Sector involved: Telecommunications

Applicable BIT: Turkey-Kazakhstan

Members of the Annulment Committee: Judge Stephen M. Schwebel (Chairman), Professor Campbell McLachlan Q.C., Dr. Eduardo Silva Romero

The Tribunal’s Award: The Tribunal held that Kazakhstan had expropriated Rumeli and Telsim’s 60% stake in the telecommunications company KaR-Tel and awarded them damages in the amount of US$125 million (the “Award”).

Kazakhstan’s position: Kazakhstan sought the annulment of the Tribunal’s damages award on the basis that it was “inexplicable, being based on inconsistent, illogical or nonexistent reasons,” and that the Tribunal had failed to adequately state the reasons for its decision on the quantum of damages.

In addition to arguing that the Tribunal’s damages award was inconsistent with certain factual holdings, Kazakhstan criticized the Tribunal in three main respects. First, Kazakhstan alleged that the Tribunal had preferred the liquidation value approach of Kazakhstan’s damages expert, Navigant, but nonetheless had adopted the discounted cash flow (DCF) method advanced by Rumeli and Telsim’s damages expert, Analysys, despite describing its shortcomings. Second, Kazakhstan contended that, in applying the DCF method, the Tribunal took the Analysys figure of US$227 million as a starting point and, without providing full reasons for its decision to accept or reject various factors relevant to the DCF analysis, reduced this figure to arrive at a damages award of US$125 million. Third, Kazakhstan argued that it was not possible to see how the DCF analysis resulted in the figure of US$125 million, in light of the Tribunal’s failure to elaborate on any of the inputs or to describe the methodology used.

Rumeli and Telsim’s position: The Claimants contended that the Award was easy to follow and was not lacking in reasons, and that Kazakhstan’s complaints related exclusively to the correctness of the award. According to the Claimants, the Tribunal adopted the DCF approach—and the figure of US$227 million—as a starting point because it would have been a starting point in discussions between a willing buyer and a willing seller, and because it reflected the significance of the telecommunications license held by KaR-Tel. In light of the circumstances, including KaRTel’s balance sheet insolvency and the prospect that the company’s fortunes would not improve without new management, the Tribunal exercised its discretion and reduced the figure to US$125 million.

The standard of review applied by the Committee: In considering an application to annul an award on the grounds that a tribunal “has failed to state the reasons on which it is based,” the Committee was of the view that this ground concerns a failure to state any reasons, not the failure to state correct or convincing reasons. Moreover, it considered that an ad hoc committee was entitled to seek to understand the reasons for an award in light of the full record before the tribunal.

Observations regarding the quantification of damages: Before analyzing the parties’ contentions and examining the evidence on damages before the Tribunal, the Committee made some general observations about the nature of the task facing a tribunal when it is determining the quantum of damages. The Committee highlighted the distinction between the “fact of loss,” which is for the claimant to prove, and the “amount of loss,” which is for the tribunal to determine in light of all of the evidence before it. Because the task of valuing the future profitability of a business is inherently uncertain, the Committee stated that tribunals “are generally allowed a considerable measure of discretion in determining issues of quantum.”

Conclusions of the Committee: The Committee acknowledged that the figure of US$125 million was stated in the Award without an explanation of the Tribunal’s underlying mathematical calculation in arriving at that number. Although the Committee considered it “highly desirable” for tribunals to explain how an ultimate damages figure is derived, the Committee declined to annul the Award because it deemed that the Tribunal had not failed to give reasons for its damages award. In the Committee’s view, the Tribunal had clearly rejected the argument that Rumeli and Telsim’s shares in Kar-Tel were worthless at the time of expropriation and had concluded that KaRTel’s major asset, the license, was income-generating, thereby warranting the use of the DCF method as a tool to ascribe a value to it. Accordingly, the only evidence available to the Tribunal was that put forward by Analysys on behalf of Rumeli and Telsim. However, the Tribunal was not limited by the evidence or figures put forward by the parties. The Tribunal had taken the Analysys figure as a starting point and was entitled to balance a number of countervailing considerations, which led to the reduction from US$227 million to the final damages figure of US$125 million. Since the estimation of damages in such circumstances is not an exact science, the Committee considered that the Tribunal had a measure of discretion to arrive at the final figure, noting that “[t]here may in that context be real limitations on the extent of reasoning which can reasonably be expected.”