Caratube International Oil Company LLP and Devincci Salah Hourani v. Republic of Kazakhstan

Case summary

At a glance

Parties: Caratube International Oil Company LLP (CIOC, Kazakhstan) and Mr. Devincci Salah Hourani (United States) v. the Republic of Kazakhstan
Case no.: ICSID Case No. ARB/13/13
Forum and rules: ICSID Convention arbitration; ICSID Arbitration Rules 2006
Treaty: Contract No. 954 of 27 May 2002 (Clause 27, ICSID arbitration) and Kazakhstan's Foreign Investment Law
Tribunal: Dr. Laurent Lévy (President), Prof. Laurent Aynès, Dr. Jacques Salès (replaced Mr. Bruno Boesch, who was disqualified on 20 March 2014)
Annulment Committee: Prof. Eduardo Zuleta (President), Prof. Lawrence Boo, Judge Bernardo Sepúlveda Amor
Sector: Oil and gas; exploration and production contract
Outcome: Award of 27 September 2017: jurisdiction upheld over CIOC's claims and declined over Mr. Hourani's claims. By majority, the termination of the contract was held to be an unlawful expropriation; Dr. Salès dissented in part. Kazakhstan applied for annulment. On 12 December 2019 the Committee kept the stay of enforcement in place without security.
Amount: Claimed: USD 941.05 million. Awarded: USD 39.2 million in sunk investment costs, plus interest at LIBOR + 2% compounded semi-annually from 31 January 2008. Arbitration costs to be shared equally (Kazakhstan to reimburse USD 1,207,757.44 of advances); each party bears its own legal costs.

The dispute

CIOC, a Kazakh company 92% owned by Mr. Devincci Hourani (a US national), held by assignment Contract No. 954 of 27 May 2002 with the Ministry of Energy and Mineral Resources (MEMR) for oil exploration and production in the Caratube field in Aktobe Oblast. In 2007 the exploration period was extended by two years. Kazakhstan then terminated the contract in January–February 2008, after a "Recommendation" of 7 September 2007 from the Prosecutor's Office. The claimants argued that the termination was an expropriation and part of a State campaign against the Hourani family after their relative Rakhat Aliyev, the President's former son-in-law, fell out of favour. They relied on the Contract, the Foreign Investment Law and international law. An earlier claim under the US–Kazakhstan BIT (Caratube I) had been dismissed for lack of jurisdiction. Kazakhstan raised abuse of process, limitation, collateral estoppel and res judicata, and objected to Mr. Hourani's nationality and standing. On the merits it argued that it had lawfully terminated the contract for CIOC's material breaches, including a deficient 3D seismic study.

Key holdings

Mr. Bruno Boesch, Kazakhstan's appointee, was disqualified. He had sat, on Kazakhstan's appointment, in Ruby Roz Agricol v. Kazakhstan, a case brought by closely related claimants on broadly the same facts. A reasonable third party would find an evident appearance that he lacked impartiality. His repeat appointments by Curtis, Mallet-Prevost alone would not have justified disqualification. Decision on Disqualification ¶¶ 90–91, 107, 111
Provisional measures were denied. The claimants had not proven that Kazakhstan was behind the websites, the protests or the Novikova criminal proceedings in Lebanon. A particularly high threshold applies before a tribunal will touch a State's criminal proceedings. Because the request was not unreasonable, each party bears its own costs. Decision on Provisional Measures ¶¶ 130, 144, 155–156
The Tribunal has jurisdiction over CIOC's claims under the Contract and rejected the preliminary objections, including abuse of process. It has no jurisdiction over Mr. Hourani's claims. By majority, Kazakhstan breached its obligations towards CIOC by terminating the contract unlawfully, acting in its sovereign capacity, which amounted to an expropriation. Award ¶ 1268(a)–(c); ¶¶ 1219–1220
The claims for lost profits and lost opportunity failed because they were not proven with sufficient certainty or probability. By majority, CIOC was awarded its full sunk investment costs of USD 39.2 million, including reinvested revenues from trial production. No reduction was made for a cessation risk premium or for contributory fault. The moral damages claim was rejected because harassment by Kazakhstan was not proven. Award ¶¶ 1159–1161, 1164–1170, 1182, 1195–1196, 1203
Interest runs at LIBOR + 2%, compounded semi-annually, from 31 January 2008 until full payment. There is no interruption for the period of the Caratube I proceedings. Each party bears its own legal costs, and the costs of the arbitration are shared equally. Award ¶¶ 1221, 1227, 1265–1267
Dr. Salès dissented on expropriation. In his view CIOC's unusable 3D seismic study was a material breach, and Kazakhstan acted as a contracting party, not as a sovereign. The case was therefore one of breach of contract only. He would also have deducted oil sales revenues and awarded USD 20.8 million. Salès Opinion ¶¶ 10, 35, 42–44; Award ¶ 1171
The ad hoc Committee kept the stay of enforcement in place without security. The stay is neither automatic nor limited to exceptional circumstances. Kazakhstan was not shown to be a serial defaulter. There was a real risk of non-recoupment: CIOC is a shell company, and the claimants had not paid the USD 3.2 million costs award from Caratube I. The claimants were also precluded from arguing for a standard contrary to the one they had relied on in Caratube I. Decision on Stay ¶¶ 62, 80, 90–93, 98

Procedural history

5 June 2013Request for Arbitration filed. ICSID registers it on 28 June 2013.
7 January 2014Tribunal constituted (Lévy, Aynès, Boesch).
20 March 2014The unchallenged arbitrators uphold the claimants' proposal to disqualify Mr. Bruno Boesch.
29 April 2014Tribunal reconstituted with Dr. Jacques Salès.
4 December 2014Decision denying the claimants' request for provisional measures.
15 September 2017Dr. Salès signs his concurring and dissenting opinion on the expropriation analysis.
27 September 2017Award dispatched to the parties: USD 39.2 million plus interest awarded to CIOC; Mr. Hourani's claims dismissed for lack of jurisdiction.
25 January 2018Kazakhstan applies for annulment. The Secretary-General provisionally stays enforcement on 2 February 2018.
26 September 2019ad hoc Committee constituted after the proceeding resumed.
12 December 2019Decision on stay: the claimants' request to lift the stay is rejected, and the stay is maintained without security. The published documents do not show the outcome of the annulment proceeding.

Tribunal, counsel and experts

Decided by: Laurent Lévy President — appointed by the parties jointly
Laurent Aynès Co-arbitrator — appointed by the claimant
Bruno Boesch Co-arbitrator — appointed by the respondent (disqualified on 20 March 2014)
Jacques Salès Co-arbitrator (replaced Mr. Boesch; tribunal reconstituted 29 April 2014; dissented in part on expropriation and damages)
Eduardo Zuleta Committee president
Lawrence Boo Committee member
Bernardo Sepúlveda Amor Committee member
For the claimant: Derains & Gharavi
For the respondent: Curtis, Mallet-Prevost, Colt & Mosle LLP
Experts: Grant Thornton (claimant) · Sven Tiefenthal (claimant) · Fawaz Fakhry (claimant) · Vladimir Brailovsky (respondent) · Hadi Slim (respondent) · Martha Brill Olcott (respondent) · Kulyash Ilyasova (respondent) · Mangat R. Thapar (respondent) · IFM Resources Inc. (respondent)