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Jurisdictional Award

(1) Applicable Law to the Jurisdictional Issues Under the Arbitration Clause

Introduction

[1].
Article 9 of the Agreement reads as follows:

9.1 If a certain matter is not covered by this Agreement, the Parties shall follow the legislation of the Republic of Kazakhstan in effect, the provisions of international treaties to which the Republic of Kazakhstan is a Party and the norms of international law.

9.2 Any dispute, discrepancy or claim arising in connection with this Agreement shall be settled, to the extent possible, by means of negotiations and discussions between the Parties. In the event that the Parties are unable to reach mutual agreement through negotiations and discussions, the dispute shall be resolved as follows, the law of the Republic of Kazakhstan being the governing law.

9.2.1 Any dispute between the Parties arising in connection with this Agreement which is associated with any ‘foreign investment" (as defined in Clause 2.3 of this Agreement) shall be referred to the Arbitration Institute of the International Chamber of Commerce in Stockholm and be resolved in accordance with the arbitration rules of the International Chamber of Commerce in Stockholm. The place of arbitration shall be Stockholm, and the English language shall be used throughout the proceedings;

9.2.2 Any dispute not related to ‘foreign investments" (as defined in Clause 2.3 of this Agreement) shall be resolved in a Kazakh court having jurisdiction, and its decision may be appealed in accordance with the legislation of the Republic of Kazakhstan.

[2].
Clause 2.3 of the Agreement referred to in Clause 9.2.1 reads as follows:

2.3 The Parties agree that this Agreement provides for the making of foreign investments as defined in Chapter 1 of the Law of the Republic of Kazakhstan On Foreign Investment"dated 27 December 1997.

Law Applicable to the Jurisdictional Issues Under the Arbitration Clause

[3].
The Arbitral Tribunal notes the general reference in Clause 9.2 to Kazakh law as the governing law. The Tribunal also notes the specific reference to Kazakh legislation and international law in Clause 7.1 of the Agreement:

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

[4].
The Tribunal understands these provisions to the effect that the contractual relationship between the parties is generally governed by Kazakh law. Where the Agreement is silent and in need of interpretation, the legislation of [Kazakhstan] at the relevant time, as well as the provisions of international treaties to which [Kazakhstan] is a Party and the norms of international law shall apply. The parties have not disputed this general understanding.
[5].
[Claimant—investor] has contended, and [Respondent-Kazakhstan] has not denied, that it is a general principle of Kazakh law that the literal meaning of words is decisive, that treaties to which Kazakhstan is a Party are part of Kazakh law and prevail over other Kazakh law and that treaties are to be interpreted in accordance with the Vienna Convention of 23 May 1969.

Respondent-Kazakhstan’s Position

[6].
When it comes to laws and rules governing the procedures before the Arbitral Tribunal, and the Tribunal’s competence, there is disagreement between the parties. [Respondent-Kazakhstan] contends that in the particular circumstances this case Kazakh laws and rules apply to the procedures before, and the competence of, the Tribunal. [Respondent-Kazakhstan] also asserts the applicability of certain United States legal principles, such as the so-called Act of State Doctrine, as well as certain principles of international law such as comity among states. [Respondent-Kazakhstan] has also referred to provisions of the European Convention on International Commercial Arbitration of 1961, to which Kazakhstan is a Party.

Claimant-investor’s Position

[7].
[Claimant-investor] contends drat only the procedural laws and rules of Sweden, being the agreed place of the arbitration, shall apply, together with the specifically and expressly agreed SCC Rules. However, the parties seem to be in agreement that several of the procedural issues would have the same solution whether subjected to Kazakh or Swedish law or to international law principles.

Tribunal’s Findings

[8].
The Arbitral Tribunal finds, in the case of arbitration on the basis of the arbitration clause in the Agreement, that the SCC Rules shall apply, supplemented by the Swedish Arbitration Act and other pertinent Swedish law, being the law of the place of arbitration expressly agreed by the parties. On the background of the specific provision on arbitration rules, and in view of the generally accepted principle that the lex arbitri shall govern the arbitration process unless otherwise agreed, the Tribunal finds that the reference to Kazakh law being generally applicable does not extend to the laws and rules governing the arbitral process, and consequently that Kazakh procedural laws or principles are not applicable to an arbitration based on the arbitration clause of the Agreement.

... [Respondent-Kazakhstan] contends that Clause 9.2.1 cannot serve as a basis for this arbitration for a number of reasons, some of which are interrelated:

(2) Res Judicata and Collateral Estoppel

background

[9].
... on 29 April 2000 the General Prosecutor brought an action in [the Kazakh City Court] against [Claimant—investor] on behalf of [Respondent-Kazakhstan], requesting in his Statement of Claim that the Agreement be terminated. Reference was made to the Kazakh Civil Code of 27 December 1994 Art. 401, which reads in part:

Upon the demand of one of the parties a contract may be changed or dissolved by decision of a court only: (1) in the event of a material violation of the contract by the other party;...

[10].
According to [Respondent-Kazakhstan], Section 3 of Article 55 of the Kazakh Civil Procedure Code provides the General Prosecutor with the right to file this claim with the courts of [Kazakhstan]. According to this Section,

[t]he Prosecutor shall have the right to petition to the court with a lawsuit, application to protect the rights, freedoms and legitimate interests of citizens, rights and legitimate interests of organizations, public or state interests.

[11].
According to [Respondent-Kazakhstan], The General Prosecutor’s jurisdiction is also set forth in Article 83(1) of the Constitution of [Kazakhstan], which provides:

The Prosecutor’s Office, on behalf of the state, shall exercise the highest supervision over exact and uniform application of law, the decrees of the President of the Republic of Kazakhstan and other regulatory legal acts on the territory of the Republic, legality of preliminary investigation, inquest and inspection, administrative and executive legal procedure; and take measures for exposure and elimination of any violations of the law, the independence of courts as well as the appeal of laws and other regulatory legal acts contradicting the Constitution and laws of the Republic. The Procurator's office of the Republic shall represent interest of the state in court as well as conduct criminal prosecution in cases using procedures and within the limits, stipulated by law. " And also according to Article 1(2) of the Law "On Prosecutor’s Office, "pursuant to which the ‘Prosecutor’s Office shall take measures to reveal and eliminate any breaches of legality, protect laws and other legal acts that contradict the Constitution and laws of the Republic, represent interests of the state in court...

[12].
The claim by the General Prosecutor for termination of the Agreement was based on the alleged substantial damage sustained by Kazakhstan as a result of alleged contractual breaches by [Claimant—investor] and the failure of both [Claimant—investor] and [the committee supervising Respondent— Kazakhstan’s interests in the Agreement], to fulfill their obligations. However, these alleged contractual breaches and failures and the possible res judicata effects of the courts’ findings are not subject of consideration in the present decision.
[13].
[Claimant-investor] objected to [the Kazakh City Court] on the ground that the dispute was to be determined by arbitration in Stockholm in accordance with the arbitration clause in the Agreement, but the court on 29 May 2000 decided that the action for termination fell outside the scope of the arbitration clause, and by decision of 6 June 2000, after considering the merits of the General Prosecutor’s claim, decided that the Agreement be terminated. Appeals by [Claimant—investor] to the appellate court and further to the Supreme court were rejected, and with the Supreme Court’s ruling of 18 August 2000 the decision to terminate the Agreement became final.

Respondent-Kazakhstan’s Position

[14].
In its Brief in Support of Motion to Dismiss [Respondent-Kazakhstan] states that "we use the term 'res judicata' here in a generic sense to include both res judicata, also referred to as claim preclusion, and collateral estoppel, or issue preclusion."
[15].
[Respondent-Kazakhstan] claims that the arbitration on [the] basis of the arbitration clause be dismissed for res judicata reasons. It refers to Articles 235 (4) and 247 of the Civil Procedure Code of [Kazakhstan], according to which a final judgment on the merits bars further claims and issues raised by the same parties based on the same cause of action:

Article 235(4). "... upon the entry of a court judgment into legal force, the parties and other persons participating in the action as well as their legal successors may not re litigate same claim on the same basis, as well as challenge in a different lawsuit the facts and legal relations established by the court. "

Article 247. ‘The court shall discontinue the proceeding when:...

(2) there is a court judgment that came into legal force and was issued on the matter between same parties, on same subject-matter and same grounds, or a ruling of a court to discontinue the proceeding because of renunciation of a suit by plaintiff, or amicable agreement of the parties. "

[16].
[Respondent-Kazakhstan] further argues that the courts of other jurisdictions, including the forum of this arbitration, Sweden, also recognize the principle of res judicata. Res judicata is also recognized in, for example, Switzerland, Austria, France, Germany, Greece, Italy, and Spain. In the United States, res judicata and collateral estoppel are a complete bar to any further proceedings on the same claims in any other forum.
[17].
In this context [Respondent-Kazakhstan] has also argued that the Kazakhstani courts have established that the dispute submitted to arbitration by [Claimant—investor] is not an "investment agreement" and therefore not encompassed by the arbitration clause contained in the Agreement.

Claimant-investor’s Position

[18].
[Claimant—investor] denies that rules of res judicata are applicable to this case, for a number of reasons. First, Kazakh procedural law is not applicable to this arbitration,... Secondly, res judicata rules are not applicable in the relationship between court decisions and arbitration, but only regulate the relationship between decisions of courts of law within the same state jurisdiction. Thirdly, under applicable Swedish law, decisions of foreign courts are only binding for a Swedish court or a Swedish arbitral tribunal to the extent such foreign court decisions are recognized and enforceable in Sweden. That is not the case with any Kazakh court decisions. Fourthly, there is in any event no res judicata effect since the issues decided in the Kazakh courts are not the same as the jurisdictional issues now to be decided by this Tribunal.

The Tribunal’s Findings

[19].
The Arbitral Tribunal finds, as will be seen from the conclusions above concerning applicable procedural law, that Kazakh law on res judicata does not apply in this arbitration. It is[,] therefore[J not necessary to consider whether or not Kazakh law on res judicata would have had the effect of blocking the arbitration requested by [Claimant—investor].
[20].
Further, the Arbitral Tribunal finds that according to Swedish jurisprudence res judicata operates only in respect of a cause of action before a Swedish court of law where there is a prior ruling in respect of the same cause of action rendered by a Swedish court of law or by a foreign state court, the judgment of which is enforceable in Sweden by operation of statute or treaty. However, if a court of law has been seized of an identical cause of action pending or initiated before an Arbitral Tribunal, the issue of res judicata will not arise but only the question whether the court was competent or not.
[21].
In this last mentioned respect, the Swedish Arbitration Act of 1999... Article 2, mandates the Swedish court of law at the place of arbitration, in the present case Stockholm..., to consider the jurisdiction of the Arbitral Tribunal at the request of a party. A court decision by the appropriate Swedish court of law finding that the Arbitral Tribunal lacks jurisdiction is binding upon the Tribunal, which in such a case will have to terminate its proceedings. Also, a party may bring a setting-aside action against any award made by the arbitrators. But none of these interventions by the courts of law has the effect of res judicata, i.e., the effect that the Arbitral Tribunal is barred in advance from taking the arbitral dispute under consideration and [rendering] its decisions.
[22].
[Respondent-Kazakhstan] has also referred to the fact that Kazakhstan has acceded to the European Convention on International Commercial Arbitration of 1961, claiming that the provisions of the Convention are thereby part of Kazakh internal law and claiming that this gives Kazakh courts the mandate to review the jurisdiction of the Arbitral Tribunal. The Arbitral Tribunal does not find it necessary to decide whether the Convention gives a Party to the Convention, other than the State on which territory the arbitration is to take place, the right to review the jurisdiction of an arbitral tribunal subject to the Convention Rules. No such Convention based right, if any, can be asserted vis-à-vis companies or persons of a State which is not a Party to the Convention. Sweden, and, for that matter the United States, are not Parties to the European Convention.
[23].
[Claimant-investor] has also denied any res judicata effect on the ground [that] the claims and issues decided by the Kazakh courts are not the same as those raised before the Arbitral Tribunal. [Claimant-investor] contends that while the Kazakh court action and decision concerned the contractual right to terminate the Agreement, the claims before the Arbitral Tribunal are the contractual consequences of the allegedly unfounded termination of the Agreement decreed by the Kazakh courts. [Respondent-Kazakhstan] did not specifically address this issue. In view of its other findings that res judicata is not a reason for dismissal [,] the Arbitral Tribunal does not find reason to consider whether this contention by [Claimant—investor] would be an additional bar to res judicata effects.
[24].
In respect of [Respondent—Kazakhstan]^ argument that the Kazakhstani courts have determined that the present dispute does not constitute an "investment dispute" according to the terms of the Agreement],] the Tribunal finds that the present dispute is in fact an "investment dispute" in the meaning of the Agreement for the following reason.
[25].
From [Claimant—investor’s Request for Arbitration and Statement of Claim it appears that [Claimant—investor] seeks indemnification for certain alleged investments in acquisition of concession rights and certain capital expenditure. The fact that alleges having made disbursements of funds, for purposes which would qualify as investments in the meaning of the Foreign Investment Law to which the Agreement refers in its Clause 2.3, is a sufficient basis for the Tribunal to be vested with competence to adjudicate these issues (whether [Claimant—investor] will be able to establish that there were in fact investments made and that these are indemnifiable on one basis or the other is obviously a matter which will be deferred to the examination of the merits of the case).
[26].
The Arbitral Tribunal’s conclusion is that res judicata is not a bar to jurisdiction under the arbitration clause.

(3) Principle of Separability, Competence- Competence Doctrine

Respondent-Kazakhstan's Position

[27].
[Respondent-Kazakhstan] further claims that since the Agreement has been terminated by the Kazakh courts, the whole Agreement including its arbitration clause is terminated. Therefore, the arbitration clause cannot be invoked as a legal basis for arbitration.
[28].
[Respondent—Kazakhstan] admits that [Kazakhstan] recognizes the principle of severability of an arbitration clause. Reference is made to Regulation No. 5 of [Kazakhstan]’s Chamber of Commerce and Industry and, more recently, to the definition of "Arbitration Clause" in the Regulations of International Court of IUS Law Center adopted on 30 December 2001-—both to the same effect drat invalidation of an agreement does not invalidate an arbitration clause therein. However, a distinction must be made between invalidation and termination of an agreement, at least where the agreement is terminated by a court rather than a party to the contract. Termination falls outside the scope of the separability principle and leads to the extinction also of the arbitration clause. [Respondent-Kazakhstan] has referred to recent rulings of the Kazakh Supreme Court holding this, hereunder a decision of 27 January 1999 in a so-called TWG/SSGPO case.

Claimant-investor’s Position

[29].
[Claimant—investor] contends that the courts’ decision to terminate the Agreement has no legal effect in the present arbitration, since the arbitration clause excludes the jurisdiction of Kazakh courts to consider the validity or termination of the Agreement. The finding of the Kazakh courts that they had jurisdiction to hear the case on termination is incorrect and has no res judicata effect, as explored above. Also, Kazakh procedural law has no application in the present case. Further, [Claimant-investor] argues that in any event the scope of the Kazakh courts’ decision does not extend to a termination of the arbitration clause. The principle of separability of the arbitration clause, existing under both Swedish and Kazakh law, establishes that the agreement to arbitrate is to be considered and evaluated as a separate agreement. This principle is firmly established in numerous countries and laid down in the UNCITRAL Model Law on Arbitration. The contention that a distinction between invalidity and termination of an agreement, or between a termination declared by a party or by a court, are novelties without any substantiation.

The Tribunal’s Findings

[30].
The Arbitral Tribunal refers to its finding above that Swedish law is decisive for the legal effects to be attributed to the Kazakh courts’ decision to terminate the Agreement. Under Swedish law there is no doubt that these Kazakh court decisions are not binding upon the Arbitral Tribunal, and that the Tribunal is empowered to determine its own competence. The evidentiary effect attributable to Kazakh jurisprudence is of little[,] if any[,] significance when the law such jurisprudence is alleged to clarify is without application in the present case.
[31].
The Arbitral Tribunal’s conclusion is that the Kazakh courts’ decision to terminate the Agreement is no bar to jurisdiction under the arbitration clause.

(4) Act of State Doctrine

Respondent—Kazakhstan’s Position

[32].
[Respondent-Kazakhstan] claims that the action of the General Prosecutor and the decisions of the Kazakh courts to terminate the Agreement are sovereign acts of [Kazakhstan] in enforcing Kazakh law within its territory and should not be adjudicated by this Tribu nal [Respondent-Kazakhstan] argues that such a complaint would be barred by the Act of State doctrine in the United States, allegedly [Claimant-investor’s citizenship. [Respondent-Kazakhstan] admits that 9 U.S.C. Section 15 enacted in 1988 provides that enforcement of arbitration agreements and the confirmation of arbitration awards are enforceable in the United States notwithstanding the Act of State doctrine, but asserts that this is not the issue in the present arbitration, and refers to U.S. cases supporting that the Act of State doctrine bars consideration of claims in U.S. courts.

Claimant—investor’s Position

[33].
[Claimant-investor] argues the Act of State Doctrine is an American judicial principle preventing U.S. courts from trying the legality of actions of foreign states. The Act of State Doctrine is, however, a principle of U.S. procedural law and does not bind courts, let alone arbitral tribunals, outside the United States. Consequently, the Act of State Doctrine does not apply to international commercial arbitrations. It has no relevance whatsoever to the dispute before the Arbitral Tribunal. According to [Claimant-investor] the Act of State doctrine does not even apply to arbitrations in the United States. Reference is made to Chapter 1 § 15 of the United States Arbitration Act, which stipulates that:

Enforcement of arbitral agreements, confirmation of arbitral awards, and execution upon judgments based on orders confirming such awards shall not be refused on the basis of the Act of State Doctrine.

The Tribunal’s Findings

[34].
The Arbitral Tribunal does not find that the U.S. procedural principle referred to as the Act of State Doctrine is applicable in the present arbitration. The nationality of [Claimant-investor] is obviously not sufficient to make U.S. procedural principles applicable. The SCC Rules or Swedish arbitration law do not contain any provisions corresponding to the procedural principle asserted by [Respondent-Kazakhstan].
[35].
The Arbitral Tribunal, therefore, concludes that the Act of State Doctrine, or the asserted nature of the General Prosecutor’s actions or the decisions of the Kazakh courts, asserted to be sovereign acts of a State, do not constitute bars to jurisdiction under the arbitration clause.

(5) Comity Among States

Respondent—Kazakhstan’s Position

[36].
[Respondent-Kazakhstan] also contends that "as a matter of international comity this Tribunal should be hesitant to review the acts of [Kazakhstan] in its sovereign and judicial capacity, acting to enforce its laws against its own government agency, absent a blatant abuse of power, which clearly is not this case." The Tribunal "should at least give the sovereign, non-commercial acts of [Kazakhstan] the deference that comity requires."

Claimant-investor’s Position

[37].
[Claimant-investor] states that [Respondent-Kazakhstan]’s reference to "comity" is as misplaced as the reference to the Act of State Doctrine. Comity— comitas gentium— is a concept of public international law which refers to non-binding rules of politeness, convenience and goodwill observed by sovereign states in their mutual dealings. The Arbitral Tribunal does not act in the interests of any State, nor does it exercise State authority of any kind. The Arbitral Tribunal derives its authority from the arbitration agreement entered into by [Claimant—investor] and [Respondent-Kazakhstan]. There is no room for "comity" in such context.

The Tribunal’s Findings

[38].
The Arbitral Tribunal must agree with [Claimant-investor] that the concept of "comity" among states, in international law or practice, has no applicability in arbitration. It has not been shown that such a legal principle is part of any known laws or rules concerning international commercial arbitration, including Swedish or Kazakh arbitration law.
[39].
The Arbitral Tribunal has no basis, in the arbitration agreement or in applicable laws and rules, to exercise "hesitance" and abstain from decisions otherwise following from the circumstances of the case, solely on the ground that the breaches of contract alleged by [Claimant—investor] are the acts of a sovereign state.
[40].
The Arbitral Tribunal concludes that "comity" as asserted by [Respondent—Kazakhstan] is no bar to or restriction of jurisdiction under the arbitration clause.

(6) Sovereign State, Issue of Sovereign Immunity

Respondent-Kazakhstan’s Position

[41].
Under point (3) (e) of the conclusions in the Statement of Defence [Respondent-Kazakhstan] stated as a fifth reason for the Tribunal to deny jurisdiction that:

(e) the Repub He of Kazakhstan is entitled to enforce its laws against its own government agencies and persons doing business with those agencies without interference try a foreign tribunal.

[42].
No further explanation or elaboration of this asserted "entitlement to enforce its laws... without interference by a foreign tribunal" was given in the Statement of Defence, in the related Motion to Dismiss, in the subsequent briefs or in the oral presentation at the hearing on.... At the hearing... the chairman assumed that this objection was concerned with the arbitration clause, and asked [Respondent-Kazakhstan] whether it also was an objection to Treaty and Investment Law, but obtained no response.
[43].
In the related Brief in Support of Motion to Dismiss [Respondent-Kazakhstan] commences as follows:

[Respondent-Kazakhstan] moves the Tribunal to dismiss [Claimant-investor] ’s Request for Arbitration and Statement of Claim on the following grounds:

(1) The arbitration Institute lacks jurisdiction under the Treaty and the Foreign Investments Law because there is no U.S. or foreign investor involved.

(2) The claims and issues raised try [Claimant—investor] have already been derided adversely to [Claimant— investor] by competent courts in Kazakhstan.

(3) The Concession Agreement with the arbitration clause was terminated try the same courts before the Request for Arbitration was filed.

(4) Linder these circumstances [the Arbitral 'Tribunal’s emphasis] it is not appropriate for an international arbitration tribunal to adjudicate the propriety of [Kazakhstan]’s enforcement of its laws against its own government agencies and citizens.

[44].
The emphasized expression may suggest that the asserted "entidement"—or lack of appropriateness—is not made as an independent objection to jurisdiction but rather is an alternative way of summing up one or several of the objections dealt with under [(!)—(4)] above.
[45].
[Respondent-Kazakhstan] has not commented specifically on this fifth objection.

The Tribunal’s Findings

[46].
The Arbitral Tribunal finds that it lacks any foundation to assert that [Respondent-Kazakhstan], choosing to enter into a commercial contract with a foreign party and obliging itself to arbitration in case of certain disputes, should be free to disregard its contractual obligations. Kazakhstan, both in its Foreign Investment Law and as Party to the Treaty, has embraced and validated the concept of binding settlement of disputes by arbitration. In the absence of any substantiation or even explanation of this fifth objection, the Arbitral Tribunal concludes that these assertions are unfounded and constitute no bar to jurisdiction under the arbitration clause.

Conclusion as to Jurisdiction under the Arbitration Clause

[47].
Summing up the conclusions... above, the Arbitral Tribunal finds that the objections raised do not constitute any bar to the Arbitral Tribunal’s jurisdiction under the arbitration clause.

(7) Definition of "Foreign Investor" Under the Foreign Investment Law of Kazakhstan

Relevant Provisions of the Foreign Investment Law as Quoted by the Arbitral Tribunal

[48].
The Foreign Investment Law contains, inter alia, the following provisions: Article 1. Principal Terms and Concepts

"Investments" are all types of property and intellectual valuables to be invested in objects of entrepreneurial activity for the purpose of receiving revenue, including:

—any right to effectuate activity based on a license or in other form granted by a state agency.

‘Foreign investments" are investments effectuated in the form of participation in the charter capital of juridical persons of the Republic Kazakhstan, and also the granting of loans (or credits) to juridical persons of the Republic Kazakhstan with respect to which foreign investors have the right to determine the decisions to be adopted by such juridical persons...

‘Foreign investor" is:

—foreign juridical persons;

—foreign citizens...

— foreign States;

"Foreign juridical person" is a juridical person (company, firm, enterprise, organization, association, etc.) created in accordance with legislation of a foreign State beyond the limits of the Republic Kazakhstan.

'Empowered State agency" is a State agency, which has the right to act in the name of the Republic Kazakhstan within the framework of its competence established by legislative and normative legal acts.

'Investment Dispute" is any dispute between a foreign investor and the Republic Kazakhstan in the person of empowered State agencies arising in connection with foreign investments, including a dispute connected with

—the actions of empowered State agencies violating the rights and interests of foreign investors provided for by the present Law, other legislation of the Republic Kazakhstan, or the applicable law;

—any agreement between the Republic Kazakhstan and a foreign investor;

Article 3. Sphere of Operation of Law

(1) Relations connected with foreign investments in the Republic Kazakhstan shall be regulated by the present law, and also by other legislation of the Republic Kazakhstan.

(4) If other provisions have been established by an international treaty ratified by the Republic Kazakhstan than those which have been provided for by the present Law, the provisions of the international treaty shall apply.

Article 27. Settlement of Disputes

(1) Investment disputes shall be settled, whenever possible, by means of negotiations.

(2) If such disputes can not be settled by means of negotiations... then the dispute at the choice of any of the parties thereof may be transferred for settlement when there exists the written consent of the foreign investor.

(1) to judicial agencies of the Republic Kazakhstan;

(2) in accordance with the agreed procedure for the settlement of disputes, including in the contract or any other agreement between the parties to the dispute, to one of the following arbitration agencies:

(a) the Internationa! Centre for Settlement of Investment Disputes...

(b) The Supplementary Organ of the Centre...

(c) arbitration organs founded in accordance with [the UNCU RAL. Arbitration Rules]...

(d) for arbitral consideration at the Arbitration Institute of the Chamber of Commerce in Stockholm,

(e) the Arbitration Commission attached to the Chamber of Commerce and Industry of the Republic Kazakhstan.

The Arbitral Tribunal’s Findings

[49].
Article 3 [of the Agreement] clearly stipulates that Kazakh law and legislation shall generally govern legal relationships established under the Law, with the modifications following from treaties to which Kazakhstan is a party. However, [the Foreign Investment Law] grants the parties considerable freedom to choose an arbitration agency, the place of arbitration and the arbitration rules to govern the dispute. In the absence of indications to the contrary, the natural interpretation is therefore that insofar as a place of arbitration, and the applicable rules of arbitration are chosen in accordance with the Foreign Investment Law, the chosen rules and pertinent law at the chosen place of arbitration governs the arbitration, with the parties’ national legal systems not being applicable.
[50].
It follows from these provisions [of the Foreign Investment Law] that, for [Claimant—investor] to be entiled to demand arbitration according to the SCC Rules under the Foreign Investment Law, several conditions must be fulfilled:

(1) The dispute must be an investment dispute within the meaning of the Foreign Investment Law, which implies that:

a) the dispute must involve a "foreign investor" within the meaning of the Law, which includes a "foreign juridical person," being defined as a juridical person (company etc.) created in accordance with legislation of a foreign State beyond the limits of the Republic;

b) the dispute must be between the foreign investor and the Republic Kazakhstan;

c) the dispute must be arising in connection with "foreign investments," which includes a dispute connected with, among other alternatives, "any agreement between the Republic and a foreign investor."

(2) The parties have not been able to settle the dispute by negotiations;

(3) There must exist a written consent of the foreign investor;

(4) The chosen procedure must be in accordance with the agreed procedure for the settlement of disputes, including an agreement for settlement of disputes in the contract or any other agreement between the parties to the dispute.

[51].
At first glance, all of these conditions appear to have been met: [Claimant—investor] is a company created and existing under the laws of New York, U.S.A.; the Agreement is between that foreign juridical person and [Respondent-Kazakhstan]; [and] the dispute meets the requirements of a "foreign investment." The Tribunal is satisfied that serious attempts were made to settle the dispute through negotiations, and the fact of [Claimant— investor]’s initiating this arbitration is ample proof of [Claimant—investor]’s consent to this procedure for settlement of the dispute between the parties.

Respondent—Kazakhstan’s Position

[52].
[Respondent-Kazakhstan] objects to the Tribunal’s jurisdiction under the Foreign Investment Law principally on the ground that "[Claimant— investor] is no longer a foreign investor,"...
[53].
...[Respondent-Kazakhstan] has elaborated on this contention as follows:

A stipulation of parties to a contract, including a governmental body like the Department for State Property, to the effect that they are entitled to protection of a particular law does not make it so. If the law is in fact not applicable to their contract, saying it is does not make it so. The parties to the Agreement could not have stipulated, for example, that [Claimant—investor] was or is entitled to be regarded as a U.S. national entitled to invoke the Treaty if, when the time came, the facts concerning [Claimant-investor] did not support Treaty jurisdiction. The same must be true with respect to the [Foreign Investment Law]. It was and is not up to [Claimant—investor] to decide, even if a government Department agreed at the time, that it is now entitled to be regirded by this Tribunal as a ‘foreign investor" under the [Foreign Investment Law], or that the Agreement is now a foreign investment, [emphasized by Respondent-Kazakhstan]

Moreover, what may have been true when the Agreement was executed in 1997 may not be true today. If, for example, ownership and control of the New York company called [Claimant—investor] had not only subsequently been acquired by [the Holding Company, a holding company of the same name as Claimant-investor’s], but has also (1) become a hollow U.S. shell without assets or activities in the United States, and (2) become controlled by Kazakhstani nationals, by contract, payments, intimidation or otherwise].] [T]he [Foreign Investment Law] is no longer applicable, no matter what [Claimant-investor] was in 1997 when it signed the Agreement.

[Respondent-Kazakhstan] believes that the facts will show that [Mr. X] [alleged president of Claimant—investor, Editor’s note] has long since lost control of [Claimant-investor;] even if [Mr. X] and a group of investors [Mr. X] has refused to identify],] still nominally "own" [the Holding Company] and in turn [Claimant—investor]. But even if they, as [Mr. X] protests..., are genuinely non-Kazakhstani investors and therefore might qualify as "foreign investors" under the [Foreign Investment Law], we also believe what [Mr. X] said in his message sent to us by the General Prosecutor, that [Mr. X] is being controlled by others, not his non-Kazakhstani partners....

It would appear that [Mr. X] has now made a deal with Kazakhstani interests who see],] in the sad history of [Claimant—investor]’s dealings with [the Refinery,] an opportunity to invoke all the protective language of the Treaty and the [Foreign Investment Law] against condemnations and expropriations and discriminations. By using an empty New York shell company owned nominally by foreigners, they hope to have an international arbitration tribunal award damages for expropriation etc., whereas the Agreement specifically provides that if the dispute is not related to foreign investments, it "shall be resolved in a Kazakh court"....

[54].
In connection with the arbitration clause, [Respondent-Kazakhstan] asserts that the Kazakh courts have ruled that the dispute before it was not associated with "foreign investment" and, therefore, not within the scope of the arbitration clause. [Respondent-Kazakhstan] appears to contend that these court rulings are also binding with respect to the Foreign Investment Law and exclude arbitration on the basis of the [Foreign Investment Law].

Claimant-investor’s Position

[55].
[Claimant—investor] denies that there is anything in the Foreign Investment Law to support that the application of the law is excluded in cases where a U.S. company is owned or controlled, directly or indirectly, by other than U.S. citizens or companies. The only requirement under [the Foreign Investment Law] to qualify as a "foreign juridical person" is that the company is created in accordance with legislation of a foreign State beyond the limits of [Kazakhstan]. In any event, [Claimant—investor] is owned 100 per cent by the [the Holding Company], but indirectly owned and controlled by [Mr. X], an American citizen holding 51 per cent of the shares in the [Holding Company].... The decisions of the Kazakh courts with regard to "foreign investments" are not binding, for the same reasons as set forth in connection with the arbitration clause.

The Tribunal’s Findings

[56].
The Arbitral Tribunal notes that the questions of direct or indirect ownership or control of [Claimant—investor] need to be explored in connection with arbitration on the basis of the Treaty,... But [Respondent-Kazakhstan] has offered no evidence, or even indication, that the Foreign Investment Law is to be given such narrow interpretation as contended, or that [the Foreign Investment Law] contains exceptions similar to Article I (2) of the Treaty. By the clear wording of the [the Foreign Investment Law], [Claimant-investor] qualifies as a "foreign investor" and the dispute before this Arbitral Tribunal as an investment dispute under the Foreign Investment Law.
[57].
For the same reasons as set forth in connection with the arbitration clause],] the decisions of the Kazakh courts constitute no bar to jurisdiction under the Foreign Investment Law.
[58].
With regard to the argument [of Respondent-Kazakhstan] that the parties are not capable of agreeing that the Foreign Investment Law is applicable when on the facts of a case it is not, the Tribunal finds it sufficient to refer to the [Foreign Investment Law]’s definition of "foreign investments," which clearly covers [Claimant—investor's contractual rights in connection with [Respondent—Kazakhstan’s shares in [the Kazakh Company], and to the definition of an "investment dispute," which includes the alternative that "any agreement between [Kazakhstan] and a foreign investor" in connection with foreign investments is covered. Whether or not [Kazakhstan] is capable of extending the application of the Foreign Investment Law through agreements with foreign investors, the present Agreement is clearly within the framework of the [Foreign Investment Law].

[59].
The Tribunal therefore concludes that [Respondent-Kazakhstan] has not proven any bar to the Tribunal’s jurisdiction under the Foreign Investment Law.

(8) Applicable Law to Jurisdictional Issues Under the Treaty Between the USA and the Republic of Kazakhstan Concerning the Encouragement and Reciprocal Protection of Investment (19 May 1992) ("BIT") _

Relevant Provisions of the Treaty

[60].
Articles I and VI of the treaty of 19 May 1992 between the USA and the Republic of Kazakhstan Concerning the Encouragement and Reciprocal Protection of Investment read in part as follows:

Article I

(1) For the purposes of this Treaty,

[a] "investment" means every kind of investment in the territory of one Party owned or controlled directly or indirectly try nationals or companies of the other Party....

[b] "company of a Party means any kind of corporation, company... legally constituted under the laws and regulations of a Party or a political subdivision thereof

[c] "national" of a Party means a natural person who is a national of a Party under its applicable law.

(2) Each Party reserves the right to deny to any company the advantages of this Treaty if nationals of any third country control such company and, in the case of a company of the other Party, that company has no substantial business activities in the territory of the other Party or is controlled by nationals of a third country with which the denying Party does not maintain normal economic relations.

Article VI

(1) For the purposes of this Article, an investment dispute is a dispute between a Party and a national or company of the other Party arising out of or relating to:

[a] an investment agreement between the Party and such national or company;

[b] an investment authorization granted try that Party’s foreign investment authority to such national or company; or

[c] an alleged breach of arty right conferred or created by this Treaty with respect to an investment.

(2) In the event of an investment dispute, the parties to the dispute should initially seek a resolution through consultation and negotiation. If the dispute cannot be settled amicably, the national or company concerned may choose to submit the dispute for resolution:

(c) in accordance with the terms of para. 3.

(3) (a)... [T]he national or company concerned may choose to consent in writing to the submission of the dispute for settlement by binding arbitration:

iv) to any other arbitration institution, or in accordance with any other arbitration rules, as may be mutually agreed between the parties to the dispute.

(b) Once the national or company concerned has so consented, either party to the dispute may initiate arbitration in accordance with the choice so specified in the consent

(8) For purposes of an arbitration held under para. 3 of the Article, any company legally constituted under the applicable laws and regulations of a Party or a political subdivision thereof but that, immediately before the occurrence of the event or events giving rise to the dispute, was an investment of nationals or companies of the other Party, shall be treated as a national or company of such other Party in accordance with Article 25 (2) (b) of the ICSID Convention.

[61].
Article 25 (2) (b) of the ICSID Convention referred to in Article VI (8) reads as follows:

"(2) "National of another Contracting State ’ means:

(b) any juridical person which had the nationality of Contracting State other than the State party to the dispute on the date on which the parlies 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.

The Tribunal’s Findings

[62].
With respect to arbitration based on the provisions of the Treaty, the Treaty does not contain express choice of law provisions corresponding to Clause 9.2 of the Agreement or Article 3 of the Foreign Investment Law, but does contain references to the predominance of the parties’ agreement with regard to the rules of arbitration under the various alternatives. Thus..., Article VI (3) (a) iv) provides:

(3)...[T]he national or company concerned may choose to consent in writing to the submission of the dispute for settlement by binding arbitration:

iv) to any other arbitration institution, or in accordance with any other arbitration rules, as may be mutually agreed between the parties to the dispute.

[63].
The Arbitral Tribunal finds that a natural reading of the Treaty leads to the conclusion that, insofar as it is found that the parties have agreed to arbitration in Stockholm in accordance with the SCC Rules, those rules of arbitration are applicable, supplemented by the Swedish Arbitration Act being the law of the chosen place of arbitration. There is no basis for holding that Kazakh procedural law, or for that matter U.S. procedural law, the procedural laws of the parties to the arbitration, is applicable.

(9) Definition of "National of Another Contracting State" Under the Treaty Between the USA and the Republic of Kazakhstan Concerning the Encouragement and Reciprocal Protection of Investment

The Arbitral Tribunal’s Finding

[64].
It follows from the provisions [of the Treaty] that, for [Claimant-investor] to be entitled to demand arbitration at [the SCC] in Stockholm under the Treaty, several conditions must be fulfilled:

(1) The dispute must be an "investment dispute" within the meaning of the Treaty, which implies that:

a) the dispute must be arising out of or relating to an "investment agreement," an "investment authorization" within the meaning of the Treaty, or an alleged breach of any right conferred or created by the Treaty with respect to an investment;

b) the dispute must be between a U.S. national or company and [Kazakhstan];

(2) The parties have not been able to settle the dispute by negotiations;

(3) The parties must have mutually agreed to submit the dispute to this particular arbitration institution;

(4) [Kazakhstan] must not have exercised its right under Article I (2) of the Treaty to deny to [Claimant—investor] the advantages of the Treaty.

[65].
The Tribunal is satisfied that the requirements under (2) and (3) above have been met, and there has been no contention that [Kazakhstan] has exercised any right according to the Treaty Article I (2) (point 4 above) to deny [Claimant—investor] the advantages of the Treaty.
[66].
[Claimant—investor] asserts Article VI (3) (a) (iv) of the Treaty as one basis for this arbitration. (Respondent-Kazakhstan] denies on various grounds that the Arbitral Tribunal has such jurisdiction. Some of [Respondent—Kazakhstan]’s contentions are related to the ownership or control, directly or indirectly, of [Claimant—investor], and the nationality of the companies and persons involved. Other contentions are related to the legal consequences of the decisions of the Kazakh courts of law concerning the termination of the Agreement.

Assertions as to the Ownership and Control of [Claimant-investor]

[67].
The Arbitral Tribunal finds it practical first to give a description of the asserted ownership and control of [Claimant—investor], as a general background.
[68].
Much of the following is based on statements made by [Mr. X], president of [Claimant—investor]. His statements have been objected to by [Respondent-Kazakhstan], requesting that his testimony be substantiated by documentary evidence available to [Claimant—investor]. The Tribunal comes back to this evidentiary issue below, but finds his assertions useful as a background for the decisions to be made.
[69].
... [I]n 1986 [Mr. X, a national of the United States] became the [sole] owner of an offshore company [the Offshore Company],... [which] formed a joint stock company in 1987 under the laws of New York state with the name of [Claimant—investor]... [Mr. X] asserts that [Claimant—investor] was 100 per cent owned by him, which presumably means that he was the sole shareholder, when the First Agreement was signed on 7 March 1997.
[70].
The [First Agreement] required considerable payments into [the Kazakh Company], which were financed by loans from a group headed by [Mr. Y]. In the Statement of Defence it is stated that [Mr. Y] was chairman of [another Kazakh Company in another industry], and was believed to be a Kazakh citizen. [Mr. X] in his testimony at the hearing stated that [Mr. Y] is not a Kazakh but a Russian citizen. The financing group [headed by Mr. Y] acquired 50 per cent of the shares in [Claimant—investor], whereby [Mr. X] became a 50 per cent shareholder in the company. This transfer of shares took place in May 1997, after the First Agreement but before the Agreement was signed on or about 8 July 1997. [Mr. X] has not been able or willing to give the names or nationalities of the shareholders who held 50 per cent of the shares in [Claimant—investor] from 1997 to 2000, beyond a suggestion that there were "some westerners and some Russians, and possibly some Kazakhs."
[71].
In May 1998, [Claimant-investor] acquired two... plants in... New financing was required, and [Mr. X] had to reduce his shareholding to 25 per cent It has been suggested that the financing group [headed by Mr. Y] all in all invested close to 100 million USD to [the Kazakh Company] as loans, while [Mr. X] himself invested about 2 million USD.
[72].
After [Claimant—investor] entered into the Agreement all activities of [Claimant—investor] other than operating the Refinery and executing the Agreement ceased. Today, [Claimant—investor] has no otlier assets than the claim against [Respondent-Kazakhstan] for breach of the Agreement.
[73].
After the Agreement was terminated by the Kazakh courts in 2000, part of the group of investors decided that they did not wish to participate in an arbitration against [Respondent-Kazakhstan], the reason given was that they had, or intended to have, business with [Respondent-Kazakhstan]. After negotiations, this group of investors withdrew as shareholders in [Claimant—investor] and formed a company, which took over the ownership of the two... plants from [Claimant—investor]. As a result of these transactions ¡Mr. X] became 51 per cent shareholder in [Claimant—investor], while the investors who remained held 49 per cent of the [Claimant-investor] shares. It has not been further explained why or how [Mr. X] acquired 51 per cent of the shares in [Claimant—investor], nor has it been documented that he obtained this percentage of the shares.
[74].
On 16 February 1998 a Virgin Islands Company was formed, with the name of... [the Holding Company]. This company is said now to own all the shares in [Claimant—investor], while [Mr. X] owns 51 per cent and the remaining investor group 49 per cent of the shares in [the Holding Company].
[75].
This 49 per cent shareholder group is represented by [Mr. Z], a Geneva lawyer. (Ms. S] testified, with no denial from [Mr. X], that [Mr. P], previously the president of [Claimant-investor], receives mail to [Claimant-investor] and forwards all such mail to [Mr. Z], not to [Mr. X]. The group represented by [Mr. Z] finances 100 per cent of the costs of the present arbitration. [Mr. X] has entered into an oral agreement with the group that he will receive one sixth of any proceeds of the arbitration (and again become a 100 per cent shareholder of [Claimant-investor]) while the group will keep five sixths of any proceeds of the arbitration.

Respondent-Kazakhstan ’r Position

[76].
[Respondent-Kazakhstan] objects to the Tribunal’s jurisdiction under the Treaty principally on the ground that ‘there is no Treaty jurisdiction since [Claimant—investor] is not owned or controlled by a U.S. citizen,’...
[77].
[Respondent-Kazakhstan] does not deny that [Claimant—investor] is created and existing under the laws of the State of New York and as such is a "company of a Party" within the meaning of the Treaty. Nor does [Respondent-Kazakhstan] deny that [Mr. X], the president of [Claimant-investor] and the asserted majority shareholder in [the Holding Company], is a "national" of a Party to the Treaty. But [Respondent-Kazakhstan] maintains that available information, including [Mr. X]’s statements in other connections, and his oral testimony at the hearing..., indicates that [Claimant-investor] directly or indirectly is controlled by others, possibly Kazakh citizens, who are not protected by the Treaty. [Respondent-Kazakhstan] contends that [Claimant—investor] must provide the Arbitral Tribunal with evidence and precise information concerning the shareholders’ nationality and the size of their shareholdings in and their control, directly or indirectly, of the companies concerned. [Respondent-Kazakhstan] also asserts that [Claimant—investor] is an "empty shell" with no business activity in the United States.

Claimant-investor's Position

[78].
[Claimant—investor] refers to the undisputed fact that [Claimant-investor] is a U.S. company, and contends that [Claimant—investor] as such is entiled to protection and to request arbitration under the Treaty. It is well established, also in international law, that the corporate entity is separate from juridical or physical persons who own or control the company. The Treaty must be interpreted and applied on that basis.

(10) Burden of Proof to Establish "National of Another Contracting State" Under the Treaty Between the USA and the Republic of Kazakhstan Concerning the Encouragement and Reciprocal Protection of Investment

The Tribunal’s Findings

[79].
The Arbitral Tribunal is satisfied on the evidence that [Claimant-investor] is created and existing under the laws of the State of New York and as such is a "company of a Party" within the meaning of the Treaty, and satisfied that [Mr. X], allegedly the president of [Claimant—investor] and the majority shareholder in [the Holding Company], is a U.S. citizen and a "national" of a Party within the meaning of the Treaty.
[80].
However, the Tribunal finds that the ownership and control of [Claimant—investor], and the question whether a company seeking protection is an "empty shell" without any business activity within the territory of a Party, must be taken into regard in the interpretation and application of the Treaty. Although not directly applicable, several provisions of the Treaty take ownership and control into regard. The definition of "investments" in Article I(l)(a) refers to investments "owned or controlled directly or indirectly by nationals or companies of the other Party;" the right to deny protection under the Treaty according to Article 1(2) is based on a Party finding that the company concerned "has no substantial business activities in the territory of the other Party or is controlled by nationals of a third country and Article VI (8) addresses the situation where an investment changes nationality immediately before the occurrence of the event or the events giving rise to the dispute.
[81].
In consequence hereof it must be a procedural requirement that a Claimant party, requesting arbitration on the basis of the Treaty, provides the necessary information and evidence concerning the circumstances of ownership and control, directly or indirectly, over [Claimant—investor] at all relevant times. This is especially the case when reasonable doubt has been raised as to the actual ownership of and control over the company seeking protection. In the present case, by [Mr. X]’s admission, the sole activity of [Claimant—investor] since the termination of the Agreement by the Kazakh courts, and the sole asset of [Claimant—investor], is the arbitration initiated against [Respondent-Kazakhstan]. This activity is financed solely by a group of shareholders allegedly owning 49 per cent of the shares in [the Holding Company], and the economic outcome of the arbitration is fixed to be shared with five sixths to the shareholder group and one sixth to [Mr. X]. This explanation places the burden of proof on [Claimant—investor] to prove that [Mr. X] is in control of the decisions to be made in the arbitration or generally in control, directly or indirectly, of [Claimant-investor].
[82].
[Claimant—investor] has repeatedly been requested by [Respondent-Kazakhstan] to provide further information and evidence concerning such ownership and control, but has resisted, partly with the argument that the shareholder group wishes to remain anonymous. The Tribunal cannot find that such an argument can justify for instance that [Claimant—investor] does not provide any evidence of [Mr. X]’s shareholdings in the group at various times.
[83].
Under the circumstances, the Arbitral Tribunal does not find it necessary to determine in further detail what ownership or control is necessary under the Treaty to be entiled to demand under the Treaty. The Tribunal finds, on the evidence before it, that [Claimant-investor] has not provided any degree of probability, let alone proof, that U.S. citizens or companies have any degree of control, directly or indirectly, over [Claimant—investor]. The Arbitral Tribunal therefore concludes that it has not been established that the Tribunal has jurisdiction on the basis of the Treaty.

Other Issues Related to Treaty Jurisdiction

[84].
In its post-hearing brief [Respondent-Kazakhstan] has submitted new arguments and evidence concerning Kazakh law of corporations, placing weight on substance rather than form, and argues that this also throws light on the correct interpretation of the Treaty. [Claimant—investor] objects, at this late stage of the separate proceedings, to deal with new arguments and evidence not included in the five defined issues... The Tribunal accepts this objection, and also notes that with the findings stated above it appears at this stage that the Tribunal does not, in any event, have jurisdiction under the Treaty.

Decision on Jurisdiction

[85].
The Arbitral Tribunal renders the following unanimous Decision on Jurisdiction:

1. Tribunal’s jurisdiction considered in this decision, that it is vested with jurisdiction to adjudicate the claims brought by [Claimant—investor] on the basis of the arbitration clause in [the Agreement],..., and on the basis of the Foreign Investment Law of Republic Kazakhstan of 29 December 1994 with amendments, but not on the basis of the Treaty of 19 May 1992 between the USA and the Republic of Kazakhstan Concerning the Encouragement and Reciprocal Protection of Investment....

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