Stati v. Republic of Kaz.

• Citation: 302 F.Supp.3d 187
• Decision Date: 23 March 2018
• Docket Number: Civil Action No. 14–1638 (ABJ)
• Parties: ANATOLIE STATI; Gabriel Stati; Ascom Group, S.A.; Terra Raf Trans Traiding Ltd., Petitioners, v. REPUBLIC OF KAZAKHSTAN, Respondent.
• Court: U.S. District Court — District of Columbia

302 F.Supp.3d 187

ANATOLIE STATI; Gabriel Stati; Ascom Group, S.A.; Terra Raf Trans Traiding Ltd., Petitioners,

v.REPUBLIC OF KAZAKHSTAN, Respondent.

Civil Action No. 14–1638 (ABJ)

United States District Court, District of Columbia.

Signed March 23, 2018

James E. Berger, Charlene C. Sun, King & Spalding LLP, New York, NY, Kevin D. Mohr, Reginald R. Smith, King & Spalding, Houston, TX, for Petitioners.

Kara Petteway Wheatley, Matthew H. Kirtland, Rebecca E. Bazan, Norton Rose Fulbright U.S. LLP, Washington, DC, for Respondent.

MEMORANDUM OPINION

AMY BERMAN JACKSON, United States District Judge

Petitioners, Anatolie Stati, Gabriel Stati, Ascom Group, S.A., and Terra Raf Trans Traiding Ltd. ("Stati parties")¹ have brought this action to enforce an international arbitration award against the respondent, the Republic of Kazakhstan ("Kazakhstan"), in the United States. The matter is fully briefed and ripe for decision, but before the Court can turn to the merits of the dispute, it must address respondent's motion for reconsideration of the Court's May 11, 2016, Order denying respondent's motion for leave to submit additional defense grounds in opposition to the motion to confirm the arbitral award. For the reasons that follow, the Court will deny respondent's motion and it will confirm the award.²

BACKGROUND

A. Factual Background

Petitioners have been involved in the oil and gas business in Kazakhstan for approximately 17 years. Between 1999 and 2000, petitioners purchased controlling shares in two Kazakh companies, Kazpolmunay LLP ("KPM") and Tolkynneftagaz LLP ("TNG"). Pet. ¶¶ 28–30. The companies owned the subsoil use rights to the Borankol oil field, the Tolkyn gas field, and the Tabyl exploration block in Kazakhstan. Id. ¶¶ 29–30. Petitioners eventually came to own 100% of KPM and TNG, and in 2000, those companies obtained approval from Kazakhstan to explore and develop various oil and gas fields located in the country. Id. ¶ 31; Arb. Award [Dkt. # 2–1, 2–2, 2–3, 2–4] ("Award") ¶ 229. A year later, in 2001, petitioners, through KPM and TNG, invested more than one billion dollars in the development of the Borankol and Tolkyn fields, and the Tabyl Block. Pet. ¶ 32.

In 2008, Kazakhstan began a government investigation of Anatolie Stati and his companies, including his compliance with export tax laws. Award ¶¶ 296–99. Petitioners and respondent disagree on what followed. According to petitioners, the government of Kazakhstan began to intimidate and harass petitioners into selling their investments to the state-owned company KazMunaiGas at a substantial discount. Pet. ¶ 33. Specifically, petitioners claim that Kazakhstan "baselessly" accused petitioners of fraud and forgery, levied more than $70 million dollars in back taxes, arrested KPM's general manager for "illegal entrepreneurial activity," and ultimately seized all of KPM and TNG's assets. Id. And on July 21, 2010, Kazakhstan terminated petitioners' subsoil use contracts. Award ¶ 611.

Kazakhstan's version of events is that the Kazakh Tax and Customs Committee properly assessed $62 million dollars in taxes to petitioners, and that a lawful criminal investigation by the Kazakh authorities led to the arrest and imprisonment of KPM's General Director. Award ¶¶ 394, 430, 440, 492. Respondent maintains that it was the investigation that led to the termination of KPM and TNG's subsoil use contracts on July 21, 2010, and it disputes the claim that Kazakhstan expropriated petitioners' assets. Id. ¶¶ 591–611. Instead, respondent takes the position that the Kazakh state oil company and its subsidiary placed petitioners' oil and gas fields into trust management on a temporary basis only. Id. ¶ 611.

B. Procedural Background

On July 26, 2010, petitioners filed a Request for Arbitration with the Stockholm Chamber of Commerce ("SCC") in Sweden. Req. for Arb., Ex. C. to Decl. of Charlene C. Sun [Dkt. # 2–6] ("Req. for Arb."). The request states:

Over the past two years, Kazakhstan has engaged in a campaign of harassment and illegal acts against [petitioners] that culminated on July 21, 2010 with the State's notice of unilateral termination of the companies' Subsoil Use Contracts, the illegal expropriation of [petitioners'] Kazakh investments, and the subsequent commandeering of [petitioners'] offices by personnel of State-owned KazMunaiGas and the Kazakh Ministry of Oil and Gas.

Id. ¶ 4. Petitioners further alleged that Kazakhstan's harassment "clearly had expropriation as its ultimate goal, and it had the effect in the process of destroying both the market value and alienability of [petitioners'] investments." Id. ¶¶ 4, 8. The request invoked the Energy Charter Treaty ("ECT"), an international agreement signed by the respondent, which allows investors to submit disputes to the SCC for arbitration. Energy Charter Treaty, art. 26(4)(c), Dec. 17, 1994, 2080 U.N.T.S. 95, 121–22. Accordingly, the arbitral proceedings were governed by the SCC's Arbitration Rules. Pet. ¶ 22.

On December 19, 2013, the SCC tribunal issued an award in favor of petitioners and against respondent. Pet. ¶ 27. The tribunal determined that Kazakhstan breached its obligation to provide fair and equitable treatment under Article 10(1) of the ECT. Award ¶¶ 1085–95. It awarded petitioners $497,685,101 for the alleged expropriation of petitioners' assets in Kazakhstan. Id. ¶ 1859. This total included $277.8 million for the Borankol and Tolkyn oil and gas fields, $31.3 million for the subsoil use contracts, $199 million for an unfinished liquefied petroleum gas plant ("LPG plant"), and $8,975,496.40 in legal costs. Id. ¶¶ 1856–61, 1885.³

On September 30, 2014, petitioners asked this Court to confirm the arbitral award in the United States pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. § 201 et seq. , which codifies the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 330 U.N.T.S. 38, commonly known as the "New York Convention." Pet. ¶ 1. The Stati parties sought to enforce the foreign arbitral award here on the grounds that Kazakhstan maintains assets in the United States. Id. ¶ 46. Respondent opposed the petition to confirm based on five grounds under the New York Convention, focusing primarily on the SCC's appointment of respondent's arbitrator and its alleged failure to enforce the requirement that there be a three-month settlement period prior to the initiation of an arbitration. Resp't's Opp. to Pet. [Dkt. # 20] ("Resp't's Opp."). Petitioners filed a reply, Pet'rs' Reply Mem. in Supp. of Pet. [Dkt. # 24] ("Pet'rs' Reply"), and the Court granted respondent leave to file a sur-reply. Resp't's Sur–Reply in Supp. of Resp't's Opp. [Dkt. # 28] ("Resp't's Sur–Reply"). By May 26, 2015, the parties had completed briefing on the merits.

1. Respondent's motion for leave to include additional defense grounds .

According to respondent, in June of 2015, it became aware of "new evidence" that petitioners had "obtained the [arbitral] [a]ward through fraud." Resp't's Mot. for Leave to Submit Additional Grounds in Supp. of Opp. to Pet. [Dkt. # 32] ("Initial Mot.") at 4, 6. Respondent waited till April 5, 2016, though—nearly a year after learning about the alleged fraud and completing the merits briefing in this case—to file a motion seeking leave to submit additional defenses to enforcement of the arbitral award. Id. at 1, 4.

In that motion, respondent argued that petitioners procured the award through fraud by submitting "false testimony and evidence to the SCC Arbitration tribunal" that "materially misrepresented the LPG Plant construction costs for which they claimed reimbursement in the [arbitration]." Id. at 4. Respondent contended that the newly discovered fraud afforded it two additional defenses under Article V(2)(b) and Article V(1)(b) of the New York Convention. Id. at 4–6. Under Article V(2)(b) the Court could refuse recognition of the award because enforcement of a fraudulently obtained arbitral award would be contrary to United States public policy. Id. at 4–5. And respondent also asserted that "the intentional giving of false evidence" during the arbitration "denied [respondent] the opportunity to present its case," thus rendering the arbitral award unenforceable under Article V(1)(b) of the New York Convention. Id. at 5–6.

In the absence of an applicable rule setting forth the standard to be applied to respondent's motion, the Court considered whether justice required permitting respondent to "add new grounds to its opposition to the petition to confirm the award, more than a year after the original opposition was filed." Order (May 11, 2016) [Dkt. # 36] at 2–3 ("Order"). The Court reviewed the SCC arbitration award and denied the motion, reasoning that "it [would] not be in the interest of justice to conduct a mini-trial on the issue of fraud here when the arbitrators expressly disavowed any reliance on the allegedly fraudulent material." Id. at 4. In other words, the evidence respondent sought to discredit was not material to the decision.

The Court derived this conclusion based on its own detailed review of the award, which stated in relevant part:

Regarding the value of damages caused by Respondent's action, the Tribunal has taken note of the various extensive arguments submitted by the Parties relying on their respective experts' reports. However, the Tribunal considers that it does not have to evaluate these reports and the very different results they reach. In the view of the Tribunal, the relatively best source for the valuation ... are the contemporaneous bids that were made for the LPG Plant by third parties after Claimants' efforts to sell the LPG Plant ....

Award ¶ 1746. The panel concluded:

[T]he Tribunal considers it to be of particular relevance that an offer was made for the LPG Plant by state-owned KMG at that time for USD 199 million. The Tribunal considers that to be the relatively best source of information for the valuation of the LPG Plant

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