The long-running Stati case recently reached a new milestone when the Brussels Court of Appeal upheld a lower court’s decision to freeze $542 million of Kazakhstan’s assets.
While the state seeks to emphasize the decision’s limited procedural weight, this Belgian decision in the Stati case arguably constitutes a landmark precedent in favor of enforcement but nonetheless highlights the difficulties in enforcing an arbitral award against a state.
Indeed, as discussed below, on Aug. 5, the Stati investors announced they were seeking to initiate a new Energy Charter Treaty claim against Kazakhstan in relation to its refusal to pay the arbitral award issued in 2013.
This article first briefly summarizes the Stati v. Kazakhstan investor-state arbitration and goes on to consider the main legal issues considered by the Brussels Court of Appeal, before concluding with a review of how other European jurisdictions might approach a state’s attempts to resist enforcement against its assets.
In 1999, father and son investors Anatolie and Gabriel Stati invested in petroleum operations in Kazakhstan, which they alleged the state subsequently expropriated.
In 2010, the Stati investors initiated a Stockholm Chamber of Commerce, or SCC, arbitration against the state pursuant to the Energy Charter Treaty, a multilateral treaty allowing investors to bring arbitral claims against contracting states. In 2013, the SCC tribunal ordered Kazakhstan to compensate the Stati investors over $500 million.
Over the past eight years, national courts in various jurisdictions including Sweden, the U.S., the U.K., Italy,, Belgium, the Netherlands and Luxembourg have been engaged in follow-on proceedings, and have reached differing findings in relation to the Stati investors’ attempts to enforce the SCC award.
For example, in 2017 the Stati investors managed to freeze $22 billion belonging to the National Fund of Kazakhstan in its accounts at the Bank of New York Mellon NV, or BNYM, in Belgium. Kazakhstan subsequently succeeded at lifting the attachment from the overwhelming majority of these funds, although $542 million remained arrested in relation to the SCC award.
While the Svea Court of Appeal refused Kazakhstan’s attempts to have the SCC award set aside, in June 2020, the Svea Court of Appeal in Sweden found in favor of Kazakhstan when it declined to enforce against assets of the National Bank of Kazakhstan finding that it benefited from sovereign immunity.
In contrast, while in June 2021 the Amsterdam District Court found that the Stati investors had violated their duty to be truthful to the court and failed to keep the court informed when seeking to levy attachment, it held that this was an insufficient basis to refuse recognition of the award under Dutch law.
Further adding to the mix, following a 2017 finding by the English High Court that a prima facie case of fraud had been established, and that Kazakhstan is a separate entity from the National Bank, while noting that the Belgian court should make the final decision on this matter, in early 2021 Kazakhstan reported that the English High Court had ordered the Stati investors to pay several million pounds toward Kazakhstan’s legal costs after the Stati investors abandoned their enforcement efforts in the U.K.
In the latest development, on June 29, the Brussels Court of Appeal rejected the appeal by the Republic of Kazakhstan and the National Bank — the Kazakh state parties — against an attachment of Belgium-based funds from the National Fund of Kazakhstan worth $542 million. This means that the attachment order in respect of the funds held by the BNYM, an independent third party, remains fully intact.
States generally benefit from sovereign immunity and in cases where third parties — including state-owned parties — hold assets, such parties are presumed to be distinct from the state and, thus, shielded from state obligations. The Stati investors built their enforcement strategy by establishing an exception to sovereign immunity.
Unlike the Svea Court of Appeal, the Brussels court sided with the Stati investors and rejected Kazakhstan’s claim of sovereign immunity, holding that the National Fund assets were invested for a purpose “other than of a non-commercial nature,” meaning they are exempted from the protections of sovereign immunity as “[t]he assets are used or intended to be used by the foreign power for … [c]ommercial … purposes.”
The Stati investors also needed to overcome the presumed separation between the state and the National Bank of Kazakhstan.
Usually, creditors are required to show that the state, inter alia, exercises control over its company and its day-to-day operations, is the real beneficiary of the company’s profits, and is responsible for the company’s debts.
In this regard, the Brussels Court of Appeal considered whether Kazakhstan had engaged in “simulation,” or a breach of legal personality, by creating a mechanism, akin to a corporate veil, purposely designed to isolate the state from liability to its creditors.
This issue arose because the National Bank of Kazakhstan, and not the state, deposited the assets in question to the BNYM account. Kazakhstan also sought to declare its National Bank as an independent corporate entity under Kazakh law.
The court nonetheless ruled that there was enough evidence to prove the existence of “simulation,” stating that “the actual circumstances of the case contain sufficient indications of the existence of simulation on the basis of which it must be decided that the attachment was indeed made to the assets of the person liable for the attachment.”
The court determined that the actual owner of the assets was Kazakhstan and not the National Bank because, inter alia, Kazakhstan was the founder of its National Fund and National Bank, Kazakhstan maintains control over its National Bank, and the National Bank — together with Kazakhstan — tried to remove the assets from the BNYM accounts.
Like it had done before the English court, the Kazakh state parties again alleged that the Stati investors engaged in fraud during the arbitration, claiming that the investors took out a loan from a group of venture investors to increase the damages suffered and to mislead the tribunal.
In refusing to lift the attachment against the Kazakh assets, the Brussels court explained that the English court decision in favor of Kazakhstan did not preclude the Belgian court from upholding the attachment of Kazakh assets.
The Kazakh Ministry of Justice maintains that the decision by the Brussels Court of Appeal was merely procedural, and that before the Stati investors can proceed to enforce against Kazakh assets, the Brussels Court of Appeal needs to complete its review on the merits of the arguments in relation to recognition and enforcement of SCC award, which is expected to take place in October.
The significance of the Brussels ruling is in its recognition that awards against sovereigns may be enforced even when held by a seemingly independent third party.
In this regard, it is worth noting that jurisdictions vary on how they address enforcement of awards against states.
For example, although the position in France or Germany on issues of sovereign immunity may be similar to that in Belgium, Swiss law requires the demonstration of an appropriate connection between the Swiss territory and the legal relationships giving rise to the claim; a debtor’s ownership of assets or the claimant’s domicile in Switzerland would not satisfy the requirement, making Switzerland’s approach more restrictive, and thus potentially more favorable to a state resisting enforcement of an arbitral award.
The enforcement of awards against sovereign states is further often complicated by various procedural issues.
In the case of General Dynamics United Kingdom Limited v. The State of Libya, the U.K. Supreme Court ruled in June that the formal service procedure is indispensable and mandatory, and it refused to allow greater flexibility in interpreting service rules, highlighting that proper adherence to procedure is crucial for award enforcement.
Moreover, the analysis of a state resisting enforcement of a high-value arbitration award will naturally give rise to comparisons with the Yukos saga.
Reminiscent of the Stati case, the Svea Court of Appeal famously set aside some various Yukos-related arbitral awards against the Russian Federation. Awards were also set aside by the Hague District Court, before it was overturned by the Hague Court of Appeal which reinstated the awards.
The Russian Federation appealed, and notably in April, Dutch Advocate General Paul Vlas recommended that the Supreme Court should uphold the awards totaling over $50 billion in favor of former Yukos shareholders. Most recently, in July, the Yukos Foundation announced that the claimant in Yukos Capital v. Russia had prevailed in an Energy Charter Treaty arbitration, with the tribunal awarding approximately $5 billion in damages, inclusive of interest.
Russia’s prosecutor general promptly announced that the state did not acknowledge the validity of the decision and would appeal the decision. Of course, in these cases much of the battle has not yet even turned to the attachment of specific state assets to satisfy an arbitral award.
Finally, the recent development pertains to the Stati investors’ announcement that on Aug. 5, they had filed a notice of dispute to initiate a new Energy Charter Treaty claim against Kazakhstan in relation to its refusal to pay the original 2013 SCC award. The notice alleges that Kazakhstan’s refusal to honor the SCC award is itself in breach of the ECT and that, in addition to the Stati investors’ rights crystallized in the SCC award, the SCC award itself also constitutes a protected investment under the ECT.
There is some support for this position, as investor-state tribunals in Saipem SpA v. Bangladesh, ATA v. Jordan and White Industries v. India have upheld the notion that a state’s interference in enforcing a valid arbitral award, particularly where the award formed part of the overall investment, could constitute an expropriation of an investment protected under an investment treaty. The saga continues.
In light of the above, in addition to locating and identifying a debtor-state’s assets, investors must remain aware of and overcome the various hurdles discussed above to secure their attachment of state assets in the relevant jurisdictions, as the ability to enforce an arbitral award against a state, and potential need to launch new proceedings in respect of the same, may ultimately depend on the approach of domestic courts where the assets are located.
Tomas Vail is legal counsel and arbitrator at Vail Dispute Resolution. The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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