Submission of Foreign Investors Disputes over Subsoil Use Contracts to International Arbitration
Raushan Jazykbaeva, Partner Aequitas law firm
The particular feature of disputes arising out of subsoil use contracts is that one party to the dispute is the state (an authorised state agency). Submitting a dispute arising out of a contract of this kind to the courts of general jurisdiction in Kazakhstan would involve a high risk of state pressure on judges and is, therefore, undesirable to investors.
This paper addresses some issues of submitting foreign investors’ disputes arising from subsoil use contracts to arbitration. We will first analyse whether it is possible to apply the procedure for settlement of investment disputes set up by Foreign Investment Law1 to such disputes, and discuss the exclusive jurisdiction of Kazakhstani state courts with respect to investment disputes. Then we will look at some issues of enforcement of international arbitration awards in Kazakhstan.
1 The Law of the Republic of Kazakhstan On Foreign Investment dated 27 December, 1994.
1.Settlement of Investment Disputes under the Foreign Investment Law
Recognition of Disputes over Subsoil Use Contracts as Investment Disputes
The Foreign Investment Law defines an investment dispute as any dispute arising in relation to foreign investment between a foreign investor and the Republic of Kazakhstan as represented by authorized state agencies (Article 1 of the Law).
Since all subsoil use contracts are concluded between the foreign investors or subsoil users and the authorised agency of the Republic of Kazakhstan, disputes under such contracts undoubtedly fall into the category of investment disputes. However, in order to designate disputes over subsoil use contracts as investment disputes, it is also necessary to identify the investment under such contracts as foreign investment.
Prior to the introduction of amendments to the Foreign Investment Law dated August 2, 1999, the concept of foreign investment covered any investment made by a foreign investor, including those under subsoil contracts. As a result of the amendments, this concept has been considerably narrowed and currently covers only investment carried out in the form of participation in the charter capital of Kazakhstani legal entities, and granting loans to a Kazakhstani legal entity in respect of which the foreign investor ia able to make decisive resolutions.
This means that not all investment made under subsoil use contracts currently falls into the category of foreign investment, but only that which relates to contracts entered into prior to the amendments to the Foreign Investment Law dated 2 August, 1999. Consequently, only those disputes which arise out of subsoil use contracts concluded before the enactment of the indicated amendments to the Foreign Investment Law may be regarded as investment disputes.
Concept of ‘Investment’ in International Treaties
It should be borne in mind that a number of international treaties contain a broader concept of investment. Thus, Art.1(6) of the Energy Charter Treaty2 defines investment as: all kinds of assets in the ownership of the Investor, or directly or indirectly controlled by him, and includes, inter alia, any rights granted in accordance with the laws of the Contracting State or under a contract, or due to any licenses and permissions issued according to the law, to conduct any Business Activity in the Energy Sector. A similar approach is found in the bilateral investment protection treaties to which Kazakhstan is a party.3
2 The Energy Charter Treaty dated 17 December, 1994.
3 See, for example, the Kazakhstan-United States Bilateral Investment Treaty dated 19 May, 1992 (Art.I); the Kazakhstan - Federal Republic of Germany Bilateral Investment Treaty dated 22 September, 1992 (Art. I).
On the subject of the Constitutional provision that gives priority to ratified international treaties over domestic legislation, the terms of these international treaties allow investment made on the basis of subsoil use contracts to be regarded as foreign investment, irrespective of the provisions of the Foreign Investments Law. However, it is not clear whether the procedure for settlement of investment disputes stipulated by the Foreign Investment Law can be applied to investment disputes concerning international treaties.
The Right of the Parties to Submit an Investment Dispute to Arbitration
It follows from Article 27 of the Foreign Investment Law that the parties to an investment dispute may submit the dispute to arbitration on the basis of agreement stipulated in the contract, or in any other agreement between the parties («arbitration agreement»). The arbitration agreement must exclude the jurisdiction of the state courts. Since current legislation does not contain rules which clearly distinguish the jurisdictions of the arbitration tribunal and state courts, it is not uncommon for the state courts to examine investment disputes, despite the arbitration agreement.4
4 For example, the Supreme Court of Kazakhstan entertained an action by Kazakhstan Mineral Resources Group against Trans World Group, despite the agreement of the parties on an arbitration ruling. See The Civil Legislation of Kazakhstan: Articles, Comments and Practice, Almaty 1999, issue 7.
The provision on exclusive jurisdiction of the arbitration tribunal does not exclude judicial support to the parties to the arbitration in certain cases (for example, in taking measures to protect the defendant’s assets, etc.). However, current legislation is silent on this issue.
Consent of the Parties to Submit Investment Disputes to the Arbitration Bodies listed in the Foreign Investment Law
Consent of the investor. Settlement of investment disputes provided by the Foreign Investments Law has the particular feature that the Law sets out a list of arbitration bodies to which the dispute may be submitted by the parties, with the written consent of the foreign investor, provided that the dispute has not been settled within three months of the date of a written notice from one party to the other.
In our opinion, the wording of the law is not clear as to whether an investor can exercise his right to apply to one of the arbitration bodies listed in the law if an arbitration agreement between the investor and the state on the submission of a dispute to a certain arbitration body is already in place. In other words, it is not clear if the investor can refer to the dispute settlement procedure as established in Article 27 of the Foreign Investments Law, even though a procedure may have already been agreed between it and the state. We believe that the most accurate interpretation of the law would be recognition of this right of the investor only in the absence of an arbitration agreement.
Consent of the state. In the event that the dispute is initiated by an investor in one of the indicated arbitration bodies, the consent of the state should be given.5 It should be noted that the provision of the Law on the prior consent of the state contradicts the basic principles of international arbitration requiring a written agreement between the parties in order to submit a dispute to arbitration. For example, this requirement is contained in the New York Convention6 (Article II) and in the rules of major international arbitration institutions. This means that the arbitration courts may not accept the dispute on the basis of the provision of the Foreign Investments Law alone, unless the express consent of the state is obtained for submission of disputes to this specific arbitration court.
5 Similar approaches, providing for arbitration resolution of investment disputes with the written consent of the investor and the prior consent of the state to such resolution, are contained in the Energy Charter Treaty (Art.26) and bilateral investment treaties (for example, in Art. VI of the Kazakhstan-United States Bilateral Investment Treaty). However, the right of the investor to submit the dispute to one of the arbitration bodies set up by those treaties is optional, that is, it may be exercised even if there is an arbitration agreement between the parties.
6 The 1958 New York Convention On Recognition and Enforcement of Foreign Arbitration Awards.
This provision may be applied to submission of the dispute to the International Centre for the Settlement of Investment Disputes (the Centre) created in accordance with the 1965 Washington Convention.7 Although Art.25(1) of the Convention establishes that consent in writing is needed in order to submit a dispute to the Centre, the practice of the Centre shows that the relevant provisions of domestic legislation or bilateral investment treaties are recognised as state consent to the jurisdiction of the Centre.8
7 The 1965 Washington Convention On The Settlement of Investment Disputes between States and Nationals of Foreign States.
8 In South Pacific Properties (Middle East) Ltd. And South Pacific Properties Ltd. (Hong Kong) v. The Arab Republic of Egypt (SPP/SPP (ME) v. Egypt) (ARB/84/3), the Arbitration Tribunal held that a provision of Egypt’s Foreign Investment Law of 1974 constituted its consent to the jurisdiction of the Centre. The claimants on their part had expressed their consent by a letter to the Ministry of Tourism before initiating the arbitration proceedings. In Asian Agricultural products Ltd. (AAPL) v. Republic of Sri Lanka (AAPL v. Sri Lanka) (ARB/87/3) the claimant, a Hong Kong company, founded the jurisdiction of the Centre on Sri Lanka’s consent expressed in Art. 8 (1) of the UK/Sri Lanka bilateral investment protection treaty. The Centre’s jurisdiction was not contested by the respondent. Yearbook of Commercial Arbitration XVIII (1993) pp. 643-644.
Concept of Investment Disputes Under the New Law on Investment9
9 Draft as of 1 November, 2001.
A draft of the new Law On Investment (the New Law) also contains the concept of an investment dispute, defining it as: «a dispute arising out of contractual obligations between the investor and a state agency in relation to the investment activity of the investor, except for disputes related to the activity of investors which violates legislation of the Republic of Kazakhstan». This category of disputes will be resolved in accordance with international treaties of the Republic of Kazakhstan both in the courts of the Republic of Kazakhstan and under international arbitration, by agreement of the parties.
In our view, the definition of an investment dispute given in the new law is far from perfect, and significantly weakens a foreign investor’s position in comparison with the current Foreign Investment Law. Firstly, the concept of investment disputes no longer covers disputes of a non-contractual nature. This means that non-contractual disputes between the state and an investor can only be submitted to the state courts, whereas, even in the absence of consent by the state, the current Law allows the submission of such disputes to international arbitration in accordance with the procedures set out in Article 27 of the Law. Secondly, it is absolutely clear that the existence of a dispute may be substantiated by the fact that legislation has been violated by one of the parties to the dispute. This new definition of an investment dispute increases the risk of the submission of disputes between the state and investor to Kazakhstani courts on the grounds of an accusation by the state that the investor is in violation of legislation.
2. Exclusive Jurisdiction of Kazakhstani Courts
The right of investors to apply to arbitration has been restricted by the new Civil Procedural Code dated 13 July, 1999 (the CPC) which establishes the exclusive jurisdiction of Kazakhstani courts over disputes related to determining rights to real estate (Article 417 (1)). It is evident that investors exercising the rights ensuing from subsoil use contracts may also entail disputes over rights to real estate (for example, disputes concerning the recognition of rights to the land plots over the subsoil; to structures built on land above the subsoil, etc.). In this case the rule of the Civil Procedural Code on exclusive jurisdiction contradicts the rule of Art.27 (2) of the Foreign Investment Law that provides for submission of investment disputes to the state court only with the consent of the investor.
According to the Regulatory Legal Acts Law,10 if there are contradictions between the rulings of acts at the same level, the rulings of the later-dated act prevail. The Regulatory Legal Acts Law designates the Civil Procedural Code and the Foreign Investments Law as acts at the same level. Since the ruling on the exclusive jurisdiction of Kazakhstani courts in the Civil Procedural Code was adopted later than the rulings of the Foreign Investments Law on the settlement of investment disputes, the provision on the exclusive jurisdiction of Kazakhstani courts applies to investment disputes. This means that both arbitration and state courts may exercise jurisdiction over disputes arising out of the same contract, depending on the subject matter of the dispute. Certainly, such a position cannot be considered satisfactory, and should be resolved at a legislative level.
10 The Law of the Republic of Kazakhstan on Regulatory Legal Acts, dated 24 March, 1998.
Obviously, by virtue of Art. 6 of the Foreign Investments Law stipulating the stability of legislation for investors, the rule on the exclusive jurisdiction of Kazakhstani courts does not apply to disputes under contracts concluded prior to the enactment of the new Civil Procedural Code.
Furthermore, the provisions of international treaties must be taken into account when considering the issue of the exclusive jurisdiction of Kazakhstani courts. If investment disputes related to determining rights to real estate come under the scope of international treaties which stipulate submission of investment disputes to arbitration, then the ruling on the exclusive jurisdiction of Kazakhstani courts cannot apply to them.
3. Enforcement of International Arbitration Awards
The main legal ground for enforcement of international arbitration awards in Kazakhstan is the New York Convention. However, no mechanism for enforcement of international arbitration awards has been developed in Kazakhstan.11 Furthermore, the enactment of the new Civil Procedural Code has drastically worsened the situation concerning the enforcement of foreign arbitration awards in Kazakhstan.12 The issue has been clarified to a certain extent by Regulatory Decree # 14 of the Supreme Court of Kazakhstan, On Judicial Practice of Consideration of Applications for Enforcement of Arbitration Awards, dated 19 October, 2001 («Supreme Court Decree # 14»).
11 The Constitutional Council of Kazakhstan admitted this fact in Resolution # 1/2 dated 16 February, 2000, which noted the desirability of eliminating this gap in the law relating to this problem.
12 For detailed analysis of this issue see: Yu.G.Bassin, Enforcement of Judicial and Arbitration Awards on Commercial Disputes in Kazakhstan- Collection Civil Legislation of the Republic of Kazakhstan. Articles, Comments and Practice. Issue 10 (Almaty, 2001); M.K.Suleimenov, Yu.G.Bassin: Court of Arbitration in Kazakhstan: To Be or Not to Be, Yuridicheskaya Gazeta, # 24 (25 July, 2001)
Distinction between International and Domestic Arbitration Awards
The Law On Execution Procedures and the Status of Court Enforcement Officers13 mentions the enforcement of international and foreign arbitration awards, but does not define the difference between them. The New York Convention (Article 1), in turn, states that it applies not only to foreign arbitration awards, but also to those awards that are not recognised as domestic in the state in which recognition and enforcement are being sought. The basic criterion for the distinction between the foreign and domestic arbitration awards under the Convention is the place where the award is issued. Unfortunately, Kazakhstani legislation does not provide for cases in which arbitration awards issued in Kazakhstan could be recognised as international.
13 Law On Execution Procedure and the Status of Court Enforcement Officers dated 30 June, 1998.
The drawback to such an approach is that any arbitration award issued in Kazakhstan, even in compliance with the rules of an international arbitration institution, so far as the foreign investor’s dispute is concerned, would be recognised as domestic award and would not, therefore, come under the scope of the New York Convention. Needless to say, the provisions of the Convention cannot be applied to awards by the Kazakhstani arbitration courts, even if subjects of different states are involved in the dispute. Of course, such a situation hardly facilitates the development of international arbitration in Kazakhstan.
In international practice, the distinction between international and domestic arbitration awards is, as a rule, made on two criteria: the international nature of the dispute and the nationality of the parties. Thus, even a dispute between entities of the same state may be recognised as international if the subject-matter of the dispute extends beyond the jurisdiction of the state (for example, in foreign trade contracts). The second criterion refers to disputes, the parties to which are subjects of different states or carry out their activities in different jurisdictions.14 One can only hope that Kazakhstani legislation will take a similar approach.
14 The combined approach is taken in the 1985 UNCITRAL Model Law On International Commercial Arbitration (Art. 1).
The Procedure for Enforcement of International Arbitration Awards
It follows from Supreme Court Decree # 14, that the legal framework for enforcement of arbitration awards includes the New York Convention, the Civil Procedural Code, the Model Regulations on Arbitration Courts for Economic Disputes,15 Decree #3 of the Supreme Arbitration Court Plenum dated 4 August, 1995, On Enforcement of Arbitration Awards.16 This procedure can be briefly described as follows.
15 Approved by Decree of the Cabinet of Ministers of Kazakhstan -# 356 dated 4 May 1993
16 For confirmation of this position see: B.A. Akhmedov, Judge of the Supreme Court of Kazakhstan: On Enforcement of Arbitration Awards to Foreign States in the Republic of Kazakhstan – Predprinimatel i Pravo, # 9 (46), 1996.
Court of Competent Jurisdiction. The issue of enforcing foreign arbitrations award is considered by district (rayon) courts, or courts of equivalent competence, on an application by a claimant at the place of residence (location) of the debtor or, if the debtor does not reside in Kazakhstan or if its place of location is unknown, at the place where its assets are situated.
Documents. The following documents must be submitted to the court of competent jurisdiction:
1. Application for enforcement of a foreign arbitration award, which should contain the following information:
i. Name of the claimant (and his/her representative if the application is filed by a representative) with the indication of their permanent or temporary place of location.
ii. Name of the debtor and indication of his/her permanent or temporary place of location.
iii. Request of the claimant for enforcement of the award; if there have been earlier proceedings for enforcement of the award, in what part and from what date the enforcement is sought.
2. Duly certified original of the arbitration award or a duly certified copy thereof;
3. Original agreement under which the parties are obliged to submit to arbitration some or all disputes arising between them in connection with certain agreements or other irregularities.
Additionally, the claimant must submit a document testifying that, if the party against which the award was issued did not participate in the process, it was promptly and properly informed of the arbitration proceedings, and that non-participation in arbitration proceedings was for good reasons. The court also can request evidence to be presented proving that the composition of the arbitration tribunal or the arbitration procedure was in accordance with the agreement made by the parties.
It should be borne in mind that, if the indicated documents are in a language other than the official or state language of Kazakhstan, then the party which requests recognition and enforcement of the decision must provide a notarised translation of the documents into the Russian or Kazakh languages.
On the basis of these documents, the court will issue an enforcement order, which is then submitted to the court enforcement officer for execution.
The foreign investment legislation and international treaties of Kazakhstan have established certain guarantees with respect to the submission of investment disputes to international arbitration. Nevertheless, there is tendency in current Kazakhstani legislation to adopt rules that restrict an investor’s right to apply for international arbitration. Such rules include those which narrow the concept of investment and establish the exclusive jurisdiction of the Kazakhstani state courts in disputes connected with rights to real estate.
Efficient resolution of investment disputes by arbitration is also hampered by the absence of a special law on international arbitration that would provide a clear distinction between the jurisdictions of arbitration and the state courts, the enforcement of arbitration awards, and many other issues. Practising lawyers and legal scholars are unanimous that it is high time to adopt such a law in Kazakhstan.17
17 See: Legal irregularities in the activity of arbitration courts prevent their development in Kazakhstan, Panorama # 10 (16 March) 2001; Arbitration Court: Legislation, Theory and Practice (Text book), Almaty, 2000.
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