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”).
(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.
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 an
(b) “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”).
(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.
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.
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.
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.
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.
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.
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.
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.
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 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.
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.
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.
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”.
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.
(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”).
(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.
The Respondent withdraws its objections to ICSID jurisdiction on the ground that the Republic is not responsible under the Treaty for the acts of the Almaty Oblast Akim. Respondent also withdraws its objection on the ground that this dispute can only be adjudicated by the courts of Kazakhstan.
Respondent renews, however, its objection to ICSID jurisdiction on the ground that neither of these Claimants has standing to invoke the US–Kazakhstan Investment Treaty.
1. For purposes of this Article, an investment dispute is a dispute between a Party and a national or company of the other Party arising out of or relating to (a) an investment agreement between that Party and such national or company; (b) an investment authorisation granted by that Party‟s foreign investment authority to such national or company; or (c) an alleged breach of any right conferred or created by the Treaty with respect to an investment.
2. In the event of an investment dispute, the parties to the dispute should initially seek a resolution through consultation and negotiation. If the dispute cannot be settled amicably, the national or company concerned may choose to submit the dispute for resolution: (a) to the courts or administrative tribunals of the Party that is a party to the dispute; or
(b) in accordance with any applicable, previously agreed dispute-settlement procedures: or
(c) in accordance with the terms of paragraph 3. 3. (a) Provided that the national or company concerned has not submitted the dispute for resolution under paragraph 2(a) or (b) and that six months have elapsed from the date on which the dispute arose, the national or company concerned may choose to consent in writing to the submission of the dispute for settlement by binding arbitration: (i) to the International Centre for the Settlement of Investment Disputes (“Centre”) established by the Convention on the Settlement of Investment Disputes between States and Nationals of other States, done at Washington, March 18, 1965 (“ICSID Convention”), provided that the Party is a party to such Convention; or
(ii) to the Additional Facility of the Centre, if the Centre is not available; or
(iii) in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL); or
(iv) to any other arbitration institution, or in accordance with any other arbitration rules, as may be mutually agreed between the parties lo the dispute (b) Once the national or company concerned has so consented, either party to the dispute may initiate arbitration in accordance with the choice so specified in the consent. 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”).
(1)
That the Claimants‟ case for invoking ICSID jurisdiction is the BIT that allows a US private party to invoke ICSID jurisdiction in the event that it has a dispute with the Republic of Kazakhstan concerning an investment that the US party made in Kazakhstan. To qualify for Treaty jurisdiction, the investor must be “owned or controlled directly or indirectly” by a US entity.
(2)
That the investment here was the Crystal Air housing project (the Project) owned 100% by the Claimant CJSC Tema (the Joint Venture). CJSC Tema (the Joint Venture) itself is a Kazakhstani joint stock company, but it could assert Treaty jurisdiction as a US entity if it were owned or controlled by a US entity. (Reference is made to Articles I(1)(b) and (2). III and VI(1) of the Treaty.)
(3)
That CJSC Tema (the Joint Venture) is owned 34% by another Kazakhstani company, LLP Tema, which could not have given CJSC Tema any right to assert Treaty jurisdiction. The only other owner or shareholder of CJSC Tema (66% owner) is a Bermuda company, AIG Silk Road Fund, Ltd (“the Fund”).
(4)
That the Fund itself does not have any right to assert Treaty jurisdiction and cannot give CJSC Tema US entity status because it is not a US entity itself.
(5)
That the question whether CJSC Tema (Claimant No. 2) was owned or controlled indirectly by the other Claimant (Claimant No. 1) – “admittedly a US entity” (sic) – and whether such indirect ownership or control gave the Claimants standing, must be answered in the negative because:
(a)
the indirect owners of CJSC Tema are, in order of magnitude of their ownership interest, LLP Tema (34%), the EBRD (European Bank for Reconstruction and Development 20% of “the Fund‟s” 66%), various US corporate investors that are not seeking to invoke Treaty jurisdiction (even if they could), and finally Claimant No. 1 AIG Capital Partners, Inc., which it is alleged owns only 5% of the Fund‟s 66% or 3.3%. Such limited AIG ownership cannot be sufficient to confer US status on CJSC Tema on the basis of US ownership, or confer Treaty standing on AIG (Claimant No. 1) itself;
(b)
there is no indirect control of AIG (Claimant No. 1) because, according to the record in this case, CJSC Tema is controlled by AIG Silk Road Investments I, Ltd, a Bermuda company that owns 66% of the common stock of, and has voting control of, CJSC Tema (Claimants‟ Exhibit 90).50 This Bermuda company is allegedly “controlled” by the Fund, but in fact it is managed by a third Bermuda company, AIG Silk Road Capital Management, Ltd (Claimants‟ Exhibit 87).51 The latter‟s management services include “the sourcing, analysis, structuring, and closing of investments, as well as active management of the investments after closing”. So day-to-day “control” of both the Fund and CJSC Tema is in the hands of “another third-country entity”.
(6)
That Claimant No. 1 AIG is indirectly a very minor shareholder of the third country investor, the Fund – five or even fifteen percent does not give AIG (Claimant No. 1) or its US parents, status of an “investor”; “the cases which are legion hold that such a minority ownership does not confer the right to invoke ICSID jurisdiction unless there is an express right in the treaty for related entities from third countries – which of course is not the case here”.
(7)
That the present case illustrates why there is good reason to exclude third country entities from Treaty rights and to reject AIG‟s claim of jurisdiction in this case. If Kazakhstan purposely limited Treaty jurisdiction to genuine US investors, why should it allow an investor wholly owned by a Kazakhstani and third-country interests to qualify as a US investor?
(8)
That the tenuous and distant relationship between Claimant AIG Capital Partners, Inc. and Claimant CJSC Tema, plus the small fraction of its indirect share in CJSC Tema, bars AIG Capital Partners (Claimant No. 1) from qualifying as a legitimate claimant under the BIT.
(1) That AIG Capital Partners, Inc. (“AIG”) is a US corporation organized and existing under the laws of Delaware, a political subdivision of the United States (as evidenced by Claimants‟ Exhibit No. 81); and is owned 100 per cent by AIG International Group Inc. (the holding company – a corporation organized and existing under the laws of Delaware, a US entity (as evidenced by Claimants‟ Exhibit No. 83)).
(2) That AIG SRI (i.e., AIG Silk Road Investors Inc., a US Company) owns the majority of the shareholders‟ voting rights in the Bermuda based Company AIG Silk Road Fund, Limited (the “Fund”) (as evidenced by Claimants‟ Exhibit Nos. 84–5). The Fund has three classes of shareholders, and AIG SRI owns 100 per cent of the Class A shares in the Fund, the remaining shareholders in Class B and C having no right to individually exercise voting rights in respect of Class B and Class C shares (as evidenced by Claimants‟ Exhibit No. 84).
(3) The entire voting power and voting rights of the Fund [are] vested “solely and exclusively” in the holders of Class-A common shares (bylaw 54(2)), i.e., in AIG Silk Road Investors Inc. the US Company (Claimants‟ Exhibit No. 84). Under the amended and restated bylaws of AIG Silk Road Fund Ltd, effective as of June 12, 1999 (Claimants‟ Exhibit No. 85), the purpose and nature of business conducted and promoted by the Fund is to seek long term capital appreciation through investments in portfolio companies and the term of the company (the Fund) is to be eight years. The Board of Directors of the Fund is to consist of not less than five directors – and holders of Class-A common shares are entitled to elect the Chairman and the Deputy Chairman and all but two of the directors (bylaw No. 16). The Investment Committee of the Board is to have six members or such higher number as may be approved by the Board – and the Chairman of the Board is entitled to appoint five out of six members of the investment committee: each member of the investment committee is to hold office until death, resignation or removal (bylaw 32). The Investment Committee is responsible for making all investment decisions relating to acquisition, management and disposition of the Fund‟s investments.
(4) That AIG Silk Road Investors Inc. (AIG SRI), a US Corporation, is in turn owned ninety-five per cent (95%) by National Union Fire Insurance Co. of Pittsburgh (“National” a US Corporation) and five per cent (5%) by AIG Capital Partners Inc. (“AIG” Claimant No. 1) (as evidenced by Claimants‟ Exhibit No. 82) – that both National and AIG (Claimant No. 1) are wholly owned subsidiaries of American International Group Inc. US (as evidenced by Claimants‟ Exhibit No. 83).
(5) “National” (the US Corporation) had agreed by memorandum dated September 29, 1997 (part of Claimants‟ Exhibit No. 83) that AIG (Claimant No. 1) shall exclusively exercise all voting rights in respect of Class A shares (owned by AIG Silk Road Investors Inc. US, and held in AIG Silk Road Fund Ltd); AIG (Claimant No. 1) thus controls AIG SRI with respect to the Fund (as also evidenced by Claimants‟ Exhibit No. 83).
(6) AIG (Claimant No. 1) indirectly controls the Fund, having the power to appoint the Chairman of the Board of the Fund and three of the five directors of the Fund (under the Fund‟s bylaws – Claimants‟ Exhibit No. 85). It has in fact done so (the Board‟s decisions are determined by a majority vote). The Board has delegated all decisions relating to the acquisition and disposition of investments to the Investment Committee (as evidenced by Claimants‟ Exhibit No. 85). Because AIG (Claimant No. 1) controls exclusively all voting rights in respect of Class A shares, it has also the power to appoint and has appointed five of the six Investment Committee members (as evidenced by Claimants‟ Exhibit No. 85).
(7) That AIG Silk Road Capital Management, Ltd (a Bermuda company), which is 100 per cent owned by AIG SRI (AIG Silk Road Investors Inc., USA), provides management services to the Fund through a Management Agreement (as evidenced by Claimants‟ Exhibit Nos. 86 and 87). These management services include the sourcing, analysis, structuring, and closing of investments, as well as active management of the investments after closing.
(8) That the Fund directly controls AIG Silk Road Investment I Limited (“the Investment Company”) and Kazakhstan Housing Limited (“the Financing Company”), companies organized under the laws of Bermuda (Claimants‟ Exhibit Nos. 88 and 89). The Investment Company and the Financing Company are 100 per cent owned by the Fund (as evidenced by Claimants‟ Exhibit Nos. 88 and 89); and the Fund is indirectly controlled by AIG (Claimant No. 1).
(9) That the Investment Company (AIG Silk Road Investment I Ltd) controls the Joint Venture (Claimant No. 2), and the Financing Company (Kazakhstan Housing Ltd) has provided finance for the Project to the Joint Venture (Claimant No. 2). The Investment Company entered into the Investment Agreement providing for the joint venture with LLP Tema (a Kazakhstan company owned and controlled by Kazakhstani principals), in CJPC Tema Real Estate Company (a Kazakhstan Company) (the “Joint Venture”) (as evidenced by Claimants‟ Exhibit No. 90). The Investment Company (AIG Silk Road Investors I Ltd) owns 66 per cent of the common shares and 100 per cent of the preferred shares in the Joint Venture, and exercises voting control of the Joint Venture and appoints a majority of the Board of Directors in the Joint Venture (as evidenced by Claimants‟ Exhibit No. 90) – this Investment Company is a wholly owned subsidiary of the Fund. The remaining 34 per cent of the Shares of the Joint Venture (Claimant No. 2) is owned by LLP Tema (a Kazakhstan Company). Pursuant to the terms of a Bridge Loan Agreement (Claimants‟ Exhibit No. 35A), the Fund lent LLP Tema funds to purchase the Project Property. Pursuant to an Assignment and Assumption Agreement (Claimants‟ Exhibit No. 35G), LLP Tema assigned the Bridge Loan to the Joint Venture. Pursuant to a Loan Agreement (established by Claimants‟ Exhibit No. 91) and an Assignment Agreement (Claimants‟ Exhibit No. 35D), the Financing Company (Kazakhstan Housing Ltd – a wholly owned subsidiary of the Fund) (as evidenced by Claimants‟ Exhibit No. 88) took over the loan made by the Fund; and agreed to lend the Joint Venture further sums for the Project.
(10) In sum, AIG (Claimant No. 1) through its control of AIG SRI, the Fund and its subsidiaries, controls the Joint Venture (Claimant No. 2), the vehicle through which AIG‟s investment was committed and made.
(i)
That AIG (American Insurance Group) Inc. – a US Company – is a large Insurance and Financial Services Company founded in 1919 in Shanghai China and has over $500 billion in assets.
(ii)
That AIG Capital Partners (Claimant No. 1) is a wholly owned subsidiary of American International Group Inc., US.
(iii)
That AIG Capital Partners (Claimant No. l) has 100% voting control of AIG Silk Road Investors Inc., a US Company, which, in turn, controls the Fund (the AIG Silk Road Fund Ltd) which, in turn, controls the Joint Venture (Claimant No. 2) and that AIG Silk Road Capital Management Ltd is the investment manager of AIG Silk Road Fund Ltd.
(iv)
That AIG Silk Road Investors Inc., a US company, controls the Fund through control of the Class A Common Shares. The Class A Common Shares appoint the majority of the Board of Directors and appoint the majority of members of the Investment Committee which is the primary investment decision-making body within the Fund.
(a)
AIG Silk Road Investment I Ltd (a Bermuda Company) is the equity vehicle, and has 66% ownership of the Joint Venture. It has also voting control and right to appoint the majority of the Board; the remaining 34% of the Joint Venture is owned by LLP Tema (the Kazakhstan Company)
(b)
Kazakhstan Housing Ltd (a Bermuda Company), which is a vehicle by which debt-financing is provided to the Joint Venture which is also a wholly-owned subsidiary of the Fund which is controlled by Claimant No. 1.
AIG Capital Partners is one of the Claimants and it has voting control of AIG Silk Road Investors which, in turn, controls the fund which, in turn, controls the joint venture.
Perhaps I will take just a couple of minutes and go through some of the details of this. AIG Silk Road Investors controls the fund through a control of the class A common shares. According to the bylaws of the fund, the class A common shares appointed the majority of the Board of directors, they employ the majority of the Investment Committee which is the primary investment decision-making body within the fund. It is the group of people which approve all investments and all sales of investments, and it also has most of the major corporate governance rights according to the bylaws of the fund.
Moving back up stream, AIG Capital Partners has 100% voting control of AIG Silk Road Investors although some of the funding for AIG Silk Road Investors comes from another wholly owned subsidiary of AIG, but that is a very typical arrangement by which AIG injects its funding into these private equity funds.
Moving below the fund level, we move to the second exhibit here.
Q. This is the second chart that has been distributed?
A. Where the fund itself, the AIG Silk Road Fund, has two wholly owned subsidiaries which effectively control the joint venture. One of these is referred to as AIG Silk Road Investments I which is the equity vehicle. It has 66% ownership of the joint venture, it has voting control and it has the right to appoint the majority of the Board.
The other entity is Kazakhstan Housing Limited, which is a vehicle by which debt financing is provided to the joint venture, and that is also a wholly owned subsidiary fund.
That is the basic chain of control.
He was then asked:
Q. So is it your testimony that AIG Capital Partners (Claimant No. 1) controls the Joint Venture (Claimant No. 2) through these relationships?
And he gave the following answer: “That is correct.”52
(1)
The assertion of the Respondents that to qualify for Treaty jurisdiction the investor must be owned or controlled directly or indirectly by a US entity is another way of asserting that under the Treaty the investment must be owned or controlled directly or indirectly by nationals or companies of the other Party. “Controlled . . . indirectly” is not defined in the BIT – and the interpretation of that expression must be governed by its ordinary legal meaning. In Black‟s Law Dictionary, 6th Edn, page 329, the word “control” (as a noun) is defined as:
Power or authority to manage, direct, superintend, restrict, regulate, govern, administer or oversee. The ability to exercise a restraining or directing influence over something;
And as a verb the word “control” is defined as:
to exercise restraining or directing influence over; to regulate; restrain; dominate; curb; . . . Govern.
The legal meaning of the word “indirect” is (Black‟s Law Dictionary, 6th Edn at page 773):
not direct in relation or connection . . . ; not related in the natural way. Circuitous, not leading to aim or result by plainest course or method or obvious means, roundabout . . . Almost always used in law in opposition to “direct”.
The upshot of all this in the context of the Treaty definition of “investment” is that investments originating from US companies and routed through a chain of other companies (whether US or non US based) would be “indirectly controlled” by “companies of the other parties” (i.e., companies established in the USA) and hence protected by the Treaty. The Law in Kazakhstan also recognizes and treats investment “with respect to which foreign investors are entitled to determine decisions being made” by legal entities established in Kazakhstan as “foreign investments”. Admittedly, and there is no dispute about this, Claimant No. 1 is a company established and incorporated in the USA and therefore entitled to invoke the Treaty.
The “investment” in the project in Kazakhstan was to be made by AIG Silk Road Fund Ltd (the Fund)53 – a Bermuda based company – through its wholly owned subsidiary AIG Silk Road Investment I Ltd (also a Bermuda based company – Investment Company);54 the Investment Company having a 66 per cent ownership, voting control and Board majority in Claimant No. 2. It has been established that the fund (AIG Silk Road Fund Ltd) was in turn controlled by AIG Silk Road Investors Inc., which owned the entire Class A common shares of the Fund (which carried 100 per cent voting rights); the entire voting power and voting rights of the Fund were vested (under the Bylaws of the Fund)55 “solely and exclusively in the holders of Class A common shares” – the other class of shares (Class B and Class C) having no individual voting rights. And by virtue of Claimants‟ Exhibit No. 83 AIG Capital Partners (Claimant No. 1) was entitled “exclusively” to exercise all voting rights in respect of Class A shares in the Fund. Thus the chain of control of investments effectuated through the Fund and the Joint Venture has been established: by documentary and oral evidence.
(2)
The next contention of the Respondent that the investment viz. the Crystal Air Housing Project was owned 100 per cent by Claimant No. 2 Tema (the Joint Venture), which could assert Treaty jurisdiction “as a US entity if it were owned and controlled by a US entity”, is refuted by the evidence oral and documentary on record which has established that Claimant No. 2 was controlled indirectly by a US entity viz. Claimant No. 1.
(3)
The next contention – that CJSC Tema is owned 34 per cent by another Kazakhstan company LLP Tema which could not have any right to assert Treaty jurisdiction – is factually correct; the further narration that the other owner of Claimant No. 2 is a Bermuda company viz. AIG Silk Road Fund Ltd (the Fund) is also correct; and the plea that the Fund itself does not have any right to assert Treaty jurisdiction, as it is not a US entity itself, cannot also be disputed: but as explained above, the chain of control did not stop at the Fund but extended to US based corporations where the investments originated. The further contention that the invocation of Treaty jurisdiction under Kazakhstan law on foreign investments (Claimants‟ Exhibit No. 2) was initially asserted by the Fund as an investor (as established by Claimants‟ Exhibit No. 101 – the Notice of Investment Dispute dated July 7, 2000): and that the notice of investment dispute was given by the AIG Silk Road Fund Ltd, because it was “the investor”, is correct: it was in fact an approved investor under the Agreement dated April 10, 1999 (Claimants‟ Exhibit No. 90) with the Kazakhstan Investment Agency.
But in the Notice of Investment Dispute (Claimants‟ Exhibit No. 101) the chain of control is indicated and mentioned in the following words:
AIG Silk Road Fund is a private equity fund established in 1997 by American International Group Inc. (“AIG”) to make equity investments in projects throughout Central Asia and the Caucasus. AIG is one of the world‟s largest financial services companies with assets of over $260 billion and operations in more than one hundred thirty countries. The Fund‟s investors include the European Bank for Reconstruction and Development, AIG, and major strategic and financial investors with an interest in the region. In December 1998, the Fund approved an Investment in the establishment of a 75-unit Western-style residential compound in Almaty with a total projected Investment of $18 million, called Crystal Air Village (the “Project”). The Fund designed the Project to be the premier Western residential housing complex in Kazakhstan. The Fund, to implement this investment, entered into a joint venture with a leading real estate development firm, LLP Tema, whose principals are generally recognized as the premier real estate developers in the region. The joint venture company, JSC Tema Real Estate Company (the “Joint Venture”), was the vehicle through which the Fund would construct the Project and market the residential units.
The investment made and to be made by the Fund and through the Joint Venture (as established by oral and documentary evidence on record) was controlled indirectly by AIG (Claimant No. 1) and therefore the investment is one which is protected by the BIT.
(4)
The further contention that the day to day control of the Fund and the Joint Venture is of “another third country entity” is an argument based on an erroneous hypothesis and unsupported by evidence. It is said that AIG Silk Road Investments Ltd (which owns 66 per cent of the stocks and voting control of the Joint Venture), though controlled by the Fund (AIG Silk Road Fund Ltd), is in fact managed “by the third Bermuda company AIG Silk Road Capital Management Company” – reference is then made to Claimants‟ Exhibit No. 87, which is the Management Agreement between AIG Silk Road Capital Management Ltd and AIG Silk Road Fund Ltd (the Fund).
But as already mentioned above the AIG Silk Road Capital Management Ltd (Bermuda based) is wholly owned by AIG Silk Road Investors Inc. (US)56 through which the chain of control emanating from Claimant No. 1 has already been established.
Claimants‟ Exhibit No. 86 shows that 100 per cent of the shares of the Bermuda based AIG Silk Road Capital Management Ltd is owned by AIG Silk Road Investors Inc. (admittedly a US Company); and AIG Silk Road Investors Inc. US is ultimately controlled 100 per cent by Claimant No. 1, (Claimants‟ Exhibit No. 83); through exclusive control of voting rights in the Fund.
(5)
The assertion of the Respondent that Claimant No. 1 – “admittedly a US entity” – had only a minimal indirect ownership or control of Claimant No. 2 – “5 per cent of the Fund‟s 66 per cent or 3.3 per cent”, which was insufficient to confer US status on Claimant No. 1, is also devoid of merit. Though AIG Silk Road Investors Inc. (a US company) is owned 95 per cent by National Union Fire Insurance Company, Pittsburgh (also a US Company) and 5 per cent by AIG Capital Partners Inc. (Claimant No. 1) (Claimants‟ Exhibit No. 82) it has already been established by documentary evidence (1) that National Union Fire Insurance Company, of Pittsburgh and AIG Capital Partners Inc. (Claimant No. 1) are both wholly owned subsidiaries of the American International Group Inc., the holding company of Claimant No. 1 (Claimants‟ Exhibit No. 83) (2) and that by a memorandum of September 29, 1997, National Union Fire Insurance Company of Pittsburgh had agreed that AIG Capital Partners (Claimant No. 1) shall exclusively exercise all voting rights in respect of the Class-A shares of AIG Silk Road Fund Ltd (the Fund) owned by AIG Silk Road Investors Inc. US (part of Claimants‟ Exhibit No. 83). Although Claimant No. 1 had a minimal ownership shareholding (5%) in AIG Silk Road Investors Inc. the exclusive voting control of the entire Class A Shares of the Fund (AIG Silk Road Fund Ltd) was vested in Claimant No. 1 by virtue of the memorandum of agreement dated September 29, 1997 (part of Claimants‟ Exhibit No. 83).
(6)
The assertion that Kazakhstan purposely limited Treaty Jurisdiction to “genuine US Investors” and there was no reason why it would allow an investor wholly owned by Kazakhstani and third country interest to qualify as a US investor, is a tenuous plea, and the further plea that the relationship between Claimant No. 1 and Claimant No. 2 barred Claimant No. 1 from qualifying as a legitimate Claimant under the US–Kazakhstan Treaty “to protect US investments” is again only a rhetorical plea devoid of merit. All the funds invested and to be invested in the Project were routed through the AIG Silk Road Fund Ltd (Bermuda) as evidenced by the documents – Claimants‟ Exhibit No. 35 through 80.57 AIG Silk Road Fund Ltd (Bermuda) is owned by AIG Silk Road Investors Inc. US, and AIG Silk Road Investors Inc. US is controlled solely and exclusively by the Claimant No. 1 – all voting rights in respect of Class A common Shares in the Fund being exclusively vested in and exercised by Claimant No. 1 – the Fund – through which investments were made via Claimant No. 2 – was thus entirely operated, managed and controlled by Claimant No. 1 (Claimants‟ Exhibit No. 85).
(a)
that the dispute must be a legal dispute arising directly out of an investment;
(b)
that the dispute must be between a Contracting State and a national of another Contracting State; and
(c)
that the parties must have consented in writing to submit their dispute to the jurisdiction of the Centre.
(i)
The Claimants have alleged that the Respondent has expropriated their investment in Kazakhstan in violation of the Bilateral Treaty between the United States of America and the Republic of Kazakhstan concerning the Reciprocal Encouragement and Protection of Investment (“the Treaty”); allegations to be dealt with on the merits – if proved, they have raised a legal dispute arising directly out of an investment.
(ii)
The Republic of Kazakhstan is a “Contracting State” within the meaning of Article 25(1) of the ICSID Convention, the Republic of Kazakhstan having ratified the Convention on September 21, 2000. The Claimants are nationals of “another Contracting State” because:
(a)
The United States is “another Contracting State”, it having ratified the ICSID Convention on June 10, 1996.
(b)
Claimant No. 1, a US based company, is a national of the United States because it was constituted under the laws of the United States and is domiciled there under 9 USC (s) 202.58
(c)
Claimant No. 2 (the Joint Venture), although it was constituted under the laws of Kazakhstan and domiciled there, is “a national of another Contracting State” for purposes of this arbitration, because of “foreign control” (it is indirectly owned and controlled by US companies) and the Parties have agreed (under the BIT) – Article VI(8) – to treat such a Joint Venture as a national of another Contracting State for the purposes of the Convention: Article 25(2)(b).
(iii)
The Republic of Kazakhstan has already consented in writing to submit the parties‟ dispute to the jurisdiction of the Centre by virtue of Article VI(4) of the BIT, which provides that “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 ...” The Claimants‟ written consent to submit the parties‟ dispute to the jurisdiction of the Centre is evidenced by Claimants‟ Exhibit No. 10.
(1)
that they owned or controlled directly or indirectly an investment in the territory of Kazakhstan as envisaged in Article I(1)(a); and
(2)
that the investment was expropriated directly or indirectly through measures tantamount to expropriation.
(1)
That AIG Silk Road Fund Ltd‟s (the Fund‟s) Investment Committee approved an initial investment of USD 7 million in the Crystal Air Village Project in Almaty, Kazakhstan in December 1998 – corroborated by the Appraisal Report dated December 8, 1998 (Claimants‟ Exhibit No. 14). The Fund‟s total investment in the Project “would have been approximately USD 16.3 million” (according to the oral evidence of Mr Scott Foushee: see transcript of oral hearing, Day One, pp. 34, 37). Mr. Foushee also stated that the fund Sources of this investment were to be 7 million US Dollars from AIG; 500,000 US Dollars of hard cash investment from Tema (Claimant No. 2); in addition to their 1.2 million US Dollars of collateral. We would have been seeking 2.4 million US Dollars in a combination of bank financing and pre-rental revenues. Then finally 6.4 million US Dollars would have been re-invested cash flows from the first and second phases into the succeeding phases. (emphases added) (Transcripts of the oral hearing, Day One, p. 37)
(2)
That the Fund‟s investment in the Crystal Air Village Project (“the Project”), including its investment in the Joint Venture, was controlled by AIG Capital Partners Inc., US Company (Claimant No. 1): oral evidence of Mr Scott Foushee, transcripts of the oral hearing August 28, 2002, pp. 23–4; corroborated by documentary evidence – Claimants‟ Exhibit Nos. 81 to 91 (which establish the chain of control):
(a)
Claimants' Exhibit No. 81
Certificate of Incorporation for AIG Capital Partners, Inc. (US) - Claimant No. 1: that it continues to have a legal corporate existence as of April 20, 2001
(b)
Claimants' Exhibit No. 84
Certificate of Incorporation and Share Register (dated September 1997) for AIG Silk Road Fund, Limited (Bermuda) - "the Fund" - and Subscription Agreement dated September 25, 1997 showing ownership of all Class A Common Shares by AIG Silk Road Investors, Inc. (US)
(c)
Claimants' Exhibit No. 85
Amended and Restated Bylaws of AIG Silk Road Fund Limited - effective as of June 12, 1998 - under these Bylaws:
(1) The entire voting power and all voting rights (in AIG Silk Road Fund Ltd) is vested solely and exclusively in the holders of record of Common Shares (Bylaw 54(2)).
(2) The Board of AIG Silk Road Fund shall consist of not less than 5 Directors. The holders of Class A Common Shares shall be entitled to elect the Chairman and Deputy Chairman and all but two of the Directors (Bylaw 16).
(3) The Investment Committee of the Board responsible for making all investment decisions shall have 6 members and the Chairman of the Board shall be entitled to appoint 5 members to the Investment Committee. Each member of the Investment Committee shall hold office until death, resignation or remov[al]. Any member of the Investment Committee may be removed by the Chairman (Bylaw 32).
(d)
Claimants' Exhibit No. 82
Secretary's Certificate dated August 9, 2002 of Ownership of Shares of AIG Silk Road Investors, Inc. (US) - SRI by National Union Fire Ins. Co. of Pittsburgh (US) - 95% and AIG Capital Partners, Inc. (US) - 5%.
(e)
Claimants' Exhibit No. 83
Control of AIG Silk Road Investors Inc. (US) - SRI by AIG Capital Partners Inc. (Claimant No. 1) is proved by letter dated August 15, 2002 from AIG Capital Partners Inc. New York to the National Union Fire Ins. Co. of Pittsburgh New York (and confirmed by the latter) to the following effect viz.:
(i) that each of the companies, National Union and AIGCP, are wholly owned subsidiaries of American International Group, Inc.62
(ii) that as contemplated in a memorandum sent by Thomas Haughey on September 29, 1997 (attached as Exhibit A), National Union had agreed that AIGCP shall exclusively exercise all voting rights in respect of the Class A shares of AIG Silk Road Fund, Limited (the "Fund") owned by SRI.
(iii) that AIGCP (Claimant No. 1) controls SRI with respect to the Fund.
(f)
Claimants' Exhibit No. 86
Secretary's Certificate dated August 9, 2002 and Share Register of AIG Silk Road Capital Management, Ltd (Bermuda) showing ownership of 100% of shares by AIG Silk Road Investors, Inc.
(g)
Claimants' Exhibit No. 87 Fund Management Agreement between AIG Silk Road Capital Management, Ltd (Fund Manager) and AIG Silk Road Fund Ltd (the Fund) dated September 25, 1997:
(i) Subject to the supervision of the Investment Committee the Fund Manager agrees to provide Fund Managing Services to the Fund.
(ii) Managing Director of the Fund is Mr L. Scott Foushee.
(h)
Claimants' Exhibit No. 88
Certificate of Incorporation on Change of Name of Kazakhstan Housing, Ltd (Bermuda) - Share Registry showing 100% ownership by AIG Silk Road Fund, Limited, and Share Transfer Form, dated February 10, 1999.
(i)
Claimants' Exhibit No. 89
Certificate of Incorporation of AIG Silk Road Investment I, Ltd (Bermuda) and Share Register showing 100% ownership by AIG Silk Road Fund, Limited (December 18, 1999).
(j)
Claimants' Exhibit No. 90
Investment Agreement between AIG Silk Road Investment I, Ltd. LLP Tema, Serik Tulbassov, Serzhan Zhumashev and CJSC Tema Real Estate Company, dated 10 April 1999, with annexes: recites that the Joint Venture Claimant No. 2 has been caused to be registered on the basis of the Foundation Agreement dated February 16, 1999 (part of Exhibit No. 90) under which AIG Silk Road Investment I Ltd would purchase 66% of shares of the Joint Venture (Claimant No. 2).
(k)
Claimants' Exhibit No. 91
Example of Share Certificate of CJSC Tema Real Estate Company held by AIG Silk Road Investment I, Ltd.
(3)
That on December 18, 1998, LLP Tema (34% owner of Joint Venture Claimant No. 2), using a 62 bridge loan from the AIG Silk Road Fund (the Fund), purchased the Project Property at Ahmaty suburb from LLP Talap (a limited liability partnership) for a price of USD 1.5 million.
(Evidence of Mr Scott Foushee – transcripts of the oral hearing. Day One, at p. 35, corroborated by Claimants‟ Exhibit 18): the Land Purchase Contract dated December 18, 1998 (Claimants‟ Exhibit No. 18) stated that the land plot (the Project Property) would contain not less than 10 hectares and would be used for purpose of building residential units.
(4)
On December 23, 1998, the Karasai District Land Resources Management Committee issued an Act of Ownership confirming Tema‟s ownership of the Project Property (area: 10 hectares) and stating that the designated use of the Property was “constructing and servicing a property – a residential compound” (Claimants‟ Exhibit No. 19).
(5)
An Investment Agreement (as between the investors) was entered into on April 10, 1999, between AIG Silk Road Investors I Ltd and LLP Tema (along with two individual citizens of the Republic of Kazakhstan) and the Joint Venture Company (Claimant No. 2) represented by its Chairman L. Scott Foushee (Claimants‟ Exhibit No. 90). This investment agreement recited that the parties had caused the Joint Venture (Claimant No. 2) to be registered on the basis of the Foundation Agreement dated February 16, 1999, under which AIG Silk Road Investment Ltd would purchase 66 per cent of the registered shares of the Joint Venture (Claimant No. 2) – LLP Tema the other shareholder of Claimant No. 2 holding 34 per cent. It was recorded in this Investment Agreement that the company (i.e., Joint Venture – Claimant No. 2) would directly or indirectly through one or more subsidiaries undertake and implement the project (i.e., residential real estate project) described in Annexure I which contemplated a construction of 81 units (later reduced to 76 units) within a housing development in a three-phased development plan.
(6)
On the same day – April 10, 1999 – LLP Tema transferred the Project Property to the Joint Venture for a price of USD 1.5 million – the same price that LLP Tema had paid LLP Talap for the property in December 1998 (see Claimants‟ Exhibit No. 20): this is also corroborated by Claimants‟ Exhibit No. 35, an invoice showing payment of USD 1.5 million to LLP Talap by LLP Tema from the Fund emanating from AIG Silk Road Fund Ltd.
(7)
On May 10, 1999, the Akim of the Almaty Oblast, Mr Zamenbek Nurkadilov, having considered the application of the Joint Venture, signed a decree (Claimants‟ Exhibit No. 21) authorizing the Joint Venture to carry out the Crystal Air Project on the land plot with total area of 10 hectares (Claimants‟ Exhibit No. 21); this particular land plot had been allocated in accordance with Decision No. 2-4 of the Akim of Almaty Oblast dated February 18, 1999 (Claimants‟ Exhibit No. 145).
(8)
On May 13, 1999, the Karasai District Land Resources Management Committee issued an Act of Ownership in favour of the Joint Venture (Claimant No. 2) which earmarked the Project Property (land plot of 10 hectares) for construction and servicing of a housing complex (Claimants‟ Exhibit No. 12).
(9)
On December 3, 1999, the Joint Venture‟s design contractor, TISV, completed the detailed design for the project, including full application drawings upon which the construction contract was then tendered: the Joint Venture paid TISV USD 325,000 for this design as evidenced by Claimants‟ Exhibit No. 38.
(10)
That on December 13, 1999, a contract (on the provision of incentives on and State support [of] investment activities in the Republic of Kazakhstan) was entered into by and between the Agency of the Republic of Kazakhstan for Investment (the Agency) represented by the Chairman of the Agency of the Republic of Kazakhstan for Investment and the Joint Venture – viz. Claimant No. 2 – as “approved investor”. The object of the Investment Activity was stated to be the construction of a residential complex. It was provided in this contract – contract No. 0159-12-99 – that unless otherwise stipulated by International Treaty signed by the Republic of Kazakhstan, the laws of the Republic of Kazakhstan shall apply to the contract and other agreement[s] signed on the basis of this contract. The contract provided that the “approved investor” would conduct its investment activity in accordance with the work programme agreed with the Agency (Claimants‟ Exhibit No. 3).
The Work Programme (attachment 1 to Contract No. 0159-12-1999 dated December 13, 1999) identifies the plot on which the investment project is to be constructed – “construction of Crystal Air Residential Compound in Almaty suburb”.
(11)
That on January 18, 2000, after receiving bids from six companies in a competitive tender, the Claimants selected TISV as the general contractor for the Project based on the application design which was the final design provided to the Claimants by TISV. As required by the tender, each cost item was priced according to the scope of work described in the application design, and was based on TISV‟s record of completing premium quality construction within the budget and within the time period allotted. On January 27, 2000, the Joint Venture and TISV signed a Turnkey Contract for USD 7.29 million (inclusive of VAT) for the construction of the first phase of the project (Claimants‟ Exhibit No. 39 contains this contract) – evidence to corroborate this was given during the oral hearing on August 28, 2002 by Mr M. Kasher Senior Associate of Claimant No. 1 and Investment officer in AIG Silk Road Fund Ltd (transcripts of the oral hearing, Day One, at pp. 128 and 130).
The evidence of Mr Mark Kasher establishes the source and extent of the expenses actually incurred in designing and implementing the Project before the Government ordered the Joint Venture to permanently halt construction. The expenses together with all the relevant receipts (proved by Claimants‟ Exhibits No. 35 through Exhibit 79) aggregated in all to USD 3,563,294.29 – which funds were wire transferred through the AIG Silk Road Fund Ltd, Bermuda.63
(12)
That on January 26, 2000, the State Architecture and Construction Inspectorate for the Almaty Oblast after making an assessment of the project (Act No. 7-19/99 dated October 14, 1999) issued a Permit authorizing the Joint Venture to begin construction „“at the residential complex CRYSTAL AIR” (Claimants‟ Exhibit No. 23).
(13)
According to the uncontradicted testimony of Mr Foushee and Mr Evseev (Claimants‟ witnesses), by mid-February of 2000, the Joint Venture had completed certain infrastructure work on the Project Property, including installation of water lines, electrical cabling and a temporary fence, and its contractor (TISV) had mobilized its construction crew on the site to commence general construction of the Project. (See Evidence of Mr Scott Foushee, transcripts of the oral hearing, Day One, at p. 93 and Evidence of Mr Boris Evseev, at p. 164 and p. 169.)
(a)
That on February 18, 2000, the Joint Venture received an oral request (telephone call) from the Chairman of the Oblast Land Committee. Mr Nauryzbay Taubaev, to the effect that a billboard which had been put up three months back advertising the Crystal Air Village Project be removed from the Project Property. Mr Taubaev said that the billboard was offensive to low-income residents of Almaty who could not afford the advertised project. Accordingly, the Joint Venture removed the billboard, “for fear of the billboard being taken down forcibly and damaged”: evidence of Boris Evseev, Country Director of AIG Silk Road Capital Management Ltd, given at the oral hearing, Day One, at page 165.67
This part of the evidence was not contradicted by the Respondent; Mr N. Taubaev Chairman of the Oblast Land Committee did not attend the hearings or give any oral evidence on behalf of the Respondent. His absence is the more significant since Mr Nurkadilov (at the relevant time the Akim of Almaty Oblast) who did give evidence for the Respondent deposed that the Land Committee did not have information and was not aware of “the fact” that according to the general plan of the City the land which was given to Talap to build the residential compound was to be developed as a green area for Almaty and the Land Committee made a “mistake” when it gave its consent: “According to that same general plan, they were supposed to develop a Green Area for Almaty. The Land Committee did not have the information or it was not aware of this . . . “ (Oral Evidence of Mr Nurkadilov – transcripts of the oral hearing, Day Two, pages 144–5): there is no independent evidence to corroborate this assertion viz. that the Land Committee made a mistake and/or was unaware of building construction being not permitted on the Project Site Property, and the person who could have deposed to this as a fact was Mr N. Taubaev, Chairman of the Oblast Land Committee, whose non-availability to give evidence for the Respondent is neither explained nor accounted for.
(b)
That on February 26, 2000, the Joint Venture received a telephone call from the Chairman of the Oblast Architectural Committee, Mr Sairan Fazylov, who said that the Joint Venture must stop construction of the Crystal Air Village project because the Project Property was to be taken for use “as an arboretum”. After the Joint Venture was told to stop construction Mr Nurkadilov, Akim of Almaty Oblast, was contacted and he confirmed this (evidence of Mr Boris Evseev – transcripts of the oral hearing, August 28, 2002, pages 166–8).68 Mr Boris Evseev was then asked:
Q. And did you stop construction?
A. Yes, we had to comply with the order. The people who ordered the Joint Venture to stop construction were the same people who had issued prior approvals and construction apartments [sic], so we had to comply and complied with this order, and halted construction on the Project Property.
(Evidence of Mr Boris Evseev on August 28, pp. 166–8.)
(c)
That in response to the telephone calls from Mr Taubaev and Mr Fazylov, the Claimants requested a meeting with Mr Nurkadilov, the Akim of the Almaty Oblast. (See Evidence of Boris Evseev, transcripts of the oral hearing, August 28, p. 169.) Mr Fazylov, Chairman of the Oblast Architectural Committee did not give oral evidence nor is the telephone call of February 26, 2000 – deposed to by Boris Evseev – denied.
(d)
That the Claimants‟ representatives met with Mr Nurkadilov on 2 March 2000. At this meeting, Mr Nurkadilov confirmed to the Claimants that their property was being taken for use as an arboretum and that they must therefore stop construction of the Crystal Air Village Project. (Evidence of Boris Evseev, transcripts of oral hearing, August 28, pp. 169–70.)
(e)
That following the meeting with Mr Nurkadilov, the Claimants “strongly persuaded for nearly four months” (i.e., persuaded governmental authorities) to reverse the Government‟s decision to cancel the Crystal Air Village Project.69 The Claimants even sought and obtained the intervention of US Ambassador to Kazakhstan, Richard Jones. The Claimants and Ambassador Jones both wrote to President Nazarbayev‟s advisor, Mr Bolat Utemuratov, seeking to have Mr Nurkadilov‟s decision to cancel the Project overturned.70 The Claimants also met repeatedly with Mr Dulat Kuanyshev, the Chairman of the Agency for Investment, which represents the Republic of Kazakhstan in its dealing with foreign investors. At the Claimants‟ request Mr Kuanyshev wrote Mr Nurkadilov warning him of the legal implications of his decision to cancel the Project and asking for an explanation of that decision. The letter is on record – Claimants‟ Exhibit No. 6 – March 2, 2000.71 The Claimants also met with the Mayor of the City of Almaty, Mr Victor Khrapunov, because they were told that their property was being transferred to the City and it was the City that would build the arboretum. (Evidence of Mr Boris Evseev, transcripts of the oral hearing, August 28, at pp. 174–81.) By letter dated March 21, 2000, Mr Scott Foushee, a Managing Director of Claimant No. 1 and the Managing Director of Claimant No. 2, wrote the Advisor to the President of Kazakhstan informing him of the Akim‟s intimation to confiscate the Project Property in order to construct a National Arboretum (a copy of this was forwarded to the Prime Minister of Kazakhstan): this document is also on record (Claimants‟ Exhibit No. 25).
(f)
That on April 6, 2000, the Architecture and Construction Department of the City of Almaty issued a Resolution ordering the Joint Venture to suspend all works of construction of the Project (Claimants‟ Exhibit No. 95).
(g)
That on May 15, 2000, when the Joint Venture attempted to resume construction on the Project Property, the City authorities, accompanied by police, expelled the Joint Venture‟s contractor from the site. (Evidence of Mr Boris Evseev, transcripts of oral hearing, Day One, pp. 186–7) – Material part of his evidence reads as follows:
Q. After meeting with the city Akim, did you try to recommence the construction at the site?
A. Yes, we did. There was a period of time after that meeting when, despite the communications that we have received from the city and the Oblast prior to that, nothing happened. The authorities did not actually move in and start construction of the arboretum on that site.
We were about three months late in to the construction season and our crew was still in a stand by mode, so in mid May we decided to recommence construction.
We sent a contractor with some equipment to the site, with a bulldozer.
Q. What happened when you did that?
A. Shortly after our contractor showed up at the site, the representatives of the city authorities appeared on the property, accompanied by the police, and expelled our contractor from the site.
Q. What do you mean when you say “expelled”?
A. They requested that the contractor leave the property, leave the land and suggested that they would apply physical force if the contractor did not apply.
Q. When you say “apply physical force” what are we talking about?
A. The representatives that were on the property were accompanied by police, and the police is equipped with the necessary tools to apply physical force. The contractor would be forcibly expelled.
Q. Were you physically present when this took place?
A. No, I was not.
Q. How do you know it took place?
A. The contractor contacted me and said that indeed took place.
Q. As of May 15 or thereabouts therefore you had been prevented from constructing on the property. So what did you next do?
A. At that point, it had become clear to us that we would not be allowed to continue with the project. We consulted with AIG Capital Partners in New York, myself, Mr Foushee and others, and made a decision that the project had been essentially cancelled and that we could no longer continue with it. We had to mitigate our damages.
(h)
That the Fund‟s Investment Committee decided not to proceed further with the Project, to mitigate their mounting losses, and to release the construction contractor. Accordingly, the Joint Venture invoked force majeure, and terminated the construction contract on June 16, 2000, paying $182,000 in furtherance of a mutual release of claims. (Oral evidence of [Mr] Scott Foushee, transcripts of oral hearing, August 28, 2002, pp. 112–15.) Evidence of Mr Boris Evseev, August 28, 2002, p. 188:
Q. When you say “mitigating” your damage, what do you mean?
A. It means reducing our losses as a result of this.
Q. What did you do?
A. Specifically, first, we invoked the force majeure provision in our construction contract, and both the joint venture and the contractor decided that performance was no longer possible under the contract. The contract was therefore terminated and the joint venture paid compensation to the contractor for the costs involved. Second, we, being the joint venture management, terminated most of the staff of the joint venture, most of the eleven people, reducing our costs, operating costs, therefore.
We also tried to sell some of the project property. We were not successful in doing that, but electrical cables, water pipes, simply, there was no demand for those assets because they were configured for this larger project that was not going to happen.
All this is further corroborated by Claimants‟ Exhibit No. 27, a letter dated June 16, 2000 from Boris Evseev (for and on behalf of Claimant No. 2) to the Contractor (TUNA):
As you are aware, Closed Joint Stock Company Tema Real Estate Company (“TREC”) having entered into that Contract for Works of Civil Engineering Construction with Tuna Insaat Sanayi ve Ticaret Ltd, St. (“TUNA”) dated January 27, 2000 (the “Contract”), as Employer under the Contract, has been unable to continue with construction of the project as contemplated in the Contract due to the Government of Kazakhstan‟s apparent decision to use the site as part of a national arboretum. Although it remains possible that the project will continue in some form, the parties to the Contract have been blocked from making progress on the project in accordance with the Contract for over three months without any indication from the Government that it will permit the use of the site for the project.
In light of these intervening circumstances, the Parties agree that both are prevented and discharged from performing the Contract pursuant to Clauses 66.1 and 65.8 of the Contract. In satisfaction of all amounts due from TREC and TUNA pursuant to the Contract, as well as in satisfaction of losses, costs, and expenses incurred by TUNA as may be due under the Contract, TUNA has confirmed that its costs associated with performance of the Contract amount to $182,179 (the “Settlement Amount”) and TREC has agreed to pay such Settlement Amount in consideration for this release (the “Release”).
(i)
The Claimants treated the date of expropriation as June 16, 2000 and on July 17, 2000 a Notice of Investment Dispute was submitted by AIG Silk Road Fund72 pursuant to Article VI of the BIT and Article 27 of the Law of Kazakhstan on Foreign Investments dated December 27, 1994 (Claimants‟ Exhibit 101): further explained by oral evidence of Boris Evseev (transcripts of oral hearing, Day One, p. 190).
Q. Did yon reach a point in time when you decided to file a formal claim related to the taking of the property?
A. Yes. In the summer of 2000, on July 17, after a continuous series of attempts to bring this issue to a resolution through negotiations with the Government officials that were involved in this, we filed a Notice of Investment Dispute.
(j)
That on August 2, 2000, the Chairman of the Agency for Investment, Mr Dulat Kuanyshev,73 wrote to the First Deputy Prime Minister, Mr Alexander Pavlov, concerning the Notice of Investment Dispute filed by AIG Silk Road Fund, Ltd on July 17, 2000. In this letter, the Chairman stated:
An analysis of the notice submitted and the preceding correspondence points to violation of a series of legal procedures concerning the seizure of the land plot owned by CJSC Tema Real Estate Company.
Given all of the above, with the aim of preventing the dispute from going to international arbitration, which could prove very expensive for the government of the Republic of Kazakhstan, we think it acceptable to seek a path to constructively resolve this conflict in an out-of-court settlement. (Claimants‟ Exhibit 118)
(k)
That to consider the notice of Investment Dispute on September 2000, an ad hoc Working Group (Protocol of Inter-Ministry Working Group) was set up consisting of representatives of the Foreign Ministry, the Ministry of Finance, the Ministry of Justice, the Agency for Investment, the Almaty Oblast and the City of Almaty: these representatives concluded that the cancellation of the Project was “in violation of [applicable] legislation”. The Working Group recommended that the Akim‟s order to stop construction of the Project be invalidated and the Project Property be returned to the Joint Venture, or if this was not possible, that the Joint Venture be compensated for the taking of the Property. (Claimants‟ Exhibit 28) – the conclusion is reproduced verbatim below:
Having reviewed the available materials the Working Group considers that:
(1) the decision of the local executive body that impedes the implementation of construction by the investor was adopted in violation of the procedures established by the current legislation;74
(2) with view to avoid the involvement of the Government of the Republic of Kazakhstan in the litigation process in the framework of international arbitration, bearing of judicial costs by the state, lowering of the credit rating and deterioration of the investment image of the Republic of Kazakhstan and to reimburse the economic damages concerned with the compensation of the investor‟s expenses to recommend the following to the Government of the Republic of Kazakhstan:
1. In accordance with Article 16 of the Constitutional Law of the Republic of Kazakhstan “On the Government of the Republic of Kazakhstan”, for the Government of the Republic of Kazakhstan to cancel the decision of the local executive authority with regard to the land plot owned by Tema Real Estate Company.
2. In case it is impossible for the investor to maintain ownership of the land plot (10 hectares), for the Akim of the Almaty Oblast jointly with Tema Real Estate Company to coordinate a more precise amount of compensation in the order established by law.
The Minutes (of the Working Group September 5, 2000 – Exhibit No. 28) show that the Group consisted of the Director of the Department for Regulation of Investment Activity in priority sectors of the economy (Agency on Investment of the Republic of Kazakhstan) who chaired the Working Group, as well as eight other representatives75 from various departments of Government. The fate of this unanimous recommendation of the Working Group (recorded in Claimants‟ Exhibit No. 28) later endorsed by Mr Idrissov, Minister of Foreign Affairs in his letter dated March 13, 2001 to the Deputy Prime Minister, is not known: it was (apparently) not further pursued;76 the decision to cancel the project was at no time revoked nor were the Claimants informed of the same. On the contrary – on February 14, 2001, contractors for the City of Almaty, accompanied by police, began construction on the Project site, and expelled the Claimants‟ representatives from the site. (Claimants‟ Exhibit 30 and 128 – video tape and written transcript recording construction by Almaty Oblast‟s Contractors on the Project Property.)
The video tape shows a Site Visit by representatives of Claimants and their US attorney’s firm to the plot
It is in evidence that the Claimants received notification from their security guard at the Project Property on February 14, 2001 that a construction crew had entered upon the property accompanied by local militia and had started site work for the arboretum. The next day AIG personnel accompanied by lawyers from Coudert Brothers visited the Project Property to view and document the seizure of the land plot.77
(l)
That, inexplicably, and despite what was stated in the letter of Mr Idrissov (March 13, 2001) to the Deputy Prime Minister (Claimants‟ Exhibit 31) – recommending that the prior decision of the Local Executive Body which was “in breach of certain procedures” be cancelled78 – on April 2, 2001, transfer of Project Property from Almaty Oblast to City of Almaty was decreed (Claimants‟ Exhibit No. 13).
(m)
On April 2, 2001, a decree of the President of [the] Republic of Kazakhstan recorded:
DECREE OF THE PRESIDENT OF THE REPUBLIC OF KAZAKHSTAN
REGARDING DEMARCATION OF THE BOUNDARIES OF THE ALMATY CITY
In compliance with submission of the Government of the Republic of Kazakhstan prepared in accordance with Article 9 of the Law of the Republic of Kazakhstan “On Administrative– Territorial Structure of the Republic of Kazakhstan”, dated December 8, 1993 and considering the opinions of representative and executive bodies of the Almaty city and the Almaty oblast I hereby DECREE:
1. To demarcate the boundaries of the Almaty city and include certain part of lands of Karasai district of the Almaty oblast with the total area of 158. 4 [sic] hectares in the territory of the city.
2. This Decree shall become effective from the date of publication.
The President of the Republic of Kazakhstan N. Nazarbayev. Astana. April 2, 2001 No. 579
(n)
All this meant that the cancellation of the Project was irrevocably affirmed and the Project Property was transferred out of the jurisdiction of the Almaty Oblast to the City of Almaty.
(o)
The case suggested to the Claimants‟ witnesses on behalf of the Respondent, and also mentioned in the arguments of the Respondent, that the Akim Oblast had no authority at all to grant the construction permits on the Project Property or that there had been a mistake in granting them – because of some lack of authority – has not been established by reference to any law of Kazakhstan. On the contrary what is established on the evidence is that the cancellation of the construction permits and continuous course of impediments to the Project being proceeded with on the Project site, were contrary to procedures established by Kazakhstan law.
(a)
That it has been proved that the investment79 of the Claimants was expropriated, directly or indirectly through “measures tantamount to expropriation” (Article III( 1) of the BIT); the date of taking was treated according to the Claimants as June 16, 2001 [sic],80 shortly after the date on which the Claimants were physically and forcibly dispossessed from the project site (May 15, 2000) – making their ownership rights to the plot allocated practically useless. By May–June 2000 the practical and economic use of the Project Property by the Claimants was irretrievably lost – and could not thereafter be used for development purposes.
(b)
The later recommendation of the Working Group to revoke the “expropriation” (even though it was at a very belated stage) was never finally accepted by the Government: in any event the Claimants were never informed of the same, and
(c)
The Tribunal also holds that the expropriation of the Project Property was not in accordance with “procedures established by current (Kazakhstan) legislation” (as admitted in the Minutes of the Working Group September 5, 2000 – Claimants‟ Exhibit No. 28).81
The same is also acknowledged in the Post-Hearing Brief of the Respondent (filed on October 18, 2002) in which under the heading “Facts not contested by the Respondent” it is stated:
Respondent acknowledges that the Akim of Almaty Oblast did not follow Kazakhstani law when he stopped the Project and for six months prevented CJSC Tema (Claimant No. 2) from building the Project at the Site.82
On 26 February 2000, the Government verbally notified the Joint Venture that it had decided to cancel the Project for the purported reason that the Project Property was needed for a “national arboretum”. This notice was given despite the prior approval by governmental authorities of the land purchase, the zoning and the construction plan for the Project.
10.4.4 In the Request for Arbitration, the only mention of the President of Kazakhstan is in the context that the Project Property was located in one of the most exclusive residential areas of Almaty, “adjacent to the private residence of the president of the Republic of Kazakhstan” (page 3 of the Request for Arbitration). [The] verbal intimation to the Joint Venture that the Government had decided to cancel the project (February 26, 2000) was “for the purported reason that it was needed for a national arboretum”; this is further amplified by the statement (in the Request for Arbitration) that on March 2, 2000, the Representatives of the Fund and the Joint Venture met with the Akim of the Almaty Oblast, who said he had made a “mistake” [in] having the Oblast Administration permit the sale of the Project Property to the Joint Venture. There is no mention in the Request for Arbitration that it was at the express instance and request of the President of the Republic of Kazakhstan that the project was cancelled. In the Claimants‟ Memorial (page 22) it is once again mentioned that on February 26, the Chairman of the Oblast Architectural Committee (Mr Sairan Fazylov) stated that the Oblast Administration had decided to take the Project Property for use as an arboretum and that the construction on the property should cease. No mention of the President is made. It is however stated that the mistake of the Akim was that he had failed to obtain the permission of the President before authorizing commercial authorization of the project.84(a)
In his examination-in-chief Boris Evseev says that he learned from his meeting with the Akim of Almaty that the real reason why the billboard advertising the project had to be removed was:
we learnt that the real reason was that President Nazarbayev did not want the billboard to be there (transcripts of the oral hearing, page 165).
The witness does not say who told him this.
(b)
He went on to further depose in his examination-in-chief as follows:
Q. What did the Oblast Akim tell you when you met with him?
A. The Oblast Akim told us that, indeed, President Nazarbayev was opposed to the Project and that we had to stop construction. There was no choice otherwise.
He said that the Project property indeed would be taken and an arboretum would be constructed on it.
Q. Did he give you any hope that this decision was reversible?
A. No, he made it very clear that this was a final decision and there was nothing we could do about it (transcripts of oral hearing, Day One, pages 169–70).
(c)
Boris Evseev was asked about his conversation with US Ambassador Richard Jones, and he once again attempted to implicate the President (transcripts of oral hearing, Day One, page 178):
Q. Did the (US) Ambassador (Jones) investigate the situation any further?
A. Yes, he did. He later informed us that, based on his information, there had indeed been presidential interference into this project, and the reason was that the President did not want this development in the vicinity of his Almaty residence.
Boris Evseev then went on to state in cross-examination (transcripts of oral hearing, Day One, page 234): I was told by the officials that I mentioned, including Mr Nurkadilov, which was later supported by US Ambassador Jones that the President himself indeed interfered with this project and it did not appear as a reasonable proposition to us to go and seek presidential blessing for the new site (i.e., the alternative site).
This evidence is again unsubstantiated. Ambassador Jones did not give evidence and his only letter on record (Claimants‟ Exhibit No. 26) makes no mention of Presidential interference.
(d)
About the meeting with the Mayor of the City of Almaty, in April Boris Evseev deposes as follows (transcripts of oral hearing, Day One, page 180):
Q. Can you tell us what happened at that meeting?
A. Yes, Mr Khrapunov told us that the project property was indeed being taken by the Government and that we could not construct our project on it. He further told us that an arboretum and a golf course would be built on that land. He also suggested that the Oblast authorities had made a grave mistake in not consulting with President Nazarbayev when they issued for us with the permits to go ahead with the project (emphasis added).
He also issued what we interpreted as a thinly-veiled threat by invoking a prior example of dealing with a US Ambassador. He did not specify who it was but apparently the situation was when the city wanted the Embassy to move to another location and the Ambassador was reluctant to do that. Soon thereafter they found themselves without power and water. The message was very clear that “this is my City, I make the rules here. Don‟t mess with me.”
Again the alleged involvement of the President is unsubstantiated.
The [italicized] portion is not foreshadowed at any prior stage of documentation (nor mentioned or relied on in the written arguments of the Claimants).
Arbitrariness is not so much something opposed to a rule of law as something opposed to the rule of law. This idea was expressed by the Court in the Asylum case when it spoke of “arbitrary action” being “substituted for the rule of law” (Asylum Judgement ICJ Report 1950 p. 284). It is a wilful disregard of due process of law, an act which shocks or at least surprises a sense of juridical propriety (para. 128 at p. 76).
10.5.2 In the facts and circumstances of the case – particularly the events that occurred between February [and] May 2000 (already set out in detail – para. 10.3.2 above)89 – and in the light of the findings recorded in the Minutes of the high-powered Working Group (of September 5, 2000)90 to the effect that the decision of the local executive body impeding implementation of construction by the investor on the Project Property was adopted “in violation of the procedures established by the current legislation”, this Tribunal records a finding that the taking (by measures tantamount to expropriation) was arbitrary, in wilful disregard of due process of law and the series of acts from February 26, 2000 and culminating in the events of May 15, 2000 were shocking to “all sense of juridical propriety”.Then, on March 2, 2000, the Akim (governor) of the Almaty Oblast formally notified the Claimants that the authorization to construct the Project was being rescinded. The Akim said that he had “made a mistake” when he authorized construction on the Project Property, because he had failed to obtain prior authorization from the President, Nazarbayev. The Akim said that the Project Property and other contiguous property were to be used to create a public park adjacent to the President‟s home. In exchange for the Project Property, the Akim offered the Claimants an alternative but inferior site on which to build the Project. The Claimants explained that the Project Property was an integral part of the Project and that moving the Project to a different site would in effect involve a new and different project which would require new feasibility studies, re-design of the Project, a new construction contract and de novo approval of the Project by the Fund‟s Investment Committee. The Akim replied that construction of the Project on the Project Property was simply not an option.
The Respondent‟s Counter-Memorial does not dispute the fact that an alternative site was offered on March 2, 2001, orally by the Akim of the Almaty Oblast, and was not accepted by the Claimants. Apart from relying on Kazakhstan law about Claimants “not taking reasonable measures to mitigate losses” (reliance is placed on Article 364 of the Civil Code of the Republic of Kazakhstan), it is concluded that “Claimants have not made any serious or sufficient efforts to mitigate the alleged losses” and that the Claimants should be denied the compensation claimed.
So in other words, Kazakhstan offered an alternative site and we offered to undertake some of the expenses so that they would not be duplicated, and for reasons, that will [have] to be explained, at least to me, Claimants rejected that offer (emphasis supplied). (See transcripts of the oral hearing, Day One, page 13.)
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.
42Rule 41 Objections to Jurisdiction
(1) Any objection that the dispute or any ancillary claim is not within the jurisdiction of the Centre or, for other reasons, is not within the competence of the Tribunal shall be made as early as possible. A party shall file the objection with the Secretary-General no later than the expiration of the time limit fixed for the filing of the Counter- Memorial, or, if the objection relates to an ancillary clam, for the filing of the rejoinder – unless the facts on which the objection is based are unknown to the party at that time.
(2) The Tribunal may on its own initiative consider, at any stage of the proceeding, whether the dispute or any ancillary claim before it is within the jurisdiction of the Centre and within its own competence.
(3) Upon the formal raising of an objection relating to the dispute, the proceeding 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.
(4) The Tribunal shall decide whether or not the further procedures relating to the objection shall be oral. It may deal with the objection as a preliminary question or join it to the merits of the dispute. If the Tribunal overrules the objection or joins it to the merits, it shall once more fix time limits for the further procedures.
(5) If the Tribunal decides that the dispute is not within the jurisdiction of the Centre or not within its own competence, it shall render an award to that effect.
43See Respondent‟s Objections to Jurisdiction filed on July 31, 2002.
44According to the principle established in the decision of the International Court of Justice in the case of (Jamahiriya Libyan Arab Republic v. United States of America) paras. 37 and 42: issues of interpretation and application of the Montreal Convention of 1971 resulting from the Lockerbie air accident: cited in Antoine Goetz (ICSID case) mentioned below.
45ICSID case: Antoine Goetz or Republic of Burundi reported in ICCA Yearbook 2001 Vol. XXVI pp. 24–46 at p. 32 (footnote 17).
46Article XIII provides that the Treaty shall enter into force thirty days after the date of exchange of instruments of ratification (i.e., January 12, 1994) and shall remain in force for a period of ten years and shall continue in force unless terminated.
47Article I(1) of the BIT states that for the purposes of this Treaty:
(1) investment means every kind of investment in the territory of one party owned or controlled directly or indirectly by nationals or companies of the other party...
48The Fund, the Investment Company and the Finance Company were Bermuda based.
49The Joint Venture was a Kazakhstan Company having a 66% foreign ownership and control.
50Investment Agreement dated April 10, 1999, between AIG Silk Road Investment Ltd (Bermuda Company). TEMA, two individual citizens of Kazakhstan and the Joint Venture (Claimant No. 2).
51Fund Management Agreement dated September 25, 1997, between AIG Silk Road Capital Management Ltd (Bermuda Company) and AIG Silk Road Fund Ltd (Bermuda Company).
52Transcripts of the Oral hearing, Day One, pp. 22–4.
53Claimants‟ Exhibit No. 14 (Appraisal Report) in the arbitration proceedings.
54Claimants‟ Exhibit 89 in the arbitration proceedings.
55Claimants‟ Exhibit 85 in the arbitration proceedings.
56Claimants‟ Exhibit No. 86 in the arbitration proceedings.
57Exhibits 36 through 79 documents are vendor payments: with funds sourced through AIG. These aggregate to USD 3,563,294.29. Some payments were made directly by AIG Silk Road Fund, Limited and Kazakhstan Housing, Limited, and some were made directly by the Joint Venture. The Joint Venture received the funds from which it made the direct payments primarily from Kazakhstan Housing Limited pursuant to funding agreements. Exhibit 80 provides further backup documentation of payments made directly by the Joint Venture. It contains the wire transfer instructions for the draw down payments made to the Joint Venture by AIG Silk Road Fund, Limited and Kazakhstan Housing Limited pursuant to these funding agreements in the aggregate USD 944,356.08. The amount of these wire transfers includes the sum of USD 3,563,294.29.
58“A corporation is a citizen of the United Slates if it is incorporated or has its principal place of business in the United States.”
59Oppenheim: International Law 9th Edition Vol. II (Peace) – page 1204.
60Oppenheim‟s International Law 9th Edition Vol. II (Peace) pages 31 and 32 – para. 11.
61Contract No. 0159 12 99 is between the Agency of the Republic of Kazakhstan for investment (the Investment Agency) and CJSC Tema Real Estate Co. (the Joint Venture – Claimant No. 2) dated December 13, 1999.
62Holding Company of Claimant No. 1.
63The entire totality of wire transfers up to 2001 aggregating to USD 944,356.08 from AIG Silk Road Fund Ltd, and Kazakhstan Housing Ltd. to Claimant No. 2 include the sum of USD 3,563,294.29 (payments made to Vendor). See Claimants‟ Exhibit 80.
64See Oppenheim‟s International Law 9th Edition Vol. II – pp. 912–15 under the heading “Property of Aliens: Expropriation”:
Some states have regarded foreign investment capital used in the development of a state‟s natural resources as threatening that state‟s sovereignty over them, and have wanted to assert those sovereign rights as justifying the seizure without compensation of the foreign investments concerned. Nevertheless, a balance has to be struck between the legitimate interests of the territorial state and the need to protect from arbitrary action by that state those who provide the foreign capital, particularly since such capital is essential to the full development of the natural resources of many states and will not be forthcoming unless assured of reasonable protection.
65This concept of a “creeping expropriation” is best illustrated in the words of the Iran–US Tribunal in the Starrett Housing Corporation Case (Interlocutory Award dated December 19, 1983). The Tribunal (Judge [Lagergren], Mr [Kashani] and Judge Holtzmann) concluded in its Interlocutory Award as follows:
It is undisputed in this case that the Government of Iran did not issue any law or decree according to which the Zomorod Project or Shah Goli expressly was nationalized or expropriated. However, it is recognized in international law that measures taken by a State can interfere with property rights to such an extent that these rights are rendered so useless that they must be deemed to have been expropriated, even though the State does not purport to have expropriated them and the legal title to the property formally remains with the original owner . . . It has therefore been proved in the case that at least by the end of January 1980, the Government of Iran had interfered with the Claimants‟ property rights in the Project to an extent that rendered these rights so useless that they must be deemed to have been taken. (Reported in 4 Iran–US CTR 122(1983).)
66Article II(2)(b) read with Article III(1) of the BIT – relevant portion reads as under:
II(b) Neither Party shall in any way impair by arbitrary or discriminatory measures the management, operation, maintenance, use, enjoyment, acquisition, expansion, or disposal of investment . . .
III(1) Investments shall not be expropriated or nationalised either directly or indirectly through measures tantamount to expropriation or nationalisation (“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).
67He went on to say that “Later in our discussions – in our meeting with the Akim of the Almaty Oblast. Mr Nurkadilov, we learned that the real reason was that President Nazarbayev did not want the Billboard to be there.” Evidence of August 28, 2002, of Mr Boris Evseev, page 165.
68Mr Nurkadilov, Akim of Almaty Oblast, who gave evidence did not deny this.
69This was not disputed by the Respondent. In the opening statement of its Counsel at the oral hearing, it was stated: “. . . After the project property was taken which was in March 2000, Claimant persisted: they tried to get the decision reversed.” (Transcript – Day One page 14.) Besides, the evidence on record (documentary and oral) does establish that the Claimants made several efforts to reverse the Government‟s decision to cancel the Property viz: (i) The Claimants requested the Chairman of the Agency for Investment to intervene on their behalf (Claimants‟ Exhibit 5); (ii) The Claimants requested the United States Ambassador to Kazakhstan to intervene on their behalf and he did so (transcripts of oral hearing, Day 1, p. 177; Claimants‟ Exhibit 26); (iii) The Claimants wrote to Mr Bolat Utemuratov, Advisor to President Nazarbayev, asking that the decision to cancel the Project be reversed (Claimants‟ Exhibit 25); (iv) The Claimants met repeatedly with the Chairman of the Agency for Investment and representatives of the Almaty Oblast and Almaty City administrations seeking a reversal of the decision to cancel the Project (Testimony of Mr Evseev, transcripts of oral hearing, Day 1, p. 155; and Statement of Mr B. Evseev, pp. 3–4); (v) The Claimants attempted to resume construction on the Project Property in May 2000 when they were prevented from doing so by authorities of the City of Almaty, accompanied by police (transcripts of oral hearing, Day One, p. 186).
70Claimants‟ Exhibit No. 26 – letter dated March 24, 2000 from the US Ambassador Richard Jones to Mr Bolat Utemuratov.
71In reply (March 20, 2000) the Deputy Akim of Almaty informed Mr D. Kuanyshev, Chairman of the Investment Agency, that the Act of Ownership which had authorized construction of the Project was unacceptable and that the prior decision of the Akim (No. 5-142) as well as Ordinance of the Oblast Architectural and Construction Inspectorate authorizing the project were “deemed invalid”. This letter was communicated to the Claimant by the Chairman of the Agency for Investment (Evidence of Boris Evseev, transcripts of oral hearing, Day One, pages 175–6).
72The Notice of Investment Dispute was signed by L. Scott Foushee, Managing Director AIG Capital Partners as well as Managing Director AIG Silk Road Capital Management (which manage and control the AIG Silk Road Fund Ltd) – L. Scott Foushee was also a Director of Claimant No. 2.
73Mr Kuanyshev, Chairman of the Agency for Investments, was not called as a witness and gave no oral evidence.
74What were these procedures and how they were violated is not brought out in evidence - neither in the evidence in chief of the Respondent‟s witnesses nor in their cross-examination and questioning on behalf of the Claimants: neither the oral nor written arguments of either Party have addressed this question: it appears to have been accepted by the Respondent that the decision to cancel the project was in fact in violation of “the procedures established by current legislation”.
75Kaimsultanov Gabidin, Head of Construction Department of Almaty City Akim Office; Parsegove Boris Anatolievich, Deputy Director of Department of Legal Service, Agency on Investments of the Republic of Kazakhstan; Umbetalieva Dana Shekerbekovna, Head of Division of Department of Legal Provision and Work with Investor Applications, Agency on Investments of the Republic of Kazakhstan; Tashibayev Murat Seitzhanovich, Head of Administration of Department of International Economic Co-operation of the Ministry of Foreign Affairs of the Republic of Kazakhstan; Saparov Abai Esbolovich, Chairman of Almaty City Committee on Land Resources Management; Krasmik Victor Kondratievich, Deputy Chairman of Almaty Oblast Committee on Land Resources Management; Rakhimov Dauketkhan Zhanbatovich, Chief Specialist of the Land Use Department, Agency on Land Resources Management of the Republic of Kazakhstan; and Kasymbekova Aigerim Zhaksybayevna, Lead Specialist of the Legislative Department of the Ministry of Justice of the Republic of Kazakhstan.
None of the eleven persons mentioned in these Minutes gave evidence or denied the correctness of the contents recorded in the Minutes of September 5, 2000. In fact as stated in the oral evidence of Mr Idrisov (transcripts of oral hearing, Day Two – page 6) the findings and recommendations of this Working Group coincided with the findings recorded in Exhibit 31: Letter dated March 13, 2001, from Mr Idrissov, to the Deputy Prime Minister of the Republic of Kazakhstan.
76Exhibit 97–98, Respondent‟s Counsel (Mr Barnum) was asked by the Tribunal (during cross-examination of Boris Evseev) as to why the decision to revoke the cancellation was not pursued (Transcripts of the oral hearing, Day One, pages 256–7). There was no relevant response – either at that time or later during oral arguments or the Post-Hearing Brief filed on behalf of the Respondent.
77Relevant extract of transcript of the video-tape reads as follows:
Claimants‟ “Attorney representative”
Oleg Shvander: “Before going to court we‟d like to know on what basis the work is being conducted.”
The Contractor: “We are, let‟s say, the general contractor for the City.”
Oleg Shvander: “Has the City given you the assignment to do the construction?”
The Contractor: “Absolutely! [unclear]. I have a contract with City to build this park.”
Voice of Aliya
Suleymonova of Coudert: “Can we have a look at …”
The Contractor: “Yes, you can, but who are you? You understand, I don‟t like this … when somebody films sneakily … I speak to you openly…”
Then the Contractor says: “It is prohibited to be on the construction site.”
Side conversation as to videotaping.
The tape ends.
The tape, identified as Exhibit 30, was made by Yerken Kaliyev, video cameraman for AIG. The time stamp of “15.02.2001” is shown throughout the entire length of the tape.
78About this letter Mr Idrissov – who gave oral evidence on behalf of the Respondent (transcripts of oral hearing, Day Two, page 6) – deposed:
It clearly shows that the Government has tried looking into the matter and they have made their recommendations and I have informed the Deputy Prime Minister of those recommendations which were valid, and never changed.
Q. How is this letter related to the Claimants‟ Exhibit 28, the protocol of the working group, please?
A. There is a clear relation between both exhibits because it is clearly seen that the findings and recommendations of the working group almost completely coincide with the recommendations I have made in my letter.
79The quantum of investment expropriated will be dealt with when considering the claim for compensation.
80In the Claimant Post-hearing Memorial dated October 18, 2002 it is stated:
For purposes of estimating fair market value, the Claimants have taken mid-June of 2000, when the Claimants invoked force majeure under the construction contract, as the date of the taking because that is when it became apparent that the various measures taken by the government had become irreversible.
81The Ministry of Foreign Affairs of the Republic of Kazakhstan, having reviewed the Appeal of the US Ambassador Mr Richard Jones and the Investment Dispute Notice, informed the Deputy Prime Minister of the Republic of Kazakhstan that the Working Group had reviewed all available material and concluded that the earlier decision that had been made by the local executive body was in breach of “certain procedures established by existing legislature [sic]” and recommended that the Government of [the] Republic of Kazakhstan should cancel it. It appears from this letter (Claimants‟ Exhibit No. 31) that the Government of [the] Republic of Kazakhstan agreed with the opinion expressed by the Working Group and had instructed the Almaty Oblast to take all necessary steps to settle the issue and inform the Government of the Republic of Kazakhstan of the results thereof – but also further records that “the dispute has not been settled yet” (letter of Mr Idrissov dated March 13, 2001, to the Deputy Prime Minister – Claimants‟ Exhibit No. 31).
82Page 17, para. 30 B of the Post-Hearing Brief of the Respondent.
83(1) Claimants‟ Request of Arbitration dt. May 3, 2000 page 9: “On February 26, 2000, the Government verbally notified the Joint Venture that it had decided to cancel the Project for the purported reason that the Project Property was needed for a „national arboretum‟.”
(2) Claimants‟ Exhibit No. 25 letter of Mr Scott Foushee dt. March 21, 2000 to the Advisor to the President of Kazakhstan: “Late last month, we were notified by the Almaty Oblast Akim that our land, which had been purchased in full compliance with Kazakhstan Law, would be confiscated in order to construct a „National Arboretum‟ on it and surrounding property.”
(3) Claimants‟ Exhibit No. 30 Transcript of video tapes:
Oleg Shvander: “Has the City given you the assignment to do the construction?”
The Contractor: “Absolutely (unclear) I have a contract with city to build this park.”
(4) Evidence of Boris Evseev (Transcripts of the oral hearing, Day One. p. 184).
“(The arboretum) for the most part was completed. As you can see they are still building something there but the walkways are there, the trees have been planted [and] the irrigation system is there.”
(5) Evidence of Nurkadilov (Transcripts of the oral hearing. Day Two, at p. 154 – Mayor of Almaty):
“Every Saturday, the population of Almaty, including the children come to this arboretum and plant the trees there.”
(6) Evidence of Dolzhenkov (Transcripts of the oral hearing, Day Three, at page 54):
Q. The purpose of that transfer was so that the city could build the park?
A. We just gave the land, or transferred the land, to the city territory, both for the arboretum and the golf club, or golf course, together with all the land users documents.
84There is no law of Kazakhstan which is pointed out or relied on to show that the President‟s permission was needed.
85Oral evidence of Boris Evseev, Country Director AIG Silk Road Investment Ltd, given on August 28, 2002.
86As to the expropriation of the Claimants‟ investment:
On 18th February, 2000, the Joint Venture received a telephone call from the Chairman of the Oblast Land Committee. Mr Taubaev, asking that a billboard advertising the Crystal Air Village Project be removed from the Project Property. Mr Taubaev said that the billboard was offensive to low-income residents of Almaty. Accordingly, the Joint Venture removed the billboard. (Testimony of Mr Boris Evseev, ibid.. p. 165.) The Claimants‟ representatives met with Mr Nurkadilov on March 2, 2000. At this meeting, Mr Nurkadilov confirmed to the Claimants that their property was being taken for use as an arboretum and that they must therefore slop construction of the Crystal Air Village Project. (Ibid.. Testimony by Mr Boris Evseev pp. 169–70.)
87Oppenheim‟s International Law, 9th Edition Vol. 1 Peace pages 919–20.
88ICJ Rep. (1989) page 15 at pages 73 to 77.
89The last straw was when the Joint Venture (Claimants‟ Exhibit No. 2) attempted on May 15, 2000 to resume construction on the Project Property – the City authorities accompanied by the police expelled the Contractor from the project site: an event not disputed or contradicted by or on behalf of the Respondent State.
90Claimants‟ Exhibit No. 28 in the Arbitration proceedings.
91Request for Arbitration pages 9 and 10.
92See Transcripts of the oral hearing, Day 1, Mr Foushee pp. 53 to 63, Mr Boris Evseev pp. 170 to 178; Day 2 (August 29, 2002), Mr Z. Nurkadilov at pp. 145 to 155; Day 4 (August 31, 2002) at pp. 89 to 95 (Arguments).
9393 Vol. 106 ILR 50 (SPP(ME) Ltd v. Egypt) – Award of ICSID Arbitral Tribunal dated May 20, 1992, para. 630: the entire paragraph reads as follows:
72. Finally, as to the substitute site at the Sixth of October City, the Claimants‟ witnesses gave convincing testimony that the site was totally unsuitable for tourist development. In any event, it is clear that the Prices agreement provided for development of the Pyramids site, not a substitute site. The Claimants made a substantial investment pursuant to those agreements, and the investment was in effect expropriated as a result of the Respondent‟s cancellation of the Pyramids Oasis Project. Furthermore, the same commercial and financial considerations which suggest that financing could not have been raised for the Ras El Hekma site after the cancellation of the Pyramids Oasis Project apply to development at the Sixth of October City site. While the Claimants may have been under an obligation to mitigate the damages incurred as a result of the cancellation of the Pyramids Oasis Project, such an obligation is not so broad and all encompassing as to require the Claimants to accept an unsuitable alternative site that was never contemplated by the Parties‟ agreement.
94Honnold, J., Uniform Law for International Sales, cd., 1982, p. 418.
95Well Blowout Control Claim – UN Compensation Commission (Tribunal consisting of Allan Philip, Chairman; Bola A. Ajibola, and Antoine Antoun. Members) dated November 15, 1996 – reported in Vol. 109 International Law Reports 479 at pages 502–3 para. 54.
96Enclosure No. 3 to the Post Hearing Brief of the Respondent of 18-10-2002.
97Jamal v. Mulla Daud [1916] 1 AC 175 PC at page 129.
98In the case concerning the Gabčíkovo–Nagymaros Project (Hungary/Slovakia) – 1997 ICJ Reports page 7 at paras. 79 and 80 (page 55).
99The Soholt 1983 (1) Lloyds Reports 605 CA – also see Macgregor on Damages 16th Edition paragraphs 299–300.
100In the Claimants‟ Memorial (filed in February, 2002), the reason for selection of the Project site has been stated as follows:
In September of 1998, after carefully evaluating a number of potential sites, the Fund and Tema selected a 10 hectare site in the Karasai District of the Almaty Oblast as the location for the Project. The site was selected for a number of reasons. It was convenient to the City of Almaty; it was in a prestigious neighbourhood near the President‟s residence and a planned international school (a significant marketing benefit for the Project); it is a physically attractive site with good views of the mountains; and it was generally flat so it would have required very little grading. This site was certainly not the only site on which the Project could have been built, but it was the strongly preferred site. It was part of a 240 hectare tract that was being offered for sale by the Almaty Oblast. At the time, this property was zoned for agricultural use. The Oblast agreed to re-zone the site to allow construction of the Project in the event that the Fund and Tema elected to purchase it.
101Exhibit 4: Certificate of Registration of the Investment Agreement by the Investment Agency, dated 13 December 1999
Exhibit 11: Resolution No. 10-289 of the Akim of the Almaty Oblast, dated October 6, 1998
Exhibit 12: Act of Ownership No. 0025673, issued to CJSC Tema Real Estate Company (the “Joint Venture”) by Karasai District Land Resources Management Committee, dated May 13, 1999
Exhibit 21: Decision No. 5-142 of the Akim of the Almaty Oblast authorizing the Joint Venture to Construct the Project on the Project Property, dated May 10, 1999
Exhibit 23: Ordinance No. 23 of State Architecture and Construction Inspectorate for Almaty Oblast, dated January 26, 2000.
102The decisions to cancel the permit were reached by the local authorities in breach of Kazakhstan‟s laws and in fact it was so decided at the highest level after consideration of the recommendation of a high powered working group appointed by the Government for that purpose: it recommended to the Government of the Republic of Kazakhstan that the permit should be restored (Claimants‟ Exhibit 31) – the letter dated March 13, 2001 from Mr Erlan Idrissov, Minister of Foreign Affairs, to Deputy Prime Minister Mr Uraz Dzhandosov also recommended this to the Government.
103See the common law principles of “mitigation” as stated in Chitty on Contracts 28th Ed Vol. I pp. 1316 to 1325.
104Transcripts of oral hearing, Day Four, page 65.
105Vol. 106 ILR 501 – SPP(ME)Ltd. v. Egypt – Award of ICSID Arbitral Tribunal dated May 20, 1992.
106The reluctance on the part of the Claimants to accept the alternative site was summed up in the closing arguments of Mr Pietrowski:
Mr Pietrowski: So Mr Nurkadilov said that the guarantee, if these people went ahead and took the alternative site, and risked their money, they had his signature and he said he had never gone back on his signature and, as I said, that is just what he did. This is why we are here today: because Mr Nurkadilov went back on his signature…
I want to ask each one of you to imagine that you are the individual who is responsible for making the decision on this substitute site. You are the one who has to say: Yes. I accept it. I am going to accept it with all the economic risks I know are involved, or: No, I am just going lo reject it and find some place else. You are not just talking about your money; you are talking about the money of other people. You are talking about $18 million of other people‟s money, your investors‟ money.
I just put it to you: would you entrust that money to Mr Nurkadilov on his assurance that you can rely on his signature? That is exactly the position [that] Mr Foushee and the three other members of the Investment Committee faced in June 2000. That is what they were looking at.
You have seen what they had to deal with and I am not going to say any more on the subject. (Transcripts of oral hearing, Day Four, pages 13–14).
107The further evidence of Mr Nurkadilov, that the US Ambassador Jones actually approved of his offer to give alternative land (Transcripts of the oral hearing, Day Two, page 154) appears to be directly contrary to the documentary evidence placed on record and cannot be accepted.
108See the evidence of Boris Evseev, Country Director of AIG Silk Road Capital Management –
Q. What was your view of the alternative piece of land?
A. The alternative property was of a different configuration. I cannot say that it was materially inferior to the original plot of land that we had for the property, but our decision to terminate the project had little to do with the attributes of the alternative piece of land. The reason[s] to terminate the project were purely economic.
Transcripts of the oral hearing, Day One, pages 220-1.
109Transcripts of the oral hearing, Day One, page 5.
110Respondent Exhibit No. 11: Letter of Tulbassov to Nurkadilov Akim of Almaty Oblast dt. June 13, 2000 requesting permit to purchase the alternative site. Respondent Exhibit No. 12: Letter from Mr Scott Foushee to Mr Nurkadilov. Akim dt. June 12, 2000 rejecting the alternative site. Respondent Exhibit No. 13: Act of Determination of the Assessed Value of Land Parcel dt. September 8, 2000.
111Transcripts of the oral hearing, Day One, page 79:
The Chairman: Where is Mr Tulbassov?
Mr Barnum: He is not coming.
The Chairman: No, but where is he?
Mr Cahn: I do think we need to address this issue.
Mr Pietrowski: Could we go off the record and we will explain why Mr Tulbassov is not here./ (Off the record at 11.58 a.m. and back on the record at 12.09 p.m.).
112Transcripts of the oral hearing, Day Four, page 73.
113Transcripts of the oral hearing, Day Four, pages 113–14.
114Respondent‟s Exhibit 4 – Transcripts of the oral hearing, Day One, page 75.
115Respondent‟s Exhibit 13 – Transcripts of the oral hearing, Day One, pages 74–5 and Day Four, page 72.
116Transcripts of the oral hearing, Day Four, pages 71–2.
117Transcripts of the oral hearing, Day Four, pages 113 and 119.
118Claimants‟ Exhibit No. 142 (Assignment Agreement dated September 27, 2002 between CJSC Tema Real Estate Company and AIG Silk Road Fund Ltd, and Assignment Agreement between AIG Capital Partners and AIG Silk Road Fund Ltd), and Claimants‟ Exhibit No. 143 (Waiver dated September 26, 2002 between LLP Tema [and] AIG Silk Road Fund Ltd) were filed after the London hearings. In these documents the Joint Venture (Claimant No. 2) has irrevocably and unconditionally as of September 27, 2002, assigned and transferred to the Fund all right, interest (and title) to the proceeds of monetary or any other form of compensation from any award resulting from ICSID Case No. ARB/01/06 (i.e., the present case) and LLP Tema have also waived and relinquished their rights to all proceeds from any award to be made by the Arbitral Tribunal including rights, titles and interests from payments of any stock or distribution of funds available from the proceeds of any such award. But this ex post facto documentation has been ignored by the Tribunal in these proceedings.
119Transcripts of the oral hearing, Day One, pages 25–6.
120Transcripts of the oral hearing, Day One, pages 33–5.
121Claimants‟ Memorial at page 16 – Mr Scott Foushee states in his evidence (Transcripts of the oral hearing, Day One, page 28) that Mr Tulbassov and his partner Serzhan Zhumashev were broadly recognized as the most competent real estate developers in Kazakhstan when they brought [the] business plan to them.
122Transcripts of the oral hearing, Day Four, page 110.
123When Talap purchased the Project Property from the Oblast and resold it to LLP Tema the General Director of Talap was Yuri Nosof (Claimants‟ Exhibit Nos. 16 and 18).
124Respondent‟s Exhibit 11 (letter dated June 13, 2000).
125Transcripts of the oral hearing, Day 4, page 69.
126Transcripts of the oral hearing, Day One, pages 217 –18.
127Transcripts of the oral hearing, Day Two, pages 4-5.
128The entire part of Respondent‟s counsel‟s statement reads: “We have no reason to believe or disbelieve that he was or [was] not acting with AIG. I accept the representations of AIG that he was not, but the fact is Mr Tulbassov saw there was an opportunity to acquire a piece of land that the Oblast was clearly disposed to sell for development of housing. Undoubtedly, he did not tell AIG that he was going to buy it if they did not, but he did buy it.” – Transcripts of the oral hearing, Day Four, page 67.
129See [Military] and Paramilitary Activities Case, ICJ Reports (1986) at page 146.
130Starke‟s International Law 11th Edition 1994 page 269.
131The word “taking” is wider than “espropriazione” (or expropriation): a “taking” is generally recognized as including not merely an outright expropriation of property but also unreasonable interference with its use, enjoyment or disposal. (See Case Concerning Elettronica Sicula – USA v. Italy) – Judgement of the ICJ dated 20.7.1989 at p. 68.
132Case concerning the Factory at Chorzów Judgment No. 13 (September 1928) – PCI.I – Ser A. No. 17 – page 29.
133For an insightful modern analysis of the Chorzów Factory Case see the observations of Judge Brower in Amoco International Finance Corporation v. Iran: (1987) 15 Iran–US Claims Tribunal Reports page 189 at pages 300–1.
134It is now accepted that, subject to any international engagements to the contrary, expropriation of alien property is not in itself contrary to international law, provided that certain conditions are met; including payment of “appropriate compensation” (which is no different from “full compensation”). Article 31 of the Draft Articles on Responsibility of States for Internationally Wrongful Acts prepared by the International Law Commission – and which were adopted by the UN General Assembly Resolution 56/83 on December 12, 2001 sets forth as a general rule that the responsible State is under an obligation to make full reparation for any injury caused by the internationally wrongful act.
135The standard set in Resolution 1803 came to represent “opinio juris communis” according to Professor Dupuy: see award in Texaco Overseas Petroleum Co. v. Government of the Libyan Arab Republic – 17 ILM 329 (1978), 53 ILR 389 (1979).
136Based on the classic Hull doctrine, Secretary of State Cordell Hull‟s famous letter to the Mexican Government in 1938. demanding “prompt, adequate and effective” compensation for the expropriation of a US national‟s property. See R. Dolzer, New Foundations of the Law of Expropriation of Alien Property, 45 Am. J. Int‟l L.553, 558 (1981).
137So described by Professor Rosalyn Higgins (later to be Judge of the International Court of Justice) in her 1982 Hague Academy Lectures: Taking of Property by the State: Recent Developments in International Law, Vol. 1976 Recueil des Cours 1982 p. 267 at p. 294.
138It has been pointed out by the International Court of Justice in the Barcelona Traction Case ICJ (1970) – page 3 (at para. 87 of the judgment) – that the investment-receiving State, though not an insurer of the investment made, is bound to extend some protection in law to the investment.
139See the Award of Damages (dated June 30, 1990) of the Arbitration Tribunal consisting of Judge Schwebel, President, Mr Wallace and Mr Leigh, Arbitrators, in the UNCITRAL Arbitration Biloune v. Ghana Investment Centre, Vol. 95 ILR 183 at page 228.
140See for instance Texaco Overseas Petroleum v. Libya (“TOPCO”), 53 ILR 389 (1977): Sedro Inc. v. The National Iranian Oil Co., 84 ILR 483 (1986) and separate opinion of Judge Brower; and the award in Amoco International Finance Corp. v. Islamic Republic of Iran (“Khemco”), 83 ILR 500 (1987).
141Volumes 1 to 4 published in different years from 1972 to 1987 by the University Press of Virginia, Charlottesville; Editor Mr Richard Lillich.
142Sapphire International Petroleum Ltd v. National Iranian Oil Company – Arbitral Award dated March 15, 1963 of Sole Arbitrator M. P. Cavin, Federal Judge, Lausanne, Switzerland (ILR Vol. 35, page 136(1963)).
143American International Group, Inc. v. The Islamic Republic of Iran (Chamber Three: Mangard, Mosk and Moin: award dated December 19, 1983) 4 Iran–US CTR 96 (1985).
144INA Corporation v. The Government of the Islamic Republic of Iran (Chamber One: Lagergren, Ameli and Holtzmann – Award dated August 12, 1985) 8 Iran–US CTR 373 (1985).
145 Article IV paragraph 2 of the Treaty of Amity reads:
Property of nationals and companies of either High Contracting Party, including interests in property, shall receive the most constant protection and security within the territories of the other High Contracting Party, in no case less than that required by international law. Such property shall not be taken except for a public purpose, nor shall it be taken without the prompt payment of just compensation. Such compensation shall be in an effectively realizable form and shall represent the full equivalent of the property taken: and adequate provision shall have been made at or prior to the time of taking for the determination and payment thereof.
146Oppenheim‟s International Law Vol. I – 9th Edition pages 920–1.
147So stated in the Award dated March 24, 1982 by the Arbitral Tribunal (consisting of Mr Reuter, President and Mr Hameed Sultan and Sir Gerald Fitzmaurice, Members) in Government of Kuwait v. American Independent Oil Co. (1982) ILR 66, pages 518, 602 (para. 144).
148“New Foundations of the Law of Expropriations of Aliens Properly” by Rudolf Dolzer – printed in Vol. 75 – American Journal of International Law (1981) page 553 at page 573.
149The World Bank Guidelines have been noted in the recent UN Report of the International Law Commission, 53rd Session (2001) – at page 255 in the commentary under Article 36. In August 2001 the International Law Commission adopted draft Articles on Responsibility of States for internationally wrongful acts and on December 12, 2001, the United Nations General Assembly adopted Resolution 56/83 which commended the Articles to the attention of Governments “without prejudice of their future adoption”.
150Each of the [italicized] expressions [is] also defined in the purposes of greater clarity. For the above purposes:
1) “going concern” means an enterprise consisting of income-producing assets which has been in operation for a sufficient period of time to generate the data required for the calculation of future income and which could have been expected with reasonable certainty, if the taking had not occurred, to continue producing legitimate income over the course of its economic life in the general circumstances following the taking by the State;
2) “discounted cash flow value” means the cash receipts realistically expected from the enterprise in each future year of its economic life as reasonably projected minus that year‟s expected cash expenditure, after discounting this net cash flow for each year by a factor which reflects the time value of money, expected inflation, and the risk associated with such cash flow under realistic circumstances. Such discount rate may be measured by examining the rate of return available in the same market on alternative investments of comparable risk on the basis of their present value;
3) “liquidation value” means the amounts at which individual assets comprising the enterprise or the entire assets of the enterprise could be sold under conditions of liquidation to a willing buyer less any liabilities which the enterprise has to meet;
4) “replacement value” means the cash amount required to replace the individual assets of the enterprise in their actual state as of the date of the taking; and
5) “book value” has been defined as the difference between the enterprise‟s assets and liabilities as recorded on its financial statements or the amount at which the taken tangible assets appear on the balance sheet of the enterprise, representing their cost after deducting accumulated depreciation in accordance with generally accepted accounting principles.
151Controversy has persisted in relation to expropriation cases, particularly over standards of compensation applicable in light of the distinction between lawful expropriation of property by the State on the one hand, and unlawful takings on the other, a distinction clearly drawn by the Permanent Court in Factory at Chorzów, Merits, 1928, PCIJ, Series A, No. 17 page 47. In a number of cases tribunals have employed the distinction [to] rule in favour of compensation for lost profits in cases of unlawful takings (see e.g. the observations of the arbitrator in Libyan American Oil Company (LIAMCO) v. Government of Libya (1982) ILR vol. 62, p. 141 at pp. 202–3; and also the Aminoil arbitration: Government of Kuwait v. American Independent Oil Company (1982) ILR vol. 66, p. 529, at p. 600, para. 138; and Amoco International Finance Corporation v. Government of Islamic Republic of Iran (1987) 15 Iran–US CTR 189, at page 246, para. 192). Not all cases, however, have drawn a distincition between the applicable compensation principles based on the lawfulness or unlawfulness of the taking. See, e.g., the decision of the Iran–United States Tribunal in Phillips Petroleum Co. Iran v. Government of the Islamic Republic of Iran (1989) 21 Iran–US CTR 79, at page 122, para. 110. See also Starrett Housing Corp. v. Government of Islamic Republic of Iran (1987) 16 Iran–US CTR 79, where the Tribunal made no distinction in terms of the lawfulness of the taking and its award included compensation for lost profits.
152 The “caution” to be observed in applying the DCF method and in considering claims for lost profits is also reflected in the recent Report of the International Law Commission (2001) published by the United Nations, New York. Under Article 36 paragraph 2 (Draft Article on State Responsibility) the ILC provided that “compensation shall cover any financially assessable damage, including loss of profit in so far as it is established”. The commentary on this draft article reads as follows:
27 Paragraph 2 of article 36 recognizes that in certain cases compensation for loss of profits may be appropriate. International tribunals have included an award for loss of profits in assessing compensation: for example the decisions in the Cape Horn Pigeon Case (USA v. Russia UNRIAA Vol. IX p. 63, 1902) and Sapphire International Petroleums Ltd v. National Iranian Oil Company (1963 ILR Vol. 35 p. 136 at pp. 187. 189). Loss of profits played a role in the Factory at Chorzów case itself, the Permanent Court deciding that the injured party should receive the value of property by way of damages not as it stood at the time of expropriation but at the time of indemnification (1928 PCIJ Series A No. 17 pp. 47–8. 53). Awards for loss of profits have also been made in respect of contractbased lost profits in Libyan American Oil Company (LIAMCO) v. Libya (1977 ILR Vol. 62 p. 40) and in some ICSID arbitrations (e.g. Amco Asia and Others v. Republic of Indonesia 1984 and Resubmitted Case 1990 (1) ICSID Reports 377. AGIP v. Government of Republic of Congo 1979 (1) ICSID Reports 306). Nevertheless, lost profits have not been as commonly awarded in practice as compensation for accrued losses. Tribunals have been reluctant to provide compensation for claims with inherently speculative elements. When compared with tangible assets (and intangible assets which are income-based) profits are relatively vulnerable to commercial and political risks, and increasingly so the further into the future projections are made. In cases where lost future profits have been awarded, it has been where an anticipated income stream has attained sufficient attributes to be considered a legally protected interest of sufficient certainty to be compensable. This has normally been achieved by virtue of contractual arrangements or, in some cases, a well-established history of dealings. According to Whiteman: “in order to be allowable prospective profits must not be too speculative, contingent, uncertain and the like. There must be proof that they were reasonably anticipated and that the profits anticipated were probable and not merely possible”: Whiteman, Damages Vol. III page 1837.
153It is stated in the Appraisal Report (at p. 25): “The total funding cost for the project is $16.3 MM of which $9.9 MM will be external funding made up of a $1.5 MM straight equity and $8.4 MM debt. The latter will come as $1.2 MM SRF subordinated secured loan, $4.8 SRF subordinated unsecured loan and $2.4 as senior secured bank debt. The balance of the required funding of $6.4 MM will be re-invested from internally generated cash.”
154 It has been held in an ICSID Arbitral Award that the legal relation arising from a request for an investment licence and from a decision granting it can be deemed to be a sui generis relationship comparable to a contract. (See AMCO Asia Corporation v. Republic of Indonesia (1984) 24 International Legal Materials (1985) page 1030, ICCA Yearbook Vol. XIV 1989 p. 92 noted in a later ICSID award in Antoine Goetz, el at. (Belgium) v. The Republic of Burundi ICCA Yearbook – 2001 Vol. XXVI p. 24 at pp. 32–3, where the Claimants did not allege any contractual relationship and the relationship was held to be strictly unilateral in character.)
155No evidence has been led by the Respondents in support of this statement.
156AIG Silk Road Capital Management Appraisal Report – Tema Residential Development.
157In Sapphire International Petroleums Ltd v. National Iranian Oil Company – Award of Sole Arbitrator Federal Judge M. Pierre Cavin (March 15, 1963) – the fact that the party was released from the contract (by reason of the expropriation) was stated to be a relevant consideration that had to go to diminish any damages [that] must be awarded:
Another plausible consideration is that, now that they are released from the present contract, the plaintiff company can employ its resources, its organization and its strength in other profitable activities which it could probably not have kept on hand at the same time as the prospecting and exploration of the concession areas, which required investments and important personal obligations.
158The DCF method and the difficulties arising in its application have been succinctly summarized by the International Law Commission in its Report of 53rd Session (2001) in its commentary on Draft Article 36 (on Compensation). It reads (para. 26):
(26) Since 1945, valuation techniques have been developed to factor in different elements of risk and probability. The discounted cash flow (DCF) method has gained some favour, especially in the context of calculations involving income over a limited duration, as in the case of wasting assets. Although developed as a tool for assessing commercial value, it can also be useful in the context of calculating value for compensation purposes. But difficulties can arise in the application of the DCF method to establish capital value in the compensation context. The method analyses a wide range of inherently speculative elements, some of which have a significant impact upon the outcome (e.g., discount rates, currency fluctuations, inflation figures) suggesting a cautious approach to use the method. Hence although income-based methods have been accepted in principle, there has been a decided preference fur asset-based methods. A particular concern is the risk of double-counting which arises from the relationship between the capital value of an enterprise and its contractually based profits.
It is stated in the UN Report (2001) that “in the context of claims for the lost profits there is corresponding preference for claims to be based on past performance rather than forecasts”. For example, the United Nations Compensation Commission Guidelines on valuation of business losses in Decision 9 (S/AC.26/1992/9. para. 19) state: “the method of a valuation should therefore be one that focuses on past performance rather than on forecasts and projections into the future”.
159See evidence of Scott Foushee (Transcripts of the oral hearing, Day One, page 48) and evidence of Mark Kasher (Day Two, page 68).
160[Emphasis] supplied.
161In considering claims for future profits, the UNCC Panel dealing with the fourth instalment of “E3” claims expressed the view that in order for such claims to warrant a recommendation, “it is necessary to demonstrate by sufficient documentary and other appropriate evidence a history of successful (i.e., profitable) operation, and a state of affairs which warrants the conclusion that the hypothesis that there would have been future profitable contracts is well founded” (see Report and Recommendations made by the Panel of Commissioners concerning the Fourth Instalment of “E3” Claims, 30 September 1999 (S/AC.26/1999/14), para. 140 (quoted in footnote (600) of the UN Report of the International Law Commission (2001) at p. 260).
162Transcripts of the oral hearing, Day One, page 139.
163Southern Pacific Properties (Middle East Ltd) v. Arab Republic of Egypt (1992) (ILR Vol. 106 p. 501) – (ICSID Case No. ARB/84/3).
164Southern Pacific Properties (Middle East Ltd) v. Arab Republic of Egypt (1992) (ILR Vol. 106 p. 501) – (ICSID Case No. ARB/84/3).
165(1993) 95 ILR 183 – Biloune and Marine Drive Complex Ltd v. Ghana Investments Centre.
166(1993) 95 ILR 183 – Biloune and Marine Drive Complex Ltd v. Ghana Investments Centre.
167Biloune v. Ghana Investment Centre 95 ILR 183, 207–10 (1993) – Judge Schwebel, Mr Wallace and Mr Leigh.
168(1987) 4 Iran–US Claims Tribunal Reports 122.
169Shah Goli Apartment Company was the Iranian subsidiary to which Starrett had assigned the Project Agreement. Starrett Housing owned 79.7% of Shah Goli.
170(1989) 21 Iran–US Claims Tribunal Reports 79 (award dated 29/06/1989 Chamber Two: Mr Briner, Mr Khalilian and Mr Aldrich) – Relevant parts of paras. 111 and 112 of the Award read as follows:
111. The Tribunal recognizes that the determination of the fair market value of any asset inevitably requires the consideration of all relevant factors and the exercise of judgement. In the absence of an active and free market for comparable assets at the date of taking, a tribunal must, of necessity, resort to various analytical methods to assist it in deciding the price a reasonable buyer could be expected to have been willing to pay for the asset in a free market transaction, had such a transaction been possible at the date [the] property was taken ...
112. One such method of analysis, and the method used by the Claimant, is the Discounted Cash Flow (“DCF”) analysis, which calculates the Claimants‟ prospective net earnings over the term of the JSA and discounts them to give their value at the date of taking, using a discount rate that takes into account the perceived risks. In that connection, the Tribunal does not understand the Claimants‟ calculations of anticipated revenues from the JSA as a request to be awarded lost future profits, but rather as a relevant factor to be considered in the determination of the fair market value of its property interest at the date of taking. The Tribunal recognizes that a prospective buyer of the asset would almost certainly undertake such DCF analysis to help it determine the price it would be willing to pay and that DCF calculations are, therefore, evidence the Tribunal is justified in considering in reaching its decision on value. In Starrett, supra, the Tribunal based its Award on an expert‟s report that utilized the DCF method, but the Tribunal made various adjustments to the conclusions and the resulting amounts. The need for some adjustments is understandable, as the determination of value by a tribunal must take into account all relevant circumstances, including equitable considerations. While a DCF analysis can, and often should, be an essential and even central component in that determination of value, it must not exclude other relevant considerations. In this connection, the Tribunal notes that in Amco International Finance, supra, Chamber Three considered the DCF method inadequate and distinguished between the assets of a going concern, including good will and commercial prospects, which it noted are closely linked to the profitability of the concern, and what it described as the “financial capitalization of the revenues which might be generated by such a concern ...”
171Claimants‟ Exhibit No. 28 – Protocol of Inter Ministry Working Group dated September 5, 2000: the Working Group considers that:
1) the decision of the local executive body that impedes the implementation of construction by the investor was adopted in violation of the procedures established by the current legislation.
172Claimants‟ Exhibit No. 31 – letter dated March 17, 2001 of Foreign Minister Yerlan Idrissov to Deputy Prime Minister.
173Transcripts of the oral hearing. Day four, pages 58–9.
174Article III(2) reads as follows:
A national or company of either Party that asserts that all or part of its investment has been expropriated shall have a right to prompt review by the appropriate judicial or administrative authorities of the other Party to determine whether any such expropriation has occurred and, if so, whether such expropriation, and any associated compensation, conforms to the principles of international law.
175See Claimants‟ Memorial dated February 15, 2002, p. 19.
176The Appraisal Report mentions that investment would be made through a company owned by AIG Silk Road Fund and that AIG Silk Road Fund would receive 100% of all cash flows generated by rental or sale of individual properties until it achieves an IRR of 30% – subsequent cash flows would be split with TEMA on a 66%/34% basis.
177Interest on deposits in the World market were of the order of about 6% p.a. at the time.
178Claimants‟ Exhibit 125: “In response to your letter, we hereby inform you that JSC „Almaty Merchant Bank‟ in 2001 provided loans to corporate clients with the following interest rates: in foreign currency – 18%–20% and in the national currency (tenge) – 22%–24% per annum.”
179Transcripts of the oral hearing, Day Four, pages 101–2.
180It was on this basis that in the Santa Elena case: 15 ICSID Review Foreign Investment Law Journal 169 (as rectified in 15 ICSID Review Foreign Investment Law Journal 205 (2000)) 39 ILM 1317 (2000) that compound interest was awarded.