Khan Resources v. Mongolia (PCA Case No. 2011-09)
Summary by Natalia Charalampidou, citation details below.
Two decisions were rendered in this proceeding: the decision on jurisdiction issued on July 25, 2012; and the final award issued on March 2, 2015.
Invoked instruments, purported breaches & administering institution:
This was an arbitration under the ECT, arising out of an alleged breach of the standards of expropriation (Article 13 of the ECT), fair and equal treatment and the umbrella clause (Article 10(1) of the ECT) (¶ 106 of the final award). The dispute was submitted to a PCA arbitral tribunal under the UNCITRAL Arbitration Rules according to Article 26(4)(b) of the ECT.
Any third parties:
Factual background, including procedural history:
Claimants in this arbitration were Khan Resources Inc. ("Khan Canada"), an entity incorporated in Canada, Khan Resources B.V. ("Khan Netherlands"), an entity incorporated in the Netherlands, and CAUC Holding Company Limited ("CAUC Holding"), an entity incorporated in the British Virgin Islands. Respondents were the Government of Mongolia ("Mongolia") and MonAtom LLC ("MonAtom"), an entity incorporated in Mongolia (¶¶ 1, 2).
In July 2003 Khan Canada acquired WM Mining Inc. that participated by 58% to a joint venture in Mongolia, the Central Asian Uranium Company Ltd. ("CAUC"), the object of which was to develop a uranium exploration and extraction in the Mongolian province Dornod. The founders of CAUC had executed three documents: (a) the Founding Agreement; (b) the Agreement on Development of Mineral Deposits in Eastern Aimak of Mongolia ("Minerals Agreement"); and (c) the Charter of CAUC ("Charter"). The acquired company was later renamed as CAUC Holding, claimant in this proceeding. Khan Netherlands was established on September 5, 2007 for the specific purpose of holding Khan Resources LLC ("Khan Mongolia"), a separate subsidiary incorporated in Mongolia to help coordinate its activities in Mongolia. (¶¶ 22-28).
The joint venture company CAUC obtained the Mining License, which permitted engagement in the exploitation of radioactive mineral resources on a specific area in the Dornod region on November 10, 1998. Khan Mongolia obtained the Exploration License, which allowed it to conduct radioactive mineral exploration within the boundaries of an area of land neighboring the one covered by the Mining License (¶¶ 28-30). The Mining and Exploration Licenses were initially suspended with a Decree of the Mongolian Nuclear Energy Agency on October 8, 2009, whereas on April 9, 2010 they were invalidated after a governmental report setting forth alleged violations of domestic law. Invalidation was successfully challenged before domestic courts that ruled the invalidation "clearly unlawful" (¶¶ 53-55). Finally, the parties agree that the Mining and Exploration Licenses were not re-issued after the purported April 2010 invalidation (¶ 89 of the final award).
A. Decision on Jurisdiction dated July 25, 2012
The tribunal first addressed the issue of burden of proof. It then considered its jurisdiction under the Founding Agreement and the ECT and finally analyzed its jurisdiction over the claims of breach of the Foreign Investment Law ("FIL") of Kazakhstan (¶ 319).
The tribunal noted that at the jurisdictional stage only facts relevant to its determination on jurisdiction had to be proven. For facts relevant to the merits it would be sufficient, if claimants made a prima facie case. The tribunal would then take them as true pro tem for the purposes of establishing jurisdiction, in line with Phoenix (¶¶ 321-322). Regarding the burden of proof, the rule actori incumbit probatio applied under UNCITRAL Arbitration Rule 27(1) (¶ 326).
The first objection to jurisdiction argued that the tribunal could not assert jurisdiction over Khan Canada because it was not party to the Founding Agreement. In this regard, the tribunal made a factual determination of the common intention of the signatory and non-signatory parties to the contract. For this, it took regard of the negotiation, performance and termination of the contract. It then noted that although Khan Canada had not participated in the negotiation, after acquiring the shares of WM Mining Inc. it behaved as if it were replacing CAUC Holding as a party to the Founding Agreement in the sense of performing CAUC Holding's obligations thereunder. Thus, it became a "real party" to the Founding Agreement and therefore the objection was dismissed (¶¶ 329, 333, 338). Equally important, MonAtom and its predecessors in the Founding Agreement were aware of, expressly acknowledged and never objected to that fact. Hence, the tribunal concluded that it had jurisdiction over Khan Canada (¶¶ 341-342).
The tribunal also dismissed respondents' second objection, that of Mongolia not being a party to the Founding Agreement (¶ 343). It took the view that SPC and MRAM, as state agencies had no legal existence separate from Mongolia. With reference to Erdene and MonAtom, which were limited liability companies, the tribunal noted that Erdene undertook obligations that only a sovereign state could fulfil, whereas all notices addressed to it had to be directed to the address of the Ministry of Energy, Geology and Mining of Mongolia. Hence, Mongolia was a party to the Founding Agreement, albeit through a representative, the tribunal concluded (¶¶ 346-354).
The tribunal equally rejected the objection of the investment being in violation to domestic law. It affirmed that the protections of the ECT could not be extended to an investment made illegally, aligning with Plama, Phoenix, Inceysa and Fraport v. Philippines and referring to the principle nemo auditor propriam turpitudinem allegans. Yet, it found no compelling reason to altogether deny the right to invoke the ECT to any investor, who has breached the law of the host state in course of its investment. This, the tribunal underscored, would undermine the purpose and object of the ECT (¶¶ 380-385).
Further, it dismissed the objection based on the fork-in-the-road provision (Art. 26(3)(b)(i) of the ECT) as the triple identity test was not satisfied. Notably, the tribunal stated that the triple identity test should not be too easy to satisfy, as this could have a chilling effect on the submission of disputes by investors to domestic fora, even when the issues at stake are clearly within the domain of local law (¶¶ 386-400).
Thereafter, the tribunal specified the requirements for amicable settlement request in alignment with Amto (¶¶ 404-405) and addressed the denial of benefits clause (Art. 17(1) of the ECT) agreeing with the approach in Plama and Yukos Universal. Still, as the parties agreed to treat this as a preliminary question, it proceeded further with the examination (¶¶ 411-413). In the present case it was uncontested that the substantive conditions were met, as Khan Canada owned and controlled Khan Netherlands (¶ 415). The tribunal further noted that Mongolia through raising this jurisdictional objection, it exercised its right as required. Yet, in view of the object and purpose of the ECT as well as the obligation of the states to create "transparent conditions" for investors under Art. 10(1) of the ECT, it concluded that contracting states wishing to exercise their right under Art. 17(1) of the ECT are obliged to give adequate notice to investors (¶¶ 419-427). Thus, the tribunal found that the provision in question did not operate to bar Khan Netherlands from invoking the protections of the ECT (¶ 431).
Finally, the tribunal took the view that breach of respondent's statutory obligations under the FIL of Kazakhstan would constitute a breach of the umbrella clause of Art. 10(1) of the ECT and thus a breach of the provisions of Part III of the ECT (¶ 438).
B. Final award dated March 2, 2015
The tribunal found that the Mining and Exploration Licenses had to be treated separately, as Khan Canada acquired the Exploration License, which was never formally merged with the Mining License. Thus, in the present dispute no "unity of investment" existed (¶¶ 291-292).
It then proceeded with examining, whether respondents had breached their obligations under Arts 8.2 and 8.3 of the FIL. If affirmed, this would mean that Mongolia also breached its obligations toward Khan Netherlands under the ECT through operation of the umbrella clause in Art. 10(1) of the ECT (¶¶ 293, 296). After a thorough analysis of Mongolian law, the tribunal indeed concluded that respondents were in breach of their obligations towards claimants under Art. 8.2 of the FIL, which provided that "foreign investment within the territory of Mongolia shall not be unlawfully expropriated". Therefore, Mongolia was liable towards Khan Netherlands under Art. 10(1) of the ECT (¶ 366).
The tribunal decided that the principles to be applied in determining the damages caused to claimants included the Chorzów Factory standard. Claimants bore the burden of proof to show that they had suffered the loss they claim on the balance of probabilities. The tribunal reiterated that estimating future losses often involves some level of uncertainty or estimation, but no pure speculation, while citing Judge Greenwood in the ICJ Case Concerning Ahmadou Sadio Diallo (¶¶ 370, 375, 410). It examined the methodologies presented by claimants but found none satisfactory. Rather, it decided that the true value of Khan's investment would be better reflected by the offers made for the mine or for Khan Canada's shares in and around the relevant period (¶ 390). Lastly, the tribunal decided that a commercially reasonable interest rate was LIBOR +2%, compounded annually from valuation date until the date of payment (¶ 426).
This dispute concerned a mining license and an exploration license that permitted exploitation of radioactive material on specific areas in Mongolia. These licenses were later suspended and invalidated for alleged violation of domestic law. The tribunal rejected the jurisdictional objection arguing that one of the claimants (Khan Canada) was not party to the founding agreement of the joint venture that held the mining license. It decided that since Khan Canada after acquiring one of the juridical persons that had signed the founding agreement, performed the obligations of the acquired person and none of the other signatories complained, it had become a "real party" to same agreement. It also rejected the objection that Mongolia was not a party to same agreement, as members thereto were state agencies along with private companies undertaking obligations that only a sovereign state can fulfil. It then stated that illegality of an investment may not deny the right to invoke the ECT to an investor. It further noted that the triple identity test should not be too easy to satisfy as this shall prevent investors from submitting disputes to domestic fora. With reference to the denial of benefits clause (Art. 17(1) of the ECT) the tribunal found that states wishing to exercise this right are obliged to give adequate notice to investors in view of the object and purpose of the ECT. In the phase of the merits, it found violation of the domestic Foreign Investment Law and in particular the provision of prohibition of unlawful expropriation. It concluded that this amounted to breach of the umbrella clause under Art. 10(1) of the ECT.
This summary comes from the following paper:
The paper is part of the joint OGEL/TDM/ArbitralWomen Special Issue:
TDM 7 (2018) - OGEL/TDM/ArbitralWomen - Strategic Considerations in Energy Disputes