Consent to Treaty Arbitration Should be Specific, not General

Recently investors vigorously but unsuccessfully tried to revive an arbitral award against the Kyrgyz Republic in the Russian courts.

On 20 July 2015 the Arbitrazh Court of the Moscow Circuit rejected the cassation claim of companies Stans Energy Corp. and Kutisay Mining and upheld the ruling of the Arbitrazh Court of the first instance.

The court upheld the annulment of the arbitration award (see Kyrgyz Republic’s Mixed Fortunes in Investment Arbitration). The court also confirmed that the treaty clause which provides that a state will resolve disputes by arbitration (but does not specify the arbitral institution or rules) does not enable an investor to apply to arbitration without an explicit arbitration clause.

Case summary

Stans Energy Corp. and Kutisay Mining (the “investors“) filed a claim against the Kyrgyz Republic in the arbitration court of the Moscow Chamber of Commerce and Industry (this is an arbitral institution completely different from the ICAC at the Chamber of Commerce and Industry of Russian Federation). They based their claim on the Convention on the Protection of Investors’ Rights (hereinafter, the “Moscow Convention“).

Article 11 of the Moscow Convention provides that the investor and the State shall resolve the dispute by arbitration:

the disputes on investments under the present Convention shall be decided by courts or by arbitration courts of the states-participants to the disputes, by the Economic Court of the Commonwealth of Independent States and/or other international courts or international arbitration courts

This provision does not identify the arbitral institution or applicable arbitration rules. Claimants believed that such provision allowed them to apply at any competent arbitral institution of their choice. The arbitral tribunal found itself competent to hear the case and satisfied the claim.

The Kyrgyz Republic applied to the Arbitrazh Court of Moscow to set aside the award. During the proceedings the Kyrgyz Republic applied for an advisory opinion to the Economic Court of the Commonwealth of Independent States (the “CIS Court“) concerning Article 11 of the Moscow Convention.

The question was whether Article 11 as such amounts to a consent to arbitration. The CIS Court is an international judicial organ located in Minsk and empowered to resolve disputes within the framework of the CIS and to interpret legal instruments of the CIS organs and international treaties. The Moscow Convention provides that “controversies related to interpretation of this Convention shall be resolved by … application at [the CIS Court]”.

The court of first instance granted the claim of the Kyrgyz Republic on three main grounds: lack of arbitration agreement, non-respect of state sovereignty and doubts as to the arbitrators’ impartiality.

The court held in particular that under the UN Convention on Jurisdictional Immunities of States and their Property (New York, 2004) a state wishing to waive its immunity shall explicitly express it. Neither the Moscow Convention, nor the law on investments of the Kyrgyz Republic provides such waiver of immunity.

Second instance

The investors applied to the Arbitrazh Court of the Moscow Circuit to repeal the ruling of the court of the first instance. The companies based their claim on approximately 15 grounds. They argued that the above CIS Court is not a judicial body and its decisions are not binding on national courts; the court of the first instance ignored expert opinion on Kyrgyz law and misapplied the law. Furthermore, they claimed that Russia is not a Party to the UN Convention on Jurisdictional Immunities of States and Their Property and therefore this treaty is inapplicable.

The Kyrgyz Republic argued that the States Parties to the Moscow Convention expressly authorised the CIS Court to interpret its provisions. Therefore the issue of the legal nature of the CIS Court was irrelevant to the case. The UN General Assembly approved the UN Convention on Jurisdictional Immunities of States and Their Property. Thus the Convention reflects general principles of law recognised by civilised nations which as such form part of international law.

The court of second instance upheld the court judgment with the following reasoning.

According to the CIS Court decision of 23 September 2014 the Moscow Convention only specifies possible dispute resolution procedures but does not contain a consent to arbitration. The decision of the CIS Court on interpretation the Moscow Convention is final.

Moreover, the court confirmed that the arbitration court of the Moscow Chamber of Commerce did not have competence over the dispute in question.

The court concluded that the challenged arbitral award contradicts the principle of respect of state sovereignty. In this regard the court agreed that the UN Convention on Jurisdictional Immunities of States and Their Property reflects international custom which requires an express waiver by the State from its immunity.

Though Stans Energy Corp. and Kutisay Mining can still try to reverse the resolution of the court of the Arbitrazh Court of the Moscow Circuit dated 20 July 2015, their success is unlikely. Under current law, even if a State is a party to the Moscow Convention an investor cannot commence arbitration proceedings without explicit consent of the state.

A parallel case

Currently the proceedings on a similar case ‑ Lee John Beck and Central Asian Development Corporation v Kyrgyz Republic ‑ are still pending. That case concerns a dispute between Lee John Beck, Central Asian Development Corporation and the Kyrgyz Republic. Similar to the Stans Energy Corp. case the parties filed a claim in the same arbitration court and based their claims on Article 11 of the Moscow Convention.

The arbitration court upheld the claims and the Kyrgyz Republic is currently trying to reverse the decision in the state courts. During the proceedings in the state court the Kyrgyz Republic also applied to the CIS Court seeking interpretation of the provisions of the Convention. The interpretation was the same – Article 11 does not amount to consent to arbitration but stipulates possible means of resolving disputes under the Moscow Convention. As a result, the state court reversed the arbitral award.

The next hearings in Lee John Beck will take place on 24 September 2015. Though it is improbable that the court will decide otherwise than in re Stans Energy Corp., other judges will hear it, so the rationale may differ.

Dmitry Davydenko, Natalia Ivanova

Muranov Chernyakov & Partners law firm