{"id":410,"date":"2010-04-08T13:19:41","date_gmt":"2010-04-08T18:19:41","guid":{"rendered":"http:\/\/itn.mattrock.ca\/2010\/04\/08\/ad-hoc-committee-confirms-that-kazakhstan-is-on-the-hook-for-us-125-million\/"},"modified":"2013-01-23T07:43:30","modified_gmt":"2013-01-23T13:43:30","slug":"ad-hoc-committee-confirms-that-kazakhstan-is-on-the-hook-for-us-125-million","status":"publish","type":"post","link":"https:\/\/www.iisd.org\/itn\/2010\/04\/08\/ad-hoc-committee-confirms-that-kazakhstan-is-on-the-hook-for-us-125-million\/","title":{"rendered":"Ad hoc committee confirms that Kazakhstan is on the hook for US$ 125 million"},"content":{"rendered":"

By Elizabeth Whitsitt<\/strong><\/p>\n

April 8, 2010<\/strong><\/p>\n

An ad hoc committee, established pursuant to the ICSID<\/span> Arbitration Rules, has rejected the annulment application of the Republic of Kazakhstan.\u00a0 The former Soviet Republic’s bid for annulment came after an ICSID tribunal ordered Kazakhstan to pay Rumeli Telekom A.S. (Rumeli) and Telsim Mobil Telekomunikasyon Hizmetleri A.S. (Telsim) US$ 125 million in damages for breaches of the Kazakhstan-Turkey BIT<\/span>.<\/p>\n

Problems between the parties began in the summer of 1998 when Rumeli and Telsim, through their 60% shareholding in Kazakh company KaR-Tel, won a bid to hold a license to operate the second mobile telephone network in Kazakhstan.\u00a0 Around October 1998, KaR-Tel started to negotiate with the State Committee on Investment an agreement that would grant KaR-Tel investment incentives.<\/p>\n

Those negotiations led to the conclusion of an investment contract between KaR-Tel and the Kazakh investment committee some months later.\u00a0 The investment contract obliged KaR-Tel to make investments, to apply advanced technology and to provide the investment committee with regular and detailed information on the progress of its investment.\u00a0 In return, KaR-Tel was granted tax and other benefits, including a five-year total exemption from corporate and property tax, and reduced rates for the five years thereafter. The investment contract was to expire on July 31, 2009.<\/p>\n

In 2001 various differences arose between the parties to the agreement, which culminated in the unilateral termination of the investment contract by the Kazakh investment committee.\u00a0 Challenging this maneuver, Rumeli and Telsim commenced arbitral proceedings in July of 2005.<\/p>\n

Specifically, the claimants maintained that their agreement with the state investment committee was wrongful as they had met their obligations under the investment contract.\u00a0 According to claimants, once KaR-Tel\u2019s success was assured, the respondent devised a scheme to orchestrate their expulsion from KaR-Tel in a definitive manner and to keep all of KaR-Tel for their sole benefit.\u00a0 Thus, Rumeli and Telsim argued that Kazakhstan had breached obligations it owed to foreign investors under international law and the Kazakhstan-Turkey BIT.<\/p>\n

On July 29, 2008 an ICSID tribunal unanimously sided with Turkish claimants finding that: (i) it had jurisdiction over the dispute; (ii) Kazakhstan had breached its obligation to accord Rumeli and Telsim fair and equitable treatment; and (iii) Kazakhstan had expropriated Rumeli and Telsim\u2019s investment.<\/p>\n

Some three months later Kazakhstan sought an annulment of the tribunal\u2019s award.\u00a0 Grounding its application on Articles 52(1)(b) and 52(1)(d) and 52(1)(e) of the ICSID Convention<\/span>, the Republic argued that: the tribunal had manifestly exceeded its powers; there had been a serious departure from a fundamental rule of procedure; and the tribunal failed to state the reasons upon which its decision was based.\u00a0 Specifically, Kazakhstan took issue with the tribunal\u2019s decision regarding: jurisdiction, collusion, causation and damages.<\/p>\n

As seen in other annulment decisions*, the ad hoc committee in this case began its consideration of those arguments by clarifying the scope of its power to review decisions.\u00a0 Addressing the contradictory views of the parties on this point, the committee observed that \u201c[a]n ad hoc committee should not be concerned with upholding the finality of an award or ensuring that the review of the award is as extensive as possible\u2026but should simply act within the confines of the task devolved upon it by the ICSID Convention.\u201d\u00a0 Moreover, the committee noted that its discretion to annul an award does not depend on whether an alleged breach of Article 52 is \u201ctrivial\u201d or \u201cdeterminative of the claim.\u201d<\/p>\n

The ad hoc committee, composed of Judge Stephen M. Schwebel, Professor Campbell McLachlan and Dr. Eduardo Silva Romero, then went on to reject all of Kazakhstan\u2019s arguments for annulment.\u00a0 In so doing, the committee confirmed that the standard of review applicable to all of Kazakhstan\u2019s arguments is very high, thus making successful annulment applications under the ICSID Convention extremely rare.<\/p>\n

One example of the ad hoc committee\u2019s reasoning in this regard can be seen in its consideration of arguments raised by Kazakhstan regarding the tribunal\u2019s damage assessment.<\/p>\n

Kazakhstan contended that the tribunal failed to give reasons for its decision on the quantum of damages awarded and that the award should be annulled on that basis.\u00a0 In particular, Kazakhstan asserted that the tribunal\u2019s reasons \u201c\u2026were so erroneous, illogical, inconsistent and insufficient\u2026\u201d that it was impossible to determine how the tribunal had reached a damage amount of US$ 125 million.\u00a0 As support for this contention, the Republic took issue with a number of aspects of the tribunal\u2019s analysis, calling into question the method and evidence used to value the claimants\u2019 investment.<\/p>\n

Citing previous arbitral awards, the ad hoc committee noted that annulment under Article 52(1)(e) is concerned with a failure to state any reasons with respect to all or part of an award, not the failure to state correct or convincing reasons.\u00a0 Additionally, the committee took note of the fact that damage assessments are \u201cinherently uncertain\u201d \u2013 a fact that results in tribunals being afforded a considerable measure of discretion in determining issues of quantum.\u00a0 Accordingly, the ad hoc committee went on to reject Kazakhstan\u2019s bid for annulment.<\/p>\n

In particular, the ad hoc committee considered that the tribunal\u2019s award of damages was not a decision worthy of annulment \u201c\u2026since the [t]ribunal did not fail to give reasons for its award.\u201d\u00a0 Thus, while the committee acknowledged that the tribunal\u2019s damage amount was simply stated in the award without any explanation, it found that the tribunal did not \u201cfail to give reasons\u201d because the tribunal had \u201c\u2026set out reasons for its award in terms appropriate to the circumstances of the case and the evidence available to it.\u201d
\nHaving previously rejected Kazakhstan\u2019s bid for annulment on every other ground, this decision falls in line with prior annulment decisions and confirms that a very high standard of review applies to ICSID annulment applications.<\/p>\n

* See Previous ITN<\/span> Reporting on annulment proceedings:<\/p>\n

\u201cVery High Standard of Review for ICSID Annulment Applications Confirmed,\u201d By Elizabeth Whitsitt, Investment Treaty Newsletter, 6 December 2009 available here:<\/p>\n

http:\/\/www.investmenttreatynews.org\/cms\/news\/archive\/2009\/12\/04\/very-high-standard-of-review-for-icsid-annulment-applications-confirmed.aspx<\/a><\/p>\n

\u201cAd Hoc Committee confirms Argentina is on the hook to Azurix for US $165 million\u201d By Elizabeth Whitsitt, Investment Treaty Newsletter, 2 October 2009 available here:<\/p>\n

http:\/\/www.investmenttreatynews.org\/cms\/news\/archive\/2009\/09\/28\/ad-hoc-committee-confirms-argentina-is-on-the-hook-to-azurix-for-us-165-million.aspx<\/a><\/p>\n

\u201cArgentina must respect award despite ICSID finding that it has errors of law,\u201d By Luke Eric Peterson, Investment Treaty News, 15 October 2007, available here:<\/p>\n

http:\/\/www.IISD<\/span>.org\/pdf\/2007\/itn_oct15_2007.pdf<\/a><\/p>\n

Sources:<\/p>\n

Decision of the ad hoc committee in Kazakhstan v. Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon Hizmetleri available here:<\/p>\n

http:\/\/ita.law.uvic.ca\/documents\/RumeliAnnulment.pdf<\/a><\/p>\n