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Fraud allegations at the enforcement stage of ASCOM case

ASCOM Case

The Swedish Supreme Court recently put an end to Kazakhstan’s attempts to set aside the award rendered by SCC tribunal in favour of Anatolie and Gabriel Stati, Ascom Group SA and Terra Tar Trans Trading (“ASCOM” or the “Claimant”). The Supreme Court rejected the claims, declaring that Kazakhstan provided insufficient evidence to support their fraud allegations. Nevertheless, the struggle continues in the jurisdictions where ASCOM seeks the enforcement of the award.

The case concerned an investment made by two Moldovan businessmen and their affiliated companies in Kazakhstan. The dispute arose when the Ministry of Oil and Gas of Kazakhstan unilaterally terminated the contracts for subsoil use of two subsidiaries of ASCOM. The government also canceled the contract with Tolkynneftgaz, an ASCOM subsidiary, for the construction a liquefied petroleum gas (“LPG”) plant. The Claimant filed a claim at the SCC, whose arbitral tribunal found in December 2013 that Kazakhstan breached the fair and equitable treatment obligations under Energy Charter Treaty, and determined that the investor’s losses amounted to approximately $500 mln.

This article examines Kazakhstan’s attempts to oppose the enforcement of the arbitral award in various jurisdictions, alleging that the Claimants obtained the Award using false evidence, and fraudulently inflated its losses. Kazakhstan also filed in October 2017 a Civil Racketeering Complaint (“RICO”) against ASCOM at U.S. District Court in Washington. It sought to recover compensatory and punitive damages arising from “a sophisticated and wide-ranging illegal pattern of racketeering” undertaken by the claimants.

RICO complaint against ASCOM and its affiliates

In a nutshell, Kazakhstan alleges by its RICO complaint that ASCOM and its affiliates, by a series of undisclosed related party transactions, fraudulently inflated the costs of construction of an LPG plant in Kazakhstan and falsified financial statements. Then ASCOM used those documents to obtain a bid for the LPG plant from a Kazakh state-owned company called KazMunaiGas. Also, latterly ASCOM used those statements as evidence of the LPG plant’s value in international arbitration.

Fraud allegations

In essence, as Kazakhstan explains in its RICO lawsuit, the fraud relates to the ASCOM relationship with Perkwood Investment Ltd., which sold equipment in a total value of $115 to ASCOM subsidiaries, for the LPG at issue in the underlying dispute. Kazakhstan claimed that after the arbitration it discovered new evidence that a large quantity of the equipment allegedly purchased by ASCOM, had already been purchased at a far lower cost. According to Kazakhstan, ASCOM used the equipment’s purchase price as part of its argument that it had invested $245 mln on the development and construction of the LPG plant. Therefore, ASCOM had inflated the bid submitted by KazMunaiGas that the tribunal had relied on when calculating the damages owed to ASCOM. Thus, Kazakhstan claims that enforcing the award in the U.S. and Great Britain would violate U.S. and English public policy because ASCOM obtained the award by fraud, and Kazakhstan was unable to present its case during the arbitration.

Enforcement proceedings before English courts

On 6 June 2017, the High Court held that there was sufficient evidence that the award against Kazakhstan may be tainted by fraud and that this should be examined at the trial in Stati v. The Republic of Kazakhstan [2017] EWHC 1348 (Comm).The key contention in the ASCOM case referred to the valuation of LPG plant. The fraud alleged by Kazakhstan concerns that ASCOM inflated its losses by falsifying the financial statements. The facts examined by English courts are quite the same as stated by Kazakhstan in its RICO lawsuit, mentioned above.

Mr. Justice Robin Knowles found that it was necessary to assess the fraud allegation, before deciding whether the award can be enforced in England. Also, the judge held that the decision of the Swedish court does not create an issue estoppel. Therefore, Kazakhstan is entitled to rely on the new evidence discovered since the award, and it established a prima facie case that ASCOM obtained the award by fraud. Thus, this issue of whether the award should be refused recognition and enforcement under Section 103(3) of the Arbitration Act 1996 on the basis of English public policy, will now proceed to a full trial in the Commercial Court of England and Wales.

The High Court held that two conditions would need to be fulfilled for a full trial to commence. First, evidence of fraud had to be unavailable at the time of the initial arbitration (Westacre Investments Inc v Jugoimport-SPDR Holding Co Ltd [2000] QB 288). Second, there must be a prima facie case of fraud sufficient to overcome the inherent reluctance of the court to refuse the enforcement of an award recognised under the New York Convention (IPCO (Nigeria) Limited v Nigerian National Petroleum Corporation [2015] EWCA Civ 1144).

The High Court stated that it was not prevented from considering the allegations of fraud. Mr. Justice Knowles found that the Swedish courts had not decided, from a factual perspective, the possible impact that the alleged fraud may have had on the arbitral tribunal. Thus, although the case brought before the Swedish courts was deemed acceptable as a matter of Swedish public policy, “as a matter of law…English public policy is not the same”.

Enforcement in The Netherlands and Belgium

On 8 September 2017, the Amsterdam District Court issued a judgment in favour of ASCOM by which the court seized the Kazakhstan’s shares in the Samruk-Kazyna Fund, through which Kazakhstan participates in the international consortium to develop its largest offshore oil and gas field Kashagan. Also, Belgian bailiffs have attached $517 mln worth of shares in the National Fund of the Republic of Kazakhstan, within the Brussels branch of the Bank of New York Mellon.

Conclusions

The ASCOM case is quite controversial, giving the complexities of multi-jurisdictional award-related proceedings. This case is important because it shows that the parties, who wish to enforce the arbitral awards through the New York Convention, should not assume that they will be able to do so in a uniform manner. It means that each jurisdiction may have a different approach in refusing the enforcement of the foreign arbitral awards on public policy grounds. The English and US courts’ future decisions in this matter will be interesting not only for the development of this particular case but for the case law in general.

About the Author:

Sorin Dolea is an intern at CIS Arbitration Forum. He is a Moldovan lawyer, currently pursuing Geneva LLM in International Dispute Settlement-MIDS. He graduated with a bachelor degree and LLM in International Law from Moldova State University, Arbitration Academy in Paris and the Hague Academy of International Law (course on the international private law). He specializes in international commercial and investment arbitration and has experience working in a major Austrian law firm for two years.

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