ASCOM case : Allegation of fraud in arbitration between Moldovan investors and Kazakhstan

By Swann Bigot, legal expert and consultant in international affairs – Eurasia Business News – May 12, 2018

Building of the High Court of Justice in London – Photo credit : UK Crown

The High Court of Justice in London has ruled in a judgement published on May 11 that the allegation of fraud in arbitration proceedings seated in Sweden between the Moldovan businessman Anatolie Stati, his son Gabriel, two family-controlled companies and Kazakhstan must proceed to trial in October 2018 as previously scheduled, reported Reuters. The judgement stated that a decision about whether fraud had occurred during arbitration would be useful to the Courts of other countries involved in the dispute.

The judge Robin Knowles handed down his judgment on May 11 and by an order dated May 21, he set aside the notice of discontinuance filed by the Moldovan investors on February 26, whereby they asked to end the proceedings, allegedly because they had already secured “attachments of Kazakhstan’s assets amounting to USD 28 billion in other jurisdictions which made the English proceedings redundant.” The proceedings were launched under section 101 of the UK Arbitration Act of 1996 to enforce a New York Convention award.

Earlier, in a judgement dated June 6, 2017, the High Court decided that the interest of justice required examination during trial of the allegation of fraud against the arbitral award rendered on December 19, 2013 and seated in Sweden.

The ASCOM case is an investment dispute and a long legal battle started in 2010 between Moldovan investors and Kazakhstan over the controversial nationalization of oil industrial assets. The arbitral award of December 2013 imposed around USD 500 million to be paid by Kazakhstan as damages for breach of fair and equitable treatment standards and seizure of a liquefied petroleum gas plant.

The ASCOM case is an investment dispute and a long legal battle started in 2010 between Moldovan investors and Kazakhstan over the controversial nationalization of oil industrial assets. The arbitral award of December 2013 imposed around USD 500 million to be paid by Kazakhstan as damages for breach of fair and equitable treatment standards and seizure of a LPG plant.

The refusal of the Central Asian Republic to pay financial compensation to the Moldovan investors led to enforcement proceedings of the award in foreign jurisdictions and the freeze in October 2017 of USD 22.6 billion of assets owned by the Government of Kazakhstan and registered in the Bank of New York Mellon.

The proceedings before the High Court illustrate how allegations of fraud in arbitral proceedings can be used to deny the enforcement of foreign arbitral awards in national jurisdictions, if they are proven and considered as such by the state judge. Since arbitration disputes between States and investors often cover damages amounting to several dozen or hundreds of millions of dollars, studying the ASCOM case can provide useful insights over the enforcement regime of arbitral awards and public policy considerations.

FACTS          

The origin of this international dispute is related to the nationalization by Kazakhstan’s government in July 2010 of two Kazakh subsidiaries of Ascom Group S.A., namely Kazpolmunay LLP (‟KPM”) and Tolkynneftegaz LLP (‟TNG”). KPM and TNG were involved since 1999 in oil fields and a liquefied petroleum gas plant in the western part of Kazakhstan. The Moldovan tycoon Anatolie Stati and his son Gabriel acquired the control of KPM in December 1999 and of TNG in May 2000 through Ascom Group S.A., their company based in Moldova.

The Moldovan investors and their companies Ascom Group S.A. and Terra Raf Trans Traiding Ltd claim that once their investment started to generate financial returns they have been subjected to intimidation and harassment from Kazakh authorities between October 2008 and July 2010, including the imprisonment in April 2009 of the General manager of KPM on allegedly falsified criminal charge of illegal entrepreneurial activity. According to the claimants, these measures were aimed at forcing them to sell at a low price their investments in oil fields and the LGP plant.

This case is not immune from political aspects, since an official letter from the President of Moldova Vladimir Voronin to the President of Kazakhstan Nursultan Nazarbayev and dated October 6, 2008, would have informed the head of the Kazakh state that the businessman Anatolie Stati “concealed profits” from the states where he has earned them and “used his money to invest in countries targeted by international sanctions such as Southern Sudan.”

The President of Moldova also warned his Kazakh counterpart about the “damage to the image and international authority” of their countries and accused the businessman to “interfere in the policy decision making, funding corrupted supporters to trade agreements with countries under international sanctions.”

If the letter did not bring any evidence to these accusations, it might have led the Kazakh President Nazarbayev to issue an official order dated 14/16 October 2008 to the Kazakh Deputy Prime Minister and the Head of the Agency for Fighting Economic and Corruption Crimes. The order asked them to “thoroughly check company’s work and to take decision on its further work in the best interests of the country.”

Numerous official audits and investigations on Anatolie Stati, KPM, and TNG were launched by the Kazakh authorities following this order.

The assets of the Moldovan investors were finally seized and transferred to KazMunayGas JSC (KMG), a Kazakh state-owned company, on July 21-22 2010.

However, Kazakhstan denied the allegations of harassment and pressure against the Anatolie Stati and his companies.

THE ARBITRAL AWARD 

Anatolie Stati and his son Gabriel initiated arbitral proceedings on July 26, 2010 before the Stockholm Chamber of Commerce, several days after the seizure of their assets. They claimed before arbitrators that Kazakhstan had breached its legal obligations under the Energy Charter Treaty of 1994 by violating the investor protection provisions.

The Moldovan businessmen contended that the KPM senior employee’s conviction before a Kazakh criminal court and the recovery of income from KPM by Kazakh tax authorities after a series of audits and official investigations were contrary to fair and equitable treatment standards and to the constant protection and security clause included in the Energy Charter Treaty. Both these standards have part of international customary law.

Investors thus claimed that Kazakhstan was thus liable to pay damages to them and a financial compensation with respect to the seizure of the LPG plant and of the companies KPM and TNK.

In the arbitral award rendered on December 19, 2013, the Tribunal understood the “fair and equitable treatment” as that “the host state has to act in a manner that is consistent with the legitimate expectations of investors.” (§941 of the award)

The arbitral tribunal granted the claim of the Moldovan investors over the breach by Kazakhstan of the obligation to treat investors fairly and equitably, as required by Art. 10(1) of the Energy Charter Treaty (ECT) (§1798 of the award).

In order to assess the amount of damages that must be paid by Kazakhstan, the Statis claimed to have invested USD 245 million in the development and the construction of the seized LPG Plant. Artur Lungu, Chief Financial Officer and Vice President of ASCOM S.A., confirmed the words of Anatolie Stati, according to documentation provided to the High Court of Justice in London (§16, High Court of Justice, June 6, 2017, [2017] EWHC 1348 (Comm)).

The arbitral tribunal used the well-known principle of the Chorzów Factory case, ruled by the International Court of Justice in its Judgment No. 13, (Merits) 13 September 1928 :

“[p.47] The essential principle contained in the actual notion of an illegal act – a principle which seems to be established by international practice and in particular by the decisions of arbitral tribunals – is that reparation must, as far as possible, wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed. Restitution in kind, or, if this is not possible, payment of a sum corresponding to the value which a restitution in kind would bear; the award, if need be, of damages for loss sustained which would not be covered by restitution in kind or payment in place of it-such are the principles which should serve to determine the amount of compensation due for an act contrary to international law.”

The tribunal considered that the starting point for the calculation of damages should be the formula applied in the Chorzów factory case, and often applied in investment arbitrations as well, i.e. that the damages awarded “must as far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed.” (§1527 of the award)

Following this point the arbitrators based their assessment of the damages with respect to the LPG plant on a valuation mentioned in a KMG indicative bid dated 2008 (§1746-1748 of the award).

Indeed, the arbitrators considered that the relatively best source for the valuation in the period accepted by the tribunal are the contemporaneous bids that were made for the LPG Plant by third parties after Claimants’ efforts to sell the LPG Plant, both before and after October 14, 2008.

In particular, an offer made for the LPG Plant by the Kazakh state–owned KMG at that time for USD 199 million has been considered by the tribunal to be the relatively best source of information for the valuation of the LPG Plant among the various sources of information submitted by the Parties.

Finally, the total of damages awarded by the arbitral tribunal and to be paid by Kazakhstan to the Moldovan investors amounted to USD 497,685,101. (§1859 of the award)

However, the Central Asian Republic contends that the valuation of the LPG Plant at USD 199 million was based on false financial information and challenged the arbitral award before the Court of Appeal of Stockholm and the Supreme Court of Sweden.

DISPUTE OVER THE VALUATION OF DAMAGES  

The figure of USD 245 million of investment claimed by Anatolie Stati and Artur Lungu appeared in audited and reviewed financial statements of TNG. In addition, documentation of the state-owned KMG related to the bidding process in 2008 estimated the value of the LNG plant at USD 199 million.

Nonetheless, Kazakhstan claims that the Moldovan investors had not proved that USD 245 million had been spent on the LNG Plant and refused to pay the damages.

In turn, the Moldovan investors filed enforcement lawsuits in several European countries and in the United States which led to the freeze of USD 22.6 billion of assets owned by the Kazakh sovereign wealth fund in October 2017.

KAZAKHSTAN CHALLENGED THE ARBITRAL AWARD

Kazakhstan filed a request on March 19, 2014 before the Court of Appeal of Svealand (Stockholm) to annul the award but the Court upheld it on December 9, 2016 2016 and dismissed the Kazakhstan’s action. (Svea Court of Appeal, Judgement, December 9, 2016, Case no. T 2675-14)

The Swedish Court of Appeal did not determine the truth or otherwise of the fraud allegations claimed by Kazakhstan. The Court of Appeal held that the State did not provide grounds that the allegedly false evidence over valuation of the LPG plant has been directly determinative of the outcome of the arbitration or, if it had an indirect influence, that it had been of decisive importance for the outcome.

The Kazakh government then filed a claim to the Supreme Court of Sweden to challenge this ruling, contending that the allegation of fraud in the arbitration proceedings was not considered in substance in the appealing process. Nevertheless, the Supreme Court issued its ruling on October 24, 2017 favouring the Moldovan investors.

The enforcement proceedings in the UK’s jurisdiction were stayed pending determination of the Kazakhstan’s application to set aside the award in Sweden.

DOCUMENTS OBTAINED THROUGH SUBPOENA IN THE US JURISDICTION

After that the arbitral award was rendered on December 19, 2013 (Anatolie Stati, Gabriel Stati, Ascom Group SA and Terra Raf Trans Traiding Ltd v. Kazakhstan, SCC Case No. V (116/2010)), the Kazakh state filed an application for judicial assistance in the United States, which resulted in a subpoena against the law firm of Clyde & Co. LLP compelling the production of documents.

Documentation obtained in June 2015 by Kazkakhstan includes a contract dated 17 February 2006 between TNG and the company Perkwood Investment Limited. (Decision of the US District Court for Southern District of New York on Discovery Application, 15 Misc. 0081(SHS), 06/22/15)

This contract shows that TNG agreed to buy equipment from Perkwood relating to the construction of the LPG Plant in Kazakhstan for USD 115 million.

This point has significance since Kazakhstan claims that a large proportion of this equipment had already been purchased at a far lower cost. (§28, High Court of Justice, June 6, 2017)

Therefore, we can understand that the Kazakh Party may consider that new equipment was not necessary to the normal operation of the LPG Plant or even was not purchased at all.

Astana considers that the USD 199 million valuation of a LPG plant operated by the plaintiffs was based on fraudulent information and refused to pay the damages.

ENFORCEMENT PROCEEDINGS IN THE UK’S JURISDICTION

The Moldovan businessmen initiated proceedings to obtain the recognition and the enforcement in the English jurisdiction of the arbitral award rendered on December 19, 2013 and seated in Sweden, which is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of June 10, 1958.

By an arbitration claim form dated February 24, 2014 the Statis invoked the jurisdiction of the Courts of England and Wales under section 101 of the UK Arbitration Act of 1996. They were granted permission to enforce the arbitral award against the state of Kazakhstan in the U.K. jurisdiction on February 28, 2014.

On April 7, 2015 the Kazakh state issued an application before the High Court of Justice to set aside the permission that had been granted to enforce the award in the U.K.’s jurisdiction, alleging that the award had been obtained by fraud.

Nonetheless, after the production of concealed documents by the subpoena procedure in the United Sates in June 2015, the Kazakh State amended its application in August 2015, adding that the “enforcement of the arbitral award would contravene English public policy by fraud of the claimants” (Moldovan investors).

WHAT IS PUBLIC POLICY ?

Public policy is a ground for setting aside arbitral awards, denying their recognition and enforcement in national jurisdictions.

The article V §2, (b) of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) states that :

“2. Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that:

(b) The recognition or enforcement of the award would be contrary to the public policy of that country.”

The concept of public policy can be defined as the “state’s most basic notions of morality and justice” (Parsons & Whittemore Overseas Co., Inc. v. Société Générale De L’industrie Du Papier (Rakta). 508 F.2d 969. U.S. Court of Appeals, 2d Cir., Dec. 23, 1974) or as the fundamental principles of a legal system such as justice, honesty, fairness.

The public policy defence arises before Courts when bribery, corruption, fraud, breach of legislation, perjury or serious procedural violations occurred in arbitration proceedings.

In the Ascom case, Kazakhstan claimed in its application to set aside the enforcement order before the High Court in London that the concealment of documents related to the valuation of the LPG plant by the Moldovan investors was a fraud impacting the arbitration proceedings and contrary to the English public policy.

HOW THE HIGH COURT ANSWERED TO THE REQUEST OF KAZAKHSTAN ?

Because of the pending determination of the Kazakh State’s application in Sweden to set aside the arbitral award of 2013, the application to amend filed in August 2015 was not heard by the High Court until 2017.

In its judgement dated June 6, 2017, the High Court of Justice stated that the contract between TNG and Perkwood was never submitted to the arbitral tribunal seated in Sweden although arbitrators required the production of documents by the Moldovan investors.

Indeed, during arbitration proceedings the tribunal had upheld a request that the Moldovan investors disclose the documentation specifying the cost of construction and assembly of operations, start-up and adjustment works in respect of the LPG Plant. Despite this order from the arbitral tribunal, the contract with Perkwood was not disclosed by the claimants, stated the High Court. (§29, High Court of Justice, June 6, 2017)

Furthermore, the judgement stressed that TNG paid USD 44 million to Perkwood as a “management fee”, although there is no contemporaneous record of what management was undertaken.

The text of the judgement also mentions that documents obtained in the United States Disclosure Proceedings indicated a USD 72 million payment which was ascribed to equipment delivered to TNG but not incorporated into the LPG Plant. Kazakhstan asserts that the plant was almost complete and that equipment of such value could have been stored nowhere.

Besides, Perkwood Investment Limited, incorporated in the UK in 2005 (Company number 05563754), from 2006 to 2009 filed accounts that showed it was dormant. The company was finally struck off the British companies register in 2011 and dissolved. (§30, High Court of Justice, June 6, 2017)

The High Court of Justice noted in its judgement that after the discovery of these contracts between Perkwood and TNG, the Moldovan investors had to respond to Kazahstan’s assertions before the Swedish Court of Appeal.

Anatolie Stati and his son Gabriel then alleged that the unveiled contracts covered transportation costs and new equipment to increase the capacity of the LPG plant but failed to submit any evidence. In addition, the businessmen neither produced evidence to support that the “management services worth USD 44 million” were actually performed by or on behalf of Perkwood Investments Limited, nor they explained what equipment was purchased for USD 72 million.

Following these new elements, Kazakhstan contended that the claim by the Moldovan investors in the arbitration proceedings that investment in the LPG Plant amounted to USD 245 million was dishonest.

Moreover, the Central Asian Republic claimed that the concealment of these elements affected the KMG Indicative Bid dated 2008 and the valuation of damages in the arbitral award rendered in 2013. (§34, High Court of Justice, June 6, 2017)

Indeed, if constructions costs were not USD 245 million because that figure was fraudulently inflated by the Moldovan investors to the extent alleged by Kazakhstan, then the KMG Indicative Bid in 2008 assessing the plant at USD 199 million would have been lower. (§43, High Court of Justice, 6 June 2017)

In the judgment rendered on June 6, 2017, the High Court of Justice stressed that “Recognition or enforcement of a New York Convention award shall not be refused except in the following cases …if it would be contrary to public policy to recognise or enforce the award”: section 103(1) and (3) Arbitration Act 1996.” (§11)

RECEIVABILITY OF ALLEGATIONS OF FRAUD IN ARBITRATION

The High Court of Justice considers that two conditions must be fulfilled to permit a party in the UK jurisdiction to pursue to a trial the examination of allegation that a foreign arbitral award was obtained by fraud:

The first condition required is that “the evidence to establish the fraud was not available to the party alleging the fraud at the time of the hearing before the arbitrators” and “where perjury is the fraud alleged, i.e., where the very issue before the arbitrators was whether the witness or witnesses were lying, the evidence must be so strong that it would reasonably be expected to be decisive at a hearing, and if unanswered must have that result.” (Westacre Investments Inc v Jugoimport-SPDR Holding Co Ltd [2000] QB 288 (CA) at 309F)

The second condition is that “there is a prima facie case of fraud which is sufficient to overcome the extreme caution of the court when invited to set aside an award on the grounds of public policy” : (IPCO (Nigeria) Limited v Nigerian National Petroleum Corporation [2015] EWCA Civ 1144; [2016] 1 Lloyd’s Rep 5 at [191] per Christopher Clarke LJ)

The judgement of the High Court of Justice added that when addressing the question whether an award has been obtained by fraud or the award or the way in which it was procured is contrary to public policy the Court will normally look to see whether “some form of reprehensible or unconscionable conduct has contributed in a substantial way to the obtaining of the award.” (On this issue see Double K Oil Products 1996 Limited v Neste Oil OYJ [2009] EWHC 3380 (Comm); [2010] 1 Lloyd’s Rep 141 at [33] per Blair J; and see Gater Assets Ltd v Nak Naftogaz Ukrainiy [2008] 1 CLC 141 at [41] per Tomlinson J)

Regarding the request of Kazakhstan, the High Court of Justice stated that :

“There is the necessary strength of prima facie case that the alleged fraud would have made a difference to the Tribunal […] in asking the Arbitral Tribunal to rely on the KMG Indicative Bid in circumstances (concealed from the Tribunal, as from the bidder) of the alleged fraud, there was a fraud on the Tribunal.” (§48)

In its conclusion, the institution stated that “there is a sufficient prima facie case that the Award was obtained by fraud. It will do nothing for the integrity of arbitration […] if the fraud allegations in the present case are not examined at a trial and decided on their merits, including the question of the effect of the fraud where found. The interests of justice require that examination.” (§ 92 and 93)

On June 27, 2017, the High Court also denied Anatolie Stati the possibility of filing an appeal against the judgement dated June 7, revealed a press release of the Ministry of Justice of Kazakhstan.

On January 11, 2018, the Civil Division of the Court of Appeal of England rejected the petition of Mr. Anatolie Stati for permission to appeal the June 2017 decision of the High Court of Justice in favour of Kazakhstan, reported the Ministry of Justice of the Republic.

Lire aussi : Les Etats face à l’espionnage dans le cyberespace

New hearings before the British Justice are scheduled in October 2018 and Kazakh authorities intend to prove the fraud in the arbitral proceedings against the Moldovan investors.

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© Copyright 2019 –  Swann Bigot, legal expert and consultant.

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