Don't count your chickens: tribunal refuses jurisdiction in final stages of UNCITRAL arbitration

In Ruby Roz Agricol and Kaseem Omar v Kazakhstan, UNCITRAL (Award on Jurisdiction) (1 August 2013), Ruby Roz Agricol LLP (Ruby Roz), a Kazakh company in the business of producing, breeding and marketing poultry for the Kazakh market, initiated UNCITRAL arbitration proceedings against the Republic of Kazakhstan on the basis of alleged breaches of Kazakh law and international law, amounting to expropriation of its assets.

Two alternative bases for jurisdiction were submitted - the 1994 Kazakh Law of Foreign Investment (FIL) and an investment contract (Contract), which had later been amended by the parties.

The Tribunal rejected jurisdiction under both instruments, at a late stage in proceedings. Under the FIL, Ruby Roz's right to rely on the arbitration clause had expired.  The legislation had been repealed and the stabilisation clause, which might have protected Ruby Roz's right to arbitrate, took effect from the date of the Contract – meaning that the stabilisation period had ended. Under the Contract, Ruby Roz was not entitled to rely on the arbitration clause because as a foreign-owned Kazakh company, it did not qualify as a "foreign investor". 

The case is of interest to investors in Kazakhstan and clients and practitioners interested in effective arbitration case management. It highlights the advantage of identifying an arguable jurisdictional point early, and in advance of incurring significant costs in addressing issues of liability.  It also highlights the importance of ensuring an arbitration clause will survive the termination of any other applicable instrument.

Background

Ruby Roz alleged that it had incurred substantial losses by the actions of the Republic in breach of Kazakh and international law, including unlawful interference by governmental agencies and authorities in the management and operation of Ruby Roz.  It was alleged that these actions amounted to expropriation of Ruby Roz's assets.

It was alleged that Ruby Roz was sold, under duress and following an alleged period of extortion and harassment, to a distant relative (O) of the President of Kazakhstan. Further harassment and interference in Ruby Roz culminated in another sale, again under alleged duress, to N, a daughter of the President of Kazakhstan.  This sale was then rescinded by agreement and ownership was returned to O.

The jurisdictional issue assumed significance only at a late stage in the proceedings.  At this point, the Tribunal decided to hear the issue of jurisdiction in advance of the merits.  The Tribunal considered whether there was a valid arbitration agreement between the parties, either under the Contract or the FIL.  It found that it did not have jurisdiction to determine the parties' substantive dispute under either document.

The Foreign Investment Law

Ruby Roz's primary argument was based upon the FIL, which provided for the determination of disputes by the courts of Kazakhstan.  However, an optional arbitration agreement provided alternatively for disputes to be resolved "in accordance with the agreed procedure for settling disputes, including those set out in the contract or any other agreement between the parties to the dispute ".

The relevant article stated that when a foreign investor opts for arbitration, "the consent of the Republic of Kazakhstan is considered to be secured."

Ruby Roz argued that this provision of the FIL was a freestanding and independent arbitration agreement.   The fact that the consent of the Republic was "secured" indicated that the investor was granted the option to arbitrate without the need for, and quite separately from, a contractual arbitration agreement.  The provision amounted to an open offer to arbitrate, which might be accepted by an investor at any time. 

However, the jurisdictional claim faced the significant hurdle that the FIL had been repealed since the investment had been made. Ruby Roz attempted to surmount it by arguing:

• A foreign investor making an investment in the jurisdiction whilst the FIL was in effect acquired a right to submit disputes under the arbitration clause. This right could not be abrogated by subsequent appeal.
• It could rely on the stabilisation clause in the FIL, which stated that: "in case of deterioration of the position of foreign investor, which results from the change of legislation […] the legislation that was in force at the time of carrying out of the investments, is applicable to the foreign investments during 10 years, while to the investments made on the basis of long-term contracts with the authorized governmental agencies (longer than 10 years) – up to the expiry of the contract's term except as otherwise provided". 

The Republic disputed the Tribunal's jurisdiction under the FIL for the following reasons:

• Ruby Roz was not a "foreign investor" within the meaning of the FIL. The definition in the FIL required that a natural person owning a Kazakh company must be "registered to carry out business activities in [his] country of citizenship or permanent residence". In the factual submissions of the Republic, O was not so registered. 
• Neither the arbitration nor the stabilisation clause of the FIL survived the law's repeal. 
• Even if the stabilisation clause did survive repeal of the FIL, the stabilisation period ran from the date of the Contract, rather than the date of the amendment or the date of the latest investment made pursuant to that amended Contract. Therefore, the period ended prior to the filing of the Notice of Arbitration.
• Ruby Roz lost its status as a foreign investor under the FIL when O transferred the shares to N.

 The stabilisation clause could not be intended to endure indefinitely

The Tribunal found that Ruby Roz's claim fell down on the third of the Republic's arguments.  The stabilisation period had expired: Ruby Roz could no longer rely upon the repealed arbitration agreement in the FIL.

Various translations of the Russian language of the stabilisation clause were offered.  All were ambiguous as to whether the stabilisation period ran from the time an investment project was initially undertaken, or alternatively from each new investment of funds over the life of the investment project.  The parties' experts agreed that the latter interpretation could not have been the intention of the Kazakhstan legislature. In particular, it would be impractical to calculate distinct stabilisation periods (and therefore apply distinct legal regimes) for each asset associated with an investor's overall business operations. 

The Tribunal found that the period must be taken to run from the time that the investor commenced the investment project as a whole.  It noted that the language in the latter part of the stabilisation clause, which dealt with contracts extending over 10 years, supported this interpretation, as it referred to a single stabilisation period rather than to multiple periods over the life of the investment.

The Tribunal noted the practical point that, if multiple trigger points were permitted, in the event of continuous investment or reinvestment of profits the period would never be triggered.

It also gave weight to the fact that, under the latter part of the clause, if the Contract had provided for a term of 10 years and one day, the stabilisation clause would have expired at the end of that contractual term.  It was unlikely to have been the legislator's intention that a contract with a term a few days short of 10 years should, in effect, enjoy indefinite protection.

The Tribunal disagreed that a new investment served as a separate trigger for the 10 year period.  Although the amendment provided for the significant expansion of the project's scope, this expansion had commenced before the amendment. The Tribunal also found that the nature of the amendment was to contribute to the existing investment, rather than to initiate a new investment project.  The practical impossibility of applying two separate legal regimes to such an integrated operation also confirmed the joint nature of the investment.

Accordingly, the Tribunal concluded that the benefit of the stabilisation clause (being the continuing availability of the arbitration clause) was only available to Ruby Roz from the date of its initial investment until its expiry 10 years later.  Ruby Roz was therefore not entitled to rely upon the FIL as a basis for the Tribunal's jurisdiction.

The Investment Contract

Ruby Roz's alternative jurisdictional argument was based upon the arbitration clause in the Contract itself. 

The Contract provided for a dispute to be determined by the courts of Kazakhstan, or to be removed "to the various foreign arbitration organs, if interests of a foreign Investor are affected and there is a written objection by him against having the dispute be resolved in Kazakhstan courts".

It therefore provided for different jurisdictional regimes to be available to foreign and domestic investors – only foreign investors were given the option of arbitration.

The Republic made two objections to the Tribunal's jurisdiction.  First, that the arbitration clause was pathological for uncertainty, and second, that Ruby Roz could not benefit from the clause because it was not a foreign investor.

Ruby Roz did not qualify as a foreign investor

On the second point, the Tribunal observed that the "Investor" was defined in the Contract as Ruby Roz.  On a plain, literal meaning, "foreign", in the case of a body corporate, simply meant "incorporated under the laws of a foreign jurisdiction".  On this plain language, Ruby Roz could not qualify.  It was a Kazakh company (albeit one owned by an individual resident in another country), and therefore could not benefit from the option to arbitrate.

The Tribunal considered whether the FIL, being the legislation in force at the time the Contract was made and being concerned with foreign investment, could assist in the construction of the word "foreign" as evidence of the Contract drafter's intent.  However, at the time the Contract was made, the definition of "foreign Investor" in the FIL did not extend to Kazakh companies under foreign control (though it was later amended to do so).

In any event, for the referral of a dispute to arbitration, the Contract required acceptance of the Republic's open offer to arbitrate by written objection to the resolution of the dispute by the Kazakh courts.  At the time that Ruby Roz made this notification, perfecting the agreement to arbitrate, the FIL was no longer in force and was therefore of no relevance in determining the meaning of "foreign" in the arbitration clause.

Accordingly, Ruby Roz was not entitled to invoke the arbitration clause in the investment Contract because it was not a foreign investor.  The Tribunal had no jurisdiction to hear the merits of the dispute.

It was unnecessary for the Tribunal to consider whether the uncertainty of the clause – with no stated place of arbitration and no reference to any specific arbitral institution – rendered it pathological.

Comment

The case is of particular interest to investors in Kazakhstan.  It is also of broader interest to clients and practitioners interested in effective arbitration case management. The jurisdictional decision came in the final stages of a long and complicated arbitration. The jurisdictional and merits arguments had been heard in parallel, though with little focus upon the jurisdictional points until the later stages of the process.  Lengthy submissions, extensive witness statements and expert evidence on the merits had been produced.  Extensive costs will have been incurred on both sides and the Tribunal had studied the submissions in detail in preparation for the pending merits hearings. Indeed, a decision on the merits may have been contemplated.  However, as the Tribunal itself noted, although it might be tempted to do so, it could not take a "pro-arbitration" stance when there was no valid arbitration agreement either under the FIL or the Contract. 

The case highlights the advantage of identifying an arguable jurisdictional point early, and the potential costs consequences of considering jurisdictional and merits issues together where an arguable jurisdictional point may be extant.  It also demonstrates the value of ensuring that an arbitration agreement is clear, certain and binding upon the parties and that it will survive the termination of any other applicable instrument. 

For further information, please contact Craig Tevendale, Partner, Susan Field, Associate, or your usual Herbert Smith Freehills contact.

 This article is produced from material supplied by Herbert Smith Freehills LLP for publication by the Practical Law Company.