Title
ICSID Award of October 7, 2003, AIG Capital Partners, Inc. and CJSC Tema Real Estate Company v. Republic of Kazakhstan, ICSID Case No. ARB/01/6
Content

  AIG CAPITAL PARTNERS INC. AND CJSC TEMA REAL ESTATE COMPANY v. REPUBLIC OF KAZAKHSTAN1

(ICSID Case No. ARB/01/6)

Award. 7 October 2003

(Arbitration Tribunal: Nariman, President; Bernardini and Vukmir, Members)2

1. Introduction

1.1 On October 5, 2001, the International Centre for Settlement of Investment Disputes (“ICSID” or “the Centre”) notified to the above mentioned parties that this Arbitral Tribunal in ICSID Case No. ARB/01/6 was deemed to be constituted – whether validly or otherwise is one of the preliminary questions, amongst others, that arise for determination in this case.

This case arises out of a Request for Arbitration filed on May 3, 2001 by AIG Capital Partners Inc. (“AIG” or “the first Claimant”) and CJSC Tema Real Estate Company (“Tema” or “the second Claimant”) – (jointly referred to as “the Claimants”) – with the Centre requesting for arbitration of an “investment dispute” with the Republic of Kazakhstan (“Kazakhstan” or “the Respondent”). The claim in the Request for Arbitration arises out of the alleged expropriation of the Claimants‟ investment in a Real Estate Development Project in Kazakhstan, before the construction of the Project had been completed. The Request for Arbitration was made by the Claimants pursuant to and relying upon:

i.

Article 36 of the 1965 Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States (“the Convention”).

ii.

Rules 1–4 of the Rules of Procedure for the Institution of Conciliation and Arbitration Proceedings (“Institution Rules”).

iii.

Article VI of the Treaty dated May 19, 1992 between the United States of America and the Republic of Kazakhstan Concerning the Reciprocal Encouragement and Protection of Investment (“the BIT” or “the Treaty”).

2. The Parties 

2.1 The first Claimant, AIG, is a corporation constituted under the laws of Delaware (USA) and is entirely owned and controlled by a holding company, American International Group Inc. also incorporated in Delaware (USA).1 AIG, through American International Group Inc. and its subsidiaries (including AIG Silk Road Investors Inc. – a US Company), is engaged in a broad range of activities and services worldwide including financial services. The second Claimant, Tema, is a joint venture company (“the Joint Venture”) incorporated in Kazakhstan comprising (34%) LLP Tema (a Kazakhstan Real Estate Development Company) and (66%) AIG Silk Road Investment I Ltd (a Bermuda Company), a wholly owned subsidiary of AIG Silk Road Fund Ltd (a Bermuda Company).2 The entire voting power and all voting rights of the AIG Silk Road Fund Ltd are vested solely and exclusively in the holders of Class A shares viz. AIG Silk Road Investors Inc. USA, and AIG (Claimant No. 1) is entitled to exercise all voting rights in respect of these Class A shares of AIG Silk Road Fund Ltd owned by AIG Silk Road Investors Inc., USA.3

The Respondent, the Republic of Kazakhstan, has been an independent sovereign State since 1991.

2.2 The BIT was signed by the parties on May 17, 1992 and on exchange of instruments of ratification it came into force on January 12, 1994.

The United States of America (hereinafter referred to as the “US” or “USA”) and the Republic of Kazakhstan are parties to the Convention – the Convention was signed by the USA on August 27, 1965, ratified on June 10, 1966 and came into force on October 14, 1966; the Convention was signed by the Republic of Kazakhstan on July 23, 1992, ratified on September 21, 2000 and came into force on October 21, 2000. The Request for Arbitration – in respect of the Claimants‟ alleged investment dispute with the Respondent – was filed with the Centre on May 3, 2001 relying on the provisions both of the Convention, as well as the Bilateral Investment Treaty.

3. PROCEDURAL HISTORY OF THE CASE

3.1 In the Request for Arbitration (May 3, 2001) the addresses of the parties are given as follows:

a) AIG
175 Water Street,
New York, NY 10038
United States of America (First Claimant)

b) CJSC Tema Real Estate Company (the Joint Venture)
Aiteke Bi Street, 62, 3rd Floor,
480091 Almaty
Republic of Kazakhstan (Second Claimant)

c) Republic of Kazakhstan
Attn: Ministry of Foreign Affairs
Minister Yerlan Idrisov
10 Beibyshilik Street,
473000 Astana
Kazakhstan (Respondent)

3.2 The facts as stated in the Request or Arbitration – and later supported by documentary evidence filed by the Claimants (and indicated in footnotes) – are as follows:

A. AIG, the first Claimant, had established AIG Silk Road Fund Limited, a private equity fund organized under the laws of Bermuda (“the Fund”) to make equity investments in projects throughout Central Asia and the Caucasus.4 AIG Silk Road Fund Ltd (“the Fund”) was controlled by AIG through AIG Silk Road Investors Inc. (a US Company).5 The Fund established two wholly owned subsidiaries: AIG Silk Road Investment I Limited (“the Investment Company”, a Bermuda Company) and Kazakhstan Housing Limited (“the Financing Company” – also a Bermuda Company) to invest in a real estate project in Kazakhstan (“the Project”).6

AIG directly controls AIG Silk Road Investors Inc. (a US Company), which directly controls the Fund and its two subsidiaries (viz. the Investment Company and the Financing Company). The Investment Company is the majority owner of (66%) and directly controls the Joint Venture (Claimant No. 2). Accordingly, AIG indirectly controls the Fund, the Investment Company, the Finance Company and the Joint Venture. Claimants‟ control of Relevant Entities and Investments have been illustrated in the following Chart [p. 11] (part of the Request for Arbitration);

B. that the investment was in a Project – a residential housing complex to be called “Crystal Air Village” in Almaty – expected to involve a total investment of approximately USD 16.3 million7 over a three-year period;8 to implement this investment the Fund, through its wholly owned subsidiary (the AIG Silk Road Investment I Limited – “the Investment Company”), entered into a joint venture with LLP Tema (a Kazakhstan Company owned and controlled by Kazakhstani principals); the majority ownership and control of this joint venture being vested in the Investment Company which was in turn controlled by the Fund (AIG Silk Road Fund Limited), and indirectly and ultimately controlled by AIG (Claimant No. 1);9

C. that with financial assistance from the Fund, LLP Tema purchased for the Joint Venture ten hectares of land on which it was intended to construct the “Crystal Air Village”;10 the land (the Project Property) was located in one of the most exclusive residential areas of Almaty, adjacent to the private residence of the President of Kazakhstan; subsequent to its purchase by LLP Tema, the property was assigned in May 1999 to the Joint Venture for the purposes of the Project;11

D. that as required by the municipal laws of Kazakhstan, the purchase of the Project Properly and its intended use as the site for the Crystal Air Village was specifically approved by local governmental authorities namely the Karasai Raion Committee on Management of Land Resources12 and the Almaty Oblast Administration13 and all necessary building permits were also obtained for the Project;14

E. that the Project itself was approved by Kazakhstan‟s Agency on Investment with which the Joint Venture had entered into a written agreement on December 13, 199915 which constituted further tacit approval of the Project; the agreement dated December 13, 1999 obligated the Investment Agency to act as an advocate for the investor in the event of any dispute with other agencies or instrumentalities of the Government of Kazakhstan; the investment agreement was also registered by the Investment Agency of the Republic of Kazakhstan by means of a Certificate dated December 13, 1999,16 which recognized the purpose of the Project, viz. “Construction of residential complex Crystal Air in Almaty suburb”;

F. that after the Project Property was purchased, AIG, through affiliated companies, began the design, engineering, procurement and the financing work required to implement the Project, and retained various consultants and contractors for that purpose; it also built engineering networks and implemented other improvements on the Project Property. The Joint Venture then entered into a USD 7.3 million contract with Tuna LLP, a Kazakhstan subsidiary of the Turkish Architectural and Design Company (Tuna Insaat Sanayi ve Ticaret) for the construction of the first phase of the Project17 (see Request for Arbitration page 5); the Joint Venture also retained Scott Holland Estates, a Kazakhstan company owned by UK interests, to undertake a full scale marketing and advertising campaign, and (it is stated that) Scott Holland Estates launched a marketing programme geared towards the high-end market based on a combination of direct marketing contracts and various types of advertising and made presentations to prospective clients; “all told approximately a sum of USD 3.5 million was spent in designing and implementing the Project; before the Government (of Kazakhstan) ordered the Joint Venture to permanently halt construction”;18

G. that on February 26, 2000, the Government of Kazakhstan verbally notified the Joint Venture that it had deeded to cancel the Project for the reason that the Project Property was needed for “a national arboretum”;19

H. that on March 1, 2000, the Joint Venture wrote to the Chairman of the Investment Agency,20 explaining what had happened, requesting the Agency‟s assistance pursuant to the investment agreement dated December 13, 1999. In response, the Chairman of the Agency wrote a letter to the Akim (Governor) of the Almaty Oblast stating that the rights of an Investor having been violated by the actions of the Government the Investment Agency should be informed (by the Akim) of the reasons for the decision to terminate the investment and the intentions of the Almaty Oblast management in this regard;21

I. that on March 2, 2000, representatives of the Fund met with the Akim of the Almaty Oblast, who said that he had made “a mistake” in having the Oblast administration permit the sale of the Project Property to the Joint Venture and to issue the necessary approvals for the construction of the Crystal Air Compound on the Project Property. He (the Akim) stated that notwithstanding the authorization to purchase the site, the Joint Venture would not be permitted to construct the residential compound on the Project Property; he said that it was a decision made at the highest levels of the Government and that the only recourse available to the Joint Venture and the Fund would be to construct their residential compound on an alternate site which was offered;

J. that on March 17, 2000, the Oblast issued a resolution (Resolution No. 3-79)22 ordering the transfer of the Project Property, and also other areas, to the City of Almaty. This resolution provided for compensation to agricultural users in other areas for the taking of their property, but offered no compensation to the Joint Venture. On March 20, 2000, the Investment Agency23 received a letter from the Almaty Oblast declaring invalid the construction permits issued for the Project – permits that had been previously authorized by the Oblast;

K. that on April 6, 2000, the Almaty City State Architecture and Construction Inspection Agency issued an Ordinance24 ordering that all work on the Project Property be stopped;25

L. that in late February 2001, the Respondent, through the City of Almaty, physically seized the Project Property and began earthworks on it;26

M. that these acts of the political subdivisions of Kazakhstan effectively resulted in the expropriation of the investment of AIG and the joint venture, and AIG and the Joint Venture had no choice but to accept the fact that the Respondent had terminated the Project;

N. that in the circumstances the provisions of the BIT had been violated by the Respondent – in particular the following provisions in the Bilateral Investment Treaty viz.:

Article II(2)

(a)

Investment shall at all times be accorded fair and equitable treatment, shall enjoy full protection and security and shall in no case be accorded treatment less than that required by international law.

(b)

Neither Party shall in any way impair by arbitrary or discriminatory measures the management, operation, maintenance, use, enjoyment, acquisition, expansion, or disposal of investments.


Article III(1)

Investments shall not be expropriated or nationalized either directly or indirectly through measures tantamount to expropriation or nationalization (“expropriation”) except: for a public purpose; in a nondiscriminatory manner; upon payment of prompt, adequate and effective compensation; and in accordance with due process of law and the general principles of treatment provided for in Article II(2): Compensation shall be equivalent to the fair market value of the expropriated investment immediately before the expropriatory action was taken or became known, whichever is earlier; be calculated in any freely usable currency on the basis of the prevailing market rate of exchange at that time; be paid without delay; include interest at a commercially reasonable rate from the date of expropriation; be fully realizable; and be freely transferable.

O. that the Claimants had become entitled to invoke Article VI(4) of the Bilateral Investment Treaty which provides as follows:

4.

Each Party hereby consents to the submission of any investment dispute for settlement by binding arbitration in accordance with the choice specified in the written consent of the national or company under paragraph 3. Such consent, together with the written consent of the national or company when given under paragraph 3 shall satisfy the requirement for:

(a)

written consent of the parties to the dispute for purposes of Chapter II of the ICSID Convention (Jurisdiction of the Centre) and for purposes of the Additional Facility Rules; and

(b)

an “agreement in writing” for purposes of Article II of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, done at New York, June 10, 1958 (“New York Convention”).


P. that by ratifying the Bilateral Investment Treaty, Kazakhstan had given its written consent to submit the dispute mentioned in the Request for Arbitration to the jurisdiction of the Centre; – and the Claimants had satisfied the conditions for initiating an Arbitration under Article VI of the Bilateral Investment Treaty;

Q. that the dispute which is the subject of the Request for Arbitration is a legal dispute because it involves alleged contravention of the BIT, and of rules of customary international law; the jurisdiction of the Centre could be lawfully invoked by the Claimants by reason of the provisions of the ICSID Convention – the US and Kazakhstan having ratified the Convention: which had entered into force (in accordance with Article 68) with respect to the US on October 14, 1966, and with respect to Kazakhstan on October 21, 2000.

4. NOTICE OF REGISTRATION OF THE REQUEST FOR ARBITRATION

On June 4, 2001, a formal Notice of Registration of the Request for Arbitration was issued by the Centre to the Claimants and to the Respondent (“the parties”) – the letter of June 4, 2001 to the Respondent being addressed “c/o Ministry of Foreign Affairs, 10 Beibytshilik Street, 473000 Astana, Kazakhstan”. It was stated in the Notice of Registration that pursuant to ICSID Institution Rule 7(b) parties were notified that all communications and notices in connection with the proceedings would be sent to the addresses indicated in the Request, unless other addresses were indicated to the Centre. And in accordance with Rule 7(d) of the Institution Rules the parties were invited to proceed as soon as possible to constitute an Arbitral Tribunal in accordance with Articles 37 to 40 of the Convention.

5. BRIEF DESCRIPTION OF THE METHOD OF CONSTITUTION OF THE ARBITRAL TRIBUNAL27

5.1 There was apparently no response by the Republic of Kazakhstan to the Notice of Registration (of June 4, 2001), nor to the invitation to the parties made therein to proceed as soon as possible to constitute an Arbitral Tribunal in accordance with Articles 37 to 40 of the Convention.

5.2 On June 12, 2001, counsel for the Claimants acknowledged receipt of the Notice of Registration of June 4, 2001, and stated that since the parties had not agreed upon the number of arbitrators or the method of their appointment, the Claimants proposed pursuant to Rule 2(1)(a) of the Centre‟s Rules of Procedure for Arbitration Proceedings, also known as Arbitration Rules,28 that the Tribunal consist of three Arbitrators to be appointed as follows:

(i)

the Claimants shall appoint one arbitrator not later than July 3, 2001, failing which such appointment shall be made by the Chairman of the Administrative Council;

(ii)

the Respondent shall appoint one arbitrator not later than July 3, 2001, failing which such appointment shall be made by the Chairman; and

(iii)

the third arbitrator, who shall be the president of the Tribunal, shall be appointed by agreement of the parties not later than August 3, 2001, failing which such appointment shall be made by the Chairman.


It was requested on behalf of the Claimants that this proposal for the constitution of the Tribunal be transmitted to the Respondent pursuant to Rule 2(2) of the Centre‟s Arbitration Rules, which was done by a communication from the Centre dated June 12, 2001, addressed to the Republic of Kazakhstan c/o Ministry
of Foreign Affairs, Minister Yerlan Idrisov, 10 Beibytshilik Street, 473000 Astana, Kazakhstan. This letter intimated that the Centre was looking forward to receiving a response from the Republic of Kazakhstan to the Claimants‟ proposal. A copy of the letter of June 12, 2001, along with its enclosures (which included the Claimants‟ letter dated June 4, 2001) was also forwarded by the Centre to HE Ambassador Bolat K. Nurgaliyev, Embassy of the Republic of Kazakhstan, 1401 16th Street, NW Washington DC, 20036. 

Since the Respondent did not respond to the Centre‟s letter of June 12, 2001 nor replied to the Claimants‟ proposal (also of June 12, 2001) and since more than 60 days had elapsed since the Request for Arbitration was registered, and since there was still no agreement on the method of constituting the Tribunal, the Claimants by a letter to the Centre dated August 6, 2001 requested that the Tribunal be constituted in accordance with Article 37(2)(b) of the Convention.29

5.3 By letter dated August 6, 2001, addressed to the parties – including to the Republic of Kazakhstan (c/o Ministry of Foreign Affairs, 10 Beibytshilik Street, 473000 Astana, Kazakhstan), the Centre intimated the fact that it had received from the Claimants a letter dated August 6, 2001, and that the Claimants had chosen the formula provided in the Article 37(2)(b) of the Convention, and that in accordance with Rule 2(3) of the Arbitration Rules, the Arbitral Tribunal was to be constituted in accordance with the Convention. By the same letter, the parties were invited by the Centre to appoint the arbitrators in accordance with Rule 3(1) of the Arbitration Rules of the Centre.30

5.4 On August 7, 2001, the Claimants wrote to the Respondent, with a copy to the Centre, naming Professor Piero Bernardini as an arbitrator, proposing another person for appointment as the President of the Tribunal and inviting the Respondent to concur in that proposal and to appoint another arbitrator. A copy of this letter was also forwarded to the Respondent by the Centre under cover of a letter of August 8, 2001, in which the Centre intimated that it looked forward to hearing from the Respondent concerning the appointment by the Respondent of an arbitrator as well as the response to the Claimants‟ proposal for President of the Tribunal: the Centre‟s letter was addressed to the Republic of Kazakhstan. Ministry of Foreign Affairs, Minister Yerlan Idrisov, 10 Beibytshilik Street, 473000 Astana, Kazakhstan, with a copy to HE Ambassador Bolat K. Nurgaliyev, Embassy of the Republic of Kazakhstan, 1401 16th Street, NW Washington, DC, 20036. There was no response from the Respondent to this communication of August 8, 2001.

5.5 On August 13, 2001, the Centre informed the parties that it had received from Professor Piero Bernardini an acceptance of his appointment as arbitrator in the case, and that it was looking forward to receiving from the Respondent, pursuant to ICSID Arbitration Rule 3,31 information on the arbitrator that it appoints, as well as a response to Claimants‟ proposed candidate for appointment as President of the Tribunal. This letter was addressed to the Republic of Kazakhstan, c/o Ministry of Foreign Affairs, 10 Beibytshilik Street, 473000 Astana, Kazakhstan, and a copy of the same was forwarded to the Embassy of the Republic of Kazakhstan, Aslan Sarimzhipov, 3rd Secretary, Trade Department, 1401 16th Street, NW Washington, DC, 20036. There was no response by the Republic of Kazakhstan to the Centre‟s letter of August 13, 2001.

5.6 By letter dated September 4, 2001, addressed by the Claimants to the Centre, it was stated that more than ninety days had elapsed since the Centre had registered the Request for Arbitration and the Tribunal was still not constituted. The Centre was reminded that the Respondent had not appointed an arbitrator and had neither agreed to the Claimants‟ proposal for appointment as President, nor proposed anyone else. In these circumstances relying on Article 38 of the Convention32 and Rule 4 of the Centre‟s Arbitration Rules33 the Claimants requested that the Chairman of the Administrative Council appoint the Arbitrators not yet appointed and designate the President of the Tribunal. A copy of this letter along with a forwarding letter of September 4, 2001 (of the Centre) was duly addressed to the parties. The last paragraph of the said letter reads as follows: 

Appointments by the Chairman in compliance with this request must be made from the Panel of Arbitrators of the Centre. Such appointments must be made within 30 days of our receipt of the request, i.e., no later than October 4, 2001. Before such appointments are made, the parties must as far as possible be consulted. We will shortly begin the process of consultation with the parties.

This forwarding letter of September 4, 2001 was addressed by the Centre to the Republic of Kazakhstan, c/o Ministry of Foreign Affairs, 10 Beibytshilik Street, 473000 Astana, Kazakhstan, and a copy of this letter was also forwarded by the Centre to the Embassy of the Republic of Kazakhstan, Aslan Sarimzhipov, 3rd Secretary, Trade Department, 1401 16th Street, NW Washington, DC, 20036. There was no response by the Respondent to this letter.

5.7 On September 7, 2001, the Centre addressed a letter to the parties – stating inter alia as follows:

As recalled in my letter to you of September 4, 2001, the Claimants have appointed as one of the three arbitrators Professor Piero Bernardini of Italy. As the other two arbitrators have still not been appointed, the Chairman of the Administrative Council is required to make the two appointments in order to comply, pursuant to Article 38 of the ICSID Convention and Rule 4 of the ICSID Arbitration Rules, with the request made by the Claimants in their letter of September 4, 2001.

As pointed out in my above-mentioned letter of September 4, 2001, the appointees of the Chairman of the Administrative Council must be members of the ICSID Panel of Arbitrators. They may not be nationals of the United States of America or of the Republic of Kazakhstan. As also explained in my letter of September 4, 2001, the parties must be consulted as far as possible before the Chairman of the Administrative Council makes his appointments. In this regard, I wish to inform you that we are considering recommending to the Chairman of the Administrative Council that his appointees in the present case be Dr Branko Vukmir and Mr Fali S. Nariman and that the Chairman designate Mr Nariman to be the President of the Tribunal. 

Dr Vukmir is a national of Croatia and one of its designees to the ICSID Panel of Arbitrators. Mr Nariman is a national of India designated to the Panel of Arbitrators by the Chairman of the Administrative Council. Attached are copies of the curricula vitae of Dr Vukmir and Mr Nariman as on file at ICSID.

Please let me know by September 14, 2001, whether you have any objections to the appointment of Dr Vukmir or Mr Nariman.

The communication dated September 7, 2001, from the Centre was forwarded to the Republic of Kazakhstan at the following address: “Republic of Kazakhstan, Ministry of Foreign Affairs, 10 Beibytshilik Street, 473000 Astana, Kazakhstan”. A copy of this letter was also forwarded to the Embassy of the Republic of Kazakhstan, Aslan Sarimzhipov, 3rd Secretary, Trade Department, 1401 16th Street, NW Washington, DC, 20036. There was no response by the Respondent to this communication.

5.8 On September 25, 2001, the Centre informed the parties (including the Republic of Kazakhstan at c/o Ministry of Foreign Affairs, 10 Beibytshilik Street, 473000 Astana, Kazakhstan), that the Claimants by letter dated September 14, 2001, had indicated that they had no objection to the appointments of Dr Vukmir and Mr Nariman, but that no response had been received from the Republic of Kazakhstan. It was intimated that in the absence of any objection, the Centre would recommend to the Chairman of the Administrative Council that he appoint Dr Branko Vukmir and Mr Fali S. Nariman as Arbitrators in this case and that the Chairman do designate Mr Nariman to be the President of the Tribunal. By the said letter of September 14, 2001, it was intimated that pursuant to ICSID Arbitration Rule 4(4) such appointments by the Chairman must be made within 30 days of September 4, 2001, which was the date that the Centre received the Claimants‟ request for the Chairman to make the appointments, i.e., by October 4, 2001. There was no response by the Respondent to this communication.

5.9 On October 1, 2001, the Centre intimated to the parties (including to the Republic of Kazakhstan at the following address: c/o Ministry of Foreign Affairs, Minister Yerlan Idrisov, 10 Beibytshilik Street, 473000 Astana. Kazakhstan, with a copy to the Embassy at the address indicated above) as follows: 

In our letter of September 7, 2001, we informed you that we were considering recommending to the Chairman of the ICSID Administrative Council that he appoint Dr Branko Vukmir and Mr Fali S. Nariman as arbitrators in this case and that the Chairman designate Mr Nariman to be the President of the Tribunal. We also requested the parties to indicate whether they would have any objections to those appointments. In our letter of September 25, 2001, we informed you that, in the absence of any objection by the parties, we would be proceeding to recommend the appointment of Dr Branko Vukmir and Mr Fali S. Nariman and the designation of Mr Nariman as President of the Tribunal. 

On this recommendation, the Chairman of the Administrative Council has now appointed Dr Branko Vukmir and Mr Fali S. Nariman as arbitrators in this case and has designated Mr Nariman to be the presiding arbitrator. 

Pursuant to ICSID Arbitration Rule 5(2), we are now seeking the acceptance of Dr Branko Vukmir and Mr Fali S. Nariman of their appointment. 

There was no response by the Respondent to this letter dated October 1, 2001.

5.9.1. Dr Branko Vukmir and Mr Fali S. Nariman having accepted their appointment, the Centre addressed a further letter dated October 5, 2001, to the parties (including to the Republic of Kazakhstan c/o Ministry of Foreign Affairs, 10 Beibytshilik Street, 473000 Astana, Kazakhstan), intimating that in accordance with Rule 6(1) of the Arbitration Rules of the Centre the Tribunal34 is deemed to be constituted and the proceedings to have begun “on today‟s date October 5, 2001”. It was further intimated that in accordance with Arbitration Rule 13(1) the Tribunal must hold its first session within 60 days after its constitution, that is by December 4, 2001.35

Copies of all the letters mentioned above were, upon constitution of the Tribunal, transmitted to each of its members by the Centre.

The above factual narration describes the method of constitution of this Arbitral Tribunal in the present case.

6. SUMMARY OF THE SUBSEQUENT EVENTS INCLUDING A SUMMARY OF THE PROCEEDINGS BEFORE THE ARBITRAL TRIBUNAL

6.1 By letter dated October 6, 2001 addressed by Mr Erlan Idrisov Minister of Foreign Affairs, Republic of Kazakhstan to the Deputy Secretary-General of the Centre (received by the Centre on October 23, 2001) it was stated as follows:

On behalf of the Government of the Republic of Kazakhstan I would like to inform you that the Akim of Almaty Oblast (head of the Almaty Oblast Administration) has been appointed respondent from the Kazakhstan party in this case.

Also, due to internal procedures in Kazakhstan, more time is needed for appointing the arbitrator from the Kazakhstani party. Therefore, we ask you to grant a delay for conducting of all necessary procedures in Kazakhstan.

This letter was replied to by the Centre‟s letter dated October 25, 2001, in which it was recorded:

I have the honor to confirm our receipt on October 23, 2001 of your letter of October 6, 2001.

I understand from your letter that the Akim of Almaty Oblast will henceforth represent the Republic of Kazakhstan in this arbitration proceeding. To enable us to redirect our communications accordingly, we would be grateful if you could provide us with his full mailing address and telephone and fax numbers.

In the present case, it was established that the Arbitral Tribunal would consist of three arbitrators, one appointed by each side and the third – the President of the Tribunal – appointed by agreement of the parties. The Claimants appointed an arbitrator on August 7, 2001. The two other arbitrators, however, were not appointed within the 90-day period mentioned in Article 38 of the ICSID Convention. Following the expiry of that period, therefore, the Claimants requested the
Chairman of the ICSID Administrative Council to appoint the two other arbitrators in accordance with Article 38 of the ICSID Convention. After we informed the parties, and received no objections from them, the Chairman of the ICSID Administrative Council appointed those arbitrators by the October 4, 2001 deadline for this under our rules. The Tribunal was officially constituted on the following day, October 5, 2001. As recalled in our letter of October 5, 2001 to the parties, the members of the Tribunal are Mr Fali S. Nariman, the President of the Tribunal; Professor Piero Bernardino; and Dr Branko Vukmir.

A first session of an ICSID Arbitral Tribunal is typically devoted to preliminary procedural matters. Under our rules, a Tribunal must hold this first session within 60 days after the official constitution of the Tribunal. As mentioned in our letter of October 18, 2001 to the parties, the President of the Tribunal in this case plans to hold the first session starting at 10:00 a.m. on Thursday, November 15, 2001, at the International Dispute Resolution Centre, 8 Breams Buildings, Chancery Lane, London, England.

We hope that the above-mentioned date and place for the first session of the Tribunal will be convenient for the Republic of Kazakhstan. Please do not hesitate to let me or my colleague Mr Ucheora O. Onwuamaegbu know if you have any questions.

Please accept, Mr Minister, the assurances of our highest consideration.

A copy of this letter was also forwarded to HE Ambassador Bolat K. Nurgaliyev, Embassy of the Republic of Kazakhstan 1401 16th Street, NW Washington, DC, 2003.

6.2 The Centre did not receive any further response from the Respondent to its letter of October 25, 2001, nor was the full mailing address, telephone and fax numbers of the Akim of Almaty Oblast communicated to the Centre by the Respondent.

6.3 The first session of the Tribunal was then held in London (as duly intimated to both parties) on November 15, 2001. Mr Robert Pietrowski of Coudert Brothers along with Mr L. Scott Foushee, Managing Director of AIG Capital Partners, Inc., attended on behalf of the Claimants. No person attended the meeting on behalf of the Respondent. 

Detailed directions as required in the Rules were given and recorded in the Minutes of the first session of the Tribunal. In these Minutes it was inter alia recorded that the Respondent should file its Counter-Memorial within three months of the date of the filing of the Memorial by the Claimants. 

The Claimants‟ Memorial is dated February 15, 2002. In the 58-page Memorial the Claimants, after
narrating facts and events, have set out what according to them are the reasons why the Tribunal should
adjudge and declare that:

1.

The Respondent, through acts of its political subdivisions, has expropriated certain investments made by the Claimants in the territory of Kazakhstan.

2.

The fair market value of the expropriated investments immediately before the expropriatory act was $13.5 million.

3.

Under the terms of the Treaty between the United States of America and the Republic of Kazakhstan concerning the Reciprocal Encouragement and Protection of Investment, the Respondent is obligated to promptly pay the Claimants the sum of $13.5 million, plus interest until the date of payment.

4.

In addition, the Respondent shall pay to the Claimants their attorneys‟ fees, experts‟ fees and the costs of the arbitration.

5.

The Claimants shall be awarded such further or other relief as may be appropriate.


6.4 By a further letter of February 27, 2002, the Claimants suggested that in view of the letter of October 6, 2001, of the Minister of Foreign Affairs of the Republic of Kazakhstan that he would be represented in this Arbitration by the Akim of Almaty Oblast, the Centre may wish to send an additional copy of the Claimants‟ Memorial (which was enclosed) to Mr Shalbay Kulmakhanov, the current Akim, and his mailing address was intimated. 

On February 27, 2002, the Centre forwarded to the Akim of Almaty Oblast copies of the Centre‟s letter of October 25, 2001, minutes of the first session of the Tribunal held in London on November 15, 2001, and the letter of February 27, 2002, from the Claimants as well as the Claimants‟ Memorial of February 25, 2002 with annexures. The attention of the Respondent was drawn in particular to paragraph 15.1b of the minutes of the first session which recorded that the Respondent shall file its Counter-Memorial within three months of the date of the filing of the Memorial by the Claimants. The Centre in the letter dated February 25, 2002, stated that as the Claimants‟ Memorial was filed on February 15, 2002, “the counter-memorial must be filed by April 15, 2002” (later corrected by the Centre by further letter of March 4, 2002, to “May 15, 2002” – i.e., the date of filing of the Counter-Memorial would be May 15, 2002).

By letter dated March 27, 2002 the parties (including the Respondent) were informed by the Centre that the President of the Tribunal, after having consulted with its members and the ICSID Secretariat, planned to fix a session of the Tribunal with the parties on Sunday, June 2, 2002 in Paris, France and inquired whether the parties had any objection to this. The said letter further recorded:

Pursuant to paragraph 15(1)(b) of the minutes of the Tribunal‟s first session, the Respondent‟s Counter-Memorial is due to be filed on May 15, 2002. The purpose of the session on June 2, 2002, would be to determine further steps to be taken by the parties and the Tribunal in the arbitration, including outstanding issues under ICSID Arbitration Rule 20, as well as to deal with other preliminary matters that the parties may wish to canvass before the Tribunal. A proposed draft agenda will be sent to the parties under separate cover.

By a further letter dated March 28, 2002 the Secretary of the Tribunal informed the parties as follows:

As advised by the Embassy of the Republic of Kazakhstan in Washington, DC, I have been in correspondence with Mr Askar Batalov, President of the Kazakhstan Investment Promotion Centre (Kazinvest) – In my email to him, I again reminded the Republic of Kazakhstan of the deadline of May 15, 2002, for the filing of the Respondent‟s Counter-Memorial. I also informed him of the proposal by the Tribunal to hold a session with the parties on Sunday, June 2, 2002, in Paris, which was the subject of my letter to the parties of yesterday. 

Please be advised that henceforth, all communications in connection with the proceeding will be sent to the above addresses unless other addresses are indicated to the Secretariat.

The said letter was addressed to the Respondent at the following addresses: viz.

Republic of Kazakhstan,
C/o Mr Shalbay Kulmakhanov,
Almaty Oblast Akimat,
38, Taulsyzdyk Street,
Republic of Kazakhstan

and

Mr Askar Batalov,
President of the Kazakhstan
Investment Promotion Center,
Republic of Kazakhstan.

A copy was also sent to the Embassy of the Republic of Kazakhstan in Washington, DC.

6.5 The second meeting of the Tribunal was held on June 2, 2002 at the Offices of the World Bank, in Paris, France as previously intimated. Mr Robert Pietrowski, counsel, along with Mr Boris Evseev of AIG Capital Partners, attended on behalf of the Claimants – but no one attended on behalf of the Respondent. This was duly recorded in the minutes of the second session of the Tribunal:

The absence of the Respondent was noted. The Tribunal declared itself satisfied that both parties were duly informed of today‟s meeting through:

a.

Letters from the Secretary [of the Tribunal] to the parties dated: March 27, 2002, April 22, 2002, May 13, 2002 and May 15, 2002;

b.

Telephone conversation between the Tribunal‟s Secretary (through an interpreter) and the office of the Akim of Almaty Oblast in March 2002; as well as with the Embassy of the Republic of Kazakhstan in Washington DC, in March 2002; and 

c.

Electronic mail exchange, in March 2002, between the Tribunal‟s Secretary and the President of the Kazakhstan Investment Promotion Centre (Kazinvest), who had been proposed to the Centre, by the Embassy of the Republic of Kazakhstan in Washington, DC, as an additional addressee of correspondence in this case.


After the second session, on July 18, 2002, Mr John Barnum of McGuireWoods Kazakhstan addressed a letter to the Centre stating that McGuireWoods Kazakhstan LLP had been retained to represent the Republic of Kazakhstan with respect to the claims filed with ICSID by the Claimants. The letter went on to state:

Unfortunately, despite your apparent several efforts to bring this matter to the attention of the Government of the Republic, the Ministry of Justice has been able to locate only a few of the communications pertaining to Claimants‟ claims that ICSID apparently has sent to various offices in the Government.

Thanks to the courtesy of Claimants‟ counsel, Mr Pietrowski, however, I now have a copy of Mr Escobar‟s letter of June 3, 2002, and its enclosures, namely, the minutes of a June 2 hearing and procedural order No. 1. I would appreciate your sending me copies of the communications, minutes, notes of telephone conversations and e-mails referred to on pages 1 and 2 [of] those minutes, specifically the letters from ICSID dated October 16, 2001 and February 27, March 4, 27 and 28, April 22, May 13 and 15, and October 18, 2002.

We also have not been able to locate any of the correspondence from ICSID or Claimants relating to the appointment of the tribunal.

I would appreciate your sending me copies of that material as well. I would like to emphasize that I do not mean to suggest that ICSID did not act in complete good faith in its attempts to inform the Republic of Claimants‟ claims or of the other events that followed. The Government has indeed been aware of Claimants‟ claims since 2001, and it was pursuing settlement discussions until Claimants failed in January this year to deliver information concerning the specifics of their claims, but the Ministry of Justice has received very little information concerning the ICSID proceedings.

Thank you in advance for your assistance.

By a further detailed letter dated July 31, 2002 the Respondent through its Counsel contended, inter alia, that the Tribunal had been appointed without proper notice to the Government of Kazakhstan in contravention of the provisions of the Convention.36

6.6 On July 31, 2002 the Respondent filed a document called “Respondent‟s Objections to Jurisdiction” (attaching as Exhibit A thereto Mr John Barnum‟s letter of July 31, 2002) and requested that pursuant to Rule 41(3)37 the proceedings on merits be suspended including the hearing scheduled for August 28, 2002. Amongst the objections to Jurisdiction was the objection that this Tribunal was constituted without proper notice to the Respondent and the procedure followed by ICSID in constituting this Tribunal was improper and in contravention of ICSID‟s own Regulations – consequently any award by this Tribunal would have to be annulled because “the Tribunal was not properly constituted”. Other objections as to jurisdiction were also raised.

On August 2, 2002 the Claimants filed with the Centre “Claimants‟ Observations on the Respondent‟s Objections to Jurisdiction”. The Respondent‟s Reply to Claimants‟ Observations on Jurisdiction was filed with the Centre on August 8, 2002.

Meanwhile, by an Order dated August 7, 2002, the Tribunal, after considering the submissions of the Parties and the facts and circumstances of the case, decided, pursuant to ICSID Arbitration Rule 41(4), to join the objections as to jurisdiction to the merits of the dispute and fixed the time limit for further procedures as follows: viz. that the Respondent be allowed a further opportunity to file its Counter- Memorial no later than August 19, 2002; and that the oral hearings in the case would take place in London on August 28–30, 2002, inclusive, as earlier scheduled.

6.7 The Respondent‟s Counter-Memorial in the above case on the merits was filed on August 19, 2002 – the last extended date for filing the same. In the Counter- Memorial the Respondent reserved its objections as to jurisdiction as set forth in its letter and brief of July 31, 2002; and for the reasons stated in the said letter, it was submitted that the Claimants‟ Claims should be rejected by the Tribunal. 

In the Respondent‟s Counter-Memorial it has set out various facts and submissions and contended:

i.

that the Claimants have brought the claim against the wrong party;

ii.

that the Claimants have brought the claim in the wrong forum;

iii.

that the Claimants have not taken appropriate measures to obtain any compensation allegedly due to
them; and

iv.

that the Claimants have not made any serious or sufficient effort to mitigate [these] alleged damages and that the Claimants should be denied the compensation requested or alternatively should be ordered to recalculate compensation on the basis [of] appropriate procedures that customarily apply in the Republic of Kazakhstan.


For the reasons stated in the Respondent‟s Counter-Memorial (filed along with 19 exhibits) it has been contended that Claimants‟ claim should be rejected by the Tribunal.

7. SUMMARY OF THE HEARINGS

7.1 The Tribunal conducted a hearing in London on August 28, 29, 30, as well as on August 31, 2002 (the scheduled dates of the hearing were extended to include August 31, 2002 by consent of the parties). Both the Claimants and Respondent appeared through their accredited Counsel and representatives. The
Claimants were represented by (i) Mr Robert F. Pietrowski, Jr. Coudert Brothers; (ii) Mr Jonathan D. Cahn, Coudert Brothers; (iii) Mr Thomas C. O‟Brien, Coudert Brothers; (iv) Ms Sarah M. Hall, Associate, Coudert Brothers; and (v) Ms Kulgaisha V. Mukasheva, Professor of Law, Adilet Law School, of counsel to Coudert Brothers. The Respondent was represented by (i) Mr John W. Barnum, McGuireWoods LLP (Counsel); (ii) Mr Eric E. Imashev, McGuireWoods LLP (Counsel) and (iii) Ms Dinara M. Jarmukhanova, McGuireWoods LLP (Counsel).

7.2 After a brief opening of the case by Counsel on each side, the following witnesses were examined as Claimants‟ witnesses viz. Mr Scott Foushee, Mr Marc Kasher, Mr Boris Evseev, Mr Ian Gomes, and Mr Phillip Pardo – each of them was cross-examined by Counsel for the Respondent. The following witnesses Mr Z. K. Zurkadilov, Mr Dolzhenkov and Mr Erlan Idrisov were called and gave evidence on behalf of the Respondent and each of them was cross-examined by Counsel for the Claimants. Some of the witnesses present were re-called and re-examined without objection by either party. Several documents, including many that had not previously been disclosed, were tendered and exhibited both by the Claimants and by the Respondent during the hearing. Detailed arguments were addressed by each side – as to the constitution of the Tribunal and other objections as to jurisdiction, as well on the merits of the case. It was agreed at the end of the hearing that a written note of submissions would be filed by and on behalf of each of the parties: The Claimants submitted a Post-hearing Memorial dated October 18, 2002, and the Respondent submitted a Post-hearing Brief also dated October 18, 2002.

The written submissions of both parties address questions as to the constitution of the Tribunal, and other objections as to the jurisdiction of the Tribunal, as well as questions arising on the merits of the case.

8. OBJECTION TO THE CONSTITUTION OF THIS ARBITRAL TRIBUNAL

8.1 The Tribunal considers it appropriate at the outset to deal with the very first objection raised in the Respondent‟s Objection to Jurisdiction – viz. that the Tribunal was constituted without proper notice to the Respondent and in contravention of ICSID‟s own Regulations: this contention must be initially decided even before considering the other objections to jurisdiction (as well as submissions and contentions on merits) – especially since, if on a consideration of this first objection, the contention of the Respondent is upheld, the Tribunal would not be competent to go into any further question.

The objection regarding the allegedly improper constitution of the Tribunal is set out in the Respondent‟s Objections to Jurisdiction and is reproduced below:

Respondent‟s first objection is to the jurisdiction of this particular Tribunal. With all due respect to the three eminent arbitrators named by Claimants or ICSID, this Tribunal was constituted without proper notice to the Respondent. The result has been that Respondent did not participate in the Tribunal‟s formation, either by nominating one arbitrator or by having the opportunity to express its views concerning candidate for President. The reasons why the procedure followed by ICSID in constituting this Tribunal was improper and in contravention of ICSID‟s own Regulations are described in a letter to ICSID of today‟s date, a copy of which is attached thereto as Exhibit-A.

Suffice it to say here that, in Respondent‟s opinion, any award by this Tribunal would have to be annulled by ICSID pursuant to Article 52(1)(a) of the ICSID Convention because “the Tribunal was not properly constituted”.

In the letter dated July 31, 2002 (Exhibit-A to the Objections to Jurisdiction) Regulation 33 of ICSID‟s Administrative and Financial Regulations is relied upon and quoted:

Regulation 33 Communications with Contracting States
Unless another channel of communications is specified by the State concerned, all communications required by the Convention or these Regulations to be sent to Contracting States shall be addressed to the State‟s representative on the Administrative Council.

It is contended that during the period leading up to the constitution of the Tribunal on October 5, 2001, the Republic of Kazakhstan‟s representative on the Administrative Council was the Kazakhstan Deputy Prime Minister Oraz Zhandosov – who was also Governor of the IBRD: and his alternate was the Minister of Economy Zhksybek Kulekeyev, and that neither Deputy Prime Minister Zhandosov nor Minister Kulekeyev were ever informed of anything pertaining to this matter. The contention is that therefore this Arbitral Tribunal has not been duly and properly constituted and consequently it does not have any authority to decide anything in this matter since it was constituted in violation of ICSID‟s own Regulations (i.e., Regulation 33 – of the Administrative and Financial Regulations) adopted by the Administrative Council of ICSID. It is contended that the opportunity and right to nominate an arbitrator and to participate in the selection of a Tribunal President is obviously one of the most important rights of every party to every arbitration, and ICSID‟s failure to follow its own Regulations has deprived the Republic of that right. Any award made by this Tribunal (it is contended) would have to be annulled under Article 52(1) of the Convention on the ground that the Tribunal was “not properly constituted”. It is also contended that this Tribunal was constituted without any participation of the Republic of Kazakhstan and in this regard the letter of the Minister of Foreign Affairs dated October 6, 2001, has been relied upon – that letter contained a request for additional time to the Respondent to appoint an Arbitrator.38

Under Article 41 of the Convention this Arbitral Tribunal is the judge of its own competence and any objection raised by a party that the dispute is not within the jurisdiction of the Centre or for other reasons not within the competence of the Tribunal must be considered and dealt with by the Tribunal itself.

8.2 The Tribunal therefore proceeds to deal with the objection raised to its composition and constitution.

8.2.1 Under Article 6 of the Convention, the Administrative Council (the apex body of ICSID), which is composed of representatives of each Contracting State, is empowered to:

(a)

adopt Administrative and Financial Regulations of the Centre;

(b)

adopt the Rules of Procedure for the institution of Conciliation and Arbitration proceedings (for short “Institution Rules”);

(c)

adopt the rules for procedure for conciliation and arbitration proceedings (hereafter called “the Conciliation and Arbitration Rules”: for short, “Arbitration Rules” and “Conciliation Rules”).


8.2.2 As to whether the Administrative and Financial Regulations of the Centre (including Regulation 33) are applicable to ICSID Arbitration Proceedings or whether the Rules of Procedure for Institution of Conciliation and Arbitration Proceedings (briefly the Institution Rules) are applicable, must first be determined.

8.2.3 Now in Chapter IV of the Convention (Article 36) special provision is made with regard to Request for Arbitration; such request is specifically required to contain information (containing the issues in dispute, the identity of the parties and their consent to arbitration) “in accordance with the rules of procedure for the institution of arbitration and conciliation proceedings” (Article 36(2)).

The Institution Rules make special provision with regard to the address of the Respondent to an arbitration proceeding. Rule 2 of the Institution Rules provides that the Request for Arbitration shall “designate precisely each party to the dispute and state the address of each” (emphasis added) (Rule 2(1)(a)) and after registration of the Request under Rule 6, Rule 7 stipulates that the Notice of Registration of a Request shall “notify each party that all communication and notices in connection with the proceedings will be sent to the address stated in the Request unless another address is indicated to the Centre” (emphasis added).

Regulation 33 of the Administrative and Financial Regulations relied on by the Respondent stipulates that unless another channel of communication is specified by the State concerned, all communications “required by the Convention or these Regulations to be sent to Contracting States” shall be addressed to the State‟s Representative on the Administrative Council: Regulation 33 therefore deals specifically with all communications that are required by the Convention or by the Administrative and Financial Regulations “to be sent to the Contracting States”; it does not include within its sweep all communications required by
the Institution Rules to be sent to a Contracting State – which is a party to an ICSID arbitration. The communications “required by the Convention” under Regulation 33 to be sent to Contracting States would include Notices of the annual meetings of the Council under Article 7 of the Convention, and communications required by the Administrative and Financial Regulations to be sent to Contracting States (under Regulation 33) which would include: Notices of meetings (Regulation 2(1)); transmission of Agenda for meetings (Regulation 3(1)); Motions on proposed action which cannot be postponed until the next meeting of the Council (Regulation 7(3)); communication of charges for special services to be communicated to all Contracting States (Regulation 15(2)); adoption by the Administrative Council of the Budget (Regulation 17 – read with Regulation 7(3)); assessment of contributions by Contracting States
which are to be promptly communicated to Contracting States (Regulation 18(1)). Communication to parties of a Request for Arbitration (even when such parties are Contracting States) [is] left to be determined by the Institution Rules under which the address stated in the Request for Arbitration determines the address [to] which all subsequent communications (including communications under the Arbitration Rules – dealing with composition of the arbitral tribunal) are to be addressed. Rule 7 of the Institution Rules makes this very clear – the Notice of Registration of the Request for Arbitration must “notify each party that all communications and notices in connection with the proceedings will be sent to the address stated in the Request for Arbitration unless another address is indicated to the Centre”.

In the Opinion of this Tribunal the specific provisions relating to communications of the Request for Arbitration, the address to which they are to be communicated and all proceedings subsequent thereto are set out in the Institution Rules – separately adopted by the Administrative Council – and they apply. Provisions relating to communications “required by the Convention or these Regulations (i.e., Administrative and Financial Regulations) to be sent to Contracting States” (Regulation 33) do not apply to arbitration proceedings which commence with a Request for Arbitration.

8.2.4 However in this case the question regarding the validity of the composition of the Arbitral Tribunal does not merely depend upon a textual interpretation of Regulation 33 of the Administrative and Financial Regulations, and of the Convention‟s Article 36 (Request for Arbitration) read with Institution Rules 2(l)(a) and 7(b) quoted above. The more important and vital question – a question specifically urged by the Respondent – is whether the Respondent has been deprived of the opportunity and right to participate in the composition of the Tribunal.

8.2.5 On a careful consideration of all the facts and circumstances leading up to the constitution of the Tribunal by the Centre, the Tribunal holds that the Respondent was at all times made aware of the Request for Arbitration dated May 3, 2001 and of its right to participate in the composition of the Arbitral Tribunal as mentioned in the Arbitration Rules (Rules 2, 3 and 4). The circumstances relied on by the Tribunal for this conclusion are set out below:

(i)

Letters of the Centre addressed to the Respondent – (Letters dated May 4, 2001; May 8, 2001; May 31, 2001; June 4, 2001; June 12, 2001; August 8, 2001; August 13, 2001; September 4, 2001; September 7, 2001; September 14, 2001; September 25, 2001; October 1, 2001) – were addressed to the Respondent at the address mentioned in the Request for Arbitration (in accordance with the Institution Rules) – they were addressed to the appropriate and relevant Ministry concerned with foreign investment viz. the Ministry of Foreign Affairs: that this was the relevant Ministry is clear from the letter dated March 13, 2001 of E. Idrissov, Minister of Foreign Affairs addressed to the Deputy Prime Minister – (Claimants‟ Exhibit 31) – the first paragraph of which reads as follows: 

The Ministry of Foreign Affairs of the Republic of Kazakhstan, having reviewed the appeal by Mr Richard G. Jones, the United States Ambassador, and the investment dispute notice received from AIG Silk Road Capital Management Ltd, informs you as follows... 

In the course of his oral evidence Ambassador E. Idrissov admitted that it is the Ministry of Foreign Affairs that looks after foreign investments.39 None of the witnesses called by the Respondent professed ignorance of the contents of the letters referred to above commencing with the Centre‟s letter of May 4, 2001; none of them stated that those letters were in fact not received by the addressee to whom they were addressed.

(ii)

The Notices of the Centre dated June 12, 2001; and August 8, 2001 – specifically dealing with the composition of the Arbitral Tribunal (under the Arbitration Rules) were also addressed by name to HE Mr Erlan Idrissov (Minister of Foreign Affairs). Mr Idrissov was called as a witness on behalf of the Respondent and gave evidence on the merits of the case: he did not say that he was unaware of or did not receive these notices or that he was not aware of all or any of the Notices of the Centre commencing with the notice dated June 4, 2001 (intimating to the parties about the registration of the Request for Arbitration and for taking steps for constituting the Arbitral Tribunal): if it was the case of the Respondent that it was unaware of the various Notices forwarded by the Centre, the Minister of Foreign Affairs to whom at least two such notices were addressed by name would have deposed to the fact that the notices though stated to be addressed to him had not in fact been received.

(iii)

In the very first letter of July 18, 2002 addressed by Counsel for the Respondent to the Centre intimating that he had been retained to represent the Republic of Kazakhstan with respect to the claim filed by the Claimants; it was admitted that communications pertaining to the Claimants‟ claim had been sent by ICSID (the Centre) “to various offices of the Government” (of Kazakhstan) – and that (one of them) the Ministry of Justice had been able to locate “only a few of the communications...” (as to which were these communications is not stated, nor have these been mentioned at any stage of the Arbitration proceedings). The relevant part of the letter dated July 18, 2002 is quoted below: 

Unfortunately, despite your apparent several efforts to bring this matter to the attention of the Government of the Republic of Kazakhstan, the Ministry of Justice has been able to locate only a few of the communications pertaining to Claimants‟ claim which ICSID apparently has sent to various Offices of the Government.

This letter further acknowledges that the Government of Kazakhstan had been aware of the Claimants‟ claim since the year 2001 and that it was pursuing settlement discussions with the Claimants which failed in January 2002 when the Claimants did not deliver information of certain specifics of their claim.

 

(iv)

Besides, copies of letters addressed by the Centre informing the Respondent at each stage of its rights under the Arbitration Rules (inter alia with respect to the composition of the Tribunal) had been also sent to the Embassy of Kazakhstan in Washington – receipt of which has not been denied at any time, either in evidence or during arguments.

(v)

None of the communications addressed by the Centre to the Respondents through the Ministry of Foreign Affairs were ever responded to – and it is significant that the letter of October 6, 2001, addressed to the Centre by Mr Erlan Idrissov (the Minister of Foreign Affairs) received by the Centre on October 23, 2001, shows that the appropriate Ministry (the Ministry of Foreign Affairs) was in fact aware of the pending Arbitral proceedings – ICSID Case No. ARB 01/6 is cited in the letter.

(vi)

The Tribunal having already been duly constituted under the Rules as communicated to the parties by the Centre‟s letter dated October 5, 2001, the request made in the letter dated October 6, 2001, by the Minister of Foreign Affairs of Kazakhstan, received by the Centre on October 23, 2001, that further time should be granted to Kazakhstan to appoint an arbitrator, was plainly a belated request. The letters of the Centre (dated June 12, 2001, and August 8, 2001) specifically addressed to HE Mr Erlan Idrissov and specifically inviting the Respondent to participate in the composition of the Tribunal under the Arbitration Rules were ignored: the Tribunal concludes that when an opportunity is afforded to a party to appoint an arbitrator and the party chooses to do nothing and does not respond, it cannot complain that it has been deprived of the opportunity and right to participate in the composition of the Tribunal.


8.2.6 For all the above reasons the Tribunal cannot accept the contention that the Respondent had been deprived of the opportunity and right to participate in the composition of the Tribunal. The Tribunal rejects the plea of the Respondent, that this Tribunal was not validly constituted.40

9. WHETHER OTHER OBJECTIONS TO JURISDICTION PRECLUDED BY REASON OF RULE 41 OF THE ARBITRATION RULES

9.1 Before dealing with the other Objections to Jurisdiction raised by the Respondent, the Tribunal must first consider the plea of the Claimants that since the Respondent‟s Objections to Jurisdiction were not filed “as early as possible” (as required by Rule 41 of the Arbitration Rules) they cannot be and ought not to be entertained by the Tribunal: it is said that the time limit originally fixed for filing the Counter-Memorial of the Respondent was May 15, 2002;41 the Respondent filed its objections to Jurisdiction only on July 31, 2002; all the facts that the Claimants rely on to establish the Centre‟s jurisdiction had been stated in the Request for Arbitration registered by the Centre as far back as June 4, 2001, and the Respondent having

1Claimants’ Exhibit No. 83 in the arbitration proceedings.
2Claimants’ Exhibit No. 90 in the arbitration proceedings.
1Claimants‟ Exhibit No. 83 in the arbitration proceedings.
2Claimants‟ Exhibit No. 90 in the arbitration proceedings. Claimant No. 1 (AIG) exclusively exercises all voting rights in respect of Class A shares of AIG Silk Road Fund Ltd (the Fund), a Bermuda based company, the latter is owned by AIG Silk Road Investors Inc., a Delaware company. AIG controls Silk Road Investors Inc. (a US Company) with respect to the Fund: see Claimants‟ Exhibits 83 and 84.
3Claimants‟ Exhibit Nos. 83, 84 and 85 in the arbitration proceedings.
4Claimants‟ Exhibit No. 83 in the arbitration proceedings.
5Claimants‟ Exhibit No. 84 in the arbitration proceedings.
6Claimants‟ Exhibit No. 88 in the arbitration proceedings: Certificate of Incorporation on Change of Name of AIG Global Securities Landing Ltd Bermuda to Kazakhstan Housing Ltd and Share Registry showing 100% ownership by AIG Silk Road Fund Ltd.
7According to the evidence the Fund‟s total investment in the project would have been approximately USD 16.3 million – Scott Foushee, Transcripts of the oral hearing, Day One, pages 34 and 37.
8Under contract No. 0159-12-1999 dated December 13, 1999, Claimants‟ Exhibit No. 3 – Claimant No. 2 as investor contracted to make investments as specified in paragraph 3.1 in accordance with the work programme agreed with the Agency of the Republic of Kazakhstan of Investment. Under paragraph 3.1 the object of the investment activity was the construction of a residential complex which would include investment in fixed assets to the tune of approximately USD 15,876,000.00.
9Claimants‟ Exhibit Nos. 90 and 83 in the arbitration proceedings.
10Claimants‟ Exhibit No. 18 in the arbitration proceedings.
11Claimants‟ Exhibit Nos. 20 and 12 in the arbitration proceedings.
12Claimants‟ Exhibit No. 12 in the arbitration proceedings.
13Claimants‟ Exhibit No. 21 in the arbitration proceedings.
14Claimants‟ Exhibit No. 23 in the arbitration proceedings.
15Claimants‟ Exhibit No. 3 in the arbitration proceedings.
16Claimants‟ Exhibit No. 4 in the arbitration proceedings.
17This contract is exhibited by the Claimants as part of Exhibit No. 39 in the arbitration proceedings – and is also expressly mentioned in the Appraisal Report filed by the Claimants‟ Exhibit 14 (AIG Silk Road Capital Management Report, TEMA Residential Development dated December 8, 1998): it is stated in the opening paragraph of this report: “The AIG Silk Road Fund is considering an investment of USD 7 million in Tema Housing, an 81 unit western standard quality residential compound in Almaty . . . The development will be implemented in three phases over a period of two and a half years, with the first phase expected to require $9.3 million in total investment.” The contract (dated January 27, 2000) is also mentioned in the Release of Claims document between the Joint Venture and Construction Co. dated June 16, 2000: Claimants‟ Exhibit No. 27 in the arbitration proceedings.
18Page 5 – Request for Arbitration – In the Claimants‟ Memorial filed on February 15, 2002, it was stated: On February 18, 2000, Mr Serik Tulbassov, a principal in Tema and the General Director of the Joint Venture, received a telephone call from the Chairman of the Oblast Land Committee, Mr Nauryzbay Taubaev, asking that a billboard advertising the Crystal Air Village Project be removed from the Project Property. The reason given by Mr Nauryzbay Taubaev for this request was that the Oblast Administration was concerned that the advertising of expensive villas might cause discontent among low-income residents of Almaty. No mention was made of cancelling the Project.
19In the Claimants‟ Memorial it is stated: On February 26, however, the Chairman of the Oblast Architecture Committee, Mr Sairan Fazylov told Mr Tulbassov that the Oblast Administration had decided to take the Project Property for use as an arboretum, and that construction on the Property should cease immediately.
20Claimants‟ Exhibit No. 5 in the arbitration proceedings.
21Claimants‟ Exhibit No. 6 in the arbitration proceedings.
22Claimants‟ Exhibit No. 7 in the arbitration proceedings.
23Claimants‟ Exhibit No. 8 in the arbitration proceedings.
24Claimants‟ Exhibit No. 9 in the arbitration proceedings.
25In the Claimants‟ Memorial filed on February 15, 2002, it was stated: On May 15, 2000, they attempted to resume construction and began grading the site. Oblast representatives, accompanied by Almaty police, immediately appeared and expelled the Joint Venture‟s contractor from the Project Property. At this point, it had become clear that the Government‟s interference with the Claimants‟ right to build and operate the Project had reached the point where that right had become useless. Accordingly, the Joint Venture and its general contractor, TISV, agreed that a situation of force majeure had arisen. On June 16, 2000, the Joint Venture and TISV implemented the force majeure provisions of the general construction contract by executing a mutual release of claims (Release of Claims dated June 16, 2000, Claimants‟ Exhibit 27).
26Claimants‟ Exhibit No. 30 in the arbitration proceedings – videotape and script.
27This is necessary in view of the Objection to Jurisdiction raised by the Respondent – as to the constitution of the Tribunal.
28Rule 2 Method of Constituting the Tribunal in the Absence of Previous Agreement
(1) If the parties, at the time of the registration of the request for arbitration, have not agreed upon the number of arbitrators and the method of their appointment, they shall, unless they agree otherwise, follow the following procedure: (a) the requesting party shall, within 10 days after the registration of the request, propose to the other party the appointment of a sole arbitrator or of a specified uneven number of arbitrators and specify the method proposed for their appointment.

29Article 37 Constitution of the Tribunal
(1) The Arbitral Tribunal (hereinafter called the Tribunal) shall be constituted as soon as possible after registration of a request pursuant to Article 36.
(2) (a) The Tribunal shall consist of a sole arbitrator or any uneven number of arbitrators appointed as the parties shall agree.
(b) Where the parties do not agree upon the number of arbitrators and the method of their appointment, the Tribunal shall consist of three arbitrators, one arbitrator appointed by each party and the third, who shall be the president of the Tribunal, appointed by agreement of the patties.

30Rule 2(3)
At any time 60 days after the registration of the request, if no agreement on another procedure is reached, either party may inform the Secretary-General that it chooses the formula provided for in Article 37(2)(b) of the Convention. The Secretary-General shall thereupon promptly inform the other party that the Tribunal is to be constituted in accordance with that Article.
Rule 3 Appointment of Arbitrators to a Tribunal Constituted in Accordance with Convention Article 37(2)(b)
(1) If the Tribunal is to be constituted in accordance with Article 37(2)(b) of the Convention:
(a) either party shall in a communication to the other party:
(i) name two persons, identifying one of them, who shall not have the same nationality as nor be a national of either party, as the arbitrator appointed by it, and the other as the arbitrator proposed to be the President of the Tribunal; and
(ii) invite the other party to concur in the appointment of the arbitrator proposed to be the President of the Tribunal and to appoint another arbitrator;
(b) promptly upon receipt of this communication the other party shall, in its reply:
(i) name a person as the arbitrator appointed by it, who shall not have the same nationality as nor be a national of either party; and
(ii) concur in the appointment of the arbitrator proposed to be the President of the Tribunal or name another person as the arbitrator proposed to be President;
(c) promptly upon receipt of the reply containing such a proposal, the initiating party shall notify the other party whether it concurs in the appointment of the arbitrator proposed by that party to be the President of the Tribunal.

31Rule 3 Appointment of Arbitrators to a Tribunal Constituted in Accordance with Convention Article 37(2)(b)
(1) If the Tribunal is to be constituted in accordance with Article 37(2)(b) of the Convention:
(a) either party shall in a communication to the other party;
(i) name two persons, identifying one of them, who shall not have the same nationality as nor be a national of either party, as the arbitrator appointed by it, and the other as the arbitrator proposed to be the President of the Tribunal; and
(ii) invite the other party to concur in the appointment of the arbitrator proposed to be the President of the Tribunal and to appoint another arbitrator.
(b) promptly upon receipt of this communication the other party shall, in its reply:
(i) name a person as the arbitrator appointed by it, who shall not have the same nationality as nor be a national of either party; and
(ii) concur in the appointment of the arbitrator proposed to be the President of the Tribunal or name another person as the arbitrator proposed to be President; (c) promptly upon receipt of the reply containing such a proposal, the initiating party shall notify the other party whether it concurs in the appointment of the arbitrator proposed by that party to be the President of the Tribunal.
(2) The communication provided for in this Rule shall be made or promptly confirmed in writing and shall either be transmitted through the Secretary-General or directly [to] the parties with a copy to the Secretary-General.

32Article 38 of the Convention reads as follows:
If the Tribunal shall not have been constituted within 90 days after notice of registration of the request has been dispatched by the Secretary-General in accordance with paragraph (3) of Article 36, or such other period as the parties may agree, the Chairman shall, at the request of either party and after consulting both parties as far as possible, appoint the arbitrator or arbitrators not yet appointed. Arbitrators appointed by the Chairman pursuant to this Article shall not be nationals of the Contracting State whose national is a party to the dispute.

33Rule 4 Appointment of Arbitrators by the Chairman of the Administrative Council
(1) If the Tribunal is not constituted within 90 days after the dispatch by the Secretary-General of the notice of registration, or such other period as the parties may agree, either party may, through the Secretary-General, address to the Chairman of the Administrative Council a request in writing to appoint the arbitrator or arbitrators not yet appointed and to designate an arbitrator to be the President of the Tribunal.
(2) The provision of paragraph (1) shall apply mutatis mutandis in the event that the parties have agreed that the arbitrators shall elect the President of the Tribunal and they fail to do so.
(3) The Secretary-General shall forthwith send a copy of the request to the other party.
(4) The Chairman shall, with due regard to Articles 38 and 40(1) of the Convention, and after consulting both parties as far as possible, comply with that request within 30 days after its receipt.
(5) The Secretary-General shall promptly notify the parties of any appointment or designation made by the Chairman.

34Rule 6 Constitution of the Tribunal
(1) The Tribunal shall he deemed to be constituted and the proceeding to have begun on the date the Secretary- General notifies the parties that all the arbitrators have accepted their appointment.

35Rule 13 Sessions of the Tribunal
(1) The Tribunal shall hold its first session within 60 days after its constitution or such other period as the parties may agree. The dates of that session shall be fixed by the President of the Tribunal after consultation with its members and the Secretary-General. If upon its constitution the Tribunal has no President because the parties have agreed that the President shall be elected by its members, the Secretary-General shall fix the dates of that session. In both cases, the parties shall be consulted as far as possible.

36In response to Mr John Barnum‟s letter of July 31, 2002 the Deputy Secretary-General of the Centre by his letter dated August 7, 2002 stated:
We in the ICSID Secretariat are satisfied that the request for arbitration and our subsequent commutations [sic] regarding [these] proceedings were all notified to the Republic of Kazakhstan in full conformity with our Rules.
(Copy of the letter was forwarded by the Centre to the Claimants (Claimants‟ Exhibit No. 94 in the Arbitration proceedings).)

37Rule 41(3)
Upon the formal raising of an objection relating to the dispute, the proceedings on the merits shall be suspended. The President of the Tribunal, after consultation with its other members, shall fix a time limit within which the parties may file observations on the objection.

38 The Tribunal notes without comment the subsequent plea on this aspect of jurisdiction as recorded in the Posthearing brief of the Respondent (filed on October 18, 2002) which reads as follows:
With all due respect and admiration for the competence and open mindedness with which all the members of this Tribunal have addressed the witnesses and issues before them, in the event of an award to Claimants of more than Claimants‟ legitimate pre-”expropriation” expenses and other damages for delaying the Project. Respondent must reserve its rights first to ask ICSID to review the procedure followed in naming this Tribunal pursuant to ICSID Convention Article 52(1)(a) and then, if necessary, to oppose any effort by Claimants to enforce the award.

39See pages 13–14 of the Transcript of Day Three of the oral hearings in London: It is well settled that as a matter of international law the principal organ for regular conduct of interaction between States is the Ministry of Foreign Affairs. The Head of this Ministry is the Minister of Foreign Affairs, who directs the foreign affairs of the State. (See Oppenheim on International Law (Peace) 9th edition Vol. 1 para. 459 pp. 1045–6.) The Claimants have filed along with their Post-Hearing Memorial (as part of Claimants‟ Exhibit 130) copy of a regulation of the Ministry of Foreign Affairs of the Republic of Kazakhstan approved by Government Resolution No. 1578 “Issues of the Ministry of Foreign Affairs of Republic of Kazakhstan” adopted on October 21, 1999 which states that the Ministry of Foreign Affairs shall perform the following functions viz. representation of the Republic of Kazakhstan in dealings with foreign States and international organizations. It also provides that the Ministry of Foreign Affairs shall have the right to act as a party in civil-legal relations on behalf of the State.
40In addition to the above, it must also be noted that even if as contended by the Respondent, Regulation 33 was applicable to arbitral proceedings (where the Contracting State is a party) the Respondent would appear to have waived its right to object: Rule 27 of the Rules of Procedure for Arbitration Proceedings (Arbitration Rules) – adopted by Administrative Council under Article 6(b) of the Convention – specifically provides for this:
Rule 27 reads:
Rule 27 Waiver
A party which knows or should have known that a provision of the Administrative and Financial Regulations, of these Rules, of any other rules or agreement applicable to the proceeding, or of an order of the Tribunal has not been complied with and which fails to state promptly its objections thereto, shall be deemed – subject to Article 45 of the Convention – to have waived its right to object. (Emphasis is supplied.)
However no arguments were addressed by the parties as to the application of Rule 27 of the Arbitration Rules and accordingly the Arbitral Tribunal makes no finding as to this.

41It was later extended by Order dated August 19, 2002.

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