Hamid Gharavi and Nada Sader secured a US$39.2 million damages award (more than US$ 53 million with interest) against Kazakhstan in ICISD arbitration Caratube International Oil Co. LLP and Devincci Salah Hourani v. Republic of Kazakhstan, case number ARB/13/13. This important win was reported in Global Arbitration Review (GAR) and Law 360 in the following terms:
GAR article of 29 September 2017:
“Caratube tribunal vindicates Gharavi’s decision to bring second claim
The award in Caratube II vindicates the decision of Hamid Gharavi of Derains & Gharavi to bring a second case against Kazakhstan on behalf of the oil company after jurisdiction was refused first time round, dismissing the state’s objections in their entirety and awarding US$39.2 million in damages. Claims by the company’s majority stakeholder, Devinnci Hourani, were dismissed on jurisdictional grounds.
In the first ICSID claim brought by Caratube International Oil Company under the US-Kazakhstan bilateral investment treaty, the tribunal said there was no evidence of “foreign control” of the company and suggested that Devincci Hourani was a mere “puppet” of the true owners, alleged to be his brother Isaam Hourani and one of his companies.
In light of those findings, there must have been many who doubted the success chances of Caratube’s second claim filed by Gharavi – who was not counsel for the company first time round – even though it was based not on the BIT but on a contract and Kazakhstan’s foreign investment law.
But in an award issued to the parties on 27 September, a tribunal including Laurent Lévy, Laurent Aynès and Jacques Salès upheld jurisdiction over Caratube’s claims, rejecting Kazakhstan’s defences that they were an abuse of process, time-barred and precluded because of collateral estoppel and res judicata. It also said Caratube had been “fully justified” in bringing the claims even though it evidently thought the US$1 billion of damages sought was excessive.
The tribunal further ruled that the claims were not precluded by Article 25 of the ICSID Convention, as argued by Kazakhstan. This article says at subparagraph 1 that for jurisdiction to be established there needs to be consent to ICSID arbitration and the investment in dispute needs to have been made by a “national of another contracting state” to the respondent state.
Article 25(2)(b) defines that phrase, saying it includes “any juridical person which had the nationality of the contracting state party to the dispute [on the date of consent to ICSID arbitration] and which, because of foreign control, the parties have agreed should be treated as a national of another contracting state for the purposes of the convention”.
It was on the basis of this article, read with the US-Kazakhstan BIT, that the claim in Caratube I failed – with the tribunal ruling that the Kazakh-registered claimant company had not proved that it was controlled by Devincci Hourani, a US national since 2001, and was therefore a foreign investment.
Commentators have noted that this imposed a higher jurisdictional threshold under Article 25(2)(b) of the ICSID Convention than exists in the US-Kazakhstan BIT, which says that investors must have ownership or control but not necessarily both.
The findings on abuse of process, whether the claim was time-barred, collateral estoppel and res judicata
In the latest award, the tribunal first found that Caratube was not guilty of an abuse of process – rejecting Kazakhstan’s suggestion that it had deliberately failed to raise all its claims in Caratube I in a bad faith attempt to pave the way for a further case.
Nor did the tribunal accept that Devincci Hourani was made majority shareholder of Caratube (with a 92% stake bought for a US$6,500) as a “frontman for the real parties in interest” – to give them access to ICSID jurisdiction.
Hourani became a US national in 2001 and the majority shareholder in Caratube in 2004, several years before the termination of the contract and start of ICSID proceedings, the tribunal said. It added that it did not have the power to rule, as Kazakhstan wanted, that his US nationality was illegally obtained on the basis of a false statement that he was married – this was a matter for the competent US authorities to decide.
With regard to the argument that the claim was “time barred”, the tribunal said that to prevent it would be incompatible with “international prescription principles”. Caratube had acted promptly in initiating Caratube I after the termination of the contract “on a jurisdictional basis that was not manifestly unfounded”, it said. The company was thus anything but “in repose” about its rights and it was not its fault that the Caratube I tribunal took more than three years to deny jurisdiction.
On collateral estoppel, the tribunal held that the Caratube I award had not included a final and binding decision with respect to who actually controlled the company or made a “standalone” decision on the definition of investment under Article 25 of the ICSID Convention.
Kazakhstan’s res judicata defence similarly foundered on the grouds that the claims in the second case were based on contract and Kazakhstan’s foreign investment law, not the BIT used in the first case. This distinction ensured Caratube’s right to access ICSID jurisdiction and to be heard, the tribunal said.
Turning to Article 25, the tribunal held that Kazakhstan had agreed in its contract with Caratube to treat it as a foreign national and found no reason to disregard Devincci Hourani’s ownership of Caratube in favour of piercing the corporate veil.
It also said Kazakhstan had not rebutted the presumption that Caratube was under foreign control at all relevant times.
The tribunal gave careful consideration to the contract in the case, signed in 1994 by Kazakhstan’s Ministry of Energy and Mineral Resources and a Lebanese construction company that later assigned its rights to Caratube. In this contract, it said the parties had agreed that their transaction was a foreign investment and consented to ICSID arbitration of any disputes.
There was no allegation by Kazakhstan that it was an ordinary commercial transaction falling outside the objective meaning of an investment, it noted.
The tribunal rejected also rejeted the notion that either Caratube or Devinnci Hourani were “mere puppets” for Issam Hourani and his company. Kazakhstan had provided “no explanation” as to why one of the brothers would hide behind the other in relation to this project, when they were joint shareholders of other companies – such as the pharmaceutical plant that is the subject of the other pending ICSID claim – it said.
Based on the contract, the tribunal found that its jurisdiction covered Caratube’s claims against Kazakhstan for breach of the foreign investment law. It accordingly did not need to decide whether it had jurisdiction on any other basis.
Was Caratube I tainted?
Gharavi and his team were less successful in persuading the tribunal to accept jurisdiction over a claim by Devincci Hourani in person. It held that Kazakhstan had repealed its foreign investment law a year before he acquired his shares in Caratube. However, speaking to GAR, Gharavi notes that he only needed to establish jurisdiction in relation to Caratube, since Hourani owns the company.
“The tribunal’s holding that Caratube – a company owned by a US national of Palestinian origin – met ICSID’s nationality and investment requirements, and that Devincci Hourani was a bona fide investor, serves to highlight how the award of the tribunal in Caratube I was tainted by ignorance of international law and prejudice,” he says.
What is clear is that the award’s highly technical jurisdictional findings are likely to be poured over by arbitration lawyers for many days to come”.
LAW 360 Article of 29 September 2017:
“Kazakhstan Must Pay $39M In Oil Field Dispute, Tribunal Says
An international tribunal has ordered Kazakhstan to pay $39 million to Caratube International Oil Co. LLP, concluding that Kazakhstan expropriated the company’s investment in the country by unlawfully terminating a contract to develop oil fields.
The International Centre for Settlement of Investment Disputes tribunal concluded in its award, dated Wednesday and published Friday, that Kazakhstan had breached its obligations to Caratube when it terminated their contract, depriving the company of its existing rights to exclusively explore and develop the oil fields. In fact, at the time the contract was terminated in 2008, Caratube still had the right to perform under the contract until May 2009 and, if necessary, to extend the exploration period another two years.
“Based on the foregoing, a majority of the tribunal concludes that the respondent unlawfully terminated the contract,” according to the award. “Due to this unlawful termination of the contract, CIOC, at the time of the termination, was unreasonably and substantially deprived of its existing rights under the contract.”
The tribunal rejected arguments put forward by Kazakhstan that Caratube had obtained an initial extension of the contract by misrepresenting whether a certain seismic study had been successfully completed, which would have meant that it was in a position to begin its key exploration obligation of drilling four deep wells.
And although the tribunal did conclude that Caratube had failed to comply with some of its financial obligations under the contract, it concluded that Kazakhstan had not adequately notified Caratube of certain alleged material breaches.
Kazakhstan’s appointed arbitrator, Jacques Salès, dissented on these points, concluding that the study was unusable and amounted to a material breach of the contract, and that Kazakhstan had given Caratube adequate notice of its breach. That meant Kazakhstan had the right to terminate the contract, he said.
Turning to damages, the tribunal rejected Caratube’s claims for lost profits that could have come from the sale of oil obtained from the field or from the sale of the company, or lost opportunities, concluding that the claimants hadn’t sufficiently or convincingly established either of these claims. Instead, it awarded $39.2 million, representing investment costs spent by Caratube.
The tribunal concluded it did not have jurisdiction over claims put forward by Caratube’s majority shareholder, Devincci Hourani, a U.S. national. The tribunal also rejected allegations that Kazakhstan had engaged in a politically motivated campaign against the Hourani family, concluding that the claimants had not been able to specifically prove the country’s involvement in the alleged acts of harassment.
Attorneys for both sides hailed the award as a victory Friday.
“The award is yet another example that it ultimately serves no purpose for states such as Kazakhstan to give a legal spin to a political taking, as the tribunal found, and then spend tens of millions of USD of the state budget in legal fees, which Kazakhstan did in the case at hand, to defend by creative arguments on jurisdiction and merits,” said Hamid Gharavi of Derains & Gharavi International in Paris, who represented the claimants.
Curtis Mallet-Prevost Colt & Mosle LLP partner Peter M. Wolrich, representing Kazakhstan, meanwhile, pointed out that the $39 million award is a “mere fraction” of the $991 million the claimants had sought.
“This is a typical unfortunate example of what happens in arbitrations when claimants make ridiculous exaggerated claims. It makes cases far longer and far more expensive,” he said, adding that exaggerated claims negatively affect the public’s perception of the arbitration process.
The dispute has its origins in a 2002 contract providing for the exploration and production of hydrocarbons entered into by Kazakhstan’s Ministry of Energy and Mineral Resources and an international construction company called Consolidated Contractors (Oil and Gas) Co. SAL. The contract was later assigned to Caratube.
Under the contract, Consolidated Contractors and later Caratube were charged with demonstrating the commerciality of certain oil reservoirs that had been discovered in the 1960s, and to explore certain other reservoirs though seismic surveys and the drilling of exploration wells.
The parties differed on whether Caratube had met its obligations under the contract. Kazakhstan claimed that Caratube was in a persistent state of material breach of its obligations under the contract, and that the company was only interested in taking advantage of certain known deposits and wells to produce oil for its own benefit, rather than to carry out essential exploration, according to the award.
Kazakhstan ordered Caratube to halt its operations under the contract in 2007, and the contract was ultimately terminated in 2008.
Meanwhile, Caratube and Hourani alleged that they were caught up in a dispute between the president of the Republic of Kazakhstan, Nursultan Nazarbayev, and his son-in-law at the time, Rakhat Aliyev, because the Hourani family was thought to have given Aliyev assistance.
Aliyev and certain members of the Hourani family have been accused of a number of serious crimes, including money laundering, kidnapping, sequestration, torture, murder, extortion and corporate raiding. The claimants contend that certain members of the Hourani family were targeted by Kazakhstan for alleged criminal matters, and certain of Caratube’s documents were seized as part of this campaign of harassment. In addition, beginning in 2007, Caratube was subjected to an “avalanche” of state inspections and audits, the claimants said.
The arbitration is the second between the parties. An initial arbitration submitted in 2008 was dismissed for lack of jurisdiction in 2012.
The tribunal was led by Laurent Lévy and included the claimants’ appointee, Laurent Aynès, and the dissenting arbitrator, Salès.
The claimants are represented by Hamid G. Gharavi and Nada Sader of Derains & Gharavi.
Kazakhstan is represented by Peter M. Wolrich, Geoffroy Lyonnet, Gabriela Alvarez Avila, Jérôme Lehucher, Yerzhan Mukhitdinov, Marie-Claire Argac, Lisa Arpin-Pont and Olena Stasyk of Curtis Mallet-Prevost Colt & Mosle LLP. Two other attorneys, Anna Kouyaté and Svetlana Evliya, who are no longer with Curtis, also represented the country.
The case is Caratube International Oil Co. LLP and Devincci Salah Hourani v. Republic of Kazakhstan, case number ARB/13/13, in the International Centre for Settlement of Investment Disputes”.