Moscow Commercial Court sets aside arbitral award and provides interpretation of Article 11 of Moscow Convention

In Kyrgyzstan v Stans Energy Corporation, Kutisay Mining LLC (Case A4064831/14), the Moscow Commercial Court has granted an application to set aside a Moscow Chamber of Commerce and Industry arbitral award. The court considered whether Article 11 of the Moscow Convention provides for actual consent of a member state to the Convention to arbitrate investments disputes under the Convention at any arbitral institution.

Maxim Kulkov (Managing Partner) and Dmitry Vlasov (Associate), KK&P

Speedread
On 29 May 2015, the Moscow Commercial Court set aside a Moscow Chamber of Commerce and Industry (MCCI) award issued in the proceedings between Stans Energy Corporation (Canada) and Kutisay Mining LLC (Stans’ subsidiary in Kyrgyzstan) (investors) and the Kyrgyz Republic.

In the arbitration, the tribunal had granted the investors’ claim against the Kyrgyz Republic for compensation for an expropriated investment in the Kyrgyz Republic. The Moscow Commercial Court subsequently denied a challenge to the arbitral award by the Kyrgyz Republic. However, on the remission of the case back to that court from the Cassation Court of Moscow District, the Moscow Commercial Court set aside the award.

The court found, among other things, that an earlier decision of the Economic Court of the Commonwealth of Independent States (CIS Economic Court), which held that Article 11 of the Moscow Convention is insufficient to establish a state’s agreement to arbitration, was of a binding nature. The Commercial Court of Moscow also gave a useful interpretation of Article 235 of the Civil Procedure Code, which provides for the right to challenge a tribunal’s decision on jurisdiction. The court held that Article 235 (which follows the same approach as the Russian Law on International Commercial Arbitration and the UNCITRAL Model Law) does not provide for orders on jurisdiction to be issued in a specific form in order to allow for their appeal.

The decision provides a helpful analysis of Article 11 of the Moscow Convention and Russian law applicable to challenges to the jurisdiction of arbitral tribunals. (Kyrgyzstan v Stans Energy Corporation, Kutisay Mining LLC (Case No. A4064831/14).

Background
Article 11 of the 1997 Convention for the Protection of Investors’ Rights (Moscow Convention) provides that:

“Disputes in respect to making investments under this Convention are considered by the courts or commercial [arbitrazh] courts of the state parties to the disputes, the Economic Court of the Commonwealth of the Independent States and/or other international courts or international arbitration courts.”

Article 235(1) of the Civil Procedure Code provides:

“In cases provided for in an international treaty of the Russian Federation or in a federal law any party to the arbitration proceedings may file with the commercial court an application to set aside the tribunal’s preliminary ruling on its competence.”

Article 16 of the Russian Law on International Commercial Arbitration, which mirrors Article 16 of the UNCITRAL Model Law (www.practicallaw.com/72056044), provides:

“1. The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement.

3. …If the arbitral tribunal rules as a preliminary question that it has jurisdiction, any party may request, within thirty days after having received notice of that ruling, the court specified in article 6 to decide the matter, which decision shall be subject to no appeal.”

Article 18.2 of the Kyrgyz Law on Investments provides:

“…If parties fail to reach an amicable settlement of the dispute, any investment dispute shall be settled in the courts of the Kyrgyz Republic, unless there is a dispute between a foreign investor and a governmental authority and one of the parties requests that the dispute is settled in accordance with one of the following procedures:

a) in the International Centre for Settlement of Investment Disputes (ICSID) under the Convention on the Settlement of Investment Disputes between States and Nationals of other States or additional facility for the administration of proceedings by the Secretariat of the Centre? or

b) in arbitration [arbitrazh] or an international ad hoc arbitral tribunal (commercial court) established in accordance with the arbitration rules of the United Nations Commission on International Trade Law.”

Article 7 of the United Nations Convention on Jurisdictional Immunities of States and Their Property (not in force) provides:

“A State cannot invoke immunity from jurisdiction in a proceeding before a court of another State with regard to a matter or case if it has expressly consented to the exercise of jurisdiction by the court with regard to the matter or case:
a) by international agreement?

b) in a written contract? or

c) by a declaration before the court or by a written communication in a specific proceeding.”

Facts

In 2013, a Canadian mining company (Stans Energy Corporation) and its Kyrgyz subsidiary (Kutisay Mining LLC (investors) commenced arbitration proceedings against the Kyrgyz Republic under the arbitration rules of the Moscow Chamber of Commerce and Industry Arbitration Court (MCCI). The investors sought damages for the alleged expropriation of their investment in the Kyrgyzstani mining sector. In asserting the tribunal’s jurisdiction to hear the dispute, the investors relied on Article 11 of the Moscow Convention. Their case was that Article 11 constitutes actual consent of the state to arbitrate an investment dispute in any arbitral institution, whether domestic or international, brought by any investor, provided the host state had signed the Convention. The tribunal accepted this approach and, in 2014, ordered that it had jurisdiction over the dispute (Order on Jurisdiction). It later issued a substantive award in favour of the investor, ordering Kyrgyzstan to pay US$117,853,000.

Shortly after the tribunal issued its Order on Jurisdiction, the Kyrgyz Republic filed an application with the Moscow Commercial Court to set aside that order. It also applied to the Economic Court of the Commonwealth of Independent States (CIS Economic Court), which is empowered to give interpretations in respect of disputes relating to the interpretation of the Moscow Convention, seeking an interpretation of a cornerstone issue in this case – the meaning of Article 11 of the Moscow Convention.

Before the CIS Economic Court issued its decision on the interpretation, the Moscow Commercial Court discontinued the proceedings brought by the Kyrgyz Republic, finding that the Order on Jurisdiction was a type of order that cannot be set aside. The Moscow Commercial Court held that, under Russian law, an interim order of an arbitral tribunal could not be challenged separately from the substantive award. Shortly afterwards, Kyrgyzstan commenced further proceedings challenging the award itself. It also filed an appeal in the Cassation Court of Moscow District against the Moscow Commercial Court’s order on jurisdiction.

The CIS Economic Court subsequently gave its interpretation on Article 11, holding that it does not provide for the meaning suggested by the investors (Case No. 011/114), but it only applies where the parties have concluded an arbitration agreement. Therefore, Article 11 does not contain the consent of participant states to resolve investment disputes in any international arbitration court chosen by an investor.

The Cassation Court allowed the Kyrgyz Republic’s appeal against the decision on jurisdiction of the Moscow Commercial Court and remanded the case for de novo review to the lower court. The Cassation Court found that the decision of the lower court to discontinue the jurisdictional challenge brought by Kyrgyzstan was premature in the absence of the CIS Economic Court interpretation.

On remand back to the Moscow Commercial Court, both sets of proceedings were joined into one case. Therefore, the crux of the issues before the court was:

• Whether an “order”‘ of the tribunal on jurisdiction could be challenged in court given that it was neither a “ruling”‘ nor an award.
• Whether Article 11 provides for actual consent of a member state to the Moscow Convention to arbitrate investments disputes under the Convention in any arbitration court.
• Whether Article 18.2 of the Kyrgyz Law on Investments provides for the right of an investor to refer a dispute between an investor and a state to any “arbitration” of its choice, or whether it is restricted to arbitration under the UNCITRAL Arbitration Rules.

Decision

The Moscow Commercial Court set aside the substantive award, finding that there was no arbitration agreement between the parties and, as such, the tribunal lacked jurisdiction to hear the dispute. It also discontinued the Kyrgyz Republic’s application to set aside the Order on Jurisdiction.

The Order on Jurisdiction
The court disagreed with the investors’ view that the Order on Jurisdiction, which in this case had been issued in the form of an order (opredelenie), could not be appealed under Russian law, in contrast with a decision (postanovlenie). The court found that Article 235 of the Civil Procedure Code follows the approach of the Russian Law on International Commercial Arbitration, and a respective provision of the UNCITRAL Model Law. Therefore, it was not implied into the law that a ruling of an arbitral tribunal on jurisdiction had to be in a specific form for it to be challenged.

The basis on which the court discontinued the challenge proceedings was because the Order on Jurisdiction did not provide any reasoning and the tribunal went on to rule on, among other things, its jurisdiction in the award, and expressly cancelled the Order on Jurisdiction.

Article 11 of the Moscow Convention

The court gave due regard to the CIS Economic Court’s decision in which it held that Article 11 of the Moscow

Convention is of general nature and cannot be regarded as an arbitration agreement. The jurisdiction of a particular tribunal to hear an investment dispute under the Convention is possible where its competence is provided for in the national law of the state party to the dispute, international treaty and/or a separate agreement between the investor and the state.

The court further disagreed with the investor’s interpretation of Article 18.2 of the Kyrgyz Law on Investments insofar as it provides for a right of an investor to submit a dispute to any arbitral tribunal of its choice (including the MCCI arbitration). It also accepted Kyrgyzstan’s interpretation that the provision allows only for an arbitral tribunal acting under the UNCITRAL Arbitration Rules.

The court further held that the award was contrary to the international principle of respect to a state’s sovereignty that is a part of Russian law and its public policy. The court, by referring to the United Nations Convention on Jurisdictional Immunities of States and Their Property, held that the state’s consent should be expressed clearly and unequivocally.

Comment
The judgment deserves a closer look as it provides a helpful analysis of Article 11 of the Moscow Convention and the law applicable to challenges to the jurisdiction of arbitral tribunals.

The approach to the interpretation of Article 11 of the Moscow Convention employed by the Russian court is now similar to that adopted by the CIS Economic Court, namely that Article 11 alone is not enough to establish an arbitration agreement between the member state to the Convention and an investor.

The court also provided a useful analysis of the Kyrgyz Law on Investments, in particular Article 18.2(b), finding that it was not enough to establish an arbitration agreement between the parties. By referring to the principle of respecting a national sovereignty and the 2004 UN Convention on Jurisdictional Immunities of States and Their Property (which is not in force), the court concluded that the state’s consent to arbitration should be expressed in a clear and unequivocal manner.
The decision also emphasises the importance of challenging the tribunal’s jurisdiction (as Kyrgyzstan had in this case) as provided for in Article 16 of the Russian Law on International Commercial Arbitration (which mirrors Article 16 of the UNICTRAL Model Law) in order to preserve its right to challenge the tribunal’s jurisdiction in court.

Finally, the court gave a useful interpretation (although case law is not binding in Russia) regarding a procedure for challenging decisions of arbitral tribunals on jurisdiction. By referring to the Russian Law on International Arbitration and the UNCITRAL Model Law, the court held that Article 235 of the Civil Procedure Code does not prescribe a particular form (name) in which tribunals should render decisions on jurisdiction in order to allow for their challenge.

The decision of the Moscow Commercial Court can be appealed to the Cassation Court within one month. One of the investors, Kutisay Mining, has already filed an appeal.

Case: Kyrgyzstan v Stans Energy Corporation, Kutisay Mining (Case No. A4064831/14) (Moscow Commercial Court).

This article has previously been published by Practical Law Arbitration on 12 June 2015.