions of time have been
given to file the reports. And, in any case, no reports for 1999 or 2001 were ever filed.
Therefore, even if the 2000 report was filed on time – which it was not – KaR-Tel would
still have been in significant breach of its reporting obligations.
470. With respect to the timing, Mr. Agilönü’s evidence was that he filed the 2000 annual
report with the Investment Committee by facsimile on March 25, 2002. This conflicts
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with Claimants’ case in their Request for Arbitration which states that on March 25,
2002, they filed two quarterly reports and only on March 31, 2002 did they file the
remaining documents. In any event, this was after the deadline of March 23, 2002, which
was the end of the 30-day notice period granted by the letter of termination dated
February 21, 2002.
471. On the allegation of collusion that would have led to the cancellation of the Investment
Contract, Respondent points out that Ambassador Zverkov, Chairman of the Investment
Committee, denies having been under any pressure to cancel the Contract. With respect
to Mr. Abuov, who was accused of having failed to assist KaR-Tel when it needed him,
he answered that he had never been asked to assist and that whenever he had given his
advice to Claimants and their appointees, it had been routinely ignored.
472. Mr. Abuov further testified that it was nonsensical for Telecom Invest to cause the
cancellation of the Investment Contract as it would have caused significant harm to KaRTel
and thus to Telecom Invet’s investment. In any case, Almex sold Telecom Invest in
January 2003 and thereafter had nothing to do with it.
473. Respondent further submits that Claimants’ complaint of unfair procedure, i.e., that the
Investment Committee cancelled the Investment Contract on a statutory basis rather than
on the contractual basis of clause 19, which would have required a prior suspension of the
Contract, is unfounded.
474. Indeed, article 13 of the Investment Support Law gives the Investment Committee the
right to cancel the Investment Contract without prior suspension. The evidence given by
Mr. Sabirov, who was himself Chairman of the Investment Committee after
Amabassador Zverkov, shows that during his tenure on the Committee, the Committee
cancelled 30 to 40 investment contracts without prior suspension. Around a quarter of
those cancellations were based on the investor’s failure to file their reports.
475. Moreover, as confirmed by Professor Kaudyrov, article 13 of the Investment Support
Law is mandatory. Consequently, the Investment Contract could not deviate from, or
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condition, its application. Therefore, Claimants could not have had a “legitimate
expectation” that suspension was a prerequisite.
476. In any event, Respondent alleges that Claimants’ failure to challenge the cancellation of
the Investment Contract debars them from bringing a claim that Respondent has denied
them justice or fair and equitable treatment.
477. Respondent further alleges that:
- although the Investment Committee did not cancel the Investment Contract on the
basis of clause 19 thereof, and did not formally suspend the Contract, it could
have been validly cancelled pursuant to clause 19.3 on February 21 in any event.
Indeed, the notice sent on September 10, 2001 constituted a suspension of the
Contract in accordance with the spirit of clause 19. If that notice alone did not
constitute a suspension, the repeated further extensions of time granted did. The
only difference from the strict position under clause 19.2 is that the Investment
Committee refrained from formally suspending the Investment Contract, as that
would have obliged KaR-Tel to make ordinary payments of tax until the
suspension was lifted: it therefore benefited KaR-Tel;
- the May 14, 2003 letters invoked by Claimants in support of their position have
been written by junior administrators in Respondent’s Ministry of Finance and
Ministry of Economy. They are not based on a review of the events. They take
as given the incorrect assertions made by Claimants in their April 2003 letters that
they had fully complied with all of their reporting obligations. Moreover,
Respondent points out that it is difficult to see how these letters match with
Claimants’ case theory of collusion;
- the cancellation was not abrupt since KaR-Tel had been granted 6 months of
extensions from the initial demand to file the reports;
- Exhibit RM32 constitutes another example of a telecommunications company
whose investment contract was terminated according to the same procedure;
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- had the Investment Committee been presented at the time with the information it
ought to have received from KaR-Tel, it would have been entitled to cancel the
Investment Contract and would have done so for breach of KaR-Tel’s obligations
to make direct investments under clause 3.
478. Respondent finally points out that Claimants did not request KaR-Tel to challenge the
termination of the Investment Contract.
3. On the purported collusion between Telecom Invest and
Respondent to effect the compulsory sale of Claimants’ interest
in KaR-Tel
a) The KaR-Tel EGMs
479. According to Respondent, it is incorrect to allege, as Claimants do, that the April 2002
EGMs were invalidly held.
480. First, contrary to Claimants’ allegation, they received notice of the EGMs. The default
rule of Kazakh law is that extraordinary general meetings of LLPs are to be convened by
the central executive body of an LLP, in the case of KaR-Tel the General Manager.
However, article 45(2) also provides that if, despite a request, the executive body does
not call an EGM, any shareholder with at least 10% of the equity may also do it.
481. By letters dated March 4 and March 20, 2002, Telecom Invest’s Mr. Podporin requested
KaR-Tel’s General Manager to call an EGM as soon as possible to discuss the
cancellation of the Investment Contract. Mr. Agilönü ignored these requests. He denied
having received these letters. However, evidence from the Kazakh postal service and
from two of KaR-Tel’s secretaries proved this statement to be false. Therefore, on March
26, 2002, in view of Mr. Agilönü’s failure to respond, Mr. Podporin sent to Rumeli and
Telsim formal notices calling an EGM of KaR-Tel.
482. According to Respondent, the Turkish postal service confirmed that the EGM notices
were delivered and signed for by named individuals at Rumeli and Telsim. Therefore,
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unless Claimants also implicate the Turkish postal service in the alleged conspiracy to
expropriate their investment, they cannot challenge this evidence.
483. Respondent further submits that contrary to Claimants’ allegation, article 46 of the LLP
Law does not state that it is not possible to provide notice of two EGMs in a single
document. On the contrary:
- the Office of the Public Prosecutor stated that it was for the Court to decide;
- the Supreme Court, having heard the evidence of Professor Suleimenov for
Claimants, rejected the view that it was impermissible to have notice for two
EGMs in one document;
- the Civil Expert Report of Respondent concludes that the Court was correct;
- Professor Sergeev, Claimants’ expert, accepted that this issue was not clear cut in
Kazakh law.
484. It is also Respondent’s allegation, supported by their legal experts, that pursuant to article
176 of the Kazakh Civil Code, notices sent by post before midnight on the last day of a
period set by law are deemed to be made on time. In any case, this issue was not raised
by Claimants before the Kazakh Courts. They cannot therefore be criticized for not
having decided an issue that they were not submitted. Moreover, in these circumstances,
it is not open to the Tribunal to find that the decision of the Almaty City Court was so
egregiously wrong that no competent and honest judge could have determined the issues
in that way
485. With respect to the issue of quorum, Respondent sets forth that, pursuant to article 47(5)
of the LLP Law, an adjourned or reconvened EGM is quorate irrespective of the number
of voting rights present. This is confirmed by their Civil Expert Report and even by
Professor Didenko, Claimants’ expert before the Kazakh Courts, who indeed changed his
views in an article subsequent to his testimony.
486. Article 47(5) of the LLP Law provides that where fewer than half of the total votes are
present at a reconvened EGM, it is not competent to adopt resolutions requiring a
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qualified majority. Claimants allege that the decision on compulsory redemption is one
requiring qualified majority voting and, thus, that as Telecom Invest held only 40% of the
total votes, it could not legally adopt a decision on compulsory redemption at the April
15, 2002 EGM.
487. Article 48(2) of the LLP Law provides that a motion for the compulsory redemption of a
participant’s shareholding in a LLP requires: “a qualified majority of three fourth of votes
of the partnership present and represented at the meeting. When adopting a decision
under sub-paragraph (9) of paragraph 2 of article 43 of this Law the participant whose
participating interest is to be purchased into a forced procedure shall not take part in
voting and the number of votes he has shall not be considered.”
488. The Almaty City Court dismissed Claimants’ contention holding that article 48(2) is clear
that it is only the votes present or represented at the meeting that count for the purpose of
assessing whether or not the 75% threshold has been achieved. The Court added that the
final part of article 48(2) made the position even more clear: had Claimants been present
at the meeting on April 15, 2002, they would not have been entitled to vote on the
question of compulsory redemption, and Telecom Invest would still have held 100% of
the votes eligible to be exercised in passing that resolution.
489. Professors Kaudyrov’s and Klimkin’s expert evidence, which was unchallenged, was that
there is an ambiguity between article 47(5) and article 48(2): the former refers to
“qualified majority of vote” and the latter to “a qualified majority of three quarters of the
votes present and represented at the meeting.” Respondent’s experts opined that, faced
with such ambiguity, the better approach is to adopt the narrower standard of article
48(2), which is also more directly relevant to the issue to be determined. In their view,
the Almaty City Court’s determination of this issue was correct. Moreover, one of
Claimants’ expert witnesses in the Kazakh proceedings, Professor Didenko, has
subsequently revised his view and now considers that the Kazakh Courts determined this
issue correctly.
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490. In this framework, Respondent alleges that, pursuant to article 48(2) of the LLP Law,
even if Claimants had been present at the meeting on April 15, 2002, they would not have
been entitled to vote on the issue of compulsory redemption, and thus Telecom Invest
would still have held 100% of the votes eligible to be exercised in passing that resolution.
In this context, the Almaty City Court rightly held that Claimants were to be treated as a
single entity in view of their mutual ownership and behavior. Professor Didenko
confirmed this point of view.
491. With respect to the certification of the quorum, Claimants allege that article 47(9) of the
LLP Law requires that the quorum be certified anew immediately prior to the vote.
However, according to Respondent, whether or not it was done is irrelevant since there
was only one shareholder present.
492. With respect to the minutes of the EGM, Respondent further points out that Claimants,
which initially argued that the minutes of the meeting did not record the evidence which
had been presented relating to the significant damage suffered by KaR-Tel, now appear to
accept that the harm suffered by KaR-Tel as a result of the cancellation of the Investment
Contract was discussed at the EGM.
493. Respondent finally submits that, as confirmed by its Procedural Expert Report, and now
also by Professor Didenko, the LLP Law contains no formal limits on the size of the
shareholding which may be the subject of an order for compulsory redemption. In any
case, even if it were otherwise, this limit would have been inapplicable in the present case
since there was no majority shareholder, unless Claimants’ shareholdings are taken
together, which they dispute in relation to the voting on compulsory redemption.
b) The Injunctive relief proceedings
494. According to Respondent, there were good reasons for Telecom Invest to seek an
injunction in March 2002. Indeed, Claimants had not participated at all in the EGMs,
and, in addition, Telecom Invest had recently discovered falsified minutes of a purported
EGM at which it had been falsely recorded that Telecom Invest had consented to Rumeli
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transferring a further 10% of its shares in KaR-Tel to Telsim. There was a risk that, once
Claimants would have learned of KaR-Tel’s resolution for compulsory redemption of
their shareholding, they might have attempted to disrupt KaR-Tel’s network and destroy
critical documents.
495. Indeed, notwithstanding the injunction, Claimants managed to delete KaR-Tel’s website.
Claimants did not challenge that point. Nor do they dispute Mr. Yerimbetov’s evidence
that Claimants’ representatives attempted to obtain the remote access details for KaRTel’s
switch, which would have permitted them to switch off the entire KaR-Tel network.
Claimants, rather than deny this outright, simply suggested to Mr. Yerimbetov that there
might be other reasons for them to have sought the switch remote access details, but
Mr. Yerimbetov was clear in his recollection.
496. Respondent submits that the application for the injunction was, by necessity, filed ex
parte. Article 158 of the Kazakh Civil Procedure Code provides that Courts may take
steps to secure a claim on a motion by a participant in the relevant case. As explained by
Respondent’s Procedural Expert Report, applications for such injunctions are determined
ex parte. The evidence of Professor Mukhamedshin that this ex parte procedure is
normal and regularly used in Kazakhstan and that the Court acted entirely properly was
unchallenged. Claimants did not adduce any expert evidence on this issue. Nor was
there any challenge to Professor Mukhamedshin’s evidence. The judge must simply
evaluate whether the applicant has submitted a prima facie case that in the absence of an
injunction the Court’s orders may be difficult to enforce. According to Respondent, in
view of the application, the Court’s decision was sensible.
497. Respondent also submits that it is not true to say that the Court ratified the appointment
of Mr. Yerimbetov and prejudged the merits of the pending claim. The appointment of
the General Manager is for the General Meeting of the Shareholders to decide. During
the meeting held in April 2002, it was decided to appoint Mr. Yerimbetov, in replacement
of Mr. Agilönü. Therefore, the Court had no basis to doubt the validity of this
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appointment and no legal basis to appoint a third party. Professor Mukhamedshin’s
evidence confirms that point.
498. Respondent further points out that Claimants filed an appeal against the injunction and
the Supreme Court set aside the second part thereof (related to the limits of access to
KaR-Tel’s premises, etc.), which is hardly the conduct of a Judiciary that is said to be
denying justice to Claimants.
499. Finally, it is not true that in fact Claimants continued to be denied access despite the
Supreme Court decision and that their requests to the Courts remained unanswered. They
made a single application on July 25, 2002 to challenge Mr. Yerimbetov’s control over
the access to KaR-Tel of employees engaged by Claimants. The decision on this point is
at the discretion of the Court. The request was rejected. In fact, the Court found that as
the only attempts made to access KaR-Tel were prior to the alteration of the injunction by
the Court of Appeal decision of June 11, 2002, it could not be said at that stage that
Claimants had been denied access to KaR-Tel, such as to justify a Court order. It was
always open to Claimants to return to Court if they still were not given access.
Respondent’s Procedural Expert Report finds that the Court’s decision was valid. His
opinion was not challenged by Claimants.
500. In this context, Respondent finally points out that, when almost one year later, on May
22, 2003, Claimants attempted to access documents at KaR-Tel once more and were
unable to contact Mr. Yerimbetov, they immediately went to the Almaty City Court
which granted their application for an order.
4. The actions of Respondent’s police authorities
501. According to Respondent, Claimants attempt to give the impression that the Kazakhstan
armed police seized KaR-Tel’s premises and evicted Claimants whereas, in fact, the
Kazakh police was not present. During the enforcement of the injunction by Court
bailiffs, there were guards from the Kuzet Security Service. Respondent does not know
whether they were armed, but, in any event, they were not present to assist in the
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enforcement of the injunction but rather to take over from the existing KaR-Tel security
guards, who had been dismissed by Mr. Yerimbetov.
502. According to Respondent, in the course of the hearing, the allegations relating to the
enforcement of the injunction were disavowed or undermined by Mr. Agilönü. Indeed,
he admitted that:
- he did not know if it was in fact the Kazakh police, it could have been Kuzet
security guards;
- he could not recall whether or not they were armed, let alone whether or not they
had machine guns;
- he had a conversation with Mr. Karijbanov at the switch and agreed to meet
Mr. Karijbanov in the following days to discuss the situation.
503. Mr. Karijbanov confirmed his evidence that he saw Kuzet security guards at the premises
of KaR-Tel during the enforcement of the injunction, but no police and no-one armed.
According to Respondent, this is a radically different picture than that previously painted
by Claimants and casts significant doubt on the reliability of their case and evidence.
504. The police was thus not there but even if it had been otherwise, it is a matter within the
discretion of the enforcing bailiff whether to call for assistance. Contrary to Claimants’
suggestion, the bailiff is not required to attempt first to enforce the injunction without
police assistance.
505. Respondent finally alleges that:
- KaR-Tel’s premises were not simultaneously seized;
- Mr. Karibjanov was not present to lead the allegedly armed force but merely to
protect Telecom Invest’s interest;
- the Court’s bailiffs did not bar Turkish executives from entering the premises.
The Turkish executives simply failed to appear for work;
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- there is no obligation in Kazakh law to notify the respondent to an ex parte
procedure that the injunction has been obtained prior to enforcing its terms.
5. The attempt to sell Telecom Invest’s participation in KaR-Tel
506. Respondent disputes Claimants’ position on Telecom Invest’s attempt to sell its
participation in KaR-Tel. This was not at all a purported way of extracting money from
the partnership. On the contrary, in late summer 2002, Almex and Telecom Invest took
the position that it would be sensible for them to sell their interest in KaR-Tel as quickly
as possible in view of the real danger of KaR-Tel being made insolvent and losing its
principal valuable asset.
507. Their first option was to discuss with Claimants. Mr. Karibjanov, appointed by Telecom
Invest, flew to Corfu and had a meeting with Hakan Uzan. Initially, Mr. Uzan offered to
sell Claimants’ shares to Telecom Invest for USD 20 million. Mr. Karibjanov refused.
Mr. Uzan then offered to purchase Telecom Invest’s shareholding for USD 12 million.
508. There followed further discussions. Claimants wanted to retain 30% of the purchase
price on completion and that Telecom Invest obtain a new investment contract. A Stock
Purchase Agreement was drafted but, ultimately, Rumeli did not transfer the funds and
the agreement lapsed.
509. According to Respondent, the price offer made does not reveal anything. It is just the
price that Mr. Uzan offered, which Respondent considered to be a considerable
overvalue. In any case, the fact that Telecom Invest was ready to sell its stake for USD
12 million is irrelevant to the issue of its true value.
510. Moreover, Claimants’ allegation that the Stock Purchase Agreement would demonstrate
that the Investment Committee was under the influence of the local partner, is simply
wrong. It is true that the Agreement provided that Telecom Invest had to procure either a
new investment contract or to persuade the Investment Committee to overturn its
cancellation of the previous Contract. However, this clause was simply a best endeavors
clause and Mr. Karibjanov took the view that even if Telecom Invest were not successful
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in securing the reinstatement of the Investment Contract, or in obtaining a new one, it
would still have obtained USD 10.2 million for its 40% shareholding which he himself
considered to be worthless.
511. Respondent finally submits that:
- the ultimate proof of the absence of influence of Telecom Invest on the
Investment Committee is the fact that the Investment Contract was never
reinstated;
- the Stock Purchase Agreement contained a contractual mechanism in the form of
a retention of 15% of the purchase price to deal with the risk that KaR-Tel could
have entered into transactions that were not in its interest during the time it was
managed by Telecom Invest. Contrary to Claimants’ allegation, this risk was not
at the origin of the non execution of the Agreement. In reality, Claimants were
unable to complete the transactions because external events left them without
funds.
6. The actions of the Working Group
512. The next entity criticized by Claimants is the Working Group established by
Respondent’s Government. According to Respondent, the only evidence adduced by
Claimants in relation to the Working Group was a short section of Professor Sergeev’s
report. The only question asked to Professor Sergeev – whether the Working Group
could validate the cancellation of the Investment Contract – was not in issue between the
parties, and so is irrelevant. On the other hand, Respondent provided a witness statement
from Mr. Imin Sabirov, who as well as being a former Chairman of the Investment
Committee, was the Chairman of the Working Group. Mr. Sabirov gave evidence to the
Tribunal at the hearing.
513. Claimants were not de facto excluded by Respondent from the Working Group
investigation. Instead:
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- there was no legal obligation for Respondent to establish such a Working Group.
It was an informal group before which there was no formal procedure. There was
thus no requirement to hear representations from Claimants, nor to involve them
in any way. However, the Working Group did offer Claimants the opportunity to
participate;
- as evidenced by Mr. Sabirov, the Working Group wanted Claimants to participate
as they were the complainants. Claimants were notified of the creation of the
Group. On July 1, 2003, Claimants’ attorney was informed by telephone of the
new start date of the work on July 4, 2003;
- since the Group was to conduct an audit on KaR-Tel, including on its investment
obligations, it was logical to hold the meetings of the Working Group at KaRTel’s
offices. In this respect, Respondent points out that, in the light of Mr.
Agilönü’s evidence that he sought access to KaR-Tel’s premises, no credence can
be given to the affirmation that those premises were hostile to Claimants;
- at no stage did Claimants display any interest in participating in the Working
Group’s investigation. There were no letters from Claimants indicating
willingness to participate or seeking information on the process.
514. With respect to the criminal proceedings, Respondent disputes Claimants’ allegation that
they were wholly unfounded and begun at the same time as the Working Group’s
examination precisely to dissuade Claimants’ appointees from participating in the
Working Group’s work:
- in 2002, Mr. Yerimbetov had discovered that approximately USD 200,000 had
been taken from KaR-Tel by its senior management without appropriate
paperwork. During the spring of 2003, Mr. Yerimbetov was warned by the tax
authorities that if he did not report this as a criminal offence, he could render
himself personally liable. After an audit of the relevant transactions,
Mr. Yerimbetov and KaR-Tel’s chief accountant made a report to the Almaty
police on June 24, 2003. Mr. Yerimbetov confirmed that once he had discovered
that the money was missing, he had contacted the individuals involved on a
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number of occasions and asked them to repay the debt, but they had refused. He
was not asked a single question at the hearing, so that his evidence is
unchallenged;
- a criminal indictment was issued on July 1, 2003. However, on September 1,
2003, the Almaty police was forced to suspend the proceedings as they had been
unable to interview any of the persons indicted, who had fled Kazakhstan;
- Claimants’ appointees did not challenge the decision to indict them as it was their
right to do so;
- on the contrary, Mr. Ozornek wrote to KaR-Tel, admitting having taken the sums
alleged;
- one of the persons indicted is a Kazakh national, which undermines Claimants’
suggestion that the criminal charges were brought only against Turkish executives
and for an ulterior purpose;
- these indictments were far from being unfounded;
- Respondent’s Expert on Criminal Procedure in Kazakhstan confirms that there
was nothing unusual from a procedural point of view. Claimants did not adduce
any expert on this issue and Respondent’s expert evidence remained
unchallenged;
- Claimants’ continued reliance on the fact that Mr. Seysembayev knew of the
criminal proceedings is misconceived. The indictment was a document of public
record and Mr. Seysembayev was the ultimate beneficial owner of Telecom Invest
at the time, and therefore the person to whom Mr. Yerimbetov was answerable. It
was therefore perfectly legitimate to make him aware of the complaint filed by
Mr. Yerimbetov.
515. According to Respondent, Mr. Agilönü’s witness statement, which is the only evidence
adduced by Claimants in relation to the criminal investigation says almost nothing.
Furthermore, in cross-examination, Mr. Agilönü admitted that:
- none of Claimants’ appointees had contested the criminal investigation;
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- Mr. Ozornek admitted to having taken the sums alleged and Rumeli offered to
offset the sums against its claims against KaR-Tel.
516. In re-examination, Mr. Agilönü alleged for the first time that he had in fact repaid the
money it was alleged he took, implicitly accepting that he had taken the sums alleged.
517. Contrary to Claimants’ allegation, the Working Group was not in any sense established to
review the legality of the Investment Committee’s decision to cancel the Investment
Contract or to find alternative grounds for its cancellation. After the Government had
received Claimants’ complaints dated April 2 and 3, 2003, various Ministries suggested
that, in the interest of preserving a good relationship with Claimants and to avoid the
costs of an arbitration procedure they were threatening to initiate, an attempt should be
made to settle the dispute amicably through negotiation. In this perspective, the Working
Group was created by the Kazakh Government to provide information to the Government
concerning whether or not KaR-Tel had fulfilled its obligations under the Investment
Contract. The purpose was therefore not at all improper. This was confirmed by
Mr. Sabirov.
518. The Working Group found that, contrary to Claimants’ allegations, KaR-Tel had not
complied either with its reporting obligations or with its investment obligations, and that,
consequently, the Investment Committee was right in cancelling the Investment Contract.
According to Respondent, it is crucial for the Tribunal to recognize that Claimants did
not challenge in evidence any of the findings of the Working Group.
519. Mr. Sabirov was cross-examined on his views on the legitimacy of the cancellation of the
Investment Contract. He confirmed his witness statement and provided further
explanation:
- suspension was only the right, not the obligation of the Investment Committee;
- it was normal practice for the Investment Committee to cancel investment
contracts unilaterally, without a Court decision, and without suspending first
pursuant to article 13 of the Investment Law;
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- he was in fact only surprised that the Investment Committee had granted KaR-Tel
so long to remedy its breaches;
- the most common grounds for which investment contracts were cancelled under
article 13 of the Investment Law were failure to file reports and non-compliance
with the working program;
- no member of the Working Group had any idea that KaR-Tel was in any way
related to the President’s family or the Government.
520. Respondent finally alleges that, even if Claimants were correct about the Working Group
process being procedurally or substantively wrongful, they failed to challenge that
process, or its findings, in Kazakhstan, even by writing to the Working Group itself to
protest its conclusions. Claimants thereby denied the Kazakh system the opportunity to
correct the alleged errors on which they now seek to rely.
7. The actions of Respondent’s Judiciary
521. According to Respondent, Claimants’ position that Respondent’s Judiciary grossly
misapplied the law is totally unfounded. Respondent adduced expert evidence from
Professors Kaudyrov and Klimkin and from Professor Mukhamedshin in relation to the
principles of Kazakh law on each issue raised by Claimants.
522. Claimants submitted the testimony of Professor Sergeev, who admitted that he had not
published on the areas of investment law, corporate law in Kazakhstan or Kazakh LLP
Law, whereas Professors Kaudyrov and Mukhamedshin have a significant experience in
those fields. In addition, in the course of his evidence, Professor Sergeev accepted that
the issue of whether the notice for the EGMs was in compliance with Kazakh law was
open to debate. He also accepted that the opinions of Professors Kaudyrov, Klimkin and
Mukhamedshin submitted to the Tribunal, and which support the Almaty City Court’s
reasoning, were their honest opinions.
523. In this respect, it is Respondent’s position that the Courts correctly applied the law by
deciding that the April 2002 EGM was valid.
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524. Respondent further submits that the delivery of the April 2002 injunction was perfectly
legitimate and in accordance with Kazakh law with the consequence that the Court’s
decision to validate it was correct.
525. Respondent further disputes Claimants’ allegation that the Court violated the law with
respect to the issue of the harm to the partnership discussed at the EGMs, following the
cancellation of the Investment Contract. Claimants indeed allege that the judge ignored
the rule of article 34 of the LLP Law that only actual and incurred harm can justify a
compulsory redemption, not purely potential harm.
526. According to Respondent, and as confirmed by their Civil Expert Report, there is no
requirement in the LLP Law for evidence of “harm” or “damage” to be presented at the
EGM. It cannot therefore be a requirement for a valid resolution of compulsory
redemption.
527. Respondent further alleges that Claimants are unable to demonstrate that the Court
decision on the compulsory redemption was incorrect. Indeed, the cancellation of the
Investment Contract had caused KaR-Tel losses in two ways. First KaR-Tel had to pay
back 34,500,000 Tenge, as well as fines and default interest bringing the total amount to
be paid to approximately USD 389,000. Second, KaR-Tel lost the benefit of the
Investment Contract for the future.
528. Respondent further alleges that Claimants caused KaR-Tel to purchase outdated
equipment and mobile telephone handsets at inflated prices and that this also generated
damage for KaR-Tel, as evidenced by the Court-appointed forensic merchandising
experts. The only complaint that Claimants expressed on this report is that it only
established probable prices, not certain prices. According to Respondent, it is notable in
relation to the issue of the transactions with Telsim that Mr. Agilönü gave evidence to the
Tribunal in which he accepted that he had not conducted any tenders for equipment
whilst General Director of KaR-Tel.
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529. In this framework, it is also Respondent’s contention that the Court rightly rejected the
argument put forward by Claimants that they could not be blamed for these transactions
since they were entered into with Telsim and not Rumeli, at a time when Telsim was not
a shareholder. Indeed, each of the transactions had been made conditional upon Rumeli’s
approval.
530. Respondent further points out that for its Procedural Law Expert, it is beyond dispute that
the multi-million dollars of harm caused to KaR-Tel are to be qualified as significant.
531. Respondent finally disputes Claimants’ allegation that the Court violated the law to the
extent that the harm caused to KaR-Tel was not attributable to Claimants or could also
have been attributed to the local partner. Claimants’ position is indeed that they did not
owe any obligations to the Investment Committee, such obligations being only owed by
KaR-Tel; a member of an LLP is not responsible for the obligations of the LLP by virtue
of article 44 of the LLP Law. Respondent disputes this and submits that the Kazakh
Courts correctly decided that the obligations of KaR-Tel to make investments under the
Investment Contract were directly related to Claimants’ obligations to invest under the
Foundation Agreement. The Courts held that the reason for the failure to file the reports
was that the companies controlling KaR-Tel recognized that KaR-Tel had not complied
with its obligations. Thus, the Investment Contract could validly be cancelled for failure
to invest.
532. The Courts further found that KaR-Tel’s General Manager was at all times a person
controlled by Rumeli and Telsim. Therefore, the failure to file the reports was
attributable to Claimants. This is confirmed by Respondent’s Procedural Expert Report.
533. On the other hand, Telecom Invest being a silent partner, it could not be considered
equally responsible for the failure of KaR-Tel to comply with its obligations.
534. With respect to the issue of the reasons to buy out a participant, Respondent submits that
their Civil Law Expert dismissed as being without any basis in the LLP Law, Claimants’
contention that any allegation of harm or damage caused to the LLP, which was not
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explicitly discussed at the EGM at which the resolution was passed, is ultra vires and
may not be entertained by the Court. Indeed, as the compulsory redemption is a judicial
procedure, the proper place to bring and consider evidence of harm or damage caused to
the partnership is before the Court.
535. Respondent further contends that the Court’s approach to the expert evidence was
appropriate. It is correct that Judge Begaliev said that opinions of Professor Suleimenov
and the other professors were not accepted, and that “the indicated individuals do not
have the right to interpret the law.” This is conform to Kazakh law, according to which
legal opinions are considered as evidence, which judges are entitled to reject.
536. According to Respondent, the only real allegation of denial of justice by Claimants
precisely concerns Judge Begaliev who would have been corrupted. The allegation
against Judge Begaliev is based only on the evidence of Mr. Agilönü. Respondent makes
the following submissions on this issue:
- this is a very serious allegation, which requires the Tribunal to look at the matter
very carefully. In addition, Mr. Agilönü is the leading factual witness for
Claimants. If the Tribunal concludes that he lied to the Tribunal with respect to
Judge Begaliev, then this should have an adverse effect on the remainder of his
evidence;
- the allegations were raised very late in the proceedings;
- there is not a single contemporary document supporting the allegations.
Mr. Agilönü reported back to Claimants’ management located in Turkey. It is
reasonable to suppose, if his evidence was truthful, that the discussions would
have been documented particularly since he says he was following management’s
instructions;
- had Judge Begaliev done any of the acts complained of, Claimants would have
asked for his removal from the case or raised his conduct by way of an appeal
from the decision of June 6 , 2003. None of this happened;
- Mr. Agilönü was an unsatisfactory witness. Indeed, his evidence was incredible:
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! for the first time he introduced the suggestion that another judge had asked
for a bribe but he was not prepared to name him;
! for the first time, once he had admitted he spoke limited Russian at the
time, he alleged that all his dealings with Judge Begaliev had been through
an interpreter, whom he also refused to name;
! it is inconsistent for Judge Begaliev to have told Mr. Agilönü on one day
that he would decide the case in Claimants’ favor for money, and the next
to have told Mr. Agilönü that he had been ordered by the highest
authorities to decide in the other way;
! although his witness statement speaks of Judge Begaliev receiving
instructions from the highest authorities, implying the Presidential family,
in cross-examination, Mr. Agilönü admitted that he had understood merely
that it was someone more senior than Judge Begaliev at Almaty City
Court;
- Judge Begaliev gave his evidence in a calm and measured manner;
- Judge Begaliev’s evidence was entirely consistent with the expert evidence given
on Kazakhstan law. Claimants did not identify a single aspect of Judge
Begaliev’s judgment that was only explicable on the basis that he was corrupt and
rendered a dishonest judgment;
- finally, the pantomime with the non-existent photograph of Judge Begaliev
wearing a dark suit and sitting behind a table with sandwiches on it did no more
than highlight the hopelessness of Claimants’ case and the inappropriate lack of
seriousness with which they treat making such grave allegations against a serving
judge.
537. Respondent further notes that, in their Memorials, Claimants did not make any direct
criticism of the Supreme Court’s judgment, though it was to be inferred that they applied
the same criticisms to it as those they applied to the judgment of the Almaty City Court.
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538. In the course of his evidence before the Tribunal, however, Mr. Agilönü, for the first time
in this arbitration, alleged that a Justice of the Supreme Court had also solicited a bribe
from him in order to determine the appeal in Claimants’ favor. However, Mr. Agilönü
refused to give the name of the judge and further details. Therefore, the Tribunal is
invited to draw the inference that Mr. Agilönü is not telling the truth on this issue. The
nature of the allegation makes it inherently improbable, the circumstances and timing in
which it was first raised and the conduct of Claimants’ counsel in respect of it only
heighten the sense that it is a further lie.
539. Respondent finally alleges that none of the critics made by Claimants against the decision
of the Presidium of the Supreme Court has any merit:
- Claimants were notified of the hearing. It is notable that they made no attempt to
protest against this alleged further failure of the Kazakh postal service;
- pursuant to article 82 of the Kazakh Civil Code, it was within the Presidium’s
power to determine the price for the compulsory redemption since there had been
no agreement between the parties. Claimants have not adduced any expert
evidence on this issue and the expert evidence of Professor Mukhamedshin and
Professors Kaudyrov and Klimkin was unchallenged in cross-examination;
- the valuation of the Presidium was correct. It based its valuation decision on
several expert reports prepared by a number of different entities, including
international audit firms and the independent and Court-appointed Forensic
Examination Center of the Ministry of Justice of the Republic. Moreover, the
Expert Valuation prepared by Navigant Consulting also confirms the valuation
provided to the Kazakh Courts. He demonstrated also that, despite the superficial
attraction of Claimants’ attempts to draw a comparison between the Presidium’s
valuation and the price paid by VimpelCom, the two are reconcilable.
540. Respondent finally alleges that, even if the Presidium’s decision could be potentially
expropriatory, which is denied, it is plain that Claimants received fair compensation for
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their shareholdings, such that one of the key requirements for expropriation is not
present, or they would not have suffered any loss as a result.
8. The alleged attempts to pay Claimants to go away
541. It is true that in April 2003, Mr. Seysembayev attempted to purchase Claimants’ 60%
interest in KaR-Tel for USD 12 to 15 million. Claimants refused the offer. However,
Claimants misstate the chronological sequence of the events. The offer made by KaR-Tel
in the amount of USD 3,000 was not made before but after Mr. Seysembayev. Indeed,
KaR-Tel’s offer was after the judgment of the Almaty City Court and Claimants failed to
appeal to the Supreme Court. KaR-Tel’s offer was thus made at a time when Telecom
Invest knew that KaR-Tel was insolvent.
542. Respondent further points out that both these offers were made considerably after the sale
of Telecom Invest to Mr. Seysembayev. There is therefore no basis for alleging that
these offers were in any way made by either Respondent or “members of President
Nazarbayev’s empire.”
543. According to Respondent, a final link to the President’s family, and supposedly therefore,
to Respondent’s liability, was the alleged offer by Arlan/Altel in August 2004 to purchase
Claimants’ shares in KaR-Tel for USD 20 million. Claimants allege that this was made
on behalf of Respondent since one of the President’s daughters has an interest in Altel
and that Kazakhtelecom does too.
544. Respondent disputes that allegation :
- Altel is only partially owned by Kazakhtelecom;
- the documents invoked by Claimants in support of their allegation are irrelevant;
- even if Claimants were correct that an offer was made at the meeting held on
August 24, 2004, it is a significant step to further allege that it was in some way
made on behalf of Respondent and that it would constitute an admission of a
violation of Respondent’s obligations under international law.
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545. According to Respondent, it was alleged that Mr. Orazbekov had made this offer at a
meeting with Mr. Akgün in Kazakhstan. However, Mr. Akgün’s evidence before the
Tribunal on this issue was riddled with inconsistencies:
- he accepted that there was no mention in the letter from Mr. Umirzhanov, the
President of Altel, to Mr. Tasalin, to anything relating to KaR-Tel, only to
opportunities for collaboration in the telecommunications sector;
- his explanation of the letter was not credible. Mr. Akgün stated that the first
contact had been by telephone. He said” This letter just makes for us possible to
visit” but he then accepted that he did not need a visa to travel to Kazakhstan;
- he accepted that his own letter in response equally made no mention of KaR-Tel,
though his explanation for it being written in English was that this was company
policy;
- in contrast to this, Mr. Akgün then suggested that the memorandum from him to
TSDIF was originally in Turkish, not English. No Turkish version of this
document has ever been provided by Claimants, unlike in relation to all other
Turkish documents in this arbitration, and it is curious that the supposed
translation is radically different from all other translations provided by Claimants;
- he accepted that the offer he alleges he received from Mr. Orazbekov was never
put into writing;
- Mr. Akgün then alleged for the first time that Mr. Umirzhanov had also made the
same offer to purchase Claimants’ shareholding for USD 20 million. This was
not alleged in Claimants’ Memorials or in Mr. Akgün’s witness statement.
546. On the contrary, Mr. Orazbekov gave evidence to the Tribunal that he had been asked to
have a meeting with some Turkish people to discuss investment opportunities, but that
they had not wanted to discuss this at all and had instead just complained of the problems
they were having in Kazakhstan. He was also clear that he did not have the authority to
commit Arlan to pay USD 20 million on any contract.
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547. According to Respondent, the Arbitral Tribunal should accept Mr. Orazbekov’s evidence
as being inherently more credible than Mr. Akgün’s inconsistent and shifting account.
The Tribunal is also invited by Respondent to find that Claimants have not established
how any such offer, even if made, could possibly be attributable to Respondent as a
matter of international law.
9. The sale of KaR-Tel to VimpelCom
548. According to Respondent, Claimants’ attempt to contrast the figure paid by VimpelCom
with the valuation of the Presidium is not proper for the following reasons:
- no account can be taken of what a private company wishes to pay to acquire an
asset in an open tender process;
- VimpelCom was bidding in an open tender for a business that might well have a
significant specific value for VimpelCom, but which could not be realized by any
other entity;
- the Presidium’s valuation was for 60% of KaR-Tel in April 2002. VimpelCom’s
bid was for 100% of KaR-Tel in late August 2004;
- VimpelCom bid for a completely different entity than the insolvent KaR-Tel of
April 2002. Indeed, KaR-Tel had been operated and restructured by
Mr. Yerimbetov.
549. According to Respondent, thanks to the efforts of Mr. Yerimbetov:
- KaR-Tel overall debt had been reduced by over USD 101 million, whilst at the
same time significant investments had been made in new technology;
- the network had been expanded considerably;
- KaR-Tel had over 600,000 real subscribers, as opposed to 150,000 alleged
subscribers;
- KaR-Tel had a market share in Kazakhstan of 31%, compared to less than 20% in
2002;
- KaR-Tel had a fast growing and very successful prepay product;
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- KaR-Tel had a modern billing platform.
550. With respect to KaR-Tel’s debt, Respondent alleges that Mr. Yerimbetov was able to
negotiate very hard with Motorola and to obtain a restructuring deal whereby the Loan
would be discounted to USD 35 million because:
- he could demonstrate to Motorola that the Uzans had nothing to do any more with
KaR-Tel;
- he had realized that the 3-year limitation period for bringing a claim would
expire; and
- he had seen that Motorola had already written off from its accounts the debt owed
by KaR-Tel.
551. Mr. Yerimbetov further persuaded KazKommertz Bank to lend KaR-Tel the USD 35
million required to repay Motorola.
552. Respondent finally points out that KaR-Tel filed a claim for the losses suffered as a result
of Claimants’ actions related to the un-commercial transactions with Telsim. On 6 July
2004, the Almaty City Court awarded KaR-Tel damages of USD 41.8 million. Claimants
did not appeal the judgment but have so far failed to pay any part of the sum. However,
this enabled Mr. Yerimbetov to set-off the alleged debts towards Rumeli and Telsim.
10. The conspiracy theory
553. According to Respondent, the first element of Claimants’ case was a conspiracy to
expropriate their investments in Kazakhstan. However, this conspiracy case was, and
remains, a fiction.
554. In this respect, Respondent points out that it presented a number of witnesses who, on
Claimants’ case, either knew of the purported conspiracy or even participated in it. It
was pointed out in Respondent’s opening submissions and twice subsequently, that
fairness required that the conspiracy case be put to any witness who, it was said, was
involved in the alleged wrongful acts. However, Claimants studiously declined to put
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their allegations, or the facts underlying those allegations to Respondent’s witness. The
reason for this failure is clear: there is no discernible factual basis for any of the
allegations made by Claimants.
555. According to Respondent, faced with the prospect that their case was lost, Claimants
resorted to bizarre tactics:
- they concocted a dishonesty case against a serving judge, Jugde Begaliev, without
any ground;
- they alleged that Respondent had taken steps to prevent Claimants from obtaining
legal advice on Kazakhstan law, whereas the truth was that Claimants were
unable to find anyone who was prepared to support their case;
- they alleged that Professor Didenko had been forced to write his academic article
“contradicting in violation of the most fundamental rules of ethics, his own
position in the previous litigation against the local partner in Kazakhstan,”
whereas this article is a balanced opinion in which Professor Didenko alters some,
but by no means all, of his views. He still stands by certain of his criticisms of the
approach taken by the Almaty City Court. Moreover, his article was published in
2003, over two years before these arbitral proceedings were commenced;
- they allege that Respondent was seeking to “intimidate” Claimants by copying
correspondence to someone in Salans’ offices in Kazakhstan: again this was a
groundless allegation.
556. With respect to Claimants’ allegation that an adverse inference should be drawn by the
fact that Respondent did not call Mr. Kulibayev, Respondent points out that there is
nothing in this point:
- no prima facie case has been disclosed which requires a response from
Mr. Kulibayev;
- Respondent does not have the power to compel Mr. Kulibayev; he holds no
position in the Republic of Kazakhstan Government;
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- Respondent did call as witnesses a number of persons who had contact with
Mr. Kulibayev. In particular, they called Mr. Abuov, who was alleged by
Claimants to be the “right hand man” of Mr. Kulibayev. He testified that
Mr. Kulibayev did not cause the Investment Committee to cancel the Investment
Contract.
III. ON THE PURPORTED BREACHES BY RESPONDENT OF ITS
OBLIGATIONS
A. The legal framework
1. Claimants’ position
557. According to Claimants, their investment is protected by the BIT between Turkey and the
Republic, more specifically by virtue of its Articles II and III.
558. Article II provides that:
“(1) Each Party shall permit in its territory investments, and activities
associated therewith, on a basis no less favorable than that accorded in
similar situations to investments of investors of any third country, within
the framework of its laws and regulations.
(2) Each Party shall accord to these investments, once established,
treatment no less favorable than that accorded in similar situations to
investments of its investors (‘National Treatment clause’) or to
investments of investors of any third country, whichever is the most
favorable (‘MFN clause’).”
559. Article III provides that:
“(1) Investments shall not be expropriated, nationalized or subject
directly or indirectly, to measures of similar effect except for a public
purpose, in a non-discriminatory manner, upon payment of prompt,
adequate and effective compensation, and in accordance with due process
of law and the general principles of treatment provided for in Article II of
this Agreement.
(2) Compensation shall be equivalent to the real value of the expropriated
investment before the expropriatory action was taken or became known.
Compensation shall be paid without delay and be freely transferable.”
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560. According to Claimants, in view of the MFN clause contained in the BIT, Respondent’s
international obligations assumed in other bilateral treaties are applicable to the instant
case. Such obligations include:
- the obligation to ensure the fair and equitable treatment of the investments of
investors of the other Contracting Party;
- the obligation to accord full protection and security to such investments;
- the obligation not to impair by unreasonable, arbitrary, or discriminatory
measures the management, maintenance, use, enjoyment, or disposal of such
investments.
561. Claimants also consider that their investment is protected by the FIL, and more
specifically its Articles 7 and 9.
562. Article 7 provides that:
“1. Foreign investments may not be nationalized, expropriated or
subjected to any measures which have the same consequences as
nationalization and expropriation (henceforth, expropriation), except for
the cases where such expropriation is carried out for public interests in
compliance with the appropriate legal procedures and carried out without
discrimination with the payment of immediate, adequate and efficient
compensation.
2. The compensation must be equal to the fair market value of the
expropriated investments at the moment when the investor learnt of the
expropriation.”
563. Article 9(2) provides that:
“[l]osses inflicted by any illegal suspension, restriction or termination of
the business activities of a foreign investor by the actions of the bodies
and persons named in Article 8 of this Law, shall be compensated to the
foreign investor.” The persons named in article 8 include, inter alia, state
executive bodies, law enforcement bodies, and state officials at any level.
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564. Finally, according to Claimants, Respondent is also obliged to act in accordance with
“such rules of international law as may be applicable,” which includes customary
international law.
565. Given the foregoing, it is Claimants’ position that the acts and omissions of Respondent,
individually and collectively, constitute breaches of its obligations:
- to afford fair and equitable treatment;
- not to deny justice;
- to ensure full protection and security;
- not to impose unreasonable, arbitrary and/or discriminatory measures;
- not to expropriate absent certain specific conditions.
2. Respondent’s position
566. Respondent submits that pursuant to Article 42(1) of the ICSID Convention, the law
applicable to this arbitration is Kazakh law, supplemented by certain principles of
international law.
567. Referring to the five international standards invoked by Claimants in their memorial (fair
and equitable treatment, denial of justice, full protection and security, no unreasonable,
arbitrary or discriminatory measures and expropriation), Respondent submits that there is
very little substantive dispute between the parties on the test for each of them, except that
these standards are probably less onerous than Claimants suggest.
568. More precisely, Respondent does not dispute that its actions are to be measured against
international standards and broadly accepts the applicability of the particular standards
set out by Claimants. Rather, it is Respondent’s case that, when applied to the real facts,
none of the above legal grounds for complaint is even close to being made out.
569. Respondent accepts that it owed Claimants a duty to accord them fair and equitable
treatment with respect to their investments and a duty not to unlawfully expropriate such
investments. It denies that it breached either of those duties.
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570. Respondent considers that, on a proper interpretation, the duty to accord fair and
equitable treatment includes the other duties set out by Claimants. According to
Respondent, in dividing the various duties, Claimants have unreasonably sought to create
the impression that Respondent owed Claimants substantially greater duties than did it in
fact. Therefore, Respondent does not accept that each such duty is a separate obligation.
571. Respondent further accepts that under customary international law, Claimants were
entitled to the minimum customary standard, and that this includes the denial of justice.
However, according to Respondent, the obligations stated by Claimants exceed that
minimum international standard.
572. Respondent also accepts that the Turkey-Kazakhstan BIT imposes certain obligations
upon it and that the provisions this case is concerned with are Articles II and III. It also
accepts that, under the MFN clause, it was obliged to treat Claimants in accordance with
any more favourable treatment afforded to nationals of other countries.
573. However, for Claimants to be afforded that treatment, they had to meet the conditions
required of those other nationals. In this respect, Respondent alleges that Claimants have
not identified the specific BITs upon which they rely to found their claims to the various
obligations. The BITs to which Kazakhstan is not a party are not relevant.
574. Finally, each of the obligations asserted by Claimants must be interpreted by reference to
the specific terms, context and aims of each individual BIT. To interpret the obligations
claimed by Claimants that are not in the Turkey-Kazakhstan itself, Respondent will refer
only to the United Kingdom-Kazakhstan BIT. This contains all of the obligations
Claimants allege they were owed and Respondent accepts that, were Claimants United
Kingdom companies, the standards of that treaty would be applicable to them.
3. The applicable standards: Decision of the Arbitral Tribunal
575. The parties agree that in view of the MFN clause contained in the BIT, Respondent’s
international obligations assumed in other bilateral treaties, and in particular the United
Kingdom-Kazakhstan BIT, are applicable to this case, such obligations including:
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- the obligation to ensure the fair and equitable treatment of the investments of
investors of the other Contracting Party;
- the duty not to deny justice;
- the obligation to accord full protection and security to such investments; and
- the obligation not to impair by unreasonable, arbitrary, or discriminatory
measures the management, maintenance, use, enjoyment, or disposal of such
investments.
The parties also agree to a large extent on the test applicable for each of these obligations,
as we will see below.
576. Whether a breach of one of the above standards can be attributed to the State will be
determined on the basis of the principles laid down in the ILC Articles. According to
Article 2 of the ILC Articles:
“there is an internationally wrongful act of a State when conduct
consisting of an action or omission : a) is attributable to the State under
international law; and b) constitutes a breach of an international
obligation of that State.”
577. According to Article 4:
“1. The conduct of any State organ shall be considered an act of that
State under international law, whether the organ exercises legislative,
executive, judicial or any other functions, whatever position it holds in the
organization of the State, and whatever its character as an organ of the
central government or of a territorial unit of the State.
2. An organ includes any person or entity which has that status in
accordance with the internal law of the State.”
578. Article 5 further provides that:
“[t]he conduct of a person or entity which is not an organ of the State
under Article 4 but which is empowered by the law of that State to exercise
elements of the governmental authority shall be considered an act of the
State under international law, provided the person or entity is acting in
that capacity in the particular instance.”
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579. According to Article 12:
“[t]here is a breach of an international obligation by a State when an act
of that State is not in conformity with what is required of it by that
obligation, regardless of its origin or character.”
580. Finally, according to Article 13:
“[a]n act of State does not constitute a breach of an international
obligation unless the State is bound by the obligation in question at the
time the act occurs.”
B. Fair and equitable treatment
1. Claimants’ position
a) The Standard
581. According to Claimants, Respondent’s obligation to afford “fair and equitable treatment”
is imposed not only by customary international law but also by virtue of the MFN clause
of the BIT.
582. The standard can indeed have two meanings. It can be given its plain meaning, i.e.,
fairness and equity of treatment as these terms are generally understood in non-technical
terms. Accordingly, tribunals would determine whether “in all the circumstances [of the
case] the conduct in issue is fair and equitable or unfair and inequitable.”31
Alternatively, this standard can mean that beneficiaries are assured treatment
commensurate to the international minimum standard for investors.
583. The standard is intentionally vague in order to give arbitrators the possibility to articulate
the range of principles to achieve the treaty’s purpose in particular disputes. As it
emerges from the arbitral case law, the principle encompasses, inter alia, the following
concrete principles:
- the State must act in a transparent manner (Metalclad, Tecmed);
- the State is obliged to act in good faith (Tecmed, Waste Management);
31
F.A. Mann, British Treaties for the Promotion and Protection of Investment, 52 British Y.B. Int’l L,
1981, pp. 241, 244 [hereinafter F.A. Mann, British Treaties].
155
- State conduct cannot be arbitrary, grossly unfair, unjust, idiosyncratic,
discriminatory, or lacking in due process (Waste Management);
- the State must respect procedural propriety and due process (Amco, Azinian,
Fabiani, Brown).
584. Fair and equitable treatment thus requires that the State act in a transparent manner,
namely that there is no ambiguity in the legal framework relating to the investor’s
operations and that the decision affecting the latter be traceable to that legal framework.
585. As confirmed by Metalclad,32
transparency requires that the investor be informed about
the laws and administrative or other binding decisions before they are imposed. In the
same vein, the tribunal in Tecmed33
stated that the fair and equitable treatment provision
requires that the investor’s basic expectations should not be affected by a State’s conduct,
which must be consistent, free from ambiguity, and completely transparent in its relation
to the foreign investor. According to the tribunal in Tecmed, the foreign investor “also
expects the host State to act consistently, i.e. without arbitrarily revoking any preexisting
decisions or permits issued by the State that were relied upon by the investor to assume
its commitments as well as to plan and launch its commercial and business activities.”34
586. According to Claimants, arbitral tribunals – including Tecmed and Waste Management –
also have confirmed that good faith is inherent in fair and equitable treatment.
587. Taking together the arbitral jurisprudence, Claimants allege that the Waste Management35
tribunal best summarized the standard requiring that a State act in a manner affording fair
and equitable treatment to foreign investment:
32
Metalclad Corporation v. United Mexican States (ICSID Case No. ARB (AF)/97/1), Award of August
30, 2000 [hereinafter Metalclad].
33
Técnicas Medioambientales Tecmed S.A. v. United Mexican States (ICSID Case No. ARB(AF)/00/2),
Award of May 29, 2003, para. 154 [hereinafter Tecmed].
34
Id., para. 154.
35
Waste Management, Inc. v. United Mexican States (ICSID Case No. ARB(AF)/00/3), Award of April
30, 2004, para. 98 [hereinafter Waste Management v. Mexico].
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“[the] minimum standard of treatment of fair and equitable treatment is
infringed by conduct attributable to the State and harmful to the claimant
if the conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is
discriminatory and exposes the claimant to sectional or racial prejudice,
or involves a lack of due process leading to an outcome which offends
judicial propriety – as might be the case with a manifest failure of natural
justice in judicial proceedings or a complete lack of transparency and
candor in an administrative process. In applying this standard it is
relevant that the treatment is in breach of representations made by the
host State which were reasonably relied on by the Claimant.”
b) Application to the facts of the case
588. According to Claimants, the facts of the case clearly demonstrate that Respondent has not
treated Claimants’ investment fairly or equitably:
- the Investment Committee did not even wait until its own extended deadline for
the filing of the reports before terminating the Investment Contract on March 25,
2002;
- the Investment Contract was terminated despite the fact that Claimants submitted
the requested reports on March 25, 2002;
- the Investment Committee had the obligation to first suspend the Investment
Contract;
- the Investment Committee terminated the Investment Contract with the utmost
lack of good faith and in clear violation of the international obligations of
Respondent contained in the Bilateral Investment Treaty. The termination was
unreasonable, arbitrary, grossly unfair, unjust, idiosyncratic and violated the
legitimate expectation of Claimants.
589. According to Claimants, the above undisputable breaches of the Bilateral Investment
Treaty are alone sufficient to justify a ruling against Respondent, irrespective of the
subsequent breaches committed by Respondent and irrespective of the collusion between
Respondent and powerful local partner.
590. Claimants further point out the following breaches of the Bilateral Investment Treaty by
Respondent:
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- the process that led to the termination of the Investment Contract and to the
decision of the Working Group was anything but transparent;
- Claimants were not granted an opportunity to present their position either before
the Investment Committee or the Working Group;
- Respondent’s Courts and enforcement authorities ousted Claimants from KaR-Tel
prior to a determination of the merits of the dispute;
- Respondent’s Courts favored the local partner by confirming the appointment of
the new General Manager;
- the decision ordering the compulsory sale of Claimants’ shareholding for
USD 3,000 is particularly outrageous;
- Respondent initiated criminal proceedings in total bad faith;
- Respondent recognized that it had treated Claimants unfairly and inequitably
when it offered Claimants, through a controlled entity, USD 20 million to acquire
its interest in KaR-Tel.
2. Respondent’s position
a) The standard
591. Respondent accepts that the duty of fair and equitable treatment was owed to Claimants
under the most favored nation clause of the Turkey-Kazakhstan BIT in conjunction with
the UK-Kazakhstan BIT. The substance of that obligation, however, is different from
that stated by Claimants.
592. Respondent accepts that in accordance with this principle, it was required to act in good
faith and in a transparent manner, and that its conduct could not be arbitrary, grossly
unfair, unjust, idiosyncratic, discriminatory or lacking in due process. However,
Respondent does not accept Claimants’ standard, which is too high. For Respondent, the
fair and equitable treatment standard is a minimal one and moreover, for a breach of the
standard to occur, Respondent’s conduct should have fallen below that minimal standard
in a manner that “shocks, or at least surprises, a sense of juridical propriety” (ELSI).
158
593. In this respect, Respondent alleges that the interpretation must follow the standard rules.
Awards based on NAFTA are in principle inapplicable since not only is the wording of
Article 1105 NAFTA different to Article II of the UK-Kazakhstan BIT but moreover, as
Schreuer stated, it does not follow that the result reached in the NAFTA context should
also necessarily be applied to other treaties, notably to BIT’s because of the special
features of Article 1105(1). Respondent will therefore rely upon elements of awards
under NAFTA only insofar as they are also applicable to the relevant BIT.
594. Respondent further alleges that to determine the extent of the fair and equitable treatment
obligation in this case, it is necessary to construe the specific part of Article II(2) of the
UK-Kazakhstan BIT. This should be done in accordance with the accepted rules of treaty
interpretation, as applied in the Saluka decision.
595. As stated in Saluka, the ordinary meaning of fair and equitable treatment “can only be
defined by terms of almost equal vagueness.” It includes “just, even-handed, unbiased,
legitimate.”36
596. Moreover, its context in an international legal instrument must indicate that it refers to
international standards. In order for the standard to be breached, the investor must
therefore have been “treated in such an unjust or arbitrary manner that [it] rises to the
level that is unacceptable from the international perspective” (S.D. Meyers37
). Its
context in an international legal instrument also indicates that it should not, without
express indication, overrule fundamental principles of international law. Any
determination of breach of the provision “must be made in the light of the high measure
of deference that international law generally extends to the right of domestic authorities
to regulate matters within their own borders.”38
36
Saluka v. Czech Republic, Partial Award of March 17, 2006, paras. 296 to 309.
37
S.D. Myers v. Canada (UNCITRAL), First Partial Award of November 13, 2000, para. 263
[hereinafter S.D. Myers v. Canada].
38
Id., para. 263.
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597. The context of the fair and equitable treatment provision does not, therefore, raise the
obligation upon Respondent beyond the international minimum standard of protection.
598. As in Saluka, one of the principal aims of BITs is to encourage international investment.
There is therefore a need for a balanced approach: if the protection of the foreign
investors were exaggerated, the host State might be dissuaded from admitting all foreign
investors.
599. Furthermore, the stated goals of the UK-Kazakhstan BIT are not to ensure extending and
intensifying economic relations like in Saluka. Its object and purpose is therefore
relevant only to the extent that Respondent is required to do no more than that which does
not deter foreign capital by providing disincentives to investment. It therefore only sets a
floor of minimum treatment that must be accorded to foreign investors, regardless of the
treatment accorded to nationals.
600. Respondent also alleges that a fair and equitable treatment standard that does no more
than not to deter foreign investment is related to the expectations of the investors. For
Respondent to be bound to respect those expectations, they must be legitimate and
reasonable in the light of the circumstances. They should be limited to a base level and
should not in any case include an expectation to be able to act contrary to public interest.
601. According to Respondent, the reasonable and legitimate expectations of an investor,
determined in accordance with the above interpretation, would always include that the
State “implements its policies bona fide by conduct that is, as far as it affects the
investors’ investment, reasonably justifiable by public policies and that such conduct
does not manifestly violate requirements of consistency, transparency, even-handedness
and non-discrimination. In particular, any differential treatment of a foreign investor
must not be based on unreasonable distinctions and demands, and must be justified by
160
showing that it bears reasonable relationship to rational policies not motivated by a
preference for other investments over the foreign-owned investment.”39
602. They will also include that the State will not commit the delict of denial of justice by
disregarding the principles of procedural propriety and due process. The State must not,
therefore, act in an arbitrary or discriminatory manner. In this respect, Respondent
submits that it accepts the definitions of arbitrary, unreasonable and discriminatory
conduct as set out in the authorities cited by Claimants.
603. Respondent concludes that in accordance with the above, in order to succeed that
Respondent breached its obligations of fair and equitable treatment, Claimants must
demonstrate that its actions were “evidently arbitrary, unjust or idiosyncratic” or prove
that they were directly or indirectly discriminated against on the grounds of their
nationality. The burden of proof is on Claimants and is a high one.
604. In this context, the Tribunal should not engage in a complex review of the decisions of
the State’s Courts. The conduct and decisions of Respondent’s Courts should only be
held to fall below the minimum standard if their conduct amounted to a denial of justice.
605. Finally, Respondent alleges that:
- the various requirements of the standard are closely interrelated. For example, if
the State acts in good faith and in a non-discriminatory manner, without any
procedural impropriety, it follows that it is exceptionally unlikely to have acted
arbitrarily;
- if the actions of the State complained of were justified, and proportionate to that
justification, it cannot have acted in an unfair and inequitable manner. The only
exception would be if the justification was in fact a sham.
39
Saluka v. Czech Republic, Partial Award of March 17, 2006, para. 307.
161
b) Application to the facts of the case
606. According to Respondent, when viewed against the facts of the case, it is clear that the
Republic has not in any way breached its obligations under the fair and equitable
treatment principle.
607. Claimants’ allegation that the Kazakhstan Supreme Court exceeded its jurisdiction and
thereby breached international law is denied by Respondent. Moreover, even if there had
been a misapplication of Kazakh law by the Kazakh Courts, that would not automatically
rise to the level of an international wrong.
608. With respect to the criminal proceedings, Respondent alleges that they were not initiated
by the Republic, that they were justified, they were not arbitrary and that in any case,
they have not prevented Claimants from pursuing their rights.
3. Decision of the Arbitral Tribunal
a) The Standard
609. The parties rightly agree that the fair and equitable treatment standard encompasses inter
alia the following concrete principles:
- the State must act in a transparent manner;
- the State is obliged to act in good faith;
- the State’s conduct cannot be arbitrary, grossly unfair, unjust, idiosyncratic,
discriminatory, or lacking in due process;
- the State must respect procedural propriety and due process.
The case law also confirms that to comply with the standard, the State must respect the
investor’s reasonable and legitimate expectations.
610. The concept “fair and equitable treatment” is not precisely defined. “It offers a general
point of departure in formulating an argument that the foreign investor has not been well
treated by reason of discriminatory or other unfair measures being taken against its
interest. It is therefore a concept that depends on the interpretation of specific facts for
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its content.”40
The precise scope of the standard is therefore left to the determination of
the Tribunal which “will have to decide whether in all the circumstances the conduct in
issue is fair and equitable or unfair and inequitable.”41
611. The only aspect on which the parties differ is that for Respondent, the concept does not
raise the obligation upon Respondent beyond the international minimum standard of
protection. The Arbitral Tribunal considers that this precision is more theoretical than
real. It shares the view of several ICSID tribunals that the treaty standard of fair and
equitable treatment is not materially different from the minimum standard of treatment in
customary international law.42
b) Application to the facts of the case
612. Claimants complain that the Investment Committee did not even wait until its own
extended deadline for the filing of the reports before terminating the Investment Contract
on March 25, 2002. The initial deadline of one month mentioned in the Committee’s
letter of February 21, 2002 was indeed extended until March 23, 2002, as was confirmed
by Mr. Zverkov during his testimony. Claimants point out that March 23 was a Saturday
and that since the 22nd
of March was Noruz, a public holiday in Kazakhstan, the
Investment Committee was certainly closed on the 23rd
; and in any case, since the 23rd
was a Saturday, the extension extended automatically until Monday, March 25, 2002, the
first following working day. The record confirms that the reports on the implementation
of the investment project for the third and fourth quarters of 2001 were faxed by
Claimants on the 25th
of March and subsequently delivered to the Committee on March
27.
40
Peter Muchlinski, Multinational enterprises and the law, 1995, p. 625 [hereinafter Muchlinski].
41
F.A. Mann, British Treaties, pp. 241-244.
42
Azurix Corp. v. Argentine Republic (ICSID Case No. ARB/01/12), Award of July 14, 2006, para. 361
[hereinafter Azurix]; and CMS Gas Transmission Company v. Argentine Republic (ICSID Case No.
ARB/01/8), Award of May 12, 2005, para. 284 [hereinafter CMS].
163
613. The Arbitral Tribunal notes however that even if Claimants are right that the deadline for
the delivery of the reports was March 25, it remains that the filing by Claimants was only
partial in that it only concerned the report for the third and fourth quarters of 2001.
Claimants did not therefore comply with the requirement of the Investment Committee.
614. On the other hand, in accordance with Article 19.3 of the Investment Contract, the
Investment Committee had the right to terminate the Contract in case of “[r]efusal of the
Investor to cure the reasons which have caused the decision on suspension of the
Contract, or a failure to cure these reasons during the term established by Agency.” This
presupposes that there had been a suspension of the Contract in accordance with the
terms of Article 19.2 and the reasons for such suspension were notified.
615. The Arbitral Tribunal considers that in deciding to terminate the Contract without prior
suspension, the Republic breached the Investment Contract. This was admitted by the
Republic in two letters sent to the Ministry of Industry and Trade on May 14, 2003 by
officials of the Ministry of Finance and the Ministry of Economy and Budget planning.
Since the Investment Committee is an organ of the State, and in the particular
circumstances of this case discussed above, this breach amounts to a breach of the BIT by
the Republic. The decision was arbitrary, unfair, unjust, lacked in due process and did
not respect the investor’s reasonable and legitimate expectations.
616. Respondent’s attempt to justify its failure to suspend the Contract by relying on Article
13 of the Investment Support Law is unconvincing. Although the Law grants the
Investment Committee the right to terminate a Contract without first suspending the
same, this provision can be supplemented by the express terms of each individual
contract. Moreover, it is a general principle of international law that a State cannot rely
on its internal law to invalidate its own undertakings.
617. The Arbitral Tribunal is also of the opinion that the process that led to the decision of the
Working Group appointed by the Ministry of Industry and Trade on June 9, 2003 lacked
transparency and due process. The Working Group was appointed in relation to the
164
termination of the Investment Contract, to perform the verification of the fulfillment by
Kar-Tel of the terms and conditions of the Contract, including investment obligations,
“for the purpose of settlement of this issue prior to the arbitration.” The Working Group
issued a three and a half pages decision, summarily reasoned, and concluded that the
Contract was lawfully terminated and that there were no grounds for its restauration. The
Working Group founded its decision of validation not only on Kar-Tel’s non-compliance
with its reporting obligations but also on various entirely different grounds than those
forming the basis for the initial decision. The decision was made without Claimants
having a real possibility to present their position. They were only verbally invited to a
meeting just two days before the meeting of the Working Group. The meeting was to
take place at Kar-Tel’s offices which were under the control of Telecom Invest and from
which Claimants had been previously ousted. Moreover, Claimants had been informed
that criminal proceedings against Claimants’ executives had been initiated on July 1,
2003, the very same day that the invitation had been extended.
618. The Arbitral Tribunal therefore considers that the process that led to the decision of the
Working Group lacked transparency and due process and was unfair, in contradiction
with the requirements of the fair and equitable treatment principle. Since the Working
Group acted as an organ of the State, the violation amounts to a breach of the BIT by the
Republic.
619. On the other hand, the Arbitral Tribunal considers that it does not have any clear
evidence that the decisions of the various Kazakh Courts which have been reviewed
above were wrong procedurally or substantially, or were so egregiously wrong as to be
inexplicable other than by a denial of justice. As was evidenced by the legal experts who
testified during the hearing, the issues that the Courts had to decide were sometimes
highly disputed issues. The Tribunal has also noted that when the decisions were
appealed, they were carefully reviewed by the appellate courts and sometimes partially
reversed by them.
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C. Denial of justice
1. Claimants’ position
a) The standard
620. According to Claimants, the duty not to deny justice arises from customary international
law and is a subset of the international minimum standard of treatment, i.e. the standard
below which a nation could not fall without violating international law. It can also be
considered to fall within the scope of treaty provisions providing for “fair and equitable
treatment.”
621. It is Claimants’ position that although denial of justice is “always procedural,” it
encompasses instances of politically-dictated judgments, corruption, and intimidation.
Moreover, it includes cases where “the proof of the failed process is that the substance of
a decision is so egregiously wrong that no honest or competent court could possibly have
given it.”43
622. Tribunals have identified four types of factual circumstances where a State’s conduct
amounted or could amount to a denial of justice.
623. First, Courts are not the only State organs the conduct of which can amount to a denial of
justice. Administrative organs can also engage the State’s international responsibility by
denying justice. This was confirmed in the Amco I44
decision where the tribunal found
that “the mere lack of due process would have been an insuperable obstacle to the
lawfulness of the revocation.” The Amco II tribunal also found that “the whole approach
to the issue of revocation of the license was tainted by bad faith, reflected in events and
procedures”45
and that therefore, even if substantive grounds existed for the revocation of
the licence, the circumstances surrounding the decision made it unlawful.46
It pointed out
43
Citing Don Wallace Jr., Fair and Equitable Treatment and Denial of Justice, International Investment
Law and Arbitration, 2005, pp. 669, 672 [hereinafter Wallace, Fair and Equitable Treatment].
44
Amco I v. Indonesia, Award of November 20, 1984, para. 242.
45
Amco II v. Indonesia, Award in the Resubmitted Case of June 5, 1990, para. 98.
46
Id., para. 99.
166
that there is “no provision of international law that makes impossible a denial of justice
by an administrative body.”47
624. Second, as the Azinian tribunal stated, a denial of justice can be pleaded “if the relevant
courts refuse to entertain a suit, if they subject it to undue delay, or if they administer
justice in a seriously inadequate way”or if there is a “clear and malicious misapplication
of the law.”48
The latter form of denial of justice likely overlaps with the notion of
“pretense of form” to mask an international law violation or cloak the pursuit of hidden
wrongful objectives.
625. Third, tribunals have found that collusion between the State judicial authorities, and the
local party-in-interest can amount to a denial of justice. In France v. Venezuela,49
Mr. Fabiani was unable to enforce an arbitral award in Venezuela due to a number of
judicial and political obstacles resulting from collusion between a private citizen and
governmental authorities. The tribunal found that the government of Venezuela was
under an obligation to “ensure the administration of justice” and adopted the view that a
State is “liable for the denial of justice committed by the judiciary, at least when, duly
informed of the denial, the state has not undertaken any action to prevent its effect.”
626. Fourth, tribunals have also found that collusion among branches of government can result
in a denial of justice. Specifically, in U.S. v. Great Britain,50
the tribunal concluded that
“[a]ll three branches of the Government conspired to ruin [an] enterprise”; that based
on the whole case, the cumulative steps taken by the State amounted to a denial of justice.
47
Id., para. 137.
48
Robert Azinian and others v. United Mexican States (ICSID Case No. ARB(AF)/97/2), Award of
November 1, 1999, paras.102-103 [hereinafter Azinian].
49
France v. Venezuela (Antoine Fabiani case No. 1), Award of 1898, V Moore’s International
Arbitrations, p. 4878 [hereinafter Fabiani].
50
U.S. v. Great Britain (Robert E. Brown case), Award of November 23, 1923, VI Reports of
International Arbitral Awards (United Nations), p. 120 [hereinafter Robert E. Brown].
167
b) Application to the facts of the case
627. According to Claimants, the following elements constitute a denial of justice:
- the Investment Committee did not even wait until its own extended deadline for
the filing of the reports before terminating the Investment Contract on March 25,
2002;
- the Investment Contract was terminated despite the fact that Claimants submitted
the required reports on March 25, 2002;
- the Investment Committee had the obligation to first suspend the Investment
Contract;
- the Investment Committee terminated the Investment Contract with the utmost
lack of good faith and in clear violation of the international obligations of
Respondent contained in the Bilateral Investment Treaty. The termination was
unreasonable, arbitrary, grossly unfair, unjust, idiosyncratic and violated the
legitimate expectation of Claimants.
628. According to Claimants, the above undisputable breaches of the Bilateral Investment
Treaty are alone sufficient to justify a ruling against Respondent, irrespective of the
subsequent breaches committed by Respondent and irrespective of the collusion between
Respondent and powerful local partner.
629. Claimants further allege that, in the present case, the Investment Committee’s termination
of the Investment Contract was unlawful and improper for the same reasons as those
enumerated by the Amco tribunals. Indeed, the Committee unilaterally terminated the
Contract abruptly and without warning and in breach of the suspension mechanism.
Furthermore, the Working Group confirmed the termination on completely different
grounds without an input from Claimants who were de facto excluded from the process.
Consequently, irrespective of whether there may have been legitimate grounds for the
revocation of the Contract – which Claimants deny – the whole approach leading to its
termination lacked in due process. Moreover, in light of Respondent’s collusion among
168
its various organs and with the various shareholders of the local partner, Respondent’s
unlawful termination of the Contract is tainted by bad faith.
630. Claimants also allege that even if Respondent’s Courts decisions could be deemed to
have been proper procedurally and substantially – which Claimants vigorously deny –
such decisions only served to cloak Respondent’s violation of international law. The
substance of the Courts’ decisions is so egregiously wrong as to be inexplicable other
than by a denial of justice.
631. Moreover, the real parties in interest behind Claimants’ local partner were various
Kazakhstan officials and/or members of President Nazarbayev’s family and empire.
Clearly, Telecom Invest and the Investment Committee were working in tandem so as to
put in place the mechanism by which Telecom Invest’s parties-in-interest would
maximize their financial interest, i.e. by forcing out Claimants.
632. Subsequently, Respondent continued to give Telecom Invest and its shareholders the
necessary active support to accomplish their objectives. Respondent’s Judiciary rubber
stamped the improperly-convened general meeting of KaR-Tel shareholders and
sanctioned the resolutions adopted thereat, notwithstanding the clear prima facie
evidence to the contrary. Respondent’s police authorities and public prosecutor’s office
then assisted Telecom Invest in physically ousting Claimants and their executives from
KaR-Tel and eventually from Kazakhstan. Finally, by putting a USD 3,000 price tag on
Claimants’ 60% stake in KaR-Tel, the Kazakhstan Supreme Court assisted Telecom
Invest in acquiring 100% of KaR-Tel for a derisory price, which Telecom Invest’s
shareholders subsequently sold to VimpelCom for the sum of USD 350 million.
633. Finally, Claimants allege that Respondent’s various organs acted in concert to achieve the
same end (the expropriation of Claimant’s investment), in collusion with the shareholders
of the local partner. Indeed, Respondent offered Telecom Invest a package of
coordinated State actions, from the termination of the Investment Contract to the fixing of
the price for the compulsory redemption of Claimants’ stake in KaR-Tel. In a nutshell,
169
the investment committee terminated the Contract unlawfully, which gave Telecom
Invest a pretext to adopt illegal shareholder resolutions. In turn, Respondent’s Judiciary
not only ratified these illegal resolutions but also the Kazakhstan Courts even went a step
further by ascribing a value of a mere USD 3,000 to Claimants’ multi-million dollar
investment, thereby sealing the expropriation. Moreover, Respondent initiated criminal
proceedings against Claimants’ executives with a view to intimidate them and to force
them to flee Kazakhstan and thereby abandon the defense of Claimants’ interests.
2. Respondent’s position
a) The standard
634. According to Respondent, denial of justice is an element of the overarching fair and
equitable treatment standard of the BIT. It does not extend or further the legal basis for
Claimants’ claims.
635. Contrary to Claimants’ allegation, Respondent points out that ‘denial of justice’ has only
one meaning: it refers to the failure of the administration of justice in a State to meet a
certain procedural standard. It is always procedural and the substantive outcome of a
proceeding is only of relevance when it demonstrates irregularities in the procedure.
636. Respondent further alleges that the four types of factual circumstances raised by
Claimants are no more than examples of attribution of various actions to a State that were
in denial of justice. However, for each of the methods of attribution, Claimants must
meet a high standard of proof. Simply stating that it is possible that a conspiracy between
the State and others can, in certain circumstances, lead to a denial of justice is not
probative of that denial.
637. Respondent also alleges that Claimants’ claim is based to a large extent upon a
substantive denial of justice in the sense that Claimants submit that the outcome of the
decisions was unfair. However, there is no concept of substantive denial of justice: “the
mere violation of internal law may never justify an international claim based on denial of
170
justice.”51
The substance is only relevant where there have been “exceptionally
outrageous or monstrously grave breaches of municipal law. In such cases, ... it must be
shown that “one can no longer explain the sentence rendered by any factual
consideration or valid legal reason.”52
638. Respondent further alleges that a claim in denial of justice does not relate to a single
Court, but to a Court system. It also submits that litigants are required to give the Court
system every opportunity to correct a challenged decision before resorting to
international tribunals. Therefore, even if Claimants were correct about the cancellation
of the Investment Contract, the Working Group process, or the decisions of the Kazakh
Courts, their failure to challenge at all or to exhaust the system bars them from
succeeding on their claims because they have denied the Kazakh legal system the
opportunity to correct the alleged errors on which they now seek to rely.
b) Application to the facts of the case
639. Denial of justice is thus only concerned with procedure. However, Claimants do not
allege that they were prevented from access to the Kazakh legal system, nor that the
determination of the Kazakh legal system was subject to ruinous delay amounting in
effect to an exclusion from its use. Claimants could not allege this, as they have, and for
the most part made use of access to all three instances of the Kazakh civil Courts.
640. Instead, what Claimants allege is that the decisions of the Kazakh Courts were wrong as a
matter of Kazakh law. However, substantive outcomes are not generally relevant. In any
case, it is Respondent’s position that Claimants have not even demonstrated that the
decisions of the Kazakh Courts misapplied Kazakh law.
641. With respect to the cancellation of the Investment Contract, it was substantially justified
on the grounds given as a matter of Kazakh law. But even if Claimants were able to
51
Charles de Visscher, Le déni de justice en droit international, (1935), 54 Recueil des cours 370 at
376.
52
Jan Paulsson, Denial of Justice in International Law, 2005, p. 83.
171
establish that the termination breached Kazakh law, this would not be sufficient to
amount to a denial of justice. Indeed, in order to amount to such a breach, Claimants
would have to demonstrate that the Investment Committee’s misapplication of Kazakh
law was patently arbitrary, unjust or idiosyncratic such that it would demonstrate bad
faith, which they have not done.
642. According to Respondent, Claimants must prove a procedural denial of justice and
Claimants do not provide this proof. They have not even begun to establish any
misapplication of Kazakh law. Their sole evidence in relation to Kazakh law comes from
one of the reports submitted in the proceedings in Kazakhstan in 2003, which were all
rejected by the Courts. In any case, those reports have no status in this arbitration.
643. Moreover, Professor Didenko, on whose expert report (produced before the Kazakh
Courts) Claimants rely, published an article a short time after the end of the Courts’
proceedings in which he expressed a different view on a number of matters at issue in this
case.
644. Respondent further alleges that:
- Claimants’ allegation that the Republic Judiciary was bribed is not particularized;
- with respect to the decision of the Presidium, Respondent disputes that Claimants
were not notified of the hearing.
645. Moreover, it is Respondent’s position that, even if Claimants would be correct about the
cancellation of the Investment Contract, the Working Group process, or decisions of the
Kazakh Courts being procedurally or substantively wrong, they failed to challenge those
decisions in Kazakhstan, which debars them from bringing a claim for denial of justice.
646. In particular, between the cancellation of the Contract and the registration of this
arbitration, Claimants made no serious attempt to challenge the cancellation, with the
exception of two letters of protest. These are not sufficient to comply with the
preconditions of a claim for denial of justice.
172
647. Respondent disputes Claimants’ allegation that they were prevented from contesting the
termination of the Contract by the injunction restricting access to KaR-Tel’s premises and
documents. This restriction was amended by the Supreme Court. It is not true that
Claimants were thereafter de facto denied access to the premises or documents. In any
case, even if they were, that did not prevent them from challenging the cancellation of the
Investment Contract.
648. Likewise, Respondent points out that Claimants never challenged the findings of the
Working Group.
649. In the same vein, Respondent submits that with respect to the validation of the
deliberation of the April 2002 EGM, Claimants did not appeal their case to the Presidium
of the Supreme Court, as was their right. Moreover, several of the contentions now
advanced by Claimants were not even put in issue before the Kazakh Courts.
650. According to Respondent, the result of Claimants’ failures to pursue their right to
challenge the disputed decisions before the appropriate Kazakh authorities and Courts is
that Claimants denied the Kazakh system the opportunity to correct any errors that there
may have been. Therefore, their claim for denial of justice, and thus for breach of fair
and equitable treatment, is inadmissible before this Tribunal and alternatively fails.
3. Decision of the Arbitral Tribunal
a) The Standard
651. The parties agree that the duty not to deny justice arises from customary international law
and can also be considered to fall within the scope of treaty provisions provided for “fair
and equitable treatment.”
652. The parties also agree that denial of justice is always procedural. However, for
Claimants, it also encompasses instances of politically-dictated judgments, corruption
and intimidation and extends to cases where there is a “clear and malicious
173
misapplication of the law.”53
On the other hand, Respondent considers that denial of
justice only refers to the failure of the administration of justice in a State to meet a certain
procedural standard. The substantive outcome is only of relevance when it demonstrates
irregularities in the procedure. In other words, a court decision will be considered a
denial of justice if it was patently arbitrary, unjust or idiosyncratic such that it would
demonstrate bad faith.
653. The Arbitral Tribunal does not think that there is a major difference in the parties’
understanding of the concept. The standard is indeed of a procedural nature. In that
sense, a court procedure which does not comply with due process is in breach of the duty.
On the other hand, as pointed out by Respondent, the substance of a decision may be
relevant in the sense that a breach of the standard can also be found when the decision is
so patently arbitrary, unjust or idiosyncratic that it demonstrates bad faith.
b) Application to the facts of the case
654. The Arbitral Tribunal notes that the violations alleged by Claimants and allegedly
constituting a denial of justice, have also been invoked by Claimants as constituting a
violation of the fair and equitable treatment principle. The Arbitral Tribunal considers
that these violations are better qualified and dealt with as issues falling under the fair and
equitable treatment standard which also includes in its generality the standard of denial of
justice. Reference is therefore made to the Tribunal’s decisions at paragraphs 609 to 619,
above. Consequently, the alleged violations will not be separately dealt with under the
denial of justice standard.
655. The Arbitral Tribunal would like however to add that Claimants’ allegation of an attempt
at bribery by Judge Begaliev has been contradicted by Respondent and Judge Begaliev
himself and is not supported by the record.
656. On the other hand, Respondent’s allegation that Claimants have made no serious attempt
to challenge the cancellation of the Investment Contract or the decision of the Working
53
Azinian, Award of November 1, 1999, paras. 102-103.
174
Group, is unfounded as these procedures could only have been initiated by Kar-Tel.
Claimants filed appeals of the court decisions each time they could, at the sole exception
of the decision relating to the validation of the deliberation of the April 2002 EGM which
they could have further appealed to the Presidium of the Supreme Court.
657. Claimants have argued that they were not given notice of the Presidium hearing which
took place on October 30, 2003, upon Kar-Tel’s appeal of September 15, 2003, to
determine the sum to be paid on the compulsory redemption. Respondent challenges that
statement and has produced copies of the notice of appeal, apparently also addressed to
Claimants, as well as copies of notices allegedly sent by Mr. D. Shamshiev, the Manager,
Secretariat of the Presidium, to counsel for Rumeli and Telsim, on October 17, 2003,
advising them that a meeting of the supervisory collegium was scheduled for October 30,
2003 in connection with the court orders in the civil case on the claim by Telekom Invest
and KaR-Tel against Rumeli and Telsim. No evidence of actual delivery has been
submitted to the Tribunal but the Tribunal does not conclude from this that it did not take
place. The Arbitral Tribunal notes in this respect that Claimants disputed for the first
time in their Reply Memorial (page 52) the fact that they were given notice. There was
no mention of this important and obvious point in their first memorial.
D. Full protection and security
1. Claimants’ position
a) The standard
658. According to Claimants, a treatment that is not fair and equitable “automatically entails
an absence of full protection and security.” The obligation to accord full protection and
security requires the host State to exercise due diligence in the protection of foreign
investments. It imposes an objective standard of vigilance and thus requires the State to
afford the degree of protection and security that should be legitimately expected from a
reasonably well-organized modern State.
175
659. According to the United Nations Conference on Trade and Development, the full
protection and security standard:
“connotes the assurance of full protection and security for foreign
investors as contemplated or required by customary international law. At
the same time, the clause on full protection and security is unusual in that
it contemplates protecting investment against private as well as public
action, that is, the clause requires that the host country should exercise
reasonable care to protect investment against injury by private parties.”
660. It is inconsequential whether the damage is caused by a member of the State forces or by
a private party. In either case, the State has a “primary obligation” to exercise due
diligence to provide adequate protection. The State’s failure to comply with this
objective obligation due to the mere lack of diligence is sufficient, without any need to
establish malice or negligence.54
661. The question was addressed in the Wena Hotels55
arbitration where a dispute arose out of
agreements concluded between Wena Hotels and Egyptian Hotels Company (“EHC”), a
State-owned Egyptian company. The tribunal found that, although it was unclear
whether Egyptian officials directly participated in the seizure of the hotel, Egypt was
aware of EHC’s intentions in this connection and took no actions to prevent EHC from
doing so. Egypt did nothing to protect Wena Hotels’ investment after the illegal seizures,
made no attempts to return the hotel, refused to compensate the claimant and failed to
prosecute the EHC or its senior officials.
b) Application to the facts of the case
662. It is Claimants’ allegation that in the present case, Respondent failed to afford Claimants’
investment full protection and security. Rather, Respondent colluded with and actively
supported Telecom Invest, to the detriment of Claimants. Among other actions:
54
American Manufacturing & Trading, Inc. v. Republic of Zaire (ICSID Case No. ARB/93/1), Award of
February 21, 1997, 36 ILM 1534, paras. 6.05 – 6.06 and 6.13 [hereinafter AMT]; and Asian
Agricultural Products Ltd. v. Republic of Sri Lanka (ICSID Case No ARB/87/3), Final Award of June
27, 1990, paras. 76-77 [hereinafter AAP].
55
Wena Hotels Limited v. Arab Republic of Egypt (ICSID Case No. ARB/98/4), Award of December 8,
2000, para. 84 [hereinafter Wena].
176
- Respondent’s Courts ratified Telecom Invest’s illegitimate resolutions adopted at
an improperly-convened meeting granting its request for injunctive relief;
- the Almaty City Court validated Mr. Yerimbetov’s illegitimate appointment as
General Manager pending a decision on the merits;
- with the help of the Kuzet security service, Respondent enjoined Claimants from
accessing the premises or data of KaR-Tel without Mr. Yerimbetov’s permission;
- Claimants were not able to enforce the judgment ruling that Claimants should
have access to KaR-Tel documents;
- Respondent instituted criminal proceedings against Claimants’ executives as a
means of exerting pressure on such individuals.
2. Respondent’s position
a) The standard
663. According to Respondent, the full protection and security standard in Article II(2) of the
UK-Kazakhstan BIT must be construed in accordance with the accepted rules of treaty
interpretation. It is closely related to the fair and equitable standard. Previous tribunals
have held that it obliges the State to provide a certain level of protection to foreign
investments from physical damage and even not all physical damage. Arbitral tribunals
have also held that the full protection and security obligation is one of due diligence and
no more. The key criterion is that the State knows of the unlawful act and takes no action
to prevent or remedy it, according to the case.
664. In Lauder v. Czech Republic,56
the tribunal stated that it considered this principle to
oblige the parties to:
“exercise such due diligence in the protection of foreign investment as
reasonable under the circumstances. However, the treaty does not oblige
the parties to protect foreign investment against any possible loss of value
caused by persons whose acts could not be attributed to the State. Such
56
Ronald S. Lauder v. Czech Republic (UNCITRAL), Final Award of September 3, 2001, paras. 318 et
seq. [hereinafter Lauder].
177
protection would amount to strict liability, which cannot be imposed to a
State absent any specific provision in the Treaty.”
665. The tribunal went on to state that:
“the investment treaty created no duty of due diligence on the part of the
Czech Republic to intervene in the dispute between the two companies
over the nature of their legal relationships. The Respondent’s only duty
under the treaty was to keep its judicial system available for the Claimant
and any entities he controls to bring their claims, and for such claims to
be properly examined and decided in accordance with domestic and
international law….”
b) Application to the facts of the case
666. According to Respondent, Claimants have not alleged any physical damage and have not
therefore alleged a breach of the obligation of full protection and security. The allegation
of favoring one shareholder over another is an allegation of unfair and inequitable
treatment; and the allegation that “in effect, Respondent took KaR-Tel away from
Claimants” is an allegation of expropriation. Claimants therefore have no proper claim
that Respondent did not accord their investment full protection and security.
667. With respect to the criminal proceedings, Respondent alleges that they were not initiated
by Respondent, that they were justified, that they were not arbitrary and in any case, that
they have not prevented Claimants from pursuing their rights.
3. Decision of the Arbitral Tribunal
a) The Standard
668. The Arbitral Tribunal agrees with Respondent that the full protection and security
standard in Article II(2) of the UK-Kazakhstan BIT must be construed in accordance with
the accepted rules of treaty interpretation. It obliges the State to provide a certain level of
protection to foreign investment from physical damage. In AMT v. Zaire57
and in the
Wena case,58
ICSID tribunals have recognized that in international law, the full protection
57
AMT v. Zaire, Award of February 21, 1997, 36 ILM p. 1534.
58
Wena v. Egypt, Award of December 8, 2000.
178
and security obligation is one of “due diligence” and no more. More recently, in
Saluka,59
the Tribunal also decided that “the “full security and protection” clause is not
meant to cover just any kind of impairment of an investor’s investment, but to protect
more specifically the physical integrity of an investment against interference by use of
force.”
b) Application to the facts of the case
669. Given the limited scope of the full security and protection standard, the Arbitral Tribunal
considers that the violations alleged by Claimants cannot fall under it, except in respect
of the allegation that with the help of the Kuzet Security Services, Respondent enjoined
Claimants from accessing the premises or data of Kar-Tel without Mr. Yerimbetov’s
permission. The Tribunal considers however that given the factual circumstances of the
case, there was no such violation.
670. Indeed, at the hearing, Respondent’s witnesses confirmed that Kuzet Security Services
were not acting upon instructions of the State authorities but pursuant to a contract they
had concluded with Telecom Invest and therefore, upon instructions of the latter.
Moreover, the record does not support Claimants’ allegation that police officers were
present during the enforcement procedure conducted by a bailiff.
E. Unreasonable, arbitrary, or discriminatory measures
1. Claimants’ position
a) The standard
671. According to Claimants, Respondent also violated the BIT by impairing the operation of
Claimants’ investment by unreasonable, arbitrary, and/or discriminatory measures. The
standard of “reasonableness” has no different meaning than the “fair and equitable
treatment” standard with which it is associated. Therefore, it requires that the State’s
conduct bears a reasonable relationship to some rational policy, whereas the standard of
59
Saluka v. Czech Republic, Partial Award of March 17, 2006, para. 483.
179
non discriminatory measures requires a rational justification of any differential treatment
of a foreign investor.
672. Arbitrariness is a willful disregard of due process of law, an act which shocks, or at least
surprises, a sense of judicial propriety.60
A measure is discriminatory when it provides
the foreign investment with a treatment less favorable than the domestic investment or
than other foreign investment.
673. According to Claimants, the award rendered in CME61
is highly persuasive for the
purpose of this arbitration.
b) Application to the facts of the case
674. According to Claimants, Respondent violated its obligations by unreasonable, arbitrary,
and/or discriminatory measures in that:
- the Investment Committee did not even wait until its own extended deadline for
the filing of the reports before terminating the Investment Contract on March 25,
2002;
- the Investment Contract was terminated despite the fact that Claimants submitted
the required reports on March 25, 2002;
- the Investment Committee had the obligation to first suspend the Investment
Contract;
- the Investment Committee terminated the Investment Contract with the utmost
lack of good faith and in clear violation of the international obligations of
Respondent contained in the Bilateral Investment Treaty. The termination was
unreasonable, arbitrary, grossly unfair, unjust, idiosyncratic and violated the
legitimate expectation of Claimants.
60
Elettronica Sicula S.p.A. (ELSI) (United States of America v. Italy), Judgment of July 20, 1989, 1989
ICJ Reports 15, para. 128 [hereinafter ELSI].
61
CME Czech Republic B.V. v. The Czech Republic (UNCITRAL), Partial Award of September 13,
2001, para. 612 [hereinafter CME].
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675. According to Claimants, the above undisputable breaches of the Bilateral Investment
Treaty are alone sufficient to justify a ruling against Respondent, irrespective of the
subsequent breaches committed by Respondent and irrespective of the collusion between
Respondent and powerful local partner.
676. Claimants further invoke the following elements as unreasonable, arbitrary, and/or
discriminatory measures:
- Respondent’s judiciary took decisions and actions in support of Telecom Invest’s
expulsion of Claimants from KaR-Tel, depriving Claimants of all the benefits and
enjoyment of their investments as well as access to documents to defend
themselves;
- the Working Group’s treatment of Claimants’ investment was also in breach of
Respondent’s same obligation since it was unreasonable, arbitrary, grossly unfair,
unjust;
- the decisions of Respondent’s judiciary were unreasonable, arbitrary and grossly
unfair;
- the sole purpose of the Investment Committee’s purported termination of the
Investment Contract was to give Telecom Invest a basis to undermine the legal
foundation of Claimants’ investment;
- all following actions of Respondent were clearly intended to collude with the
foreign investor’s local partner. Respondent’s actions were discriminatory. They
were even more so discriminatory on the part of the judiciary and other organs to
have evicted Claimants and then deprived Claimants of their shares on this basis
as it is the local partner that had the lobbying obligations with respect to the
Investment Committee, and irrespective of these obligations had the duty of
assistance as shareholder;
- moreover, Respondent took such actions in favor of Claimants’ local partner and
to the detriment of Claimants as foreign investors despite Telecom Invest’s own
failure to fulfill its obligations in KaR-Tel. Indeed, pursuant to the Foundation
Agreement, Telecom Invest assumed the obligation of assuring relations with the
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Investment Committee; it shared the responsibility of the operations and
management of KaR-Tel. Yet, Respondent’s Investment Committee and
Judiciary failed equally to take all of those elements into consideration;
- the fact that Claimants had no access to documents at KaR-Tel after their eviction
is also plainly discriminatory;
- finally, the institution of criminal proceedings against only Turkish employees
(save for one local secretary who was the secretary of Mr. Agilönü) for the
alleged theft of petty cash worth a few hundred euros is discriminatory,
particularly since a few thousand dollars were paid for years to employees forced
on KaR-Tel by the local partner who did not even show up for work but were paid
anyway upon Mr. Kulibayev’s instructions.
2. Respondent’s position
a) The standard
677. Respondent accepts the definition of unreasonable, arbitrary and discriminatory treatment
stated by the authorities cited by Claimants. According to Respondent, in accordance
with the proper interpretation of the fair and equitable treatment obligation, the standard
of protection to be afforded is low. Further, any purportedly unreasonable, arbitrary or
discriminatory conduct is capable of justification if it is proportionate and for a public
purpose.
b) Application to the facts of the case
678. According to Respondent, Claimants have not demonstrated a prima facie case of any
arbitrary or unreasonable or discriminatory conduct by any person or entity whose actions
are attributable to Respondent.
3. Decision of the Arbitral Tribunal
a) The Standard
679. As we have noted, the parties agree with the interpretation of the standard. As the
Arbitral Tribunal appropriately determined in Saluka, the standard of “reasonableness”
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has no different meaning than the “fair and equitable treatment” standard “with which it is
associated.”62
Reasonableness therefore requires that the State’s conduct “bears a
reasonable relationship to some rational policy, whereas the standard of “nondiscrimination”
requires a rational justification of any differential treatment of a foreign
investor.”63
680. Similarly, the Arbitral Tribunal in the CMS award stated that the standard of protection
against discrimination “is related to that of fair and equitable treatment. Any measure
that might involve ... discrimination is in itself contrary to fair and equitable treatment.64
The standard is next related to impairment.”65
A measure is discriminatory when it
provides “the foreign investment with a treatment less favorable than domestic
investment.”66
b) Application to the facts of the case
681. The Arbitral Tribunal notes that the violations alleged by Claimants and allegedly
constituting unreasonable, arbitrary or discriminatory measures, have also been invoked
by Claimants as constituting a violation of the fair and equitable treatment principle. The
Arbitral Tribunal considers that these violations are better qualified and dealt with as
issues falling under the fair and equitable treatment standard, which also includes in its
generality the principle of no-unreasonable, arbitrary or discriminatory measures.
Reference is therefore made to the Tribunal’s decision at paragraphs 609 to 619, above.
62
Saluka v. Czech Republic, Partial Award of March 17, 2006, para. 460.
63
Ibidem.
64
CMS, Award of 12 May 2005, para. 290. See also Saluka, Partial Award of March 17, 2006, para.
460.
65
CMS, Award of May 12, 2005, para. 290.
66
ELSI, Judgment of July 20, 1989, para. 128.
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F. Expropriation
1. Claimants’ position
a) The standard
682. Both the BIT and the FIL prohibit the host State from expropriating directly or indirectly,
or subjecting to measures of similar effect, any foreign investment, if certain specific
conditions are not met. The circumstances under which a State may lawfully expropriate
a foreign investment are limited to expropriations that are done:
- for a public purpose;
- in a non-discriminatory manner;
- in accordance with due process of law;
- upon payment of prompt, adequate, and effective compensation.
683. Moreover, it is generally accepted that a State can expropriate an investment in a number
of ways, including through acts of harassment. One of the methods is when a State forces
an alien to dispose of his property at a price representing only a fraction of what it would
have been had not the alien’s use of its property been subjected to interference by the
State.
684. An expropriation may also be ‘creeping’, i.e. a form of indirect expropriation with a
distinctive temporal quality in the sense that it encapsulates the situation whereby a series
of acts which are attributable to the State over a period of time culminate in the
expropriatory taking of such property.67
685. A distinction is indeed made in public international law between two types of
expropriation: either a direct and deliberate formal act of taking, such as an outright
nationalization, or an indirect taking that substantially deprives the investor of the use or
enjoyment of its investment, including deprivation of the whole or a significant part of
the economic benefit of property.
67
Generation Ukraine, Inc. v. Ukraine (ICSID Case No. ARB/00/9), Award of September 16, 2003,
para. 20.22 [hereinafter Generation Ukraine].
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686. Claimants further allege that although the intent of the State may play a role, such
intention is not decisive. In essence, the standard for determining whether a State’s
conduct amounts to an expropriation is the actual effect of the measures on the investor’s
property.
687. Claimants finally allege that an expropriation does not have to be for the benefit of the
host State for it to be unlawful. Indeed, as confirmed in Metalclad and Tecmed,68
a State
can expropriate an investment, or take measures equivalent to an expropriation in
connection with an investment, for the benefit of a third party. Similarly, the Tecmed
tribunal69
commented that the term “expropriation” covered situations where the State
actions “transfer assets to third parties different from the expropriating State.”
b) Application to the facts of the case
688. According to Claimants, in the present case, there can be no doubt that Respondent has
expropriated Claimants’ investment. Each of the acts and omissions described above,
individually and collectively, constitute an expropriation:
- the termination of the Investment Contract in violation of its terms was the
triggering event;
- subsequently, the decision of Respondent’s Courts to rubber stamp, without more,
Telecom Invest’s request for injunctive relief, and to replace KaR-Tel’s General
Manager by Mr. Yerimbetov, amounted to a de facto expropriation;
- Claimants were thus physically ousted from KaR-Tel’s premises but were also
excluded from the management, enjoyment, and use of their investment as such;
- Respondent’s Courts subsequently expropriated Claimants’ title for the further
benefit of Telecom Invest, ordering the compulsory redemption of Claimants’
shares in KaR-Tel;
68
Metalclad, Award of August 30, 2000, para. 103; and Tecmed, Award of May 29, 2003.
69
Id., para. 113.
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- Respondent’s unlawful expropriation culminated in the October 2003 decision of
the Kazakhstan Supreme Court, in which the compulsory redemption decision
was affirmed and Claimants’ 60% combined stake in KaR-Tel was valued at a
mere USD 3,000.
689. In reality, according to Claimants, the parties do not dispute that Claimants’ investment
was expropriated. Respondent’s objection that Claimant’s expropriation was justified is
irrelevant as Claimants are not seeking restitution or specific performance but adequate
compensation. In this respect, Claimants allege that the USD 3,000 valuation of KaR-Tel
by Respondent’s judiciary is a defiant mockery of justice. Respondent itself recognized
this fact as is evidenced by its offer, via Altel, to purchase Claimants’ shares for USD 20
million.
690. Given the foregoing, Claimants submit that none of the elements of lawful expropriation
has been satisfied.
2. Respondent’s position
a) The standard
691. Respondent accepts that the conditions for lawful expropriation are:
- that it should take place for a public purpose;
- in a non-discriminatory manner;
- in accordance with due process of law;
- upon payment of prompt, adequate and effective compensation.
692. Respondent also accepts that expropriation can be direct or indirect and take place in a
single action or a series of actions. However, Respondent submits that the intention of
the State is highly relevant, although admittedly not determinative of whether or not there
has in fact been an expropriation.
693. Respondent further accepts that expropriation can exist despite there being no obvious
benefit to the State concerned, albeit this kind of case is exceptional.
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694. Respondent finally points out that in order for an act to be an unlawful expropriation, it
must have had a significant impact upon the enjoyment of the investment and must have
been initiated by an act attributable to Respondent.
b) Application to the facts of the case
695. Respondent denies that it has expropriated Claimants’ investment. In any case, the
difficulty in which Claimants find themselves is that expropriation requires the taking of
an asset belonging to the person making the claim. Claimants did not in fact make any
investment, therefore, there was nothing to expropriate.
696. Additionally, the real Claimant is the Turkish State. The sums that Claimants are in fact
seeking to recover are the losses that the Turkish State itself, and not Rumeli or Telsim,
have suffered as a result of the collapse of the Uzan family’s bank and the settlement of
the ICSID claim brought against the Turkish State by Motorola.
697. Respondent further sets forth that a transfer to a third party is only an expropriation if that
transfer was instigated by the State. In this respect, it is Respondent’s position that
Claimants have not adduced any evidence to suggest that Respondent instigated the
compulsory redemption of their shares in KaR-Tel. The plain truth is that it was Telecom
Invest, a private Kazakh entity, the actions of which are not attributable to Respondent,
which in fact instigated that process.
3. Decision of the Arbitral Tribunal
a) The Standard
698. Article III of the BIT provides that “1.
Investment shall not be expropriated, nationalized or subject directly
or indirectly, to measures of similar effect expect for a public purpose, in
a non-discriminatory manner, upon payment of prompt, adequate and
effective compensation, and in accordance with due process of law and the
general principles of treatment provided for in Article II of this
Agreement.
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2. Compensation shall be equivalent to the real value of the expropriated
investment before the expropriatory action was taken or became known.
Compensation shall be paid without delay and be freely transferable as
described in para. 2 Article 4.”
699. The FIL provides that “1.
Foreign investments may not be nationalised, expropriated or
subjected to any measures which have the same consequences as
nationalization and expropriation (henceforth, expropriation), except for
the cases where such expropriation is carried out for public interests in
compliance with the appropriate legal procedures and carried out without
discrimination with the payment of immediate, adequate and efficient
compensation.
2. The compensation must be equal to the fair market value of the
expropriated investments at the moment when the investor learnt of the
expropriation.”
700. The parties agree that expropriation can be direct, that is, resulting from a deliberate
formal act of taking, or indirect, that is, resulting from a series of acts which are
attributable to the State over a period of time and culminate in the expropriatory taking of
the relevant property.70
The intention or purpose of the State organ is not mentioned in
Article III of the BIT and the parties agree that the intent of the State is relevant to, but is
not decisive of the question whether there has been an expropriation:
“The intent of the government is less important than the effects of the
measures on the owner, and the form of the measures of control or
interference is less important than the reality of their impact.... Therefore,
the Tribunal need not determine the intent of the Government of Iran....”71
701. The parties also agree that expropriation can exist despite there being no obvious benefit
to the State concerned:
70
Generation Ukraine v. Ukraine, Award of September 16, 2003, paras. 20-22.
71
Georges H. Aldrich, What Constitutes a Compensable Taking of Property? The Decisions of the IranUnited
States Claims Tribunal, 1994, 88 American Journal of International Law, p. 603; and Phillips
Petroleum Co. Iran v. The Islamic Republic of Iran, Case No. 39, Chamber Two, Award No. 425-39-2
of June 29, 1989, 1989 WL663903, para. 97.
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“Although formally an expropriation means a forcible taking by the
Government of tangible or intangible property by means of administrative
or legislative action to that effect, the term also covers a number of
situations described as de facto expropriation, where such actions or laws
transfer assets to third parties different from the expropriating State or
where such laws or actions deprive persons of their ownership over such
assets, without allocating such assets to third parties or to the
Government.” 72
This is supported by a footnote referring to the following passage in Metalclad:
“Thus, expropriation... includes not only open, deliberate and
acknowledged takings of property, such as outright seizure or formal or
obligatory transfer of title in favour of the host State, but also covert or
incidental interference with the use of property which has the effect of
depriving the owner, in whole or significant part, of the use or reasonably
to be expected economic benefit of property even if not necessarily to the
obvious benefit of the host State.”73
702. Whereas most cases of expropriation result from action by the executive or legislative
arm of a State, a taking by the judicial arm of the State may also amount to an
expropriation. In the Oil Field of Texas case the Tribunal held that:
“It is well established in international law that the decision of a
court in fact depriving an owner of the use and benefit of his
property may amount to an expropriation of such property that is
attributable to the state of that court. As the French-Italian
Commission held in its decision No. 136 of 25 June 1952,
concerning a dispute over Italian property in Tunisia:
‘La sentence rendue par l’autorité judiciaire est une émanation
d’un organe de l’Etat, tout comme la loi promulguée par l’autorité
législative, ou la décision prise par l’autorité exécutive. La nonobservance
d’une règle internationale, de la part d’un tribunal,
crée la responsabilité internationale de la collective dont le
tribunal est un organe, même si le tribunal a appliqué un droit
interne conforme au droit international.’”74
72
Tecmed, Award of May 29, 2003, para. 113.
73
Metalclad, Award of August 30, 2000, para. 103.
74
Oil Field of Texas Inc. v. The Government of the Islamic Republic of Iran, Iran-US Claims Tribunal,
Award in Case No. 43 (258-43-1) of October 8, 1986, Yearbook of Commercial Arbitration, Vol. XII
189
703. The Tribunal notes also the provisions of Article 4(1) of the ILC Articles (see paragraph
577 above).75
704. It is a characteristic of judicial expropriation that it is usually instigated by a private party
for his own benefit, and not that of the State. This is no doubt a relevant consideration,
although not in itself decisive, as has already been observed. The Tribunal considers
however, and Respondent indeed accepted in paragraph 259 of its Rejoinder, that a
transfer to a third party may amount to an expropriation attributable to the State if the
judicial process was instigated by the State.
b) Application to the facts of this case.
705. The final act of ‘taking’ as regards Claimants’ investment (i.e. their shares in Kar-Tel)
was the decision of the Presidium of the Supreme Court affirming the compulsory
redemption of those shares. The Tribunal is satisfied that this decision was made “for a
public purpose,” namely the administration of justice and the execution of the laws of the
host State. Moreover, despite the fact that the valuation of the shares was, unusually,
made by the Presidium rather than by either of the inferior tribunals, there was no
evidence that it was not made “in accordance with due process of law.”
706. Nevertheless, for reasons which the Tribunal will discuss under the heading “Calculation
Of Damages And Quantum,” the valuation placed on Claimants’ shares was manifestly
and grossly inadequate compared to the compensation which the Tribunal there holds to
be necessary in order to afford adequate compensation under the BIT and the FIL. The
Tribunal accordingly holds that the expropriation by the Presidium was unlawful.
(1987), at pp. 287-291 [hereinafter Oil Field of Texas v. Iran]. See also CCL v. Republic of
Kazakhstan, SCC Case 122/2001, Stockholm International Arbitration Review 2005:1, pp. 174-5
[hereinafter CCL v. Kazakhstan].
75
See also the observation of Professor Christopher J. Greenwood, State Responsibility for the
Decisions of National Courts, in Issues of State Responsibility before International Juridical
Institutions, ed. Fitzmaurice and Sarooshi 2004, p. 57, that “the decisions of a court - at whatever level
of the judicial hierarchy - are plainly imputable to the State.”
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707. The Tribunal further holds that the fact that the expropriation was not directly for the
benefit of the State but for the benefit of Telecom Invest does not affect this conclusion,
since, as the parties agree, expropriation can exist despite there being no obvious benefit
to the State concerned. In this connection the Tribunal does however consider that it is
relevant that the court process which culminated in the expropriation was instigated by
the decision of the State, acting through the Investment Committee, to terminate the
Investment Contract. This decision was taken on March 25, 2002: the following day
Telcom Invest sent its notice to Kar-Tel and to Claimants calling for an Extraordinary
General Meeting of shareholders of Kar-Tel to consider the harm to Kar-Tel and the
compulsory redemption of Claimants’ shares. This notice was sent without the decision
of the Investment Committee having been communicated to Kar-Tel. In the judgment of
the Tribunal, the only possible conclusion from these circumstances is that Telcom Invest
and its shareholders were privy to the decision and that Kar-Tel and Claimants were not,
and that this was the result of collusion between the Investment Committee on the one
hand and Telcom Invest and its shareholders on the other. The Tribunal is unable to
conclude with confidence that the Investment Committee foresaw or intended the court
proceedings which resulted from this, although such court proceedings were, if not
actually foreseen, at least reasonably foreseeable. The Tribunal is left in no doubt,
however, that the court process which resulted in the expropriation of Claimants’ shares
was brought about through improper collusion between the State, acting through the
Investment Committee, and Telcom Invest. The fact that the result may not have been
intended by the Investment Committee is not decisive of the issue of expropriation.
Moreover, it is beyond doubt that expropriation was the intended consequence of the
court orders for compulsory redemption of Claimants’ shares.
708. In summary, the conclusion of the Tribunal is that this was a case of ‘creeping’
expropriation, instigated by the decision of the Investment Committee which was then
collusively and improperly communicated to Telcom Invest and its shareholders before
Claimants were made aware of it, and which proceeded via a series of court decisions,
culminating in the final decision of the Presidium of the Supreme Court. The decision of
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the Investment Committee was moreover unfair and inequitable in itself, as the Tribunal
has found.
709. Claimants, however, advanced a very much broader case than this, founded on an
allegation that the entire process leading to the expropriation of their shares in Kar-Tel
was brought about by a conspiracy between the shareholders of Telcom Invest, the
Investment Committee, and the judges of the courts who heard the various stages of the
legal proceedings, to bring about a result which benefited members of the family of the
President of the Republic of Kazakhstan, and thereby indirectly the President himself.
The evidence for this was mainly, if not wholly circumstantial, but it is in the nature of
such an allegation that direct evidence of a conspiracy is unlikely to be available. The
Tribunal has therefore considered the evidence with particular care, reminding itself that
an allegation such as this must, if it is to be supported only by circumstantial evidence, be
proved by evidence which leads clearly and convincingly to the inference that a
conspiracy has occurred.
710. The Tribunal has before it a number of documents, mostly in the form of press reports,
which tend to establish that the whole country, the whole political system and the whole
economy of Kazakhstan are controlled by President Nurabayev and his family, including
an article by the International Eurasian Institute for Economic and Political Research.
The Tribunal was also shown a report by the UN Economic and Social Council which
indicates that the judiciary is not independent and is prone to allegations of bribery, and
another by the Bureau of Democracy noting that human rights are not respected and that
“the constitution concentrates power in the hands of the presidency, permitting the
president to control regional and local governments and to exercise significant influence
over the legislature and judiciary ...”
711. It is also clear that the President’s family played a role, at least behind the scenes, in
relation to Kar-Tel. Investel, the first partner of Claimants in Kar-Tel, was owned to the
extent of 51% by Almex. The majority owners of Almex were Timur Kulibaev and his
wife Dina Kulibaeva, the President’s second daughter. Almex is a major company: it is
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also the major shareholder of Halik Bank, with a participation of 80.92%. Investel was
later replaced by Telecom Invest whose founders were Almex (87.5%) and Mrs. Helena
Goutova (12.5%).
712. The Tribunal notes that the role of the local partner was to “obtain necessary permissions
and licenses from official bodies of Kazakhstan Republic (Government Investment
Committee, Kazakhtelcom, etc.).” In this connection, the Tribunal recalls that in August
2002, Mr. Hakin Uzan offered to sell Claimants’ shares to Telecom Invest for USD 20
million. That offer was rejected by Mr. Karibjanov, who represented Telecom Invest,
and Mr. Uzan then offered to buy Telecom Invest’s shares for USD 12 million.
Subsequently, Telecom Invest accepted the offer and a Share Purchase Agreement was
negotiated and the parties initialled it on October 13, 2002. Claimants however never
proceeded to transfer the required funds. The draft Stock Purchase Agreement provided
in its Article 6.2 that “the seller shall either obtain on behalf of the Company a valid
investment incentive certificate, which was previously cancelled by the Investment
Committee on 19 April 2002, or shall procure that the Investment Committee will have
rescinded its cancellation of 19 April 2002. It is the full responsibility of the seller that
the Company will have obtained the new and valid investment incentive certificate or the
Investment Committee will have rescinded its cancellation of 19 April 202. The seller
shall obtain the new investment incentive certificate or shall procure the rescission of the
cancellation of 19 April 2002 to the full satisfaction of the Buyer within four months after
the closing. The seller shall ensure in the new investment incentive certificate or in the
rescission of the cancellation of 19 April 2002 that the Company and the Buyer shall
enjoy exactly the same benefits as originally granted by the Investment Committee when
the Company was established as if there had been no cancellation on 19 April 2002.”
The Stock Purchase Agreement further provided that if the seller failed to obtain the
certificate or the rescission of the cancellation, Claimants would obtain a reduction of
price. This clearly indicates that Telecom Invest had grounds for believing that it was
able to influence the decisions of the Investment Committee. Mr. Kulibaev was indeed a
former member of the Investment Committee.
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713. According to Claimants, in August 2004 Altel (together with Orlon) indicated to
Claimants that they were willing to purchase their 60% share for USD 20 million.
Respondent disputes this and states that the meeting had another purpose. The Tribunal
is unable to say which version of events is correct. One of the founders of Altel was
represented by Ms. A. N. Nazarbayeva, apparently the youngest daughter of the
President. Claimants also allege, but without any concrete evidence, that Orlon is owned
by another daughter of the President.
714. The Tribunal further takes into account the fact that once the Investment Contract was
terminated the local partner took no steps - and nor did Kar-Tel - to challenge the
decision of the Investment Committee or to reinstate the Contract.
715. In these circumstances it is not in the least surprising that Claimants harbour the gravest
suspicions that they are the victims of a conspiracy for the benefit of the President and his
family. Indeed the material summarised above is consistent with and positively supports
the Tribunal’s finding that there was improper collusion between the Investment
Committee and Telcom Invest with regard to the decision to terminate the Contract,
although it is not necessary to decide whether this involved Mr. Kulibaev directly, which
he denied, or some other means. Despite this, the Tribunal is unable on this material to
conclude with the necessary degree of conviction that there was a wider conspiracy
involving the President, or for his direct or indirect benefit. Nor is the Tribunal able to
conclude that any of the other participants in the investment acted in such a way as to
engage the international responsibility of the Republic of Kazakhstan. In particular, the
Tribunal observes that in January 2003 Telcom Invest was sold to Mr. Seysembayev,
who was not alleged to have any family relationship to the President, and that a number
of key elements in the process leading to the expropriation took place after this date.
194
CHAPTER VI. COMPENSATION AND DAMAGES
I. PRELIMINARY REMARKS ON CLAIMANTS’ CLAIM FOR DAMAGES
A. Respondent’s position
716. According to Respondent, in the light of the foregoing, it is unnecessary for the Tribunal
to consider the issue of damages. Claimants have failed to establish any breach by
Respondent of its international law obligations. In any case, if it is found that the
cancellation of the Investment Contract constituted a breach of Respondent’s
international obligation, no compensation can be awarded to Claimants because:
- first, Claimants did not make investments in the amount or the nature alleged so
that they cannot claim damages for the alleged expropriation of non-existent
investments;
- second, for reasons of public policy, the Tribunal should not allow Claimants to
recover alleged losses connected with their fraud on KaR-Tel;
- third, in any case, it is obvious that Claimants’ fraud would have been detected
and used to justify the acts complained of by Claimants. Accordingly, Claimants
are unable to show any damages flowing from the acts complained of against
Respondent;
- finally, the reports filed in the Kazakh proceedings indicate that KaR-Tel was
insolvent. Any valuation must take this fact into consideration.
B. Claimants’ position
717. According to Claimants, none of these arguments is convincing:
- Claimants made a substantial multi-million dollar financial investment and
contributed know-how and training so as to build a successful and growing KaRTel
as the second GSM licensed operator in Kazakhstan;
- the manner in which the Uzan family may or may not have conducted the
business of its companies in Turkey is irrelevant;
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- even if Claimants’ alleged fraud in Turkey “would have been detected,” this does
not in any way justify or somehow change anything in Respondent’s wrongful
conduct in breach of international law. Respondent’s obligation is independent of
any conduct that Respondent might seek to attribute to Claimants;
- Claimants dispute that KaR-Tel, with the only second-issued GSM license in
Kazakhstan, was in any way an insolvent entity. The report filed before the
Kazakhstan Courts and the Courts’ conclusion in this regard form part of the
denial of justice that Claimants suffered due to the Courts’ blatant misapplication
of Kazakhstan law. In any event, this argument cannot be sustained in the light of
the fact that a year after the valuation of Claimants’ shares by the Courts,
Respondent offered – through Altel – to purchase Claimants’ rights for USD 20
million and Vimpelcom purchased KaR-Tel for more than USD 350 million.
II. GENERAL PRINCIPLES
A. The compensation in international law
1. Claimants’ position
718. According to Claimants, with respect to expropriation, the BIT and the FIL both require
that the investor be compensated for its expropriated investment. The Bilateral
Investment Treaty establishes that “Compensation shall be equivalent to the real value of
the expropriated investment before the expropriatory action was taken or became
known.” Beside the case of expropriation, the BIT does not define the manner in which
damages should be calculated in case of treaty violations other than expropriation.
Therefore, it is Claimants’ position that reparation should be determined in accordance
with general principles of international law. Such principles are set forth in the ILC
Articles. Article 31 of the ILC Articles enunciates the principle of full reparation, a
principle which is confirmed by the Chorzow Factory decision.76
76
Case Concerning Certain German Interests in Polish Upper Silesia (Germany v Poland), 1928
P.C.I.J. (Ser. A) No. 17, at 40 [hereinafter Chorzów Factory].
196
719. This principle of full reparation is equally applicable to calculate damages for nonexpropriation
breaches of treaty obligations when there has been no finding of
expropriation. Since the Bilateral Investment Treaty does not define the manner in which
damages should be calculated in case of treaty violations other than expropriation, an
arbitral tribunal “must accordingly exercise its discretion to identify the standard best
attending to the nature of the breaches found.”77
2. Respondent’s position
720. Respondent points out that the Chorzow Factory decision requires the restoration of the
status quo ante, or compensation of the same effect. The status quo ante in this case
would be for Claimants to hold 60% of the equity of a heavily insolvent partnership
whose major creditor was actively pursuing repayment of over USD 100 million.
721. According to Respondent, if the Tribunal is minded to award damages to Claimants, it is
Respondent’s case that:
- the proper valuation standard is the fair market value of Claimants’ investment in
April 2002;
- the Analysys Report is so seriously flawed as to be worthless to the Tribunal in
assessing the proper measure of compensation;
- the Navigant Report is eminently preferable to the Analysys Report, and provides
clear and compelling evidence that the fair market value of Claimants’ investment
in April 2002 was zero.
B. Valuation standards
1. Claimants’ position
722. According to Claimants, when assessing the compensation due following an
expropriation, the Tribunal should determine the fair market value of the foreign
investment so as to give full effect to the principle of full reparation set forth in Chorzow
77
CMS, Award of May 12, 2005, para. 409.
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Factory. This principle of full reparation is equally applicable to calculate damages for
non-expropriatory breaches of treaty obligations. In this respect, Claimants point out
that, while some tribunals have favored the guiding principle set forth in Chorzow
Factory, other tribunals, such as in CMS, have preferred the fair market value approach.
723. According to Claimants, in the instant case, the “cumulative nature” of Respondent’s
breaches of its treaty obligations (other than expropriation) have resulted in the
irreversible deprivation of Claimants’ entire investment for which Claimants should be
compensated at full market value.
724. Claimants submit that in determining the value of KaR-Tel, its expert, Analysys, rightly
applied a discounted cash flow (“DCF”) approach as this is the most “widely accepted
and highly regarded methodology used to calculate the value of cashflows being
generated by a business.” Analysys dismissed the net book value approach (“NBV”) as
“particularly inappropriate in the case of a mobile operator, where the business model is
one of heavy investment to establish an asset base (network) that can be used to generate
returns over an extended period of time.”
725. Therefore, Mr. Wright of Analysys used the DCF to determine the value of KaR-Tel as of
two alternative valuation dates, namely April 23, 2002 (the date of expulsion of
Claimants from KaR-Tel) and October 30, 2003 (the date of the unappealable decision of
Respondent’s Supreme Court ordering the compulsory redemption of Claimants’ shares).
726. Respondent’s damage expert, Mr. Kaczmarek of Navigant Consulting, did not dispute
that the DCF approach is a traditional method for valuing companies. He argued only
that the DCF approach was inapplicable in the instant case because, in his view, KaR-Tel
was insolvent and could thus not be treated as a going concern as of April 2002.
However, Mr. Kaczmarek did not address the question of solvency of KaR-Tel as of
October 2003.
727. Claimants further point out that, contrary to Mr. Kaczmarek’s opinion, Mr. Wright rightly
explained that “[T]his was never in doubt, that it was a going concern…This was a fully
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operational company…They couldn’t fund the financing, or they couldn’t repay the
Motorola Loan, that is balance sheet insolvent, but they were an ongoing business….”
728. According to Claimants, the facts and circumstances clearly support Mr. Wright’s view:
- KaR-Tel was and is a going concern; it continues in active existence today and is
a highly profitable company. It would be contrary to the principles of full
restitution to reject use of the DCF method on grounds of insolvency when KaRTel
has not been liquidated, had valuable assets, including one of the two GSM
licenses in a large and emerging oil-rich country;
- Motorola could not push KaR-Tel into bankruptcy for so long as the Telsim
guarantee remained in place;
- as evidenced in the PWC report, KaR-Tel generated positive EBITDA margins in
both 2001 and early 2002;
- although Mr. Wright acknowledged that the restructuring of the debt would
restore solvency, he rightly argued that “it’s valuable even before you solved it
[the restructuring of the debt], just the knowledge that it can be solved means the
thing is valuable, and it is demonstrated when you solve it;”
- the Vimpelcom transaction for USD 350 million, less than a year following the
Supreme Court’s valuation of Claimants’ shares, gives the Tribunal the benefit of
an objective and fully independent valuation. As noted by Analysys, it is simply
inconceivable that in a short period of time KaR-Tel’s value could increase to that
extraordinary extent.
2. Respondent’s position
729. According to Respondent, the only loss for which Claimants claim is the de facto or
indirect expropriation of their shareholding in KaR-Tel. A number of ICSID awards have
accepted a measure of compensation based upon fair market value as appropriate for
treaty breaches not amounting to expropriation. Moreover:
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- the BIT provides that “compensation shall be equivalent to the real value of the
expropriated investment;”
- Article 7(2) of the FIL, on which Claimants rely, provides that compensation shall
be equivalent to the fair market value of the asset expropriated;
- the Kuwait-Kazakhstan BIT specifies that compensation shall be assessed “in
accordance with internationally recognized principles of valuation on the basis of
the fair market value.”
730. Therefore, according to Respondent, the standard of compensation should be assessed by
reference to internationally recognized principles of valuation on the basis of the fair
market value. The best statement of the internationally recognized principles referred to
are the World Bank Guidelines of 1992. These provide that “without implying the
exclusive validity of a single standard for the fairness by which compensation is to be
determined and as an illustration of the reasonable determination by a State of the
market value of the investment…, such determination will be deemed reasonable if
conducted as follows: for a going concern with a proven record of profitability on the
basis of the discounted cash flow value (DCF); for an enterprise which, not being a
proven going concern demonstrates lack of profitability, on the basis of the liquidation
value.”
731. According to Respondent, there can be no doubt that KaR-Tel was heavily insolvent in
April 2002. The Navigant Report is clear that KaR-Tel satisfied each of the possible tests
for insolvency. In addition:
- KaR-Tel had missed nearly all of the targets in its own business plan;
- the total equity investment made had only been USD 10,000;
- KaR-Tel had dramatically underinvested in capital equipment in particular;
- KaR-Tel had never made a profit;
- KaR-Tel was increasingly underperforming its only rival, K-Cell;
- KaR-Tel had been capitalized using short-term debt, on which it was in default.
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732. Deloitte & Touche’s auditor’s statement dated July 15, 2002 was unambiguous: “there is
substantial doubt that the Company will be able to continue as a going concern.” Even
Mr. Wright from Analysys accepted in cross-examination that KaR-Tel was balance sheet
insolvent.
733. The best Claimants can do is say that it is not correct to say that KaR-Tel was insolvent
since it did in fact continue to survive and eventually prosper. That, however, only serves
to highlight precisely why using hindsight is inappropriate. No one looking at KaR-Tel
as it stood in April 2002 would have thought that it had a realistic chance of survival.
734. Accordingly, Respondent alleges that, in the present case, as confirmed by the Navigant
Consulting Report, the best approach is liquidation value. However, even if KaR-Tel is
valued as a going concern, the Navigant Report confirms that KaR-Tel’s shares were
worthless in April 2002.
735. Respondent further alleges that damages reflecting lost profits or future earnings are only
recoverable where the entity is a going concern with a history of actual operations. In
April 2002, KaR-Tel was not a going concern in any sense of the word. It was clearly
insolvent.
736. In the same vein, it is Respondent’s position that arbitral tribunals do not accept claims
for speculative, uncertain or contingent damages. Indeed, in cases where lost profits have
been awarded, this measure has been based upon a long history of operations. In the
present circumstances, KaR-Tel’s financial status in April 2002 was such that any
assessment of lost profits would be speculative and uncertain in the extreme.
C. The valuation date
1. Claimants’ position
737. Claimants point out that with respect to unlawful expropriation, the relevant date for
purposes of assessing damages is respectively defined by the BIT and the FIL as the
moment “before the expropriatory action was taken or became known” and “the moment
when the investor learnt of the expropriation.” However, neither provides any guidelines
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as to how such date of expropriation should be ascertained. In case of creeping
expropriation such as this one, the precise date of expropriation is difficult to ascertain
since various events can be deemed expropriatory in nature. Arbitral tribunals have
considered that, in cases of creeping expropriation, the date of expropriation is not
necessarily the date of the first or of the last expropriatory event, but can be any point in
time within that range when the owner has been irreversibly deprived of its property. The
exact date on which this moment is deemed to have occurred is left to the discretion of
the Arbitral Tribunal.
738. According to Claimants, the moment of valuation should be, as pointed out by
Messrs. Reisman and Sloane, “the date on which assessing the fair market value of a
foreign investment for purposes of calculating compensation will enable a tribunal to
give full effect to the principle of full reparation.”78
This is the approach that was
retained in the ADC case, where the tribunal, confronted to a case where the value of the
investment after the date of expropriation had risen considerably held that the application
of the Chorzow Factory standard required that the “date of valuation should be the date
of the Award and not the date of expropriation, since this is what is necessary to put the
Claimants in the same position as if the expropriation had not been committed.”79
739. Moreover, arbitral tribunals, as in Amco II, have held that, since the purpose of the
compensation is full restitution, it is neither necessary nor appropriate to exclude from
consideration in value calculations information which became available after the date of
expropriation.80
740. Claimants point out that the same approach is applicable to calculate damages for nonexpropriatory
breaches.
78
Michael Reisman and Robert Sloane, Indirect Expropriation and Its Valuation in the BIT Generation,
74 the British Yearbook of International Law, 115, 150.
79
ADC, Award of October 2, 2006, paras. 484-494.
80
Amco II, Award in the Resubmitted Case of June 5, 1990.
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741. Claimants therefore instructed Analysys to determine the value of Claimants’ investment
at two different moments in the timeline of Respondent’s creeping expropriation: (1) on
April 23, 2002, when Claimants were physically ousted from KaR-Tel by Respondent’s
enforcement authorities and on the basis of an injunction issued by Respondent’s Courts
and were never permitted to return, such that their investment was de facto expropriated
on such date; and (2) on October 30, 2003, when the final and unappealable decision of
Kazakhstan Supreme Court effectuated the compulsory sale of Claimants’ shares for a
price of only USD 3,000, thereby irreversibly depriving Claimants of their investment.
2. Respondent’s position
742. According to Respondent, the only possible relevant date for valuation should be 23 April
2002. As decided in the Chorzow Factory case, the reparations should, insofar as
possible, place claimant in the position in which it would have been had the expropriation
not occurred. The appropriate date for valuation of Claimants’ shareholding in KaR-Tel
would, therefore, be as at April 2002. Indeed, April 2002 was the last time that
Claimants or their appointees played any role in KaR-Tel. From that point onwards,
Claimants did not invest or otherwise provide any funding to KaR-Tel, nor did they or
their appointees participate in any way in the operations of KaR-Tel. If, therefore, as
Claimants allege, the injunction marked the beginning of the continuum of expropriation,
this makes April 23, 2002 the most appropriate date for valuation purposes.
743. Respondent notes that Claimants refer to the approach taken by the ADC tribunal which
adopted the date of the award as the valuation date. However, Respondent draws the
Tribunal’s attention to the very different circumstances leading to the adoption of that
approach:
- the ADC tribunal itself referred to the unique nature of the case;
- the claimant in the ADC case had a contract with the host government itself for
the provision of airport management services;
- by the time of the expropriation, that contract had been in operation for six years
and had been very successful financially;
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- had the benefit of the contract not been expropriated, the claimant would not have
had to implement significant changes to its operations;
- the claim for lost profits was therefore reasonably certain;
- the only way in which the claimant could be put into the position it would have
been without the expropriation, was to award the lost profits.
744. According to Respondent, ADC was therefore a case concerning the award of lost profits
and it relied upon the same principles, especially that of a “going concern.” Respondent
alleges that the contrast with the facts of this arbitration could not be more pronounced
since KaR-Tel failed to make any profit in its first four years, was insolvent and it is only
as a result of Mr. Yerimbetov’s management skills and change of direction that KaR-Tel
eventually became successful.
D. Causation
745. According to Claimants, Respondent’s wrongful conduct in breach of the Bilateral
Investment Treaty and of international law has resulted in the total loss of Claimants’
considerable investment. The causal nexus between the wrongful acts and the damage is
obvious. This is because it is the unlawful termination of the Investment Contract that
triggered and served as the justification for the process that ultimately led to the
expropriation of Claimants’ 60% shares in KaR-Tel by Respondent as it is on the
termination of the Investment Contract that the local partner and Respondent’s judiciary
relied to evict Claimants.
746. According to Respondent, the principles governing international law require the
wrongdoer to compensate the victim for the loss it has suffered which was directly caused
by the wrongful acts. In other words, if the Tribunal finds Respondent liable to make
reparations to Claimants, such reparations may only extend to that which is necessary to
compensate Claimants for losses directly caused by the international wrong attributed to
Respondent.
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747. In this respect, Respondent submits that if the Tribunal were to find that the cancellation
of the Investment Contract was procedurally unlawful, or even substantively unlawful,
this would not have caused any loss to Claimants.
748. Indeed, even if there had been no procedural irregularities – and Respondent alleges that
there were none – the Investment Committee would still have cancelled the Investment
Contract. Even if some procedural irregularities were established, they could not have
had any effect on the termination of the Investment Contract. It is the cancellation of the
Contract, not the alleged procedural irregularities, which is the proximate cause of
Claimants’ loss.
749. Even if the Tribunal were to find that the Investment Contract ought to have been
suspended prior to its cancellation, that did not cause Claimants any loss. Indeed, it
would not have been possible for KaR-Tel, under Claimants’ control, to remedy the
multiple breaches of the Investment Contract’s terms even if there had been a suspension.
750. Claimants’ reliance upon the Amco II award as support for its position that procedural
defects can make a substantively valid cancellation unlawful in international law, is
unjustified. According to Respondent:
- the facts of both cases are different;
- the Amco award is not binding upon the Tribunal;
- it conflicts on this issue with all the leading authorities including the International
Court of Justice.
751. Consequently, it is Respondent’s position that if the Tribunal finds either that the
cancellation of the Investment Contract was substantively valid or that other valid
substantive grounds for its cancellation existed, the causal nexus between the alleged
procedural defects and the losses allegedly suffered would not be present. From the
moment the cancellation was the ultimate cause of the compulsory redemption of
Claimants’ shares, the loss suffered by Claimants has not been caused by a wrongful act
of Respondent, which, therefore, does not have to make any reparation.
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III. CALCULATION OF DAMAGES AND QUANTUM
1. Claimants’ position
a) The position developed in Claimants’ Memorials
752. According to Claimants, the market value upon which the compensation should be based
should be ascertained against the background of the existing contemporaneous evidence,
namely the sale by Telecom Invest in September 2004 of 100% of KaR-Tel to
VimpelCom for the sum of USD 350 million.
753. In this regard, Claimants dispute Respondent’s allegation that this sale price was
achieved only as a result of two years of Mr. Yerimbetov’s “considerable efforts” and
that KaR-Tel was allegedly insolvent at the time that Claimants were ousted in April
2002.
754. Claimants submit that:
- KaR-Tel was not insolvent. It was not generating large profits in the short term,
like most telecommunications companies, but this fact alone cannot serve as a
basis to conclude that KaR-Tel was insolvent, particularly with KaR-Tel holding
the second GSM license ever issued in Kazakhstan, with over 138,000 subscribers
and a national network;
- rather, at the time Claimants were ousted, KaR-Tel was worth several hundreds of
millions of dollars;
- in any event, no evidence is – or can be – adduced that KaR-Tel’s management at
the time would not have undertaken its own restructuring of KaR-Tel and further
increased the value of the company. In fact, any other investor to which
Claimants could have sold their investment at the time would have provided
similar, if not more, considerable “efforts.” Had the company not been
expropriated nor consequently been subject to Rumeli’s and Telsim’s claims,
there is no reason why KaR-Tel could not have been sold for more than USD 350
million in 2003.
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755. According to Claimants, based on the elements identified and detailed in its report,
Analysys first established a “Base Case” evaluation of KaR-Tel as of April 23, 2002,
which consisted of two elements: (1) the Net Present Value (“NPV”) of KaR-Tel over the
period of 2002-2013 equal to over USD 345 million; and (2) the Terminal Value (“TV”)
of KaR-Tel – which takes into account revenues and costs generated upon the renewal of
the License – equal to over USD 221 million. The Base Case value of 100% of KaR-Tel
is thus approximately USD 567 million, with Claimants’ combined 60% stake in KaRTel
being valued at USD 340 million.
756. Claimants further note that Analysys took into account “certain market data…that would
not have been available in 2002, namely the actual penetration rates for mobile
telephony in Kazakhstan between 2002 and 2006” so as to ensure the “maximum
accuracy of the model in establishing a valuation that reflects the likely impact of actual
market developments and market events.”
757. According to Claimants, to ensure the comprehensiveness of its Report, Analysys made
an alternative calculation, on the basis of information that was known and predicted in
2002. The effect of this scenario is to reduce the NPV by USD 151 million and the TV
by USD 85 million, resulting in a total valuation of USD 331 million, and of
approximately USD 199 million for Claimants’ combined 60% stake in KaR-Tel.
However, it is Claimants’ position that the Tribunal should not rely on this more
conservative approach to the detriment of a more accurate approach based on actual
market developments and relevant market events.
758. Taking into consideration the date of October 30, 2003 for the valuation, Analysys has
estimated that the NPV would have increased by USD 131 million and the TV by USD
66 million, for a total valuation of KaR-Tel of USD 763 million. Claimants’ stake
therein is thus valued at approximately USD 458 million.
759. Consequently, Claimants consider that they are entitled to USD 458 million,
corresponding to the value of their stake on October 30, 2003, and alternatively, that they
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are entitled to an amount of USD 340 million, corresponding to the value of their stake
on April 23, 2002.
b) The position developed in Claimants’ Post-Hearing
Memorial
760. In their Post-Hearing Memorial, Claimants point out that, as discussed at the hearing,
Analysys had to revise its initial model. In developing its “Base Case” DCF Model,
Analysys collected and verified public forecasts of mobile subscribers in Kazakhstan to
forecast the addressable market. It then developed forecasts of Average Revenue Per
User (ARPU) based on income distribution, GDP growth, and reported market ARPU’s.
761. According to Claimants, Analysys had to revise its initial model because a key input
relating to ARPU in the model had been misleadingly identified by Vimpelcom in its
2005 Annual Report. Upon reading Vimpelcom’s 2006 Annual Report, which was not
available at the time Analysys’model was first constructed, Analysys realized that
Vimpelcom was including interconnect revenues in what was defined as “services
revenues,” although this had not been identified in Vimpelcom’s earlier definition of
“service revenues.” Analysys thus reran its model to take this difference into account.
762. Analysys’ methodology is described in more detail in Analysys’ quantum opinion of
February 26, 2007 and in Analysys’ PowerPoint presentation of October 26, 2007. In
this respect, Claimants point out that the entire amount of the outstanding Motorola Loan
was fully accounted for in Analysys’ model, and was deducted from the value of KaRTel
and by consequence from the value of Claimants’ 60% shares in KaR-Tel.
763. On the basis of this DCF methodology, Analysys concluded that the real value of
Claimants’ 60% stake in KaR-Tel under the “Base Case” scenario was USD 162,000,000
on April 23, 2002 and was USD 227,000,000 on October 30, 2003.
764. Contrary to Respondent’s allegation, it is Claimants’ position that, in this valuation, it is
legitimate to take into account the development occurring in the market and the business
after the date of the expropriation. Indeed, Claimants’ investments could have benefited
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from the expanding Kazakhstan telecom market. To ignore what actually happened in
the Kazakhstan telecom market would not reestablish the situation which would have
existed, had Respondent’s expropriation not been committed.
765. Nevertheless, for the benefit of the Tribunal, if it were to rule that no data subsequent to
Respondent’s expropriation should be used to calculate the “real value” of Claimants’
losses, Analysys has run further scenarios based on forecasts from 2002/2003, i.e.,
contemporary forecasts that underestimated actual growth in the Kazakh mobile
communications market. Without using any hindsight, and ignoring the actual growth in
the Kazakh mobile communications market, Analysys has determined that Claimants’
60% stake in KaR-Tel should be valued at USD 111,000,000 (without 3G investments) or
USD 54,600,000 (with 3G investments), respectively, on April 23, 2002.
766. On the final day of the hearing, the Tribunal requested that Analysys provide further
valuations of KaR-Tel based on the assumption that the licenses would terminate in 2013
and not be extended (so that no terminal value should be accounted for in the model).
Analysys’ expert immediately noted that “I don’t know any cases where there hasn’t
been continuity beyond the end of a license.” The presumption used in valuating telecom
companies is that there would be a renewal of the license. This is further confirmed by
the fact that there are renewal provisions contained in KaR-Tel’s GSM license.
Claimants thus strongly object to the valuation of KaR-Tel based on the assumption that
the license would not be renewed.
767. Nevertheless, on October 30, 2007, Analysys provided the breakdown requested by the
Tribunal of the valuation of KaR-Tel based on the non-renewal of the license.81
Analysys noted that, in reality, there would always be a terminal value since “we would
expect KaR-Tel to derive some value from the assets and from selling the subscriber
contracts to another operator.” Analysys added that in this scenario, the cost item for
the purchase of a 3G spectrum in 2010 should be removed from the model, since the
company would have bought a 3G spectrum only if it knew it had continuity.
81
See Exhibit 30 to the Analysys’ Quantum Opinion.
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768. In any case, Claimants allege that Analysys’ original “Base Case” scenario most
accurately reflects the real value as specified in Article III of the Bilateral Investment
Treaty. Based on the foregoing, Claimants are entitled to compensation of USD
227,000,000 corresponding to the real value of their 60% stake in KaR-Tel as of October
30, 2003. Alternatively, Claimants take the position that they are entitled to the amount
of USD 162,000,000 corresponding to the real value of their 60% stake in KaR-Tel as of
April 23, 2002.
769. As for the interest, the most appropriate standard which will satisfactorily compensate
Claimants is the 6 month average LIBOR plus 2 per cent per year for each year during
which amounts are owed. Interest should be compounded semi-annually as reflected by
the recent practice of ICSID tribunals. Finally, interest should start running at the date of
the expropriation until payment of the award.
2. Respondent’s position
770. For their valuation, Claimants rely on the difference between the compensation awarded
to them by the Presidium of the Supreme Court and the price paid by VimpelCom.
However, the difference between the two numbers is easy to explain:
- the Presidium was valuing 60% and not 100% of the shares;
- the Presidium was valuing KaR-Tel as of April 2002 whereas Vimpelcom did bid
for KaR-Tel in August 2004;
- the Presidium was bound by the formula agreed by Claimants and Telecom Invest
in KaR-Tel’s Foundation Agreement;
- the Presidium made its valuation on the basis of a number of independent expert
audit reports, all but one of which concluded that KaR-Tel was insolvent, whereas
VimpelCom was bidding for a company with significantly lower debt levels,
profitable operations, four times the number of subscribers and a great deal of
new equipment;
- the Navigant Report demonstrates that the Presidium’s valuation of KaR-Tel and
VimpelCom’s implicit valuation are in fact entirely compatible.
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771. According to Respondent, it is untenable to suggest, as Claimants do, that no evidence is
adduced that KaR-Tel’s management at the time would not have undertaken its own
restructuring of KaR-Tel and further increased the value of the company. Indeed, by
April 2002, Claimants had been in control of KaR-Tel’s management for four years and
during that period:
- they had saddled KaR-Tel with over USD 100 million of debt to Motorola alone;
- KaR-Tel did not make a single payment towards the Motorola Loan;
- Motorola had begun to threaten KaR-Tel with legal proceedings;
- between 1999 and 2001, KaR-Tel had been unprofitable;
- notwithstanding this situation, Claimants did not show any willingness to inject
any equity into KaR-Tel;
- Motorola had filed fraud and racketeering claims in the New York Courts against
Claimants’ owners;
- there was no possibility open to Claimants to renegotiate the Motorola Loan since
Motorola would not accept to discuss any settlement of its claim until the Uzans
were no longer involved in KaR-Tel;
- ultimately, whether or not some other party could have achieved the same results
is irrelevant from a valuation standpoint since, as Mr. Kaczmarek of Navigant
pointed out in his testimony, it does not alter the fact that no external investor
would have paid more than an extremely token amount for the equity in KaR-Tel
at that time. Any investor proposing to come into the business would have had to
either pay off Motorola or put sufficient funds into KaR-Tel to enable it to do it
itself. No rational investor would do either of those things without demanding the
issue of new shares for that equity, which would have left the existing
shareholders diluted so that they owned less than 1% of the company.
772. Claimants also miss the point when they allege that KaR-Tel was not insolvent in April
2002 because it is not uncommon for mobile telecom operators to generate losses during
the early years of operations. Indeed, KaR-Tel’s insolvency was not directly tied to its
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ability to generate profits. It was insolvent because it had failed to make a single
payment of interest or principal on the Motorola Loan.
773. Moreover, according to Respondent, Claimants’ statement that “it is not uncommon for
mobile telecom operators to generate losses during the early years of operations” must
be compared against the performance of KaR-Tel’s only competitor in the Kazakh
market, K-Cell. They received their licenses within a month of each other. However, as
early as 2001, K-Cell was generating short-term profits. The comparison with K-Cell is
illustrative of the fact that Claimants appear to have viewed KaR-Tel simply as another
vehicle for their worldwide fraud.
774. Respondent further considers that the Report prepared by Analysys and submitted on
behalf of Claimants is unreliable. There are two indicators which reveal immediately that
the Analysys valuation is incorrect:
- Analysys’ s April 2002 valuation gives an enterprise value per subscriber (EVPS)
of over USD 4,450, whereas the enterprise value per subscriber for comparable
companies at the same time was between USD 500 and USD 600;
- Analysys’s valuation of KaR-Tel as of September 2004 (USD 928 million) is
almost three times the value paid by VimpelCom at the time (USD 350 million).
775. Claimants’ counsel opened the hearing before the Tribunal on the basis of the figures in
the Analysys Report. It was extraordinary, therefore, when, in the middle of the hearing,
Analysys informed Respondent that they had got it dramatically wrong. In fact, Analysys
provided new figures which reduced their valuations by 50%. If, as is its usual role,
Analysys had been advising a company on the purchase of KaR-Tel, that company would
have paid more than the double of what Analysys now believes the company to have
been worth.
776. Further, Respondent alleges that what is particularly troubling is the lateness of this
admission. Analysys has had Navigant’s Report since May 2007, which made clear that
there must have been a significant error by Analysys.
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777. Moreover, the new valuation by Analysys is still hopelessly overstated. It continues to
fail to treat KaR-Tel as insolvent, which means its entire report adopts the wrong
methodology, applying a valuation method for solvent companies to an insolvent
company.
778. Respondent further submits that it is unacceptable as a matter of valuation theory, to use
historical data when producing a fair market valuation. Only knowledge and
expectations at the time are relevant. And in this context, in 2002, no analyst or investor
appears to have foreseen the exponential growth that would occur in the Kazakh mobile
telephony market between 2002 and 2006.
779. According to Respondent, the reason why Claimants have sought to rely on a different
basis than fair market value is that fair market valuations are not permitted to rely on
hindsight and must value the investment on the basis of the information that was known
to the market at the relevant time. In April 2002, which is the appropriate time for
valuation, it is quite clear that the market did not expect the growth in Kazakhstan mobile
telephony which in fact occurred. Analysys acknowledged contemporaneous forecasts
were not available for Kazakhstan in 2002. Moreover, a review of Analysys’ own exhibit
containing contemporaneous forecasts of mobile penetration for comparable countries in
Central Asia and East Europe confirms that there is compelling evidence that the mobile
markets in all these countries grew much faster than was forecast in 2002.
780. According to Respondent, the Tribunal should take into account the following:
- the BIT itself provides that “compensation shall be equivalent to the real value of
the expropriated investment before the expropriatory action was taken.” This
implicitly recognizes that what is to be valuated is the investment as it stood in
April 2002, not what somenone in 2007 would pay for it if they could go back in
time with subsequent knowledge;
- Analysys have not disclosed any authority for the proposition that real value
means something different from fair market value and that it permits the use of
hindsight in valuation. Navigant have, on the contrary, provided the Tribunal
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with a wide range of ICSID awards demonstrating that fair market value is the
appropriate standard and that it is not permissible to use hindsight in arriving at a
fair market valuation.
781. Respondent finally alleges that further evidence that even Analysys’ second attempt at a
valuation is inaccurate is provided by a comparison of the actual data we now know for
KaR-Tel with the figures that their model generates. As Navigant Slide 60 demonstrates,
Analysys’ net income figures for KaR-Tel for 2005 and 2006 are, respectively, 12 times
and almost 5 times higher than the actual results posted by KaR-Tel – differences of over
USD 25 million and over USD 70 million respectively.
782. The clearest way to see the absurdity of Analysys’ figures is to do the arithmetic. In the
course of his evidence to the Tribunal, Mr. Wright was asked about the fact that even his
revised calculations led to a notional enterprise value per subscriber for KaR-Tel of
USD 2,554.4 which looked rather high compared with the average actual enterprise value
per subscriber of USD 746 achieved on the sale of KaR-Tel’s only rival K-Cell in
February 2002. Mr. Wright maintained that his figures were correct and were
unsurprising. He stated that the disparity was explained by the fact that less developed
mobile phone operators with smaller subscriber numbers were “earlier in the curve” so
attracted a greater EVPS than more established operators like K-Cell. According to
Respondent, these arguments are hopeless. The effect of Mr. Wright’s evidence is that an
informed buyer in April 2002 would have paid more for KaR-Tel than for K-Cell.
783. According to Respondent, its Navigant Report is to be preferred. It concludes that the
fair market value of KaR-Tel was zero, even if it is evaluated on a going concern
perspective.
784. Therefore, Claimants are not able to make out their case for the damages they claim.
Respondent submits that the Tribunal should not award them a different or lesser sum.
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IV. DECISION OF THE ARBITRAL TRIBUNAL
A. The principles of compensation
785. For expropriation, Article III of the BIT provides that “(c)ompensation shall be
equivalent to the real value of the expropriated investment before the expropriatory action
was taken or became known.” Article 7(2) of the FIL provides that “(t)he compensation
must be equal to the fair market value of the expropriated investments at the moment
when the investor learnt of the expropriation.”
786. The expression “fair market value” may in certain contexts have a specific technical
meaning for the valuation of assets. In the context of the FIL, however, the expression
must be taken to have a non-technical meaning and to convey a measure of value which
can be applied whether or not a “fair market value” in a technical sense can be
ascertained in the particular case. For present purposes, the Tribunal considers that no
relevant distinction can be drawn between the expressions “real value” and “fair market
value.” The Tribunal should apply the method or methods of valuation which will most
closely reflect the value of the expropriated investment to the investor at the relevant
time.
787. Under Article 7(2) of the FIL the relevant time, i.e. the moment when the investor learnt
of the expropriation, must necessarily be later than the expropriation itself. Article III of
the BIT, on the other hand, does not indicate whether the Tribunal should apply the
moment before the expropriatory action was taken, or the moment when it became
known. For present purposes, the Tribunal considers that it can treat both moments as
having occurred at the same time, since every step in the events leading up to the decision
of the Presidium of the Supreme Court was known at once or almost at once to
Claimants.
788. The moment at which the expropriation took place is not to be determined by any
principle of international law, but is a question of fact to be determined by the Tribunal in
the particular circumstances of the case. In some cases the moment of expropriation may
be clearly established by a single expropriatory act. In other cases, such as the present
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case, the expropriation may be gradual or “creeping,” or it may be indirect rather than
direct, so that to determine the moment of expropriation may be a matter of judgment
rather than of direct and clear evidence. Given that both the BIT and the FIL refer, in
similar language, to the moment when the expropriation became known to the investor,
the Tribunal may legitimately have regard to the question whether any initial
expropriatory act was known to be irrevocable, or whether there remained any possibility
that it might be reversed.
789. For claims for breaches other than expropriation, neither the BIT nor the FIL offer any
guidance for evaluating the damages arising from such breaches. Under Article 1 of the
ILC Articles, every ‘internationally wrongful act’ of a State entails the ‘international
responsibility’ of that State. An ‘internationally wrongful act’ is defined under Article 2
as an act which is (i) attributable to the State under international law and (ii) a breach of
an international obligation of the State.
790. Under Article 28 of the ILC Articles, the international responsibility of a State which is
entailed by an internationally wrongful act involves the legal consequences set out in part
II of the ILC Articles. These include, under Article 32 (Reparation), an obligation to
make “full reparation for the injury caused by the internationally wrongful act.” Injury
is defined as including “any damage, whether material or moral, caused by the
internationally wrongful act.” Article 34 sets out the three forms of reparation which
may be claimed individually or in combination: (i) restitution; (ii) compensation; (iii)
satisfaction.
791. Under Article 36, when restitution cannot be made, as in the present case, the State is
under an obligation to compensate for the damage caused. Such compensation is to cover
“any financially assessable damage including the loss of profits insofar as it is
established.”
792. In assessing compensation for internationally wrongful acts other than expropriation, the
Tribunal considers that it should apply the principle of the Factory at Chorzow case,
according to which any award should “as far as possible wipe out all the consequences of
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the illegal act and reestablish the situation which would in all probability have existed if
that act had not been committed.”82
793. In the present case, the loss which Claimants maintain that they have suffered is in fact
the expropriation of their shares in Kar-Tel, whether or not this is characterised as an
expropriation calling for compensation under the BIT, or merely as the consequence of
some other internationally wrongful act, such as a breach of the obligation of fair and
equitable treatment. In either case, the Tribunal considers that the correct approach is to
award such compensation as will give back to Claimants the value to them of their shares
at the time when the expropriation took place. This requires the Tribunal to take account
only of the value which the shares would probably have had in the hands of Claimants if
the shares had not been expropriated, and therefore to leave out of account any increase
(or decrease) in the value of the shares which Claimants would probably not have
enjoyed (or suffered) if the shares had remained in their hands.
B. The calculation of the compensation and its amount
794. As the Tribunal has just stated, it considers that, regardless of the nature of the breach
which has been established, the correct approach in this case is to award such
compensation as will give back to Claimants the value to them of their shares at the time
when the expropriation took place.
795. The valuation date was a matter of controversy between the parties. Respondent
maintained that the expropriation took place on April 23, 2002, which was the date of the
injunction which excluded Claimants from the premises of Kar-Tel and was the last date
on which Claimants played any part in the operations of Kar-Tel. Claimants on the other
hand maintain that the expropriation did not take place until October 30, 2003, the date of
the decision of the Presidium ordering the compulsory redemption of Claimants’ shares.
Having regard to what is said in paragraph 768, the Tribunal considers that it is
appropriate to take into account the fact that until the unappealable decision of the
Presidium on October 30, 2003 it could not reasonably be known by Claimants that their
82
Chorzów Factory, 1928 PCIJ, Series A No. 17, p. 47.
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exclusion from the premises of Kar-Tel would irrevocably lead to the loss of their shares.
The injunction was challenged by Claimants, and did not become irrevocable until the
decision of the Presidium in August 2002. Even then, the shares themselves remained in
the ownership of Claimants, and the injunction could and would have been reversed if
Claimants had succeeded on the merits by defeating the claim for compulsory
redemption. It was not until June 6, 2003 that an order was made by the Almaty City
Court for the compulsory redemption of the shares. That decision was also challenged on
appeal, and it did not become irreversible until the decision of the Presidium on October
30, 2003.
796. The Tribunal considers that at no time until that date could it be said that there had been,
to the knowledge of Claimants, an expropriation which had taken definite and irrevocable
effect. The fact that successive decisions of the lower court were appealed to the
Supreme Court is cogent evidence that Claimants considered that there was at least some
prospect that they might retain their shares and resume control of the operations of KarTel.
For these reasons the Tribunal considers that it should assess the value of the shares
to Claimants at October 30, 2003, and not at any earlier date.
797. The Tribunal has given consideration to the question whether the valuation of the shares
by the Presidium is relevant or even conclusive as to the value of the shares to the
Claimant. In the Tribunal’s opinion, this valuation is neither relevant nor conclusive, for
two reasons. First, to the extent that the decision of the courts that the shares should be
compulsorily redeemed resulted from the internationally wrongful acts of the Investment
Committee, the task of the Tribunal is to make an award which will restore Claimants to
the position which would probably have prevailed if those wrongful acts had not taken
place. That involves assuming a hypothetical state of affairs, in which the train of events
which led to the valuation by the Presidium would not have taken place. That valuation
is irrelevant to the hypothesis on which the Tribunal must make its own award, because
on that hypothesis the valuation would not have occurred, and should not have occurred.
Second, to the extent that the Tribunal determines that this was a case of expropriation
requiring compensation under the BIT, it is axiomatic that such compensation must be
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assessed by the Tribunal seized of the question whether, under international law, the
compensation is “prompt, adequate and effective.” That is a question which cannot be
foreclosed by a decision of the State, including its courts, even if the decision is
unimpeachable under the law of the host State. That is clearly so where as here, the
decision of the court of the host State was a decision under the law of that State, and not
under international law or under the BIT. In principle, however, the position would be
the same even if the Presidium had purported to make its decision as if it were a valuation
for the purpose of the BIT and under international law.
798. On the assessment of compensation itself, the discussion above of the respective
positions of the parties discloses fundamental disagreements both as to the method of
valuation and as to the result. In summary form the differences can be stated as follows.
799. Claimants for their part invite the Tribunal to adopt the DCF method of valuation, which
on adjusted figures produces a valuation of Claimants’ 60% shareholding, as at October
30, 2003, of USD 227 million. This valuation was based on forecasts of future growth
which would have been available at that date (although not on April 23, 2002), so it does
not rely on hindsight, which was a criticism made by Respondent of the figures for the
earlier date, but only of those figures. Claimants maintain that the figure of USD 227
million compares well with the price paid by Vimpelcom in August 2004, of USD 350
million (of which 60% would have been USD 210 million).
800. Respondent on the other hand maintains that it is wrong in principle to use the DCF
method to value a company which is not solvent and is therefore not a going concern, as
they maintain was true of Kar-Tel in April 2002 and would have remained true in
October 2003 if Claimants had remained in control. They maintain that the DCF method,
as applied by Claimants’ expert, leads to a valuation which is grossly out of line with the
price paid in comparable transactions involving mobile phone licences, and that if the
values implicit in those transactions are taken into account, the value of Kar-Tel’s licence
was insufficient to repay Kar-Tel’s indebtedness to Motorola. In other words, Claimants’
shares were valueless.
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801. The Tribunal has considered in this connection the World Bank Guidelines on the
Treatment of Foreign Direct Investment, 1992. Guideline IV contains the following
remarks:
“3. Compensation will be deemed “adequate” if it is based on the full
market value of the taken asset ...
5. ... the fair market value will be deemed acceptable if determined by the
State according to reasonable criteria related to the market value of the
investment, i.e., in an amount that a willing buyer would normally pay to a
willing seller after taking into account the nature of the investment, the
circumstances in which it would operate in the future and its specific
characteristics, including the period in which it would operate in the
future and its specific characteristics, including the period in which it has
been in existence, the proportion of tangible assets in the total investment
and other relevant factors pertinent to the specific circumstances of each
case.”
802. The Tribunal notes that this attaches to “fair market value” a meaning which does not
presuppose the existence of a market in which investments of the class in question can be
freely traded (there being no such market in the present case) but assumes a transaction
between a willing buyer and a willing seller. The Tribunal also notes that the Guidelines
do not state that there is no other way of arriving at a “fair market value.” Nevertheless
the Tribunal considers that these sections of the Guidelines set out concisely and
accurately the approach to valuation of Claimants’ shares which is appropriate in the
circumstances of the present case, and that this is so even though the BIT refers to “real
value” rather than “fair market value.”
803. Section 6 of Guideline IV sets out the following guidelines for determining the market
value of an investment:
“6. Without implying the exclusive validity of a single standard for the
fairness by which compensation is to be determined as an illustration of
the reasonable determination by a State of the market value of the
investment under Section 5 above, such determination will be deemed
reasonable if conducted as follows:
(i) for a going concern with a proven record of profitability, on
the basis of the discounted cash flow value;
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(ii) for an enterprise which, not being a proven going concern,
demonstrates lack of profitability, on the basis of the liquidation
value;
(iii) for other assets .... [Omitted as not relevant to the present
case.]
For the purposes of this provision:
-a ‘going concern’ means an enterprise consisting of income
producing assets which has been in operation for a sufficient
period of time to generate the data required for the calculation of
future income and which could have been expected with
reasonable certainty, if the taking had not occurred, to continue
producing legitimate income over the course of its economic life in
the general circumstances following the taking by the State;
-‘discounted cash flow value’ means the cash receipts realistically
expected from the enterprise in each future year of its economic
life as reasonably projected minus that year’s expected cash
expenditure, after discounting this net cash flow for each year by a
factor which reflects the time value of money, expected inflation,
and the risk associated with such cash flow under reasonable
circumstances. Such discount may be measured by examining the
rate of return available in the same market on alternative
investments of comparable risk on the basis of their present value;
-‘liquidation value’ means the amounts at which individual assets
comprising the enterprise or the entire assets of the enterprise
could be sold under conditions of liquidation to a willing buyer
less any liabilities which the enterprise has to meet;
[The definitions of ‘replacement value’ and ‘book value’ are
omitted as not relevant to the present case.]
804. The Tribunal adopts these provisions of Guideline IV as a valuable starting point for
assessing compensation in the present case, while reminding itself (a) that they do not
imply the exclusive validity of a single standard, (b) that the guidelines are described as
“an illustration” and (c) that the overriding object is to ascertain the “fair market value”
as defined in section 5. There is, as the Tribunal is aware, an extensive body of awards
and other writings concerning the proper approach to the assessment of compensation for
expropriation. In other cases it might be necessary to refer to such writings to resolve
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particular issues, but the parties have not invited the Tribunal to embark on such an
exercise, and the Tribunal considers that these sections of Guideline IV represent a
widely recognised and well respected statement of the modern practice in such matters,
which the Tribunal should follow so far as they are appropriate to the circumstances of
this case.
805. With these observations in mind the Tribunal turns to consider the fair market value to
Claimants of their shares on October 30, 2003. For this purpose the assumption must be
made that Claimants had not been removed from the premises of Kar-Tel in April 2002
and that they had remained in continuous control of the operations of Kar-Tel from then
until October 30, 2003, and indeed thereafter. On this assumption Respondent maintains
that Kar-Tel was not a ‘going concern’ in April 2002, and that it would not have been a
‘going concern’ at October 30, 2003 if Claimants had remained in control of its
operations.
806. In support of this Respondent relies on the facts set out in paragraph 731, above, as
showing that Kar-Tel was insolvent in April 2002. The Tribunal accepts that on the basis
of these matters Kar-Tel was probably insolvent at that date, at least as regards its balance
sheet. Whether it would likewise have been insolvent as at October 30, 2003 if it had
remained in the hands of Claimants is a matter of speculation. No doubt, given the
financial strength of Rumeli’s affiliate Telsim, funds could have been found to keep KarTel
in being and even, if it had proved absolutely unavoidable, to repay the Motorola
Loan. Nevertheless the past history of the company under Claimants’ management
indicates that it would have continued to be starved of funds to make the necessary
capital investment to turn the fortunes of the company around, particularly if it had
become necessary to repay the Motorola loan. No doubt the fact that Claimants would
have provided 100% of the capital but held only 60% of the shares (of which only 15%
were held by Telsim) would have been a disincentive to any large scale investment.
There is moreover no evidence to suggest the likelihood of any improvement in the
quality of the management of Kar-Tel under Claimants’ control. The strong likelihood is
that its market share would at best have remained static and might even have continued to
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shrink, that it would have remained chronically undercapitalised, and that it would have
continued to miss its performance targets. It would also have remained under threat from
the bankruptcy proceedings begun in Kazakhstan in August 2002.
807. According to Respondent the fact that Kar-Tel did not cease to carry on business was due
to the new management brought in after Claimants were removed in April 2002, in the
person of Mr. Yerimbetov, who gave evidence at the hearing. Mr. Yerimbetov was able
to renegotiate the Motorola Loan down from over USD 100 million to USD 35 million
and to borrow the funds necessary to repay the renegotiated amount. But this was not
until after October 2003 (in fact in April 2004), and it had no impact on the availability of
capital for day to day operations. That was achieved by Mr. Yerimbetov negotiating an
allowance of credit from two large banks in the Kazakhstan market in the form of bank
guarantees in the amount of USD 25 million. This enabled to buy new up-to date top of
the range equipment from Alcatel, and thereby substantially to improve Kar-Tel’s
network coverage. Mr. Yerimbetov also purchased a new billing platform and re-branded
the prepay card system, and he attributed the fact that subscribers increased to over
600,000 people and sales to over USD 100 million a year, to the activities which he
described.
808. For the present it is sufficient for the Tribunal to find that if Kar-Tel had remained in the
hands of Claimants it is likely that there would have been little or no improvement in its
management or its financial position between April 2002 and October 2003, and that the
impressive improvement in the fortunes of Kar-Tel after April 2002 would not have taken
place.
809. Respondent’s expert, as has been mentioned, considered that the DCF value is entirely
inappropriate for Kar-Tel, because at October 30, 2003 it would still not have been a
going concern. That is perhaps correct if one has regard to the definition of ‘going
concern’ in the World Bank Guideline IV, section 6, which assumes predictable future
profits based on historical data. It is also no doubt correct that in those circumstances the
Guideline would allow the use of ‘liquidation value’ as a reasonable method for assessing
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the fair market value of the investment. The Guideline does not however require the use
of either the DCF or the liquidation value as the only correct method for assessing value.
The overriding objective, as the Tribunal has already observed, to establish the “market
value” of the investment, i.e. the amount that a willing buyer would normally pay to a
willing seller, taking into account the matters referred to in section 5 of Guideline IV.
810. In the opinion of the Tribunal a DCF valuation would likely have formed one of the
measures which would have informed a discussion between a willing seller and a willing
buyer in October 2003, and it would have been equally appropriate to use the DCF
method as a basis for discussion, whether the transaction was to involve a sale of the
shares or a sale of the licence and other assets on their own. But the discussion would
certainly not have ended there. It is well known that DCF values are to a greater or lesser
extent sensitive to the validity of the data on which they are based, such as the inflation
rate, the discount rate, the assumptions underlying the predicted cash flows. Claimants’
expert’s report contains a number of sensitivity analyses which demonstrate that quite
small changes in input can materially affect the outcome. For example, the expert’s
original value of USD 567 million could, depending on various alternative assumptions
which might reasonably have been made, have been as much as USD 753 million or as
little as USD 451 million. The Tribunal is aware that the sensitivity analyses are used as
a cross check on the figure adopted by the expert, and not to invalidate the figure.
Nevertheless, they demonstrate that the method must be understood as an approximation
which is dependent on the validity of the assumptions, and not as a mechanical
calculation which will yield a value whose validity is not open to question.
811. This is particularly relevant in a case such as this, where even in October 2003 the
enterprise had not been in existence for long enough to have generated the data required
for the calculation of future income. This would mean that the enterprise would not be
treated as a going concern under the World Bank Guidelines, and would therefore be
more suitable for the ‘liquidation value’ rather than the DCF method of valuation. KarTel
would in October 2003 still have been in a relatively immature stage of development,
with no established and stable track record of past income from which to predict future
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income. This would have given rise to considerable doubt about the reliability of the
DCF method. Despite this, the application of the ‘liquidation value’ still makes it
necessary to ascribe a value to Kar-Tel’s only asset of real value, namely its licence to
operate the mobile telecommunication network. On any view that clearly had a value in
October 2003 far in excess of its book value. Since the value of that asset was directly
linked to its potential to produce future income, there is no realistic alternative to using
the DCF method to ascribe a value to it. It is however necessary to recognise the
limitations of the DCF method, including the limited reliability of the method without
adequate historical data. This is strikingly illustrated by the fact that the DCF valuation
by Claimants’ expert as at April 2002 produced a revised valuation which implied an
enterprise value (‘EV’) per subscriber of USD 2,500, whereas, according to Respondent’s
expert the EV for a sale and purchase of a 40% stake in Kar-Tel’s competitor KCell in
February 2002 resulted in an EV between USD 722 and USD 770: analysts at the time
produced their own EV’s of between USD 500 and USD 600, from which they concluded
that the price was on the high side. The discrepancy between the DCF valuation and the
EV values is very striking.
812. A potential buyer in October 2003 would for its part have been likely to take account of
other matters which tended to increase the risk of purchasing the shares or the licence.
These would have included the fact that, assuming continued control by Claimants until
October 2003, Kar-Tel would not have regained market share lost to its principal
competitor, that it would not have benefited from any substantial injection of capital, and
that there would have been doubts about the quality of the equipment which Kar-Tel had
acquired. On the other hand, these matters might be said to have afforded opportunities
for new managers with access to adequate capital resources to turn Kar-Tel around.
813. In the absence of any more reliable method of valuation, the Tribunal takes as its starting
point the base case DCF valuation by Claimants’ expert as at October 30, 2003 of
USD 227 million for Claimants’ 60% stake in Kar-Tel, after repaying the Motorola Loan.
This figure assumes historical data derived in part from the period between April 2002
and October 2003, when Kar-Tel was under new management and adequately capitalised.
225
During this period, Kar-Tel had improved its technical base, introduced new billing
systems and begun to recover market share. It is not obvious to the Tribunal that
Claimants would have undertaken such initiatives had they retained control of Kar-Tel.
Moreover, the figure of USD 227 is to be compared with the price paid by Vimpelcom in
August 2004, of which 60% is USD 210 million. This is substantially lower than the
valuation of USD 227 as at October 30, 2003, despite the fact that the growth in mobile
phone usage in Kazakhstan had continued in the intervening period, and had in fact
accelerated.
814. Taking into account all the circumstances described above, the Tribunal concludes that an
award of USD 125 million will adequately compensate Claimants for the expropriation of
their shares and will give them full reparation for the injury caused by the internationally
wrongful acts which the Tribunal has found to have been committed by Respondent. The
Tribunal therefore orders Respondent to pay this amount of USD 125 million to
Claimants.
815. In reaching this conclusion, the Tribunal has taken note of the evidence (some of which
was contested) as to various negotiations which are said to have taken place with regard
to the shares in Kar-Tel.
816. Two of these negotiations are said to have involved offers to buy Claimants’ shares
which were rejected: see paragraphs 138, and 541-547. Since these took place at a time
when Claimants had been or were likely to be deprived of the shares, and the offers were
rejected by Claimants, the Tribunal does not regard them as relevant to the market value
of the shares in October 2003.
817. The third negotiation concerned the sale by Telcom Invest of its 40% stake in Kar-Tel to
Claimants in the autumn of 2002: see paragraphs 134-135, 401-403, and 506-510. This
reached the stage of a draft agreement for the sale of Telcom Invest’s 40% shareholding
for USD 12 million. In the end the transaction fell through, but if Telcom Invest was
willing to sell its 40% stake for USD 12 million, it can certainly be asked why Claimants’
60% stake should have been worth more than USD 18 million. A number of explanations
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are possible, the most likely of which is that Telcom Invest and its backers had at that
time little or no real knowledge of the mobile telecommunications business and had
failed to appreciate the potential value of the licence. The Tribunal does not consider that
this evidence can be used as a safe guide to the fair market value of Claimants’
shareholding, beyond indicating that the true value of the licence was less obvious in
2002 than it later became: at that time the very rapid growth in the market which began in
2003 had not become established.
818. As far as interest is concerned, the Arbitral Tribunal orders Respondent to pay Claimants
compound interest at the rate of 6-month average Libor plus 2 percent per year,
compounded semi-annually, on the amount of USD 125 million from October 30, 2003
until the date of the payment of the Award.
V. COSTS
819. Finally, the Tribunal turns to costs. To obtain justice, Claimants had no option but to
bring this arbitration forward and to incur the related costs. Although they have prevailed
on the substance of the dispute, they have failed on a number of their allegations and the
amount of damages awarded is less than the one claimed. On this basis, the Tribunal
considers fair that each party bear 50% of the costs of the arbitration proceeding
(advances to ICSID) and that Respondent be condemned to pay 50% of Claimants’ legal
costs and fees as detailed in Claimants’ letter of January 25, 2008 (with appendices under
tab 1 to 5), with the exception of the costs of the arbitration (lodging fee and advances to
ICSID).