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

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

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

(ICSID Case No. ARB/01/6)

Award. 7 October 2003

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

1. Introduction

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

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

i.

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

ii.

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

iii.

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

2. The Parties 

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

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

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

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

3. PROCEDURAL HISTORY OF THE CASE

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Article II(2)

(a)

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

(b)

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


Article III(1)

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

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


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

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

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

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

4. NOTICE OF REGISTRATION OF THE REQUEST FOR ARBITRATION

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

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

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

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

(i)

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

(ii)

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

(iii)

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


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

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

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

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

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

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


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

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

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


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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

1.

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

2.

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

3.

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

4.

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

5.

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


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

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

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


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

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


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

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

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

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

and

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

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

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


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

a.

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

b.

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

c.

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


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


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

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

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

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

Thank you in advance for your assistance.

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

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

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

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

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

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

i.

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

ii.

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

iii.

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

iv.

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


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

7. SUMMARY OF THE HEARINGS

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

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

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

8. OBJECTION TO THE CONSTITUTION OF THIS ARBITRAL TRIBUNAL

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

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


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

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

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


Regulation 33 Communications with Contracting States

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

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

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

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

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

(a)

adopt Administrative and Financial Regulations of the Centre;

(b)

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

(c)

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


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

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

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

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

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

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

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

(i)

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

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

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

(ii)

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

(iii)

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

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

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

(iv)

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

(v)

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

(vi)

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


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

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

9.1 Before dealing with the other Objections to Jurisdiction raised by the Respondent, the Tribunal must first consider the plea of the Claimants that since the Respondent‟s Objections to Jurisdiction were not filed “as early as possible” (as required by Rule 41 of the Arbitration Rules) they cannot be and ought not to be entertained by the Tribunal: it is said that the time limit originally fixed for filing the Counter-Memorial of the Respondent was May 15, 2002;41 the Respondent filed its objections to Jurisdiction only on July 31, 2002; all the facts that the Claimants rely on to establish the Centre‟s jurisdiction had been stated in the Request for Arbitration registered by the Centre as far back as June 4, 2001, and the Respondent having been aware of these facts for fourteen months, the objections filed on July 30, 2002 to jurisdiction could not now be entertained.

9.2 In the opinion of the Tribunal this plea cannot be accepted. Objections to the jurisdiction of an adjudicatory body cannot be ignored, if raised during the arbitral proceedings – delay notwithstanding. Mere tardiness in raising a point of jurisdiction cannot preclude it being considered by the Tribunal at a later stage: so long as the same is raised during the course of the arbitral proceedings.

Rule 41 of the Arbitration Rules (Objection to Jurisdiction) cannot and does not negate the mandate of Article 41 of the Convention: the latter requires a Tribunal to determine every objection to jurisdiction.

The time limits prescribed in Rule 41(1)42 and the requirement that every objection as to jurisdiction or competence of the Tribunal shall be made “as early as possible” is intended to alert the parties to bring forth their objections, basic to the dispute being adjudicated upon on merits, at the earliest possible point of time. It appears to be rationally and reasonably related only to the expeditious disposal of ICSID arbitral proceedings. It cannot be read as coercive. It could not for instance empower the Arbitral Tribunal to grant relief to a Claimant when there is apparently no jurisdiction of the Centre or the Tribunal to entertain and try the case. The plea of the Claimants based on Article 41 of the Arbitration Rules must therefore stand rejected.

9.3 The only surviving objection to jurisdiction viz. – that Claimants do not have any right to invoke ICSID arbitration under the Bilateral Investment Treaty.

 9.3.1 Apart from the composition of the Tribunal, the only specific Objection to Jurisdiction that has been raised, argued and persisted in is that the Claimants do not have any right to invoke ICSID Arbitration under the Bilateral Treaty.

9.3.2 Other objections to jurisdiction that were initially made were: (i) that the Claimants‟ claims are based on the alleged conduct of Almaty Oblast and the City of the Almaty and not the conduct of the Republic of Kazakhstan and are therefore not subject to ICSID Arbitration jurisdiction, and (ii) that the Treaty does not subject the Republic or its Subdivisions to ICSID Arbitration Jurisdiction for claims based on land or real estate which fall under the exclusive jurisdiction of the Courts of the Republic of Kazakhstan.43 But these objections were withdrawn and specifically given up as recorded in the Posthearing Brief of the Respondent filed on October 18, 2002, in which it is stated –

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.

The Tribunal accordingly proceeds to deal with the Respondent‟s only surviving Objection to ICSID Jurisdiction viz. that neither of the Claimants have standing to invoke the BIT.

9.3.3 The jurisdictional plea is that the Claimants are not entitled to invoke the provisions of the BIT.

The BIT discloses the clear intention of the Parties thereto (the United States of America on the one hand and the Republic of Kazakhstan on the other) to place investments made by nationals of one of them in the territory of the other under the guarantee of Inter-State Relations and the protection of International Law. The jurisdiction of ICSID under Article 25 of the Convention is based directly on the BIT concluded between the host State (the Republic of Kazakhstan in the present case) and the State of the investors (USA): it being asserted that the first and second Claimants are entitled to invoke the BIT and accordingly the Jurisdiction of the Centre under Chapter II of the Convention.

It is not disputed, as it cannot be, that “the measures tantamount to expropriation” (Article III(I) of the BIT) occurred later than the date on which the BIT entered into force both in the United States and in the Republic of Kazakhstan (i.e., in January 1994), and the validity and legal consequences of these measures must be ascertained in accordance with the rules in force at the date on which they occurred (i.e., on various dates in the year 2000). The BIT which binds the parties since January 1994 is among these rules.

9.3.4 As to the Jurisdiction of the Arbitral Tribunal to adjudicate upon the Request for Arbitration the same must be determined as of the date of the filing of the Request44 and its registration by the Centre45 in the present case – May 3, 2001 and June 4, 2001 respectively.

9.3.5 For the purposes of the BIT, “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 (Article I[l](a)); “investment” also specifically includes tangible and intangible properly including rights such as mortgages, liens and pledges and includes “a company” or interests in the assets thereof, it also includes a claim to money or a claim to performance having economic value and associated with an investment. The word “controlled” is not defined. The Treaty applies to investments existing at the time of entry into force as well as to investments made or acquired thereafter46 (Article XIII).

The BIT provides that an 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 and that neither party shall in any way impair by arbitrary or discriminatory measures, the management, maintenance, use, enjoyment, acquisition, expansion or disposal of investments (Article I[1](a) & (b)).

Article III provides that investment shall not be expropriated or nationalized either directly or indirectly through “measures tantamount to expropriation or nationalisation” 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).

Article VI of the BIT provides as follows:

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”).

9.3.6 The law of the Republic of Kazakhstan on Foreign Investment of December 27, 1994 (officially published on January 20, 1995 – Claimants‟ Exhibit 2) defines “foreign investments” as investments made in the form of participation in the charter capital of Kazakhstan legal entities – “with respect to which foreign investors are entitled to determine decisions being made by such legal entities”. “Foreign Investor” is defined to mean not only “foreign legal entities” (i.e., a legal entity, company, firm, enterprise, organization, association etc. established outside the Republic of Kazakhstan in accordance with the legislation of a Foreign State) but also legal entities of the Republic of Kazakhstan “with respect to which foreign investors are entitled to determine decisions made by such legal entities”. A “Joint Venture” is defined as an enterprise with foreign participation established in the territory of the Republic of Kazakhstan in accordance with the legislation of the Republic of Kazakhstan in which a part of the property (shares, interest) is owned by a foreign investor.

This law on foreign investment in the State of Kazakhstan guarantees a legal regime for foreign investment, guarantees against any change in law, guarantees against expropriation, and guarantees indemnification and reimbursement of losses of foreign investors. It also provides (sub-section (2) of Section (2) of Article 27) that investment disputes shall be resolved through negotiations and if they cannot be so resolved within a stated period, such disputes, upon choice of any of the parties, may be submitted for settlement in accordance with the agreed procedure for settling disputes, including the procedure established in the contract or any other agreement between the parties, to an arbitration body: and specifically refers to and includes the Centre if the State of the investor is a participant of the Convention (Article 27(2)(a)). Article 27(3) goes on to provide that in the event a foreign investor has chosen the procedure for dispute settlement provided for by subsection 2 of Section 2 of Article 27 (i.e., under the ICSID Convention) “the consent of the Republic of Kazakhstan shall be deemed to be obtained”. The consent of a foreign investor may be given at any time through written application to the authorized State body or at the moment of the submission to the arbitration.

9.3.7 Complementary to the December 1994 Law of Kazakhstan on foreign investment (Claimants‟ Exhibit 2) there is also exhibited in this case (as Claimants‟ Exhibit No. 34) the Law of Kazakhstan on State Support [of] Direct Investment of February 28, 1997, which provides guarantees of protection of interest of “approved investors”, and stipulates that the Agency of the Republic of Kazakhstan on Investment shall be the sole State Agency authorized to perform the State Support of Direct Investment in Kazakhstan (Article 14(1)). “Direct Investment” is defined in this law as meaning all types of investments made by an investor to fixed assets (fixed capital) made by a Kazakhstani legal entity excluding those investments bound by sovereign guarantees of the Republic of Kazakhstan, and the term “approved investor” is defined to mean an investor who has entered into a contract with the Agency. Article 3(2) however provides that if an international treaty ratified by Kazakhstan establishes other Rules than those contemplated by the legislation of Kazakhstan on the State Support of Direct Investment, then the international Treaty Rules apply (Article 3(2)).

9.3.8 Apparently pursuant to the 1997 law on State Support [of] Direct Investment, a contract – being contract No. 0159-12 of December 13, 1999 (Claimants‟ Exhibit No. 3) – was entered into between the Agency of the Republic of Kazakhstan for investment and Claimant No. 2 CJSC Tema Real Estate Company – the latter as “approved investor”. This contract established a certain legal framework regulating the relationship of the Agency and the Investor in accordance with the legislation of the Republic of Kazakhstan and for the purpose of providing various incentives and State Support for investment activity “in the construction sector of commercial housing”.

9.4 The relevant question that must now be addressed – as a jurisdictional issue (on this point a mixed issue of law and fact) – is whether the investment in the residential housing complex called Crystal Air Village was “owned or controlled directly or indirectly” by a US company.47 

9.4.1 According to the Respondent the investment was by Claimant No. 2, which was not and is not a US entity, nor is it controlled by a US entity: it is controlled by a Bermuda based company AIG Silk Road Fund Ltd (to the extent of 66 per cent); hence there is no right to invoke the Treaty (and as a consequence no jurisdiction of the Centre under the ICSID Convention).

9.4.2 According to the Claimants, however, all of the investments in the Crystal Air Village Project in Kazakhstan were made by the Fund (AIG Silk Road Fund Ltd),48 by the Investment Company (AIG Silk Road Investments I Ltd: a wholly owned 100% subsidiary of the Fund) and by the Finance Company (Kazakhstan Housing Ltd: also a wholly owned 100% subsidiary of the Fund), and by the Joint Venture49 (Claimant No. 2) and these entities were “controlled indirectly” by AIG (Claimant No. 1), and therefore protected by the Treaty. Besides, the Joint Venture (Claimant No. 2) is itself a “company” (“investments” under the BIT includes a “company”) which is situated in the territory of Kazakhstan and is indirectly controlled by a US Company (Claimant No. 1). The Joint Venture (Claimant No. 2) is itself an “Investment” for purposes of the BIT and must be treated as a US national in accordance with Article 25(2)(b) of the Convention (by virtue of Article VI(8) of the BIT).

9.4.3 The Respondent‟s detailed arguments in support of its plea of lack of jurisdiction, viz. that neither of the Claimants has standing to invoke the BIT, are set out in detail in the Post-hearing Brief filed on October 18, 2002, in which it has been asserted as follows:

(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.  


These are the detailed arguments set forth by the Respondent.

9.4.4 The contentions of the Claimants in support of their plea that they have the standing to invoke the BIT have been set out initially in their Request for Arbitration and then elaborated, with reference to several documents in the course of arguments (as well as in oral evidence).

9.4.5 In the opinion of this Tribunal the Claimants have established, through documentary evidence, the following:

(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.

9.4.6 Oral evidence was led by the Claimants in support of their contentions that both Claimants Nos. 1 & 2 have standing to invoke the BIT. Mr Scott Foushee gave oral evidence on August 28, 2002 before the Arbitral Tribunal (see pages 20 to 25 of the transcripts of the Oral hearing, Day One). He deposed that he is the Managing Director of AIG Capital Partners (AIG) Claimant No. 1, as well as the Managing Director of AIG Silk Road Capital Management Ltd, wholly owned by AIG Silk Road Investors Inc. a US Company in turn owned by Claimant No. 1. He is also a Director of CJSC Tema Real Estate Company (the Joint Venture) Claimant No. 2. He also deposed that he was in fact Chairman of the Board. In the course of his evidence he stated that he (Scott Foushee) is one of the four Managing Directors in AIG Capital Partners – Claimant No. 1 – (in the Headquarter Offices in New York) overseeing the operations of “the Fund” (AIG Silk Road Fund Ltd – the Bermuda company) and spending a majority of his time on working with “our individual Funds” to assess and complete investments. Mr Foushee‟s oral evidence establishes the following facts:

(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.


In the course of his examination in chief Mr Scott Foushee deposed as follows:

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

Those Statements were not questioned in cross-examination, nor was there any refutation of the other statements about control of Claimant No. 1 over the Joint Venture through various intermediate companies. The Respondent did not lead any evidence to challenge the correctness of the documentary evidence led on behalf of the Claimants showing “indirect control” of the investments and “indirect control” of the Claimant No. 1 over Claimant No. 2. No attempt was made to contradict the evidence of Mr Scott Foushee.

9.4.7 It is established on the oral and documentary evidence on record that Claimant No. 1 through its control of AIG SRI, the Fund and its subsidiaries controlled the Joint Venture (Claimant No. 2) which was the vehicle through which investment of Claimant No. 1 was committed and made.

9.4.8 The Arbitral Tribunal will now deal with the specific contentions of the Respondent in the Posthearing Brief filed on October 18, 2002 (in support of its plea that the Claimants have no standing to invoke the BIT) –

(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).


9.4.9 The ICSID Convention having been already signed by the USA and Kazakhstan before 1994 (when the Bilateral Investment Treaty between the USA and Kazakhstan came into force) no separate jurisdictional plea has been taken by the Respondent with respect to Article 25 of the Convention – (Jurisdiction of the Centre). Rightly so.

The prerequisites prescribed by the ICSID Convention are:

(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.


The jurisdiction of the Centre has been rightly invoked by the Claimants.

10. ON MERITS

10.1.1 Applicable Law

10.1.2 Article 42(1) of the Convention deals with the law applicable to an investment dispute. It provides that the Tribunal shall decide a dispute in accordance with such rules as may be agreed by the parties. In the absence of agreement it shall apply the law of the host State and “such rules of international law as may be applicable”. Historically, treaties (whether bilateral or multilateral) are an acknowledged source of international law – such treaties are often referred to as “law-making treaties”. In principle, all treaties are law-making in as much as they lay down rules of conduct which the parties are bound to observe as law.59 Bilateral treaties are law-making in the narrow sense that the rights and obligations to which they give rise are legally binding on the parties to them.60

The function of international law under Article 42(1) is to close gaps in domestic law as well as to remedy any violation of international law which may arise through the application of the host State‟s law.

10.1.3 The BIT itself establishes a rule of law as between the parties thereto: Article VI(1) of the BIT provides that an investment dispute (for the purposes of that Article) is a dispute between a party and a national or company of the other party that arises out of or relates to inter alia “an investment agreement between that party and such national or company” as well as “an investment authorisation granted by that Party‟s foreign investment authority to such national or company”. Contract No. 0159-12-99 dated December 13, 1999 (Claimants‟ Exhibit No. 3) is the Investment contract or authorization61 with respect to which an investment dispute has been raised – by the Claimants in the instant case: [it] has been entered into by the Claimant No. 2 (the Joint Venture) with the Agency of the Republic of Kazakhstan for investment – the only Slate body invested with authority to conduct negotiations, establish conditions and sign contracts with Investors making direct investments in the Republic of Kazakhstan. The object of Contract No. 0159-12-99 is to establish a certain legal framework regulating relationships between the Agency and the Investor in accordance with the legislation of the Republic of Kazakhstan for the purpose of providing various incentives and State support of investment activity in the construction sector of commercial housing. The Investment Agreement/authorization specifically provides that the applicable law, “unless otherwise stipulated by International Treaties signed by the Republic of Kazakhstan”, shall be the law of the Republic of Kazakhstan (Clause 16.1). The law of the Republic of Kazakhstan on Foreign Investments of December 27, 1994 (Claimants‟ Exhibit No. 2) and the law of Kazakhstan [on] State support of Direct Investments of February 28, 1997 (Claimants‟ Exhibit No. 34) are the relevant basic laws of the host State.

10.1.4 In the circumstances the Tribunal holds that the applicable law in this case is the law of the Republic of Kazakhstan (State party to the dispute) – in particular that which is contained in Claimants‟ Exhibit Nos. 2 and 34 – read with and controlled by the provisions contained in the BIT.

10.2 Liability

10.2.1 The elements needed to establish liability are set out in the BIT which came into force on January 12, 1994. Under the BIT, in order to establish the liability of the Respondent State the Claimants must prove:

(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.


10.2.2 Investment – Legal Position

The BIT‟s definition of investment is broad – and recognizes a wide variety of forms. It covers investments that are owned or controlled by nationals of one of the Treaty Parties made in the territory of the other: investments can be made either directly or indirectly through one or more subsidiaries including those of third countries. As to when an investment is “controlled” by nationals of one of the Treaty Parties, this is not defined in the Treaty, but for corporate entities, voting control of the stock held is generally determinative of control – whosoever may own that stock: a company of a third country that is owned or controlled by national or companies of a Party [is] covered by the BIT.

10.2.3 Investment – Factual Position

The following factual position about investment (and its control) emerges from the evidence oral and documentary, produced by the parties:

(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.)


10.2.4 On a consideration of the entire evidence, oral and documentary, the Tribunal holds that it is established that the Claimants owned or controlled indirectly an investment in the territory of Kazakhstan as contemplated in Article 1(a) of the BIT.

10.3 Expropriation

10.3.1 Legal Position

Article III of the BIT reflects a balance between the legitimate interests of the Contracting State where the investment is made and the need to protect from arbitrary action by that State those who provide foreign capital – particularly since such capital is essential to the full development of natural resources of any State and would not be forthcoming unless assured of reasonable protection.64

Article III incorporates into the BIT international law standards for “expropriation” and “nationalisation”. Paragraph 1 describes the general rights of investors and the obligation of the parties with respect to expropriation and nationalization: they apply to direct and indirect measures (of the State) tantamount to expropriation or nationalization – i.e., to what are known as “creeping expropriations” which result in substantial deprivation of the benefit of an investment without taking away of the title to the investment. Expropriation (in relation to investments) conveys in a general sense the deprivation of an owner of his investment and its equivalent – i.e., to a “taking” of that investment. Expropriations (“or measures tantamount to expropriation”)65 include not only open deliberate and acknowledged takings of property (such as outright seizure or formal or obligatory transfer of title in favour of the Host State) but also covert or incidental interference with the use of property which has the effect of depriving the owner in whole or in significant part of the use or reasonably to be expected benefit of property even if not necessarily to the obvious benefit of the Host State.

10.3.2 Factual Position: Expropriation of Claimants’ Investment

The following factual position regarding “expropriation” or “measures tantamount to expropriation”66 emerges from the evidence oral and documentary produced by the parties:

(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.


10.3.3 In the circumstances aforesaid the Tribunal holds:

(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


10.4 Was the Expropriation for a Public Purpose? Was there any Direct Intervention by the President of Kazakhstan in the Taking as Suggested in the Evidence?

10.4.1 Under Article III(1) of the BIT investments shall not be expropriated or nationalized either directly or indirectly through measures tantamount to expropriation or nationalization “except for a public purpose …”. This is only a reiteration of one of the essential elements of State sovereignty viz. the right to take by compulsory acquisition private property for public purposes: the fact-situation in this case is that there is no dispute whatever between the parties that the “taking” was for an arboretum or public park,83  which is manifestly a “public purpose”. The Tribunal holds that the taking was for a public purpose.

10.4.2 However, in the course of the evidence of Boris Evseev, it was alleged that the President of Kazakhstan was involved and implicated in the decision to cancel the project. This assertion must now be dealt with.

10.4.3 In the Request for Arbitration the Claimants stated as follows:
 

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

10.4.5 It is in the oral evidence (of the Claimants‟ witness Boris Evseev)85 that it is sought to directly implicate the President with regard to cancellation of the project:

(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).


Mr Nurkadilov has in the course of his evidence vehemently rejected the suggested involvement of the President in the cancellation of the project (transcripts of oral hearing, Day Two, pages 153–4).

(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).


10.4.6 In the Claimants‟ Post-hearing Memorial filed on October 18, 2002 there is no mention of the direct intervention of the President of Kazakhstan – and what is more significant, no reliance is placed on the oral evidence of [Mr] Boris Evseev given in that behalf. In fact when dealing with Respondent‟s liability under the BIT there is no reference to Mr Boris Evseev‟s evidence that the billboard advertising the Crystal Air Village be removed since it was offensive to the President. And even with regard to the meeting of March 2, 2000 with Mr Nurkadilov, it is stated that Mr Nurkadilov confirmed that the property was being taken to build an arboretum and therefore construction must stop (no mention of the President). The relevant portion from the Claimants‟ Post-hearing Memorial is extracted in the footnote.86 

10.4.7 The Tribunal finds the invocation of the name of the President of the Republic of Kazakhstan and his alleged involvement with the cancellation of the project (mentioned in the oral evidence of Mr Boris Evseev) not proven. 

In the opinion of the Tribunal, clear refutation of the plea of direct Presidential interference is to be found in contemporaneous documentary evidence viz. the Working Group‟s conclusion (Claimants‟ Exhibit No. 28) – and minutes of Working Group dated September 5, 2000, and by the endorsement of this conclusion in the letter dated March 13, 2001 of Mr E. Idrissov, Minister of Foreign Affairs, to the Deputy Prime Minister (Claimants‟ Exhibit No. 31): the recommendation there made was that a revocation of the prior cancellation of the Project should be effectuated. Obviously this would not have been so recommended if the entire initiation of the cancellation of the Project and revocation of building permits at the Project site was at the personal insistence of the Head of the State.

10.5 Was the Expropriation Arbitrary?

10.5.1 Expropriation of alien property is not itself contrary to international law provided certain conditions are met, and perhaps the most clearly established condition is that expropriation must not be arbitrary (i.e., must not be contrary to “the due process of law”) and must be based on the application of duly adopted laws.87 The requirement that expropriation should be in a non-discriminatory manner (i.e., as between alien and national) and in accordance with due process is also widely accepted, and is relevant to the assessment whether the expropriation was or was not arbitrary and in furtherance of the public interest. In the case concerning Elettronica Sicula (USA v. Italy),88 the International Court of Justice noted that:

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”.

10.6 Mitigation of Damages: Offer of Alternative Site and its Refusal

10.6.1 At this stage it is necessary to deal with the contention foreshadowed in the Respondent‟s Counter-Memorial filed on August 19, 2002, and developed later during the examination of witnesses and during arguments: although this contention has been raised by the Respondent as a substantive plea in defence of the Claim for compensation, it is dealt with here as a separate topic.

10.6.2 In the Request for Arbitration it has been stated that on March 2, 2000, when Representatives of the Fund and of the Joint Venture met with the Akim of Almaty Oblast, he insisted that notwithstanding the Joint Venture‟s authorized purchase of the site to construct the Crystal Air Village the Joint Venture would not be permitted to construct a residential compound on the project site and that this was an irrevocable decision; that the only recourse available to the Joint Venture and the Fund would be to construct their residential compound on an alternate site (“which was an unacceptable solution from the Claimants‟ point of view for commercial reasons which will be explained at the appropriate stage of the arbitral proceedings”).91

In the Claimants‟ Memorial of February 15, 2002, the events of March 2, 2001, are recorded thus:

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.

10.6.3 At the oral hearing, Counsel for the Respondent (in his opening statement) said that the Government of Kazakhstan had offered both “compensation” in the form of alternate land a kilometre away and offered to do some of the same work that had been done already by Tema on their project to save them the expense of having to do that over again. The transcript shows that Respondent‟s counsel then went on to say:


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.)

In the oral evidence led by the parties the offer (orally made) of an “Alternative Site” is an undisputed and admitted position.92 Based on this, in the Post-Hearing Brief filed by the Respondent (October 18, 2000) reliance is placed on a passage in paragraph 172 of the ICSID Award in the Pyramids Case:93 it is suggested that whilst in the Pyramids Case the substituted site was inappropriate for the project (of the Claimants) in that case, in the present case, the alternate site was virtually identical and only 170 metres away from the project site: whilst the Claimants do not admit that the alternate site was “virtually identical” its location is not disputed by the Claimants in evidence. See Mr Foushee‟s Evidence – transcripts of oral hearing, Day One, page 53.

10.6.4 As to the competing pleas of the parties with regard to the offer of an alternative site and the “duty to mitigate”, the findings
Referring Principles
Trans-Lex Principle: VII.4 - Duty to mitigate
A project of CENTRAL, University of Cologne.