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Final Award

(1) Jurisdiction— Validity of the Agreement—Apparent Authority, Ratification by Acceptance

The Validity of the Agreement

[1].
As will appear from the statement of (Respondent-Kazakhstan] at the hearing..., [Respondent-Kazakhstan] reserves the right to challenge the arbitral award on the ground that the Agreement was invalid. This question has a bearing both on the issue of jurisdiction based on the arbitration clause and on the merits of the claims based on the Agreement.
[2].
No objections have been raised with regard to the validity of the First Agreement. Nor is there any disagreement with regard to the Parties’ intention that the First Agreement should be replaced in its entirety by the Agreement signed on 8 July 1997.

Respondent-Kazakhstan’s Position

[3].
[Respondent-Kazakhstan] has mainly argued that the Agreement is invalid because it was signed on behalf of [Respondent-Kazakhstan] by an unauthorized person, that an appropriate seal was not affixed to the document, that the changes had not been approved by the Interagency Committee, and that its contents were not in conformity with the applicable Resolution of 23 May 1996 [of Kazakhstan]. But [Respondent-Kazakhstan] also concedes that the Agreement was recognized as effective by [Respondent-Kazakhstan] and that invalidity was not asserted when the Prosecutor General brought the action in the Kazakh court with a request for termination.

Claimant—investor’s Position

[4].
[Claimant—investor] argues that the person who signed on behalf of [Respondent-Kazakhstan] had actual authority, and in any event apparent authority, which under Kazakh law is sufficient and binding upon the state. [Claimant-investor] contends that the Agreement was an amendment to the First Agreement, which was allowed in the First Agreement and therefore did not need new approval by the Interagency Commission [of Kazakhstan]. The 1996 Resolution is for that reason not applicable, and in any event the Resolution is not mandatory.

The Tribunal’s Findings

[5].
The Arbitral Tribunal finds that the Agreement was signed by a person who in the least had apparent authority to sign and was otherwise executed in a proper way to become binding under Kazakh law. In any event, the Agreement was ratified by the acceptance by the agencies acting in the matter on behalf of [Respondent—Kazakhstan]. The Tribunal considers that the Agreement was in the nature of an amendment to which the Resolution of 23 May 1996 was not applicable, and for which the renewed approval of the Interagency Commission, in view of the approved wording of the First Agreement, was not necessary.
[6].
The Tribunal therefore concludes that the Agreement was validly entered into and binding upon the Parties. It follows that the arbitration, on the basis of the arbitration clause, should not be dismissed on the basis of invalidity of the clause.

(2) Jurisdiction—Admission to Jurisdiction of the Kazakh Courts

Respondent-Kazakhstan’s Position

[7].
[Respondent-Kazakhstan] also contends that [Claimant—investor] has admitted jurisdiction of the courts of Kazakhstan over disputes that arise out of the Agreement, on the ground that [Claimant—investor] brought a claim in Kazakh courts seeking the invalidation of a Governmental decree not directly relevant to the present issues. In... hearing it was also suggested that [Claimant—investor] had submitted to Kazakh court jurisdiction and abandoned the right to arbitration by answering in the court action brought by the Prosecutor General seeking the termination of the Agreement.

The Tribunal’s Findings

[8].
As for the former of these arguments, the Arbitral Tribunal finds it sufficient to remark that it is obvious that seeking invalidation of a governmental decree constitutes an altogether different cause of action than the one pursued in this arbitration, and that it cannot be interpreted as an admission of jurisdiction of the Kazakh courts or as having such effect for the present purposes. As for the latter of these arguments, [Claimant—investor] has proven that [Claimant—investor] limited its comments to objections to the Kazakh courts’ jurisdiction, and expressly made reservations against its limited pleadings being construed as submission to the jurisdiction of the Kazakh courts.
[9].
With reference to the above, the Arbitral Tribunal concludes that it ha jurisdiction to adjudge this case under the arbitration clause and the Foreign Investment Law.

(3) Party to the Arbitration Agreement—Sovereign State and State Organ—Whether the Department Designated in the Agreement or the Sate is the Contractual Party

Whether Respondent-Kazakhstan is a Party to the Agreement

[10].
The preamble to the Agreement states as follows:

The Department for the Management of State Property and Assets of the Ministry of Finance of the Republic of Kazakhstan authorized by the Government of the Republic of Kazakhstan (hereinafter referred to as the Department)... as one party, and [Claimant-investor]... as the other party... have concluded this Agreement as follows:

[11].
Clause 4 of the Agreement is termed "Rights and Obligations of the Parties" and provides for "4.1 Rights of the Department," "4.2 Rights and Guarantees of the Department" and, thereunder, contains a group o provisions headed "The Department guarantees." Also for instance, Clause 7.3 of the Agreement provides for the event of "the unilateral termination of the Department."
[12].
"The question has been raised whether the designated Department rather that the Republic of Kazakhstan is the contract Party to the Agreement."

The Tribunal’s Findings

[13].
The Arbitral Tribunal finds it clear that it is the Republic of Kazakhstan which is the contractual Party to the Agreement The Agreement itself states expressly that the Department shall have the right to represent the Government of the Republic [the Tribunal’s Italics] in direct negotiations with the Concessionaire and the right to execute the Agreement on behalf of the Government of the Republic of Kazakhstan [the Tribunal’s Italics]... [Respondent-Kazakhstan] was the owner of the shares in [the Kazakh Company], which was the subject of the Agreement
[14].
This finding also implies that [Kazakhstan] is [a] party to the Agreement under international law, that the Department is a state organ, and that its actions are actions of the Republic, under Kazakh and international law.

(4) Effects of Prior Court Decision on Termination of the Agreement

The Power of Attorney

[15].
According to Clause 4.2.1 of the Agreement... the Department on behalf of the state undertakes to:

transfer to the Concessionaire the right to use and manage the entire state shareholding of 87.9 % of PNPZ JSC and to cause the right to possess and manage PNPZ to be transferred. The issue of a power of attorney by the Department to the Concessionaire shall constitute the transfer of said rights.

The Factual Development

[16].
... the Committee for State Property and Privatization [of Kazakhstan] by a letter of 16 March 2000, after the first Power of Attorney had expired in February 2000, requested of [Claimant-investor] a number of documents, for the purpose of considering the possibility of issuing a new Power of Attorney as applied for by [Claimant—investor]. [Claimant-investor] complied with the request by letter of 2 April 2000.
[17].
But on 27 April 2000, the Kazakh Prosecutor General’s Office [i.e., the "Prosecutor General"] filed a Statement of Claim in [the Kazakh City Court], charging that both [Claimant—investor] and the Committee for State Property and Privatization had failed in their duties under the Agreement. Reference was made to Article 401 of the Civil Code of Kazakhstan stating that in the event of a material breach of an agreement, it may be terminated by a court decision. With further reference to a Presidential Edict on the Prosecutor General’s Office and to Articles 28, 32 and 55 of the Civil Procedural Code, the Prosecutor General applied for the Agreement [to] be terminated.
[18].
[Claimant—investor] objected to the action for a number of reasons, inter alia, on the ground that the Kazakh court did not have jurisdiction to adjudicate disputes between the contracting parties concerning foreign investments. Appeals against [the Kazakh City Court’s decision to proceed with the case were rejected, and [the Kazakh City Court] on 9 June 2000 ruled that the Agreement "should be terminated." [Claimant—investor]’s appeal against this decision was rejected by the Kazakh Supreme Court on 18 July 2000..
[19].
[Claimant—investor] noted in a letter of 28 June 2000 to the Prime Minister [of Kazakhstan] that, although [Claimant—investor] did not believe that the Agreement was validly terminated, [the Kazakh City Court]’s decision of 9 June 2000 had immediately led to the suspension of [Claimant—investor] from the management of [the Kazakh Company]. [Claimant—investor] declared that it was no longer in a position to be responsible for the enterprise under the existing circumstances, and proposed that instructions be given to the relevant state authority and a responsible entity be appointed to take over the Refinery. On 11 July 2000, The Ministry of Finance Committee for State Property and Privatization issued Order No. 156, based on [the Kazakh City Court] decision of 9 June 2000, that the Agreement must be terminated and the rights to possess and use the state’s 87.9 per cent shareholding in [the Kazakh Company] must be transferred to the Ministry of Energy, Industry and Trade. By acceptance certificates issued on 13 July 2000 [the New Kazakh Company] handed over to [the Kazakh Company] the assets leased under the Lease Agreement of 1 September 1997.

The Legal Effects of the Termination Internally in Kazakhstan: The Factual Effects

[20].
There is no dispute that the decision of [the Kazakh City Court], affirmed by the Supreme Court [of Kazakhstan]’s decision of... was legally binding within the national legal system of Kazakhstan, whether or not the Kazakh courts should have declined jurisdiction on a proper interpretation of the arbitration clause of the Agreement. This meant, inter alia, that all public institutions, including agents of the state, were bound to base their further actions and exercise their duties on the legal fact that the Agreement was terminated and no longer was in effect (except perhaps for winding-up provisions in the Agreement).
[21].
Presumably, the decision was also res judicata for [Claimant—investor] within the Kazakh legal system, with no opportunity to appeal. In any event, it had the factual effect that all authorities and agencies would act on the basis that the Agreement was terminated and had ceased to be in effect.
[22].
[Claimant—investor] had, in the Tribunal’s view, no option other than to accept the factual situation created by [the Kazakh City Court’s decision... [Claimant—investor] in a letter of... to the Prime Minister [of Kazakhstan] noted that it was no longer in a position to be responsible for the enterprise under the existing circumstances. In accordance with [Claimant—investor]’s proposal, a responsible entity was appointed to take over the Refinery and by acceptance certificates of... [Claimant—investor] transferred back to [Respondent-Kazakhstan] its rights under the Agreement
[23].
The Arbitral Tribunal finds and concludes [the Tribunal’s italic] that the immediate legal effect internally within Kazakhstan, and the factual effect generally, of the courts’ decisions and the subsequent Department Order, was the termination and cessation of the contractual relationship between [Respondent-Kazakhstan] and [Claimant—investor].

The Legal Effect of the Termination in this Arbitration

[24].
As already concluded... the decision of the Kazakh courts does not have any binding effect in this arbitration. It does not have a res judicata effect to prevent this Tribunal from considering all claims in this arbitration on their merits, nor is this Tribunal bound to make its findings on the basis of the decision of the Kazakh courts.
[25].
The Tribunal notes that [Claimant—investor] on the one side, denies that the Kazakh courts had any jurisdiction under Clause 9 of the Agreement to make a decision to terminate the Agreement, but on the other side it accepts and contends that the Agreement was terminated by [the Kazakh City Court]... and, for instance, claims interest on its claims from that date [of the decision by the Kazakh City Court] until payment. The Arbitral Tribunal considers that it must deny any legal effect in this arbitration of the Kazakh courts’ decision, and on a completely free basis decide when and how the Agreement was terminated and the contractual relationship ceased to exist.
[26].
However, the Kazakh courts’ decisions may be afforded evidentiary effects, as for instance this Tribunal does when it relies on the statements of the Kazakh courts as evidence of the transfer of ownership to [the Kazakh Company]’s assets, to the extent described.
[27].
Also, the factual consequences and effects of the courts’ decisions and the subsequent Department Order are matters to be taken into regard by the Tribunal, but then as matters of fact, to be proven and be relied on as such, to the extent they are relevant for the Tribunal’s conclusions.

(5) Whether Acts of the Prosecutor General, and the National Courts, Either in its Capacity of Contractual Party to the Agreement or Under Norms of Kazakh law and Customary International Law Should be Considered as Acts Attributable to Sovereign State

Did the Prosecutor General’s Action and the Subsequent Events Constitute a Termination of the Agreement by Respondent-Kazakhstan?

[28].
... Clause 8.2 of the Agreement states that the Agreement shall only cease to be in effect for one of the following reasons:

• The expiry of the five year period, unless the Parties agree on an extension;

• by mutual agreement of the Parties;

• if the Concessionaire fails to comply with its obligations to make investments, and is given a 30 days’ written notice, but fails to eliminate the reasons described as grounds for the termination before the end of the 30 days’ period.

[29].
Nevertheless, Clause 7.2 and Clause 7.3 provides for two other termination events:

7.2 In the event of the premature termination of this Agreement, the culpable party must reimburse the other Party for all the losses suffered by such Party as a result of such termination....

7.3 In the event of the unilateral termination of this Agreement by the Department, all the amounts invested by the Concessionaire [etc.]... must be fully refunded nothin one month as of the date of the termination of the Agreement.

[30].
Several of the Claimant’s claims are built on these clauses, and a first question in relation to these claims is whether the Prosecutor General’s action and the subsequent events constitute a termination of the Agreement.
[31].
a) The first question is whether the Prosecutor General, or the Kazakh courts, acted as an agent for or representatives of the Government in its capacity of contractual Party to the Agreement.

Claimant-investor’s Position

[32].
[Claimant-investor] contends that the action of the Prosecutor General and the termination by the Kazakh courts was, in fact and law, to be considered as being executed by [Respondent-Kazakhstan] in its capacity of Party to the Agreement. Representatives of the state must obviously have prompted the Prosecutor General to initiate the termination procedure before [the Kazakh City Court], as an alternative to denying [Claimant-investor] an extension of the power of attorney [under the Agreement], or as an alternative to [Respondent—Kazakhstan] ’s declaring termination of the Agreement directly through its appointed representatives in the contractual relationship. Under international law, the Prosecutor General as well as the Kazakh courts must be considered as organs of the state, the actions of which are to be considered equal to jetions directly by the state itself.

Respondent-Kazakhstan’s Position

[33].
[Respondent-Kazakhstan] mainly contends that the Prosecutor General acted on his own initiative, in performance of his duties under Kazakh law to intervene when [Kazakhs tan]’s interests are not properly taken care of. The Prosecutor General is acting independently and not under instructions by the state. His intervention and the courts’ decisions must be considered an outside event for which [Respondent-Kazakhstan] is not responsible under the Agreement

The Tribunal’s Findings

[34].
The Arbitral Tribunal finds that there is no positive proof that [Respondent-Kazakhstan] instructed or otherwise prompted the Prosecutor General to initiate the termination proceedings before [the Kazakh City Court]. On the other hand, no explanation has been given why the Prosecutor General commenced his actions at this time. It is undisputed that the Department was in the process of considering whether to issue or deny a new Power of Attorney, and that the Department evidently considered a refusal of a Power of Attorney to be tantamount to the termination of the Agreement. It is a conspicuous coincidence that the Prosecutor General initiated court proceedings exactly at this point in time.
[35].
The Tribunal also finds the role and functions of the Prosecutor General unclear. [Respondent-Kazakhstan] maintains that [the Prosecutor General] is independent, does not act under instructions, and performs functions defined in the legislation. But [Respondent-Kazakhstan] also admits that the Prosecutor General’s task is to protect the interests of the state, also in purely commercial, contractual matters as in the present case. The Prosecutor General’s application to the courts, and the courts’ decisions in the case, are all directed at the termination of the contractual relationship. In a number of the court cases submitted in this arbitration, including the major court case brought by [Company X] against [the Kazakh Company], a prosecutor general brought action on behalf of the claimants, apparently acting as their representative. Nor is it a convincing argument that the Prosecutor General brought complaints against both Parties to the Agreement, both [Claimant—investor] and the Department (on behalf of the state). The only complaint against the Department was that it did not act efficiently to protect the state’s contractual interest, and hereunder did not consider steps to terminate the Agreement. No measures or reactions were asked for with regard to the state’s representatives in the contract, only the termination of the Agreement. In the court’s decision no sanctions were ordered against the Department The Ministry of Finance was ordered to pay... about USD 14, which looks more like a court fee than a penalty or fine.
[36].
All things considered, the Arbitral Tribunal does not find sufficient basis to conclude that the Prosecutor General, or the courts making the decision to terminate the Agreement, were acting as contractual representatives of the State in the contractual relationship.

Whether the Prosecutor General, the Courts, and/ or the Department Issuing Order to Terminate the Agreement, May be Regarded as Organs of the State

[37].
b) The next question hereunder is, whether the Prosecutor General, the courts, and/or the Department issuing Order No. 156 terminating the Agreement, may be regarded as organs of the state, the actions of which are attributable to the state under the norms of the Foreign Investment Law and customary international law.
[38].
The question in this connection is, whether the action of the Prosecutor General—as being yet an embodiment of the sovereign state—may be attributed to the state as a contracting party. Provided there is no collusion or any other form of concerted action compromising the contractual [the Tribunal’s Italics] instrumentality of the state the Tribunal is inclined to answer the question in the negative.
[39].
However, in the present case the Arbitral Tribunal has to take into consideration that the Department has made a particular commitment in the Agreement as reflected in Clause 4.2.6, which provides as follows:

‘The Department guarantees:

4.2.6 unconditional compliance with Chapter II of the Law of the Republic of Kazakhstan ‘On Foreign Investment’ dated 27 December 1994, during the entire period of validity of the Agreement. "

[40].
This undertaking, which is in the nature of a guarantee, means that [Respondent-Kazakhstan] in its capacity as a contracting party has to answer for obligations under international law undertaken in the Foreign investment Law. [Respondent—Kazakhstanjas a contracting party—has, therefore, by its guarantee concerning observation of international minimum standards extended its responsibility to what would apply for the tates merely acting de jure gestionis in a commercial contractual relationship with an entrepreneur (whether domestic or foreign).
[41].
The Tribunal also notes that, on 11 July 2000, the Ministry of Finance Committee for State Property and Privatization issued Order No. 156, with reference to [the Kazakh City Court]’s decision of 9 June 2000, ordered that the Agreement must be terminated and the rights to possess and use the tate shareholding in [the Kazakh Company] must be transferred to the ministry of Energy, Industry and Trade. The Committee was aware that Claimant-investor] considered the termination of the Agreement to be invalid, but nevertheless affirmed the termination of the Agreement This order stands as a separate and independent legal act, executing the courts’ decision to terminate. But it must be assumed that the Committee would so have been empowered to reinstate [Claimant—investor] in its position f manager of the state shareholding and as operator of the Refinery, had it sound reason to continue or renew the Agreement. Therefore, the committee's affirmation of the courts’ decision to terminate the Agreement ands out as the ultimate decision, which sealed the end of the Agreement.
[42].
It is clear that the termination effected by the courts and affirmed by the committee, did not follow the rules of the Agreement for a termination :decision. However, it is also clear, as set out above, that the actions of the ate organs brought the Agreement to a definite end.
[43].
The Arbitral Tribunal therefore concludes [the Tribunal’s Italics] that [the Kazakh City Court]’s decision, affirmed by the Supreme Court and by the committee's Order of 11 July 2000, constituted the ultimate termination of e Agreement.

(6) Loss of Future Profit Based on Contractual Right of First Refusal—Whether a Contractual Right of First Refusal, Expressly Conditioned Upon the Owner’s Decision to Sell and Without Specification on the Purchase Price to be Paid, May Give Rise to a Claim for Damages

The Claim for Loss of Future Profits Based on the Agreement

[44].
The claim under the Agreement for compensable lost profits, USD..., is primarily based on the alleged unjustified termination of the Agreement by espondent—Kazakhstan]..., which allegedly had as an effect that the right of first refusal to buy [Respondent-Kazakhstan] ’s shareholding in [the Kazakh Company] was revoked. [Claimant—investor] asserts that this resulted in a loss of future profits. For this, [Respondent-Kazakhstan] is asserted to be liable under Clause 7.1 of the Agreement in conjunction with Article 350 and Article 9 of the Civil Code. As set out above, Clause 7.1 reads as follows:

7.1 In the event of a failure to perform, or the improper performance of, their obligation thereunder, the Parties shall be held liable in accordance with legislation of the Republic of Kazakhstan and the provisions of international law.

[45].
a) A first question is whether a conditional right of this kind may give rise to a claim for damages.
[46].
The Arbitral Tribunal notes that in the First Agreement, the clauses relating to this claim had the following wording:

CLAUSE 4. RIGHTS AND OBLIGATIONS OF THE PAR TIES

4.2 Obligations and guarantees of the Department The Department undertakes to:

4.2.4 Give the Concessioner a priority right to buy out the state shareholding of AO shares (or a portion thereof).

CLAUSE 12. SPECIAL CONDITIONS

12.3 Following revaluation of the authorized capital stock on the basis of results of an independent auditing expert examination, the volume of the authorized capital stock shall be changed and the shares value shall be fixed to be used as the base for selling the shares to the Concessioner. The authorized capital stock shall be changed within 6 months after the date when this Contract comes into force.

[47].
In the Agreement, the clauses were changed to read as follows:

CLAUSE 4. RIGHTS AND OBLIGATIONS OF THE PARTIES

4.2 Rights and guarantees of the Department The Department undertakes to:

4.2.4 vest the Concessionaire with the right of first refusal in respect of the state shareholding in [the Refinery] (or any part thereof) if a decision is taken on the sale (privatization) thereof...

CLAUSE 12. SPECIAL CONDITIONS

12.3 Following the charter fund having been re-evaluated based upon the results of an independent audit examination, the amount of the charter capital shall be changed. Such change shall be made within 6 months as of the effective date of this Agreement.

[48].
The Tribunal notes that in the First Agreement [Claimant-investor] was granted an unconditional right to buy the shares, although the clause is not specific as to the time the right was to be exercised, and there was a specific stipulation of the purchase price to be paid. The Agreement, in contrast, only granted a right of first refusal, which was made expressly conditional upon the owner’s decision whether to sell: if a decision is taken on the sale The reference to the price to be paid was also removed, leaving the question of the purchase right completely open, as is normal in the case of a right to first refusal, where the price is normally determined by the price a third party is willing to pay.
[49].
The Arbitral Tribunal finds that the loss of a conditional contractual right of this uncertain nature and of uncertain value would normally not give rise to any damage claim. The only conceivable exception would be if in reality there is certainty, or a very high degree of probability, that the state would decide to sell its shares in the course of the five-year contract period. In view of this, after [Claimant—investor] had submitted its brief...before the hearing, the Arbitral Tribunal... sent a letter to the Claimant stating, inter alia, as follows:

3. For its claim for lost profits [Claimant-investor] appears to be referring to Clause

4.2.4 of the Agreement, stating that:

The Department undertakes to:... vest the concessionaire with the right of first refusal in respect of the shareholding in [the Refinery](or any part thereof) if a decision is taken on the sale (privatisation) thereof.

Apart from a remark in... [Claimant-investor’s] the Statement of Claim that "It was [Claimant-investor]’s understanding that [Respondent- Kazakhstan]’s intention was to privatise [the Kazakh Company] and to do so within a time period of approximately 18 months, " the Tribunal notes-without taking any position at this time on the relevance thereof-that [Claimant-investor] cannot be found to have documented or explained the further basis for its expectation that the option to buy the shares in [the Kazakh Company] would materialize.

If this is relevant for [Claimant-investor]’s claim for lost profit, [Claimant-investor] is invited to submit further documentation or explanation thereof not later than....

[50].
[Claimant—investor] has chosen not to give any further explanation or documentation concerning the prospects of [Respondent—Kazakhstan]'s deciding to sell its shares or any part thereof.
[51].
Since it is common knowledge that the Kazakh state has carried through a considerable number of sales of state enterprises to private owners, the Tribunal also inquired at the hearing whether there were, or are, any policy decisions or declarations that might throw light on the probability of the sale of the state’s shares in [the Kazakh Company]. In response hereto, [ Respondent-Kazakhstan] [ [the Tribunal’s Italics] contended at the hearing that there was a general policy for privatising. The Ministry of Energy [in Kazakhstan] had designated several refineries and other energy properties to be privatised, and they were privatised, sold.... Those [refineries] were sold by the Ministry of Energy through the State Property Committee. [The Refinery] was never put on any list by the Ministry of Energy of properties to be privatised. No evidence was adduced in support of these contentions, [...] nor did [Claimant-investor] object to [Respondent—Kazakhstan]’s contentions.
[52].
The Arbitral Tribunal must conclude that [Claimant-investor] has not proved that there was any degree of certainty or even probability that [Respondent-Kazakhstan] would decide to sell its shares in [the Kazakh Company], or any part thereof, and therefore has not proved that it has a damage claim on the basis of the conditional right to first refusal in respect of the state shareholding in [the Kazakh Company] [...]. The claim must therefore be rejected [the Tribunal’s Italics].
[53].
b) Another consideration leads to the same conclusion. A claim for damages under Clause 7.1 of the Agreement or a claim under any other provision of the Agreement must necessarily refer to damages inflicted by the action resulting in the damage, in this case the damage caused by [Respondent—Kazakhstan’s termination of the Agreement.... By that time, [the Kazakh Company] had definitely and permanently lost virtually all its assets, and [the Kazakh Company] no longer had adequate assets to produce Refinery profits over 20 years as calculated. The value of the shares, and of a right to buy the shares, was clearly nil.
[54].
Also, for this reason [Claimant—investor's claims must be rejected [the Tribunal’s Italics].

(7) Concept of Expropriation, "Creeping" or "Covert" Expropriation

The Claim for Loss of Profits Based on Expropriation Under the Foreign Investment Law

Introduction

[55].
[Claimant—investor] asserts that a number of measures taken by [Respondent-Kazakhstan] amount to expropriation and constitute a breach of Article 7 of the Foreign Investment Law [of Kazakhstan], as well as customary international law. Reference is also made to Article 8 of the Foreign Investment Law.
[56].
[Claimant-investor] contends that [Respondent-Kazakhstan] is responsible, pursuant to international law, see Article 4 of the International Law Commission’s Draft Articles on State Responsibility, for actions taken by its state organs, including the Prosecutor General and the Kazakh courts, and officials of such organs. [Claimant-investor] also contends that [Respondent-Kazakhstan] has breached Article 7 of the Foreign Investment Law, as well as customary international law, when it—in its capacity as contracting Party—-took away [Claimant-investor]’s contractual rights by unlawfully terminating the Agreement.
[57].
At the hearing, [Claimant-investor] listed the measures allegedly amounting to expropriation as follows:

• Mandatory deliveries of oil products to the state owned agricultural companies.

• The court proceedings between [Company X] and [the Kazakh Company] which resulted in the transfer of ownership of a substantial part of the property of [the Kazakh Company] to (Company X].

• The Refusal in the spring of 2000 to extend the Power of Attorney.

• The proceedings initiated and pursued by the General Prosecutor resulting in the, procedurally and materially unlawful termination of the Agreement.

• The subsequent re-transfer of the management of [the Kazakh Company] from [Claimant-investor] to [Respondent-Kazakhstan],

[58].
With regard to the mandatory deliveries to the agricultural organizations, the Arbitral Tribunal notes that according to the Government's Order No. 187 of 9 March 1998 instructions were issued for the provision of fuel supplies to agricultural organisations. In this order various refineries - not only [the Kazakh Company] - were ordered to supply oil among them. However, the Order does not conclusively show that the Refinery was saddled with more onerous terms than any other refinery instructed to provide oil supplies to agricultural organisations. The Government's Order does not therefore, without more, provide any substantiation that the Refinery has been subjected to discriminatory treatment, which would create liability under any foreign investment protection scheme.

Price Regulation for Oil

[59].
Although they are not asserted in connection with the claim for expropriation compensation, the Tribunal also notes that [Claimant-investor] has asserted several measures that are said to be discriminatory, among them a price regulation for oil. By an Order No. 210 of 22 July 1999 [of Kazakhstan] certain price limits were determined, KZT 1700 for [refinery A, another refinery not related to this dispute], KZT 1800 for [refinery B, another refinery not related to this dispute] and KZT 1680 for [the New Kazakh Company]. It is stated [in the Order No. 210] that prices are determined in "consideration for oil products storage periods." Without further explanation the Tribunal is at a loss in assessing whether the reference to "storage periods" was a rational and non-discriminatory parameter for fixing varying price levels. However, there is in any event no price variation of any seemingly significant character and the Tribunal cannot conclude that the price differences are of a discriminatory nature.
[60].
[Claimant—investor] contends that the compensation due for the alleged expropriation is USD [262 million], equal to the compensation for lost future profits claimed under the Agreement,...
[61].
For an action, or a group of actions, to be classified as expropriation under the Foreign Investment Law or customary international law, certain criteria must be satisfied.
[62].
"Article 7 of the Foreign Investment Law reads as follows:

Article 7. Guarantees Against Expropriation

1. Foreign investments may not be nationalized, expropriated, or subjected to other measures having the same consequences as nationalization and expropriation (hereinafter: expropriation) [the Tribunal’s note], except for instances when such expropriation is effectuated in social interests in compliance with proper legal order and is done without discrimination and with payment of prompt, adequate and effective contributory compensation.

2. Contributory compensation must be equal to the fair market value of the investment being expropriated at the moment when the expropriation thereof became known to the investor.

3. Contributory compensation must include interest...

[63].
This exception for certain measures, with special guarantees for compensation to be paid, is in the Tribunal’s view fully in accordance with the norms of customary international law. Neither the Foreign Investment Law of the Republic of Kazakhstan nor any bilateral or multilateral investment treaty seeks to proscribe the state’s right to expropriate the assets of private individuals or entities. What the Foreign Investment Law and international law requires is that such expropriation meets certain criteria, i.e., that the expropriation is carried out in the public interest, on a non-discriminatory basis, is subject to due process of law and accompanied by prompt, adequate and effective compensation. Other measures, having the same consequences as nationalization or expropriation, fall outside the scope of this exception for lawful expropriations, but are covered, in the case of the Foreign Investment Law, by the state’s guarantee against taking any such measures...
[64].
The question is therefore whether the listed measures, separately or in combination, meet the conditions to be considered as expropriation under Article 7 of the Foreign Investment Law.

Mandatory Deliveries of Oil Products to the Agricultural Sector

[65].
The Arbitral Tribunal is satisfied that [the Kazakh Company] was under public orders to deliver oil products to the agricultural sector at least in 1997 and 1998. The Tribunal is also satisfied that other entities were subject to similar delivery orders, and there is no indication that [the Kazakh Company] was subject to arbitrary or discriminatory treatment.
[66].
To a large extent payment for the deliveries was guaranteed by the regional authorities, but [Claimant—investor] complains that the guarantees were not honored, nor did the state see to it that the deliveries were paid for. To some extent [Claimant-investor] ensured payment itself, by setting off tax liabilities against its claims for mandatory deliveries of oil products.
[67].
[Claimant—investor] does not claim expropriation compensation for the expropriation of oil products to the agricultural sector. In any event, the quantities of delivered oil products and the value thereof have not been documented in such a form and detail as to form basis for an award of such compensation.
[68].
[Claimant—investor] rather appears to claim that the forced deliveries of oil products without proper payment contributed to the worsening of [the Kazakh Company]’s financial situation, which [...] as a result [...] the company was unable to pay its creditors and lost all its assets due to the creditors collecting on their claims. However, the Arbitral Tribunal finds that it is sufficiently clear from the evidence with regard to the deliveries to the agricultural sector that the non-payment for some of these deliveries was not in itself capable of causing the bad financial position and the consequential loss of [the Kazakh Company]’s assets, and its contribution to the final removal of [the Kazakh Company]’s assets must be considered too insignificant to qualify the mandatory deliveries of oil products as part of an expropriation of [the Kazakh Company]’s assets under the Foreign Investment Law or international law.

The Court Proceedings Between [Company X] and [the Kazakh Company], Which Resulted in the Transfer of Ownership of a Substantial Part of the Property of [the Kazakh Company] to [Company X]

[69].
The court proceedings between [Company X] and [the Kazakh Company] and the resulting transfer of ownership of a substantial part of the property of [the Kazakh Company] to [Company X] are in evidence,...
[70].
Another element of an expropriation concept is normally that the property is acquired by a public institution, or in the public interest. In this connection, [Claimant—investor] contends that the major part of the Refinery’s assets were transferred to the ownership of [Company X], which until the spring of 1999 was wholly owned by [Kazakhstan], and now is operated by, and possibly owned by, a subsequently formed Kazakh company, [Petrochemical Company]. According to [Claimant—investor] [Petrochemical Company] is owned 51 per cent by [Company X] and 49 per cent by the Kazakhstan Government. With the Kazakhstan Government said to hold 30 per cent of the shares in [Company X], the Government is purported to own beneficially 64.3 per cent of [Petrochemical Company] through these shareholdings. [Claimant—investor] has also asserted, without presenting any evidence, that this transfer of the Refinery’s assets from [the Kazakh Company] to the new group emerged was the realization of a "hidden scheme" [of Kazakhstan] to re-posses the Refinery,...
[71].
[Respondent-Kazakhstan] denies the existence of any such "scheme" and asserts that the unfortunate development was the result of appropriate legal action undertaken by [the Kazakh Company]’s creditors for which [Claimant—investor] is liable.
[72].
The Arbitral Tribunal finds that what ultimately caused [Claimant— investor's loss of control and ability to manage the Refinery was the attachment of most of its assets in debt collection proceedings pursued by [Company X], which had decided to cash in on its claims which had existed before the commencement of the management of the Refinery by [Claimant-investor]. Such measures by [Company X] cannot be qualified as acts of state even if there was any state ownership in [Company X]. Investment protection is not in place to safeguard a foreign investor from the adverse effects of economic adversity, fully apparent at the time of investment, facing entities. Neither does it provide any safeguards against the vagaries of loss-making business operations generally.
[73].
The Tribunal notes that the confiscation or expropriation of property or other rights may take the form of "creeping" or "covert" encroachment on private assets, whereby the owner of the property or rights is exposed to measures which make the enjoyment of the rights impossible or essentially reduced and forces the owner to abandon his ownership or rights.
[74].
The Tribunal has considered the Government [of Kazakhstan's actions and the developments in the present case in this perspective. In theory, the government might have left the old debt in [the Kazakh Company] not provided for, as an unexploded time bomb, only to explode it in the form of a creditor action by its wholly owned company [Company X] and cash in on [Claimant—investor]’s investments and the increase of the working capital after they had been made in accordance with the Agreement Or the Government [of Kazakhstan] might conceivably have imposed on [the Kazakh Company] mandatory deliveries to the agricultural sector, or might have imposed a discriminatory VAT [value added tax], an excise tax, and other measures listed by [Claimant—investor], for the purpose of worsening the financial position of [the Kazakh Company] and preparing for a termination of the Agreement on account of [Claimant—investor’s and [the Kazakh Company]’s inability to perform obligations under the Agreement. However, [Claimant—investor] has not shown, and the Tribunal has not discovered, any evidence or indication that such motivation lies behind any of the Government’s actions in connection with the Agreement. What is in evidence is that both parties to the Agreement were fully aware, or ought to have been aware, that [the Kazakh Company] as a separate legal entity was in a very difficult financial position, but nevertheless they entered into a commercial contract where both parties openly left considerable [the Kazakh Company] debts and obligations not provided for, and thereby openly took the risk that [the Kazakh Company] might go bankrupt or be deprived of its assets and means of further activity. There is nothing in the situation, or the evidence presented, to cause the Tribunal to conclude that [Claimant—investor] has been exposed to any "creeping" or "covert" expropriation. Both Parties have been exposed to the consequences of the risks that they undertook when entering into the Agreement.
[75].
The conclusion [the Tribunal’s Italics] is therefore that a claim for expropriation compensation on account of the creditors’ collecting on their debt is unfounded.

The Refusal in the Spring of2000 to Extend the Power of Attorney

[76].
It is in evidence that the Power of Attorney was not renewed when the first Power of Attorney expired on 13 February 2000,...
[77].
[Claimant—investor] has not explained how the failure to renew or extend the Power of Attorney could amount to expropriation, either separately or as a contributing factor in conjunction with the other circumstances listed by [Claimant—investor].
[78].
...the Parties may at the time have labored under the conviction that a renewal or extension was legally necessary, in the sense that without a Power of Attorney the Agreement would cease to be in force. If that [would] be the case, a refusal to renew or extend the Power of Attorney would in effect amount to a termination of the Agreement. Be that as it may, the fact of the matter is that the question of a new Power of Attorney never came to the point of a definite refusal. No claims or legal arguments have been based on the lapse of the first Power of Attorney or the failure to renew or extend it after 13 February 2000.
[79].
Therefore, this factor cannot amount to, or contribute to, the alleged existence of expropriation within the meaning of the Foreign Investment Law or international law.

The Proceedings Initiated and Pursued by the General Prosecutor Resulting in the Procedurally and Materially Unlawful Termination of the Agreement

[80].
a) The first question hereunder is, what is considered to be the object of this alleged expropriation. To judge from the calculation of the claim, the object is the alleged expropriation of rights under the Agreement, and in particular expropriation of [Claimant-investor]’s right to first refusal in the event that [Respondent-Kazakhstan] should decide to sell its shares in [the Kazakh Company], or a part thereof.
[81].
b) The next question hereunder is whether the intrusion into the contractual relationship of the Parties, by the Prosecutor General and subsequently by the courts, is tantamount to expropriation. As concluded...above, the legal effect internally in Kazakhstan, and the factual effect, of the actions by the Prosecutor General and subsequently by the courts and [the Kazakh Committee for State Property and Privatization], was that the Agreement, and with it the right to first refusal, were terminated and that this was an act of (Respondent-Kazakhstan]. It must therefore be concluded that the actions here in question were tantamount to an expropriation.
[82].
c) A further question is, however, what losses were caused by this expropriation,...
[83].
It is a fact that the transfer of ownership of assets to [Company X] was finalized already on 18 October 1999, i.e., prior to the General Prosecutor’s action. Whether or not the intention of the Prosecutor General and the courts was to deprive [Claimant—investor] of its right of first refusal, what is due for compensation for an expropriation is the value of the expropriated object at the time the expropriation is executed. As concluded above, the value of the right to first refusal was undoubtedly reduced to nil at the time the expropriation took place.
[84].
No expropriâti on compensation is therefore due on account of the Prosecutor General’s and the subsequent courts’ and the Committee’s actions to terminate the Agreement

The Subsequent Re-transfer of the Management of [the Kazakh Company] from [Claimant—investor] to [Respondent-Kazakhstan]

[85].
As considered...above, the re-transfer of the management of [the Kazakh Company] from [Claimant—investor] to [Respondent-Kazakhstan] was made by [Claimant—investor] subsequent to and in consequence of the termination of the Agreement by the Kazakh courts.
[87].
[Claimant—investor] has not explained how this act, performed by itself, can constitute an act of expropriation, or contribute to the constitution of an expropriatory act in conjunction with other circumstances asserted by [Claimant—investor].
[87].
The Arbitral Tribunal does not find that [Claimant—investor]’s acceptance of the unavoidable by formally making the transfer back to [Respondent— Kazakhstan] constitutes an act of expropriation.

The Cumulative Effect of the Circumstances Referred to as Constituting an Expropriation

[88].
It follows from the separate analyses above of the circumstances referred to by [Claimant—investor] that there is no legal basis for finding that the cumulative effect of the circumstances referred to may lead to any different conclusion. In particular, there is no legal basis for combining the results of the creditors’ actions and the termination of the Agreement by the courts (subsequently reiterated by the Committee) to conclude that there was an expropriation or that títere was damage suffered and on that basis to conclude that expropriation compensation is due.

Conclusion

[89].
The Arbitral Tribunal concludes [the Tribunal’s Italics] that the claim for expropriation compensation under the Foreign Investment Law and customary international law should be rejected.

Arbitral Award

[90].
... the Arbitral Tribunal unanimously renders...

1. The claims of [Claimant—investor], brought under the arbitration clause of the Agreement... are dismissed.

2. The claims of [Claimant-investor], brought under the arbitration of the Foreign Investment Law of 27 December 1994 of the Republic Kazakhstan, are dismissed.

3. arbitrators and the Arbitration Institute shall be entiled to fees and compensation for expenses...

a) Arbitrators’ fees:

b) Arbitrators’ expenses

c) The Arbitration Institute fee

4. As between the Parties, [Claimant—investor] shall be responsible for 50 per cent and [Respondent-Kazakhstan] shall be responsible for 50 per cent of the amounts due in this arbitration to the arbitrators and the Arbitration Institute.

In relation to the arbitrators and the Arbitration Institute, the Parties shall be jointly and severally liable for the payment of the amounts due to the arbitrators and the Arbitration Institute.

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