05 December 2014

Case Law Update – CIS: Economic Court Ruling offers clarity on Article 11 of the MCPIR1997

This article was co-written by Charlotte Angwin

The Kyrgyz Republic, one of the Central Asian states formerly part of the USSR, has been hit by a series of international investment arbitration claims over the past two years brought under the little-known Moscow Convention for the Protection of Investment Rights 1997 (the “Convention”). The Republic did not take part in the proceedings, and three default awards have been made against it for the aggregate amount of US$150 million.

The claimants ranged from the Canadian mining group, Stans Energy, to individual property developers. Each claimed that a broadly drafted dispute resolution provision of the Convention entitles potential claimants to bring arbitration proceedings against the state-parties to the Convention in any arbitration court of the investor’s choice. On each occasion, the claimants chose the relatively unknown Moscow-based arbitration institution, the Arbitration Court of the Moscow Chamber of Commerce and Industry (“MCCI”). In fast-track proceedings, three MCCI tribunals made default awards against the Kyrgyz Republic.

The Convention

The Convention, which is a regional investment protection treaty, is currently in effect for Armenia, Belarus, Moldova, Kazakhstan, Kyrgyzstan and Tajikistan (Russia signed the Convention but the signature was subsequently revoked in 2007). The Convention contains guarantees to investors similar to those found in many bilateral investment treaties, but applies irrespective of the nationality of the investor.

Article 11 contains a dispute resolution provision which states:

“…disputes concerning implementation of investments within the framework of the present Convention are to be resolved by courts or arbitration courts of the state-parties, the Economic Court of the Commonwealth of Independent States and/or other international courts or international arbitration courts” (translation from Russian).

In the cases filed against the Kyrgyz Republic, the investors argued that the provision should be interpreted as a consent of contracting states for the investors to file their investment claims in any arbitration court of their choice. The MCCI agreed with the investors’ interpretation, found it had jurisdiction over each of the cases, and made default awards against the investors.

The CIS Court proceedings

The Kyrgyz Republic applied for each of the awards to be set aside before the Moscow courts, and in the meantime applied to the CIS Economic Court, a supra-national court designated by the Convention to hear disputes regarding interpretation of the Convention, seeking clarification of Article 11.

The decision by the CIS Economic Court on 23 September 2014 was the latest decision in a long-running dispute over the development of Kutessay II – one of the world’s largest rare earth mines. The dispute involved allegations of government interference, bribery, and corruption, and was previously the subject of arbitration proceedings before the MCCI between 2012 and 2013. The case turned on the question of whether Article 11 could be interpreted as allowing investors to file a claim against contracting states in any arbitration court of the investor’s choice.

The CIS Economic Court ruling

Following a hearing on 19 September 2014, the CIS Economic Court issued a ruling siding with the Kyrgyz Republic’s interpretation of the Convention. The Court ruled that Article 11 is merely a framework provision which confirms arbitrability of investment disputes but should not be interpreted as either an arbitration agreement or a standing offer to an investor to commence arbitration proceedings in any arbitration court of the investor’s choice. Specifically, the Court stated that:

“The provisions of Article 11 of the Convention for the Protection of Investor’s Rights dated March 28, 1997 are of a general nature being limited solely by determination of potential types of institutions which may examine disputes related to making investments under this Convention…The reference in Article 11 to the possibility of examination of investment disputes by international courts is not a sufficient ground for investors to refer to any international court…According to Article 11…disputes related to making investments…may be a subject-matter of examination in a specific international arbitration court provided that the competence of such court is stipulated by the national legislation of a state-party to the dispute, in a treaty to which the state-party to the dispute is a participant and/or in a separate agreement between the investor and the state-party to the dispute. The provisions of Article 11…to the effect that disputes related to making investments shall be examined by international arbitration courts establish solely the principal possibility of their examination in international arbitration subject to conclusion of arbitration agreements according to the established procedure. The provisions of Article 11…may not be considered as an arbitration agreement to examine a dispute related to making investments. The decision of the full bench of the Economic Court of the Commonwealth of Independent States on interpretation is final and not subject to appeal.”

The Court noted that investors can only commence arbitration proceedings in accordance with national laws of contracting states, bilateral investment protection treaties or direct agreement between the investor and the state.

Future cases

Legal commentators view the case as having clarified an important and contentious issue of interpretation surrounding the Convention. The judgment is expected by many to stymie the flood of proceedings which had been pouring in against Kyrgyzstan and other contracting states. The case is also likely to reaffirm the prevalence of the traditional investment arbitration institutions, including the ICSID, the ICC and of arbitral proceedings brought under the UNCITRAL rules.

The Kyrgyz Republic retained King & Wood Mallesons to represent it at the hearing before the CIS Economic Court.

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