Counterclaims in Oxus Gold v Uzbekistan: Is Investor-State Arbitration Still a One-Way Road?

oxusThe arbitral tribunal in Oxus Gold Plc v The Republic of Uzbekistan in the final award that became publicly available in April 2016 rejected all counterclaims raised by the host state against the British investor.

The award, rendered by Prof Pierre Tercier, Prof Brigitte Stern and Hon Marc Lalonde (issuing partial dissent on another legal issue) in December 2015, followed the line of previous arbitral awards, rejecting the Respondent’s counterclaims due to jurisdictional hurdles. This post discusses the reasoning of the Tribunal in this regard.

Background of the dispute

In 2011 Oxus Gold initiated arbitral proceedings against the Republic of Uzbekistan under the 2010 UNCITRAL Arbitration Rules, seated in Paris. The investor based its claims in relation to the alleged expropriation of its investment in the Amantaytau Goldfields Joint Venture (AGF) and the Khandiza deposit on the UK-Uzbekistan BIT. The Tribunal dismissed most of the claims, except for the claim for breach of the fair and equitable treatment standard, relating to the modification of the taxation regime applicable to AGF by the Uzbek authorities.

Factual and legal basis of the counterclaim by Uzbekistan

The Republic of Uzbekistan raised several counterclaims in the amount of USD 117.54 million and requested set-off of this sum with any amount awardable to the Claimant. The Respondent alleged the following misconduct by the Claimant: (i) misrepresentations as to the financing of the project; (ii) waste of natural resources; (iii) breach of the Special Dividend Agreement; (iv) engagement in self-dealing and related-party transactions; and (v) currency law violations.

The Respondent argued that the tribunal had jurisdiction over its counterclaim based on two arguments. First, Uzbekistan stated that consent to arbitration under Article 8 of the UK-Uzbekistan BIT, with a reference to the UNCITRAL Arbitration Rules, encompasses counterclaims provided in Article 21(3) of the Rules. Moreover, Uzbekistan alleged that the counterclaims were closely connected to the primary claims, as they concerned the Claimant’s breach of investment and international law obligations, not solely deriving from Uzbek law or falling within the exclusive jurisdiction of the Uzbek courts.

Claimant contested that the tribunal is competent to hear the Uzbek counterclaims

Oxus Gold objected to the jurisdiction and admissibility of the counterclaims relying on the following. First, according to the Claimant, there was no consent to counterclaims as Article 8 of the BIT only authorised submission to arbitration of “Disputes between a national or company of one Contracting Party and the other Contracting Party concerning an obligation of the latter under this Agreement in relation to an investment of the former [...]. The Claimant asserted that Article 21(3) of the UNCITRAL Arbitration Rules only conditionally permits counterclaims, “provided that the arbitral tribunal has jurisdiction over” them.

Second, the Claimant argued that the counterclaims were inadmissible because they lacked close connection to the primary claims as arising out of Uzbek law. Oxus Gold also stressed that the breach of the principle of good faith, alleged by the Respondent, is too broad to justify a valid cause of action by a host state against an investor.

Tribunals’ Findings: No Jurisdiction Over Either of Counterclaims 

The Arbitral Tribunal interpreted the arbitration clause in the BIT as an indication that the Parties’ consent to arbitration only covers claims by investors against the host State, but not claims by the host State against investors. The panel did not find convincing the Respondent’s reference to Article 21(3) of the UNCITRAL Arbitration Rules and sided with the Claimant, pointing out that this provision cannot create jurisdiction “where there is none”. Article 21(3) was interpreted as merely stating that “counterclaims are admissible and can be submitted to the extent that they already fall under the scope of the jurisdiction of the Arbitral Tribunal”.

As regards the nexus of counterclaims with the original claim, the Tribunal stated that sufficient connection would imply that counterclaims arise out of the investment and related obligations, and may not be matters merely covered by the general law of the Respondent. The arbitrators then addressed each of three groups of counterclaims and concluded that none of them satisfied the criterion of connectedness.

In particular, as concerns misconduct and the silver sale counterclaims, for the Tribunal its facts referred to the operation of AGF, rather than “to the circumstances in which the Claimant invested in AGF”, which was actually controlled by Uzbek parties, and not the Claimant. On that premise the Tribunal did not see the necessary close connection. It saw a close connection in the Special Dividend Agreement counterclaim; however, that Agreement contained the forum selection and choice of law clause providing for the Uzbek courts and Uzbek law.

The Respondent also raised the argument of reducing any compensation awardable to the investor, based on the doctrine of contributory fault (another factor eliminating the liability of host states, applied by the tribunal in the Yukos cases). However, the Tribunal did not give consideration to it.

Analysis of the Tribunal’s Reasoning

The findings of the Tribunal regarding consent to counterclaims, based on the interpretation of the narrowly worded arbitration agreement in the relevant BIT/MIT, seem rather predictable, in light of the previous arbitral practice (e.g. Amto LLC v Ukraine (the ECT, SCC); Spyridon Roussalis v Romania (BIT between Greece and Romania, ICSID), with a Declaration by Prof Michael Reisman).

What seems particularly worth taking attention of as concerns the Tribunal’s reasoning is its mention of the counterclaims with a close connection to the investor’s claims as “the possible exception” to the finding of the lack of consent in the BIT (para 948). The Tribunal did not develop this idea further, thus, leaving some uncertainty about it. It seems rather ambiguous that, if the tribunal first finds no jurisdiction over the counterclaims based on the consent requirement, it can nevertheless be competent to hear them, even where they are closely connected to the original claims.

The close connectedness requirement pertains to the admissibility of counterclaims, while the consent requirement pertains to the jurisdiction. Although the boundary between these two concepts is not always straightforward, jurisdiction refers to the powers of the tribunal to hear a dispute, while admissibility refers to the fitness of the claims to be heard by the tribunal. The latter usually presupposes the former.

These two criteria to counterclaims are supposed to operate as a two-step test: if a tribunal finds no jurisdiction over counterclaims, it cannot move further to examining its admissibility (as was applied in Goetz and others v Republique du Bururndi, ICSID). This test seems to be blurred in the approach taken by the Tribunal in Oxus Gold.

Practical Ramifications

The award in Oxus Gold Plc v The Republic of Uzbekistan produces different implications for host states and investors. It demonstrates the reluctance of arbitral tribunals to step away from the restrictive interpretation of arbitration agreements in a BIT, when they refer only to the violations of a host state’s obligations under a BIT (e.g. Article 26 of the ECT). This effect is desirable from the investor’s perspective.

From the host states’ perspective, the award would have provided some practicable solutions had the Tribunal further developed its idea about the potential exception for closely related counterclaims. Otherwise, it is merely another failed attempt by a host state at reducing the amount of the investor’s compensation by set-off.

About the Author:

Elena Burova is a regular contributor to the CIS Arbitration Forum. She holds an LL.M. degree in Investment Treaty Arbitration from Uppsala University (Swedish Institute scholar 2015-2016) and graduated with honours from Moscow State Institute of International Relations (MGIMO University) in 2015. Elena focuses on international commercial and investment arbitration and worked/trained in international law firms in Stockholm and Moscow.

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