Investment Arbitration and Protection of Subsoil Users: the View from Kazakhstan

This article is devoted to actual issues of subsoil users’ disputes in international arbitration, particularly, to the definition of international investment arbitration, investment dispute, and provides a brief analysis of current legislation of the Republic of Kazakhstan in regards to exclusive competence of state courts on specific issues.

As we know, there are several types of arbitration proceedings – international commercial arbitration, international investment arbitration, and arbitration proceedings between the states and its authorized bodies and government affiliated companies.

What is the peculiarity of international investment arbitration? It is rapidly growing in popularity mechanism of dispute resolution between foreign investors and state bodies. It is unique due to that fact that it provides investors with the possibility to claim for compensation due to material damage or violation of obligations from government itself or make it beyond the court system of relevant state.

Arbitrators usually are advocates, lawyers with well known name and reputation, selected specifically for each proceeding by the parties or appointed by one of international organizations providing its services in arbitration sphere.

The feature of disputes arisen from subsoil use contracts is that one of the dispute party is a Government or authorized state body. Delegation of dispute arisen out of such contract to the courts of law of Kazakhstan will most likely make a high pressure on the judges by State, and therefore it is very undesirable for investors-subsoil users. Thus, the difference of investment arbitration from commercial arbitration is that defendant is usually a State, and Claimant – private body, citizen/company of other state, and also the fact that here we talk about large amounts of money.

We have to note that in order to allow the dispute to be considered in international arbitration, there is a need of preliminary consent of both parties. In commercial relations such consent is being reached by including the arbitration clause to the contract, where in investment arbitration the consent of the government is usually confirmed in investment agreement between the country of investor and country attracting investments (Kazakhstan is a party of 39 such agreements). Investment agreements define rights of investors, i.e. the right for compensation in the event of expropriation or discrimination by state authorities. What is discriminative attitude, and what compensation shall be paid is being decided by arbitrators on the basis of specific facts of each case and applicable law.

According to Article 4 of the Law of the Republic of Kazakhstan On Investments № 373-II dated January 8, 2003, the investor obtains a full and unconditional protection of interests and rights. However, even considering the present mechanism of protection of investor’s rights, everyone is concerned about the issue of enforceability of arbitral awards. Currently in Kazakhstan there was formed a legal base for recognition and enforcement of international arbitration awards. Kazakhstan joined and ratified almost all main international and regional conventions and agreements related to arbitration that is an acting legislation in the Republic. For example, there were adopted national laws: On International Commercial Arbitration, On Arbitration Courts, On introduction of changes and amendments to certain legislative acts of the Republic of Kazakhstan on issues of activity of arbitration courts, i.e. to Civil Procedural Code of the Republic of Kazakhstan.

Kazakhstan has also joined to the New York Convention On Recognition and Enforcement of Foreign Arbitral Awards dated June 10,1958; European Convention on International Commercial Arbitration dated April 21, 1961, ratified Washington Convention on Settlement of Investment Disputes between States and physical persons and legal entities of other states dated March 18, 1965. Kazakhstan is a party of the Agreement On Order of Disputes Resolution related to Economical Activity dated March 20, 1992; Agreement On Order of mutual enforcement of the decisions of arbitration, economical courts on the territory of CIS states dated March 6, 1998.

Having joined to these conventions and agreements and having its own national legislation, our government is obliged to recognize the arbitration clauses in part of dispute resolution in subsoil use contracts, and also recognize and enforce decisions of both foreign and international, and Kazakhstani arbitration courts. The list of grounds for rejection in recognition or enforcement of arbitral awards stipulated by Law of the Republic of Kazakhstan On International Commercial Arbitration corresponds with the list determined in New York Convention. Therefore, the arbitral awards issued in another state, a party of the Convention will be recognized in Kazakhstan.

As we know, Russia has signed Energy Charter Treaty (ECT) that is the only multilateral international agreement creating the legal basis for safe transportation of energy materials and products in 1994, but has not ratified it yet regardless of pressure from EU. Kazakhstan though signed it on December 17, 1994 and ratified ECT on October 18, 1995. Such ratification certifies that potential investors in energy field will be assured that their rights in Kazakhstan will be protected, and state will be attracted to the material responsibility for violations of ECT through international investment arbitration.

It is very important to determine the definition of the investment dispute, the dispute that could be passed to the investment arbitration court. Investment dispute has been formulated in ECT rather narrowly: it is a dispute in regards to the investment between the party and investor of other country relating to the violation of obligations in part of “Stimulation and protection of investments”. Therefore, an investor can bring its claims according ECT’s order on the following issues:

- assurance of fair and equal regime, national regime and most favorable regime (with controlled seizures and state subsidies);
- faithful review of the issues of entry and stay of personnel of foreign investor;
- provision of most favorable regime during damage compensation to foreign investor occurred during the war, civil disorders and other similar events;
- guarantees during expropriation;
- guarantee of payments transfer related to the foreign investments.

According to Article 25 of Washington Convention, investment disputes are disputes arisen out of investment relations between accepting state and physical person or legal entity of other state. As we see, it is rather broad definition.

If we review our national legislation, according to the Law of the Republic of Kazakhstan On Investments, investment dispute is a dispute arisen out of contractual obligations between investors and state bodies with regards to investment activity of investor. In my opinion, the definition of investment dispute in current Law On Investments is not the best one, and even worsens the status of investors with comparison to the old Law On Foreign Investments.

Firstly, the disputes arisen from non contractual relations between state authorized body and investor have been excluded out of category of investment disputes. Thus they can be reviewed in state courts only, where Article 27 of previous Law On Foreign Investment Disputes permitted to pass them to international arbitration even without state consent. Secondly, it is obvious, that existence of any dispute can be reasoned by the violation of legislation by one of the dispute parties, and thus such definition of investment dispute increases the risk to pass the disputes between the state and investor to Kazakh courts, since the ground for such transfer can be an accusation of investor by state in violation of legislation.

As it is known, according to Article 9 of the Law On Investments № 373-II dated January 8, 2003 investment disputes can be resolved by negotiations, in courts of Kazakhstan, or in accordance with the previously agreed procedure of dispute resolution between parties that includes international arbitration agreed by the parties. On one hand, Law On Investments does not specify to what specific arbitrations the dispute shall be passed, as it was in old Law On Foreign Investments, and let the parties choose. However, on another hand, in my opinion, arbitration agreement shall clearly exclude jurisdiction of state court. It is important to draw attention to the limited right of investors to bring claims to arbitration due to Article 417 (1) of the Civil Procedural Code of the Republic of Kazakhstan dated July 13, 1999, that has brought the exclusive competence of Kazakh courts on disputes related to the determination of right for real estate. It is obvious, that fulfillment of rights arisen from subsoil use contract by investors can be a reason of disputes relating to the right on real estate mentioned here (i.e. possible dispute on acknowledgement of rights on land plots for subsoil use; buildings, constructions built on the plots above these depths) .

Besides, during the resolving of issue on exclusive competence of Kazakh courts it is important to mention about the provisions of international agreements. If investment disputes related to determination of rights on real estate and other issues mentioned in Article 417 of Civil Procedural Code of Kazakhstan (CPC) are within the force of international agreements providing the review of investment disputes by arbitration, then the provision of CPC on exclusive competence shall not apply to them.

If to look closely at jurisdiction of International Centre on Settlement of Investment Disputes (ICSID) established by Washington Convention, then Article 25 of Washington Convention determined the following features of disputes where ICSID jurisdiction can be applied:
1) Dispute shall be investments related;
2) The parties of dispute are a State, the party of Washington Convention, and physical person or legal entity that is a resident of other state, a party of Washington Convention;
3) Parties of a dispute shall provide a written consent for its transfer to the Centre.

If a dispute is not investments related and relates to factual conditions, Rules of Additional Procedure adopted in 1978 do let review it in ICSID. In order to increase the ICSID jurisdiction, on September 27, 1978 there were adopted “Additional means of dispute consideration and procedures on fact finding” that let ICSID regulate the disputes between state and investors in frames of arbitration that are not foreseen by Washington Convention. For example, these are disputes with the participation of parties that do not relate to the state that signed Washington Convention or disputes that are not related to investments.

The importance of such international legal mechanism is that investors have an opportunity to bring its claims against the State accepting investments, and make a dialog with them. The process of investment dispute resolution can be called a successful one when parties make a compromise and the dispute is being left without award making.

Regardless of positive moments and advantages of transfer of a dispute to arbitration court, each party can find its own issues or minuses. For example, what are the consequences of obligatory application of ECT for Kazakhstan? Firstly, international arbitration is open to all investors investing to the energy industry of ECT countries, where they can bring claims against state to get a material compensation for violation of ECT obligations related to the protection of foreign investors. Secondly, the existence of awards against Kazakhstan increases the negative image of level of foreign investments protection in the country, thus slowing down the process of economical growth. The matter is – that contrary to arbitration awards in exclusively commercial disputes – the decisions on investment disputes are often being publicly known, disclosed.

If we talk about minuses of disputes against the state for investors in general, we realize that the state has much more resources and opportunities than private investor, and is able, if necessary, to engage the administrative resources/pressure in the event of threat of damage to public interests of the state. That is why investors have rights to be on track after the state, its authorized bodies in international arbitrations, and independently choose ways and methods of dispute resolution.

It is important to note that foreign investors have significantly less opportunities of access to the documents of non public character, or obtain witness evidence from state officials in favor of investors. Regardless the right of investors to bring the claims, the state, however, has a right to review again or cancel the international agreement on the basis of Vienna Convention on the Law of Treaties 1969.

International practice shows that inequality of the parties can be seen also in nonpossibility of investor to secure himself a proper representation and protection of interests. Such countries as Iran, USA, Canada, Mexico that show an intensive investment development policy, have formed strong legal teams that have a rich experience of client representation. Though the majority of claims are being brought by middle size investment companies with medium size budget for lawyers for whom it is rather difficult to oppose to strong governmental teams.

The speed of attracting the foreign investments to Kazakhstan is a reason for increase of a number of investment disputes. Bilateral investment agreements provide a direct right to investors to bring a claim to arbitration court against the State that violated laws and agreements, even if investors did not conclude the agreements with relevant state. Therefore, Kazakhstan is ready to abide with the same rules in sphere of energy as its neighbors, and can stimulate the foreign investments flow to the country, where international investment arbitration can become an excellent guarantee for protection of rights.

Zhibek Karamanova

Senior Lawyer, GRATA Law Firm; Arbitrator of the International Arbitration Court under Chamber of Commerce and Industry of the Republic of Kazakhstan

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