Big Sky Energy Corporation v. Republic of Kazakhstan

Case summary

At a glance

Parties: Big Sky Energy Corporation (United States, Nevada) v. Republic of Kazakhstan
Case no.: ICSID Case No. ARB/17/22
Forum and rules: ICSID Convention; ICSID Arbitration Rules 2006; place of proceeding London
Treaty: United States–Kazakhstan BIT (entered into force 12 January 1994)
Tribunal: Prof. Bernardo M. Cremades (President), Prof. Stanimir A. Alexandrov, Judge Peter Tomka
Sector: Oil and gas; exploration and production
Outcome: Jurisdiction upheld (denial-of-benefits objection rejected), but all claims dismissed on the merits (Award dispatched 24 November 2021).
Amount: Claimed: not less than USD 460.1 million plus interest. Awarded: nothing. The Claimant pays all costs of the arbitration (total USD 1,145,125.42), and so must repay the Respondent USD 575,821.71 plus interest; each side bears its own legal and expert fees. A US District Court for the District of Nevada default judgment of 28 July 2022 was entered for Kazakhstan for USD 587,030.43.

The dispute

Big Sky Energy Corporation, a Nevada company, held through its Canadian subsidiary BSEK the interest in KoZhan LLP (Kozhan). Kozhan held subsoil use contracts for the Morskoye, Karatal and Dauletaly oil fields in western Kazakhstan. BSEK bought 90% of Kozhan under a 2003 SPA and the other 10% under a 2005 SPA. Four sets of Kazakh court proceedings followed. First, the sellers' spouses had the 2003 SPA invalidated for lack of notarized spousal consent; the Supreme Court ruled on 30 January 2008. Second, the 2008 ABT Proceedings invalidated the ABT agreements and left Big Sky owing about USD 27 million to ABT (later assigned to Kozhan). Third, a 2009 set-off executed that debt against BSEK's remaining 10% of Kozhan. Fourth, a 2012 set-off was ordered against BSEK's IUS arbitral award against Kozhan. Big Sky said these proceedings were part of an illicit scheme backed by three Kazakh oligarchs. It claimed judicial expropriation, breach of fair and equitable treatment, full protection and security, effective means and the bar on arbitrary measures, and denial of justice. Kazakhstan invoked the BIT's denial-of-benefits clause. It also argued that claims about court decisions require proof of a denial of justice, and that Big Sky had failed to exhaust local remedies.

Key holdings

Denial of benefits rejected on control. Mr. Lawler, a US national, was the sole director and controlled the Claimant in law and in fact. The arbitration funding agreement, under which Agrima (controlled by Mr. Daniel Israel, a Belgian national) acted as claim manager, did not transfer control to Agrima. The Tribunal distinguished CCL v. Kazakhstan. Award ¶¶ 252–272
For completeness, the Tribunal also found that the Claimant had substantial business activities in the US. The relevant period is not limited to the date of the request for arbitration. The Claimant had raised over USD 80 million on US markets, filed with the SEC, held US investor meetings and used US advisers, so it was not a 'mailbox' company. The Tribunal distinguished Pac Rim. Award ¶¶ 276–289
No denial of justice. The Tribunal is not a court of appeal. The test is whether a decision was clearly improper and discreditable. It reviewed each alleged defect: the spousal-consent rulings under Article 33 of the Matrimony Law, the refusal to call Mr. Baikenov as a witness, the withdrawal statements, limitation, notice, the piercing of the corporate veil in the set-offs, and the valuation and transfer of the 10% interest. Some conduct was 'questionable', but none was flawed enough to breach international law. Award ¶¶ 359–516
Failure to exhaust local remedies was decisive for several complaints. The Claimant chose not to appeal the 2008 ABT Decision. Expecting an appeal to fail does not show that it would have been futile. The Claimant also waited about 10 months before seeking to appeal the 2009 Set-Off Ruling. Award ¶¶ 459–467, 471–474
The other treaty claims fail on the same facts. Judicial expropriation (Article III(1)), fair and equitable treatment (Article II(2)(a)), effective means (Article II(6)) and arbitrary measures (Article II(2)(b)) each required judicial conduct that was wrongful under international law, and none was found. On full protection and security, even if the standard covers legal protection, Kazakhstan provided a functioning court system. It was not shown that Kazakhstan, as a State, knew of and allowed the alleged scheme. Award ¶¶ 518–562
Costs reflect the mixed result: the Claimant won on jurisdiction and the Respondent on the merits. The Claimant bears all costs of the arbitration and must pay the Respondent USD 575,821.71, plus interest at 12-month USD LIBOR + 2.0% compounded annually from 60 days after the Award. Each Party bears its own legal and expert fees. Award ¶¶ 592–601

Procedural history

19 June 2017Request for arbitration filed. ICSID registered it on 7 July 2017.
29 January 2018Tribunal constituted (Moser, Alexandrov, Knieper). Dr. Moser resigned on 27 February 2018. Prof. Cremades accepted appointment as President on 4 April 2018. Prof. Knieper was disqualified on 3 May 2018 and replaced by Judge Tomka on 15 June 2018.
5 December 2018Decision on Request for Bifurcation: Kazakhstan's request to hear the denial-of-benefits objection first was denied; costs reserved.
27 January 2020US District Court for the District of Arizona granted Mr. Lawler's motion to quash Kazakhstan's 28 U.S.C. § 1782 subpoena, because the evidence could be obtained in the arbitration.
4–12 January 2021Remote hearing on jurisdiction and merits. Mr. Alexander Ogai testified as a witness called by the Tribunal.
24 November 2021Award: jurisdiction upheld, all claims dismissed, Claimant ordered to pay USD 575,821.71 in costs.
28 July 2022US District Court for the District of Nevada entered a default judgment for Kazakhstan against Big Sky for USD 587,030.43.

Tribunal, counsel and experts

Decided by: Bernardo M. Cremades President — appointed by the institution (replaced Dr. Michael Moser, who resigned on 27 February 2018)
Stanimir A. Alexandrov Co-arbitrator — appointed by the claimant
Peter Tomka Co-arbitrator — appointed by the respondent (replaced Professor Rolf Knieper, disqualified on 3 May 2018)
For the claimant: Fietta LLP
For the respondent: Reed Smith LLP · Essex Court Chambers · Ministry of Justice of Kazakhstan
Experts: Asset Abzhanov (claimant) · Paul Rathbone (claimant) · Andrew Spriggs (claimant) · Miras Daulenov (respondent) · Iskander Zhanaidarov (respondent) · Fatima Aidarovna Tlegenova (respondent) · Rinat Kashifovich Mukhamedshin (respondent) · Sergey Pen (respondent) · John Fisher (respondent) · John W. Hornbrook (respondent)