By Deborah H. Ruff (Partner), Trevor Wood (Partner) and Julia Kalinina Belcher (Counsel)

Introduction

Enforcement of arbitration awards can be an intensive, unpredictable, and hard-fought process. Once a favourable award is obtained, if payment is not made voluntarily, the award creditor will use all legally available means to collect on it. It will likely go to considerable lengths to identify the award debtor’s most ‘lucrative’ assets in various jurisdictions that it can enforce the award against. It will also consider the jurisdictions where the courts will be most likely to grant it the orders sought.

Third parties routinely get caught in the middle of the crossfire between the award debtor and the award creditor. Banks, in particular, whose services are used by the award debtor and suppliers who owe the award debtor money, may find themselves affected. While, logically, one would expect that the value of the award debtor’s assets in the hands of third parties that should be subject to enforcement orders should not exceed the total value of the award debt, this is not always the case, as the recent enforcement proceedings between Moldovan investors Anatoli and Gabriel Stati and their affiliated companies (the “Stati parties”) and the Republic of Kazakhstan (“Kazakhstan”) demonstrate.

Background

The Stati parties obtained a Swedish Chamber of Commerce award of just over US$500 million against Kazakhstan (the “Award”) in December 2013. The SCC tribunal found Kazakhstan liable for breaching the Energy Charter Treaty (the “ECT”), mainly its fair and equitable treatment provisions.

Kazakhstan sought to annul the Award in the “seat” of the arbitration (Sweden), arguing, among other things, that the Stati parties obtained it by fraud. The challenge, however, was unsuccessful: both the Svea Court of Appeal and the Supreme Court upheld the Award without considering the substance of the state’s fraud claims.

In the meantime, the Stati parties took the Award for enforcement to various jurisdictions.They targeted the Bank of New York Mellon (“BONYM”), which provides banking and custody services to the National Bank of Kazakhstan (the “NBK”), which manages assets on trust for the state, in respect of Kazakhstan’s sovereign wealth fund, Samruk-Kazyna (“Samruk”). BONYM is incorporated in Belgium and has branches in Frankfurt, Amsterdam, Paris, Dublin, Luxembourg, Milan and London.  It is ultimately owned by the US-based The Bank of New York Mellon Corporation.

In 2014, the Stati parties applied to the Dutch courts seeking garnishment orders on 17 banks (including BONYM) and 40 companies, and obtained provisional leave to do so. However, the Dutch Ministry of Justice was reported to have blocked the attachments shortly after on the basis that the assets were not shown to have been held for commercial purposes, presumably on the basis of the sovereign immunity doctrine.

In August 2017, the Stati parties made a new ex parte application in the Dutch courts in which they sought pre-enforcement attachments/garnishments to attach BONYM’s assets both in the Netherlands and outside the jurisdiction. Although the order granting attachments stated that they were not to apply to BONYM’s branches outside the Netherlands, the garnishment orders issued pursuant to the attachment decision were not so limited, extending to BONYM’s assets both in and outside the Netherlands. As a matter of Dutch law, garnishment is unlimited in amount and is not confined to the amount of debt owed by the debtor to the creditor.

BONYM (upon legal advice) took the view that the Dutch garnishments were apt to apply to all of Samruk’s assets held by BONYM’s London branch under the 2001 Global Custody Agreement (the “GCA”) between BONYM and the NBK. Accordingly, BONYM froze US$22.6 billion in cash, bonds and equity shareholdings.

The Stati parties also successfully attached a further US$5.2 billion in other assets held by Samruk in the Netherlands, targeting its indirect interest in the consortium that runs an oil field in the Caspian Sea.

In January 2018, the Dutch courts lifted the US$22.6 billion attachment on BONYM’s accounts, on what appears to be the sovereign immunity doctrine and non-disclosure of the earlier application, having found that the US$22.6 billion worth of assets frozen were effectively the same assets that were the subject of the Statiparties’ failed 2014 application. Nevertheless, the Amsterdam court refused the request from the NBK for a permanent ban preventing new attachments of BONYM’s assets.

Belgian courts granted the Stati parties’ application for attachments and garnishments for largely the same assets as those frozen by the Dutch courts in October 2017. Because, under Belgian law, a garnishment at a bank’s place of incorporation covers all assets, whether or not they relate to activities of a branch of that bank outside Belgium, BONYM (upon legal advice) considered that the garnishment properly extended to all of the assets held by it under the GCA. This order remains in place.

Swedish courts also granted the Stati parties an attachment order worth around US$100 million in respect of Kazakhstan’s shareholding in 33 Swedish public companies, on which the Swedish state bailiffs have commenced the foreclosure process.

In Luxembourg, the Stati parties secured another garnishment order against BONYM and attachments of Kazakhstan’s shareholding in Luxembourg-based Eurasian Resources Group, plus trade receivables from a number of Luxembourg companies due to Kazakhstan.

The Stati parties started proceedings in September 2014 in the US courts to enforce the Award. The courts twice refused to allow Kazakhstan to introduce allegations of fraud as a defence against enforcement. Kazakhstan reportedly intends to appeal the latest decision.

The English High Court initially granted the Stati parties permission to enforce the Award in England in early 2014, which Kazakhstan applied to set aside on a number of New York Convention grounds. However, having later obtained disclosure of documents from US courts that Kazakhstan says show that the Award was obtained by fraud, the state sought to amend its initial set aside application to add a further ground – that enforcement of the Award would contravene English public policy by reason of fraud by the Stati parties.

The position of the bank

The value of assets of the NBK frozen by BONYM pursuant to the Belgian and Dutch orders was 45 times the amount awarded to the Stati parties and comprised around 40% of the value of the entire sovereign fund. By complying with the orders, BONYM no doubt sought to negate the risk of civil liability for the amount of the Stati parties’ claims, as well as potential criminal liability in Belgium and the Netherlands, had it defied the orders.

However, complying with the orders exposed the bank to claims by its customer, the NBK (and Kazakhstan), under the GCA, which provides for English jurisdiction, which the latter brought in the English High Court seeking a number of declarations designed to establish that BONYM was not obliged or entitled to freeze the Kazakh assets.

Central to the claimants’ application was the contention that the NBK contracted with the London branch of BONYM in order to secure the immunity of the assets under English law. They also argued that one of the provisions of the GCA (clause 16(i)) which excluded BONYM’s liability to perform its obligations if such failure was caused by circumstances beyond its direct control, including any order imposed by any judicial authority, was not sufficiently clear to displace the position under English private international law that the Dutch or Belgian orders would not excuse BONYM from performance under the GCA. Clause 16(i) provided that “[BNYM] shall [not] be liable for and no default shall be caused by any delay or failure on the part of [BNYM] to perform any obligation which, in whole or in part, arises out of or is caused by circumstances beyond its direct and reasonable control including without limitation…any order…imposed by any…judicial…authority”.

The English court disagreed with the NBK. Without expressing an opinion as to whether the NBK was correct as to their interpretation of English private international law, Popplewell J rejected the claimants’ contention on a number of grounds, including the lack of evidence that the NBK intended to contract only with BONYM’s London branch to protect Samruk from any enforcement process since the assets would be treated as located only in London; such intention could not be gleaned from other provisions of the GCA. Popplewell J then declined to grant the NBK and the state any of the declarations sought by them for various reasons, including that they were founded on the NBK’s interpretation of clause 16(i) of the GCA, which the judge had rejected.

Importantly, the judge declined to grant the declaration sought by the NBK that the assets of Samruk were immune from enforcement as property belonging to a central bank of a sovereign state and/or the state. He held, inter alia, that there was no substantial issue in dispute between BONYM and the NBK, since BONYM was neutral to the question of sovereign immunity and the parties interested in the resolution of this question (i.e., the Stati parties) were not party to the application by the NBK against BONYM.

Choice of Forum for Enforcement

The strategy for enforcing the Award adopted by the Stati parties has highlighted the importance of making the right choice of the jurisdiction in which enforcement orders are to be sought so that it can be used as a “springboard” to reach assets globally. The attachment/garnishment orders obtained from the Dutch and Belgian courts resulting in a freeze of US$22.6 billion worth of assets far in excess of the Award debt have made it unnecessary for the Stati parties to pursue enforcement proceedings in other jurisdictions.

There is also an issue of fraud that Kazakhstan says was committed by the Stati parties and which is said to have influenced the arbitrators’ Award, which may lead to paradoxical results. Last year, the English High Court found a “sufficient prima facie case” that the Award was obtained by fraud – a conclusion it reached in light of the new evidence obtained in US proceedings. It also ruled that Kazakhstan was not issue estopped from advancing fraud allegations, since neither the Swedish, US nor English courts have decided their merits. Even if the issue estoppel had been made out, the question of whether the enforcement of the Award should be permitted would have to be decided by the English Courts applying English public order considerations. Although the trial on the merits of Kazakhstan’s allegations was scheduled for November 2018, the Stati parties have discontinued their enforcement application in England, rendering the hearing unnecessary, possibly seeking to avoid having the Award found unenforceable in at least one jurisdiction, fearing that this could prejudice enforcement efforts in other jurisdictions.

Kazakhstan’s efforts to impede the enforcement of the Award in Sweden on the basis of the alleged fraud was unsuccessful. Kazakhstan’s motion to amend its application to add the alleged fraud to the grounds for opposing enforcement was rejected by US courts. At the moment, therefore, no court has fully tried or decided the question of whether the alleged fraud took place, and it may well be that no court will ever decide this question. Yet, the Belgian freeze on Samruk’s assets held by BONYM is still in place – at least, for now.

The US$22.6 billion asset freeze in Belgium will stay in place, unless the Belgian courts try the merits of the fraud allegations and decide that the enforcement of the Award would offend Belgian public policy. Even if the Belgian court did so decide, unless the Dutch courts did the same, the US$5.2 billion attachment that remains on other assets of Samruk would stand.

The enforcement proceedings relating to the Stati v Kazakhstan Award have highlighted how, by using jurisdictions that have the narrowest application of public policy considerations and the widest interpretation of what amounts can be frozen how an award creditor, an award creditor can use the orders granted in those jurisdictions as “springboards” for reaching assets in others, even those in which enforcement of the award is denied.