Public policy and false evidence
Arbitral jurisdiction under the treaty
The Svea Court of Appeal(1) recently rejected the Republic of Kazakhstan's request to declare invalid or set aside the arbitral award in Stati v Kazakhstan.(2) In the award, a group of foreign investors was awarded substantial damages following the state's seizure of certain assets. The judgment cannot be appealed.
The judgment touched on several questions, such as when an arbitral tribunal's wrongful action constitutes an excess of mandate and when it is considered as another procedural error. The court also considered:
- the principle of equal treatment of parties in relation to the appointment of arbitrators;
- the interpretation of the underlying arbitration provision in the Energy Charter Treaty; and
- the issue of whether an award can be declared invalid due to false evidence.
This update discusses some of the issues raised before the Svea Court of Appeal, namely regarding false evidence and arbitral jurisdiction under the treaty.
The Energy Charter Treaty is a multilateral investment protection treaty which establishes a framework for cross-border investment in the energy industry. It is designed to promote principles of openness and non-discrimination on the global energy market to stimulate cross-border trade. The treaty is binding for the contracting states and gives unfairly treated investors the right to bring claims for damages against a contracting state. It entered into force in Kazakhstan in 1998.
In 1999 Anatolie and Gabriel Stati, through companies registered in Moldava and Gibraltar, bought shares in local Kazakh businesses and acquired the extraction rights to an oil field and a natural gas deposit. The companies invested in local facilities and began operations.
A dispute arose between the investing entities and the Kazakh authorities. The conflict resulted in Kazakhstan's termination of the underlying agreements, stripping the investors of their extraction rights. The investors' assets in Kazakhstan were seized by the Kazakh authorities and the extraction rights were transferred to a state-owned company.
Following the confiscation of assets and termination of contracts by the Kazakh state, the investors initiated arbitration at the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) in 2010. The investors claimed that they had been subjected to a systematic harassment campaign by the state and claimed damages of nearly $3 billion. The arbitral tribunal consisted of Karl-Heinz Böckstiegel (chairman), David Haigh and Sergei Lebedev. Kazakhstan did not appoint an arbitrator within the stipulated time, resulting in the SCC board appointing Lebedev on the state's behalf. This later became one of the issues put forward by Kazakhstan in the challenge.
The arbitral tribunal rendered its award on December 19 2013, finding that Kazakhstan had violated its fair and equitable treatment obligations under Article 10 of the Energy Charter Treaty. The group of foreign investors was consequently awarded total damages of approximately $500 million. Lebedev dissented on the arbitral tribunal's jurisdiction and Haigh on the assessment of damages.
In 2014 Kazakhstan challenged the award before the Svea Court of Appeal in Stockholm, claiming that the award, wholly or partially, should be declared invalid or set aside pursuant to Sections 33 and 34 of the Swedish Arbitration Act.
Public policy and false evidence
Kazakhstan claimed that the arbitral award had been based on false evidence, fraudulent behaviour and misleading information given by the investors and that the award, in whole or in part, should therefore be declared invalid. The state based this part of its claim on Section 33(2) of the Arbitration Act. Under this section an award that is clearly incompatible with the basic principles of the Swedish legal system is invalid.
During the arbitration, both parties presented evidence and engaged experts to provide value assessments of the assets that the investors had lost. Kazakhstan argued that the evidence presented by the investors was misleading and that by fraudulent behaviour they had obtained fictitious valuations of certain assets. According to Kazakhstan, the misleading information affected the tribunal's overall assessment of the case, particularly the calculation of damages.
The investors denied that any false evidence had been presented during the proceedings and contested that the allegedly false evidence could have had any effect on the outcome of the arbitration. The investors argued that false evidence does not constitute a ground for declaring an award invalid with reference to public policy and Section 33(2).
The Svea Court of Appeal stated that the provision is to be applied restrictively and is aimed at highly offensive cases. Only when fundamental principles of substantive or procedural law have been put aside can an award be declared invalid on this ground. Thus, the threshold for application of the rule is very high.
Nevertheless, the court concluded that an award based on false evidence might violate public policy. However, since the public policy provision is to be applied only in exceptional cases, it is only when it is clear that the false evidence has had a deciding effect on the case outcome that an award can be declared invalid on this ground.
Ultimately, Kazakhstan was unable to prove that the alleged false evidence in the form of testimonies, written witness statements and expert reports relating to the amount of the investment cost affected the tribunal's ruling and the challenge in this part was dismissed without the court having to decide whether false evidence had in fact been presented. As regards the indicative bid, on which the arbitral tribunal based its assessment, the reasoning of the court is less clear. The court states that the indicative bid per se did not constitute false evidence, irrespective of whether it may have included incorrect information based on annual reports. It also states that the allegedly false information in the annual reports did not directly constitute the basis for the arbitral tribunal's assessment.
Following the appeal court judgment, Kazakhstan filed a motion with the Swedish Supreme Court to set aside the judgment on the basis of grave procedural errors. Kazakhstan claimed that the appeal court had not tried two of the grounds for setting aside the award invoked by Kazakhstan in connection with the allegation of fraud made against the investors. The Supreme Court rejected the motion on October 24 2017.
Arbitral jurisdiction under the treaty
Kazakhstan also claimed that there was no valid arbitration agreement between the parties, as the investors had not observed a mandatory pre-arbitration negotiation period before initiating the arbitration. Pursuant to Section 34 of the Arbitration Act, an award which is not covered by a valid arbitration agreement will be set aside on motion of a party.
In disputes under the Energy Charter Treaty, the arbitration agreement is derived from Article 26, according to which a contracting state "gives its unconditional consent to the submission of a dispute to international arbitration". By initiating arbitral proceedings and invoking Article 26, an investor is deemed to have accepted a contracting state's standing offer of arbitration. Investors can choose to have the dispute resolved under either of the Arbitration Rules of the SCC, International Centre for Settlement of Investment Disputes or the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules.
Article 26 also requires the parties to try to settle the dispute amicably:
"If such disputes cannot be settled according to the provisions in paragraph (1) within a period of three months from the date on which either party to the dispute requested amicable settlement, the Investor party to the dispute may choose to submit it for resolution."
Kazakhstan argued that this condition had not been met when the investors initiated proceedings, since the parties had not first tried to solve the dispute amicably during the three-month negotiation period. The investors responded that the negotiation period was not mandatory and, if it was, that it had been respected.
The question put to the court was whether the three-month negotiation period was an absolute prerequisite for the investors' right to initiate proceedings and consequently for the tribunal's jurisdiction.
Applying Articles 31 and 32 of the Vienna Convention on the Law of Treaties,(3) the court established that a treaty should be understood according to its wording and the common understanding of that wording. However, Article 26 of the treaty gives no clear answer to the specific question, nor is there any uniform case law or consensus in the legal community. The court examined the treaty's function and purpose, finding a mandatory negotiation period to be contrary to the underlying interest of providing swift and final dispute resolution through arbitration.
In light of the Energy Charter Treaty's purpose and history, the court determined that explicit and clear wording was needed in order for the court to uphold conditions to the contracting states' unconditional plea to accept dispute resolution through arbitration. The court also noted that nothing hinders the parties from negotiating within the scope of an arbitration. The court thus concluded that the observance of a three-month negotiation period was not a requirement for the jurisdiction of the tribunal.
One of the three judges dissented and concluded that jurisdiction under Article 26 of the treaty can arise only if no amicable solution could be found by the parties within three months. However, he also found that the investors' initiation of the process had been superseded by lengthy negotiations between the parties and therefore that the negotiation condition had been fulfilled.
The Svea Court of Appeal's judgment indicates that it is possible to declare invalid an arbitral award based on false evidence due to public policy, provided that it is proven that the outcome of the case was influenced. The judgment also highlights that the public policy provision must be interpreted narrowly and applied only in exceptional cases.
The question of false evidence was discussed in connection with the preparatory works of the Arbitration Act. It was suggested that a provision should be added, specifically stipulating that an award based on false evidence could be declared invalid on motion of a party. The suggestion was turned down by the government, since it feared that such a rule would have a negative impact on the swiftness and finality of Swedish arbitration awards. However, it was also argued that false evidence could fall under the existing public policy provision in Section 33 of the act, which would be in accordance with how the term 'public policy' is used and understood in the UNCITRAL Model Law on International Commercial Arbitration and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, thus fostering international conformity on the subject. It is with reference to this reasoning in the preparatory works of the act that the Svea Court of Appeal gave its judgment on the matter.
As regards arbitral jurisdiction under the Energy Charter Treaty, the judgment confirmed the approach to interpretation of arbitration clauses in treaties taken by the Svea Court of Appeal in a recent case between the Russian Federation and foreign investors relating to investments in Yukos.(4)
Court focus should be on the wording of the treaty provision, in accordance with Article 31 of the Vienna Convention. However, if the wording is unclear, the court will apply Article 32 of the Vienna Convention. Under Article 32, the court may consider other circumstances (eg, the treaty's history and purpose) when interpreting the provision. This also applies to treaty provisions forming the basis for arbitral jurisdiction.
For further information on this topic please contact Fredrik Norburg or Kajsa Åkesson at Norburg & Scherp by telephone (+46 8 420 035 00) or by email ([email protected] or [email protected]). The Norburg & Scherp website can be accessed at www.norburgscherp.se.
(1) Svea Court of Appeal, T 2675-14, December 9 2016.
(2) The Arbitration Institute of the Stockholm Chamber of Commerce, V 116/2010
(3) The United Nations Vienna Convention on the Law of Treaties, concluded at Vienna on May 23 1969.