The Court of Cassation of Luxembourg quashed and annulled the judgment relating to the recognition of the $500 million award against Kazakhstan, remanding the case back to the Court of Appeal, formed by different judges.
In August 2017, Anatolie Stati, Gabriel Stati, Ascom Group S.A. and Terra Raf Trans Trading Ltd (“Stati Parties”) obtained a court order on an ex parte basis by which the Energy Charter Treaty arbitral award made against Kazakhstan in 2013 was declared enforceable in the Grand Duchy of Luxembourg. This order was confirmed by a decision of the Court of Appeal of Luxembourg dated 19 December 2019.
In March 2020, the Republic of Kazakhstan filed a cassation application, claiming inter alia that the Luxembourg Court of Appeal incorrectly dealt with the crucial pieces of evidence of the Stati Parties’ fraud – the letters from the Stati Parties’ former auditors, KPMG, invalidating audit reports for financial statements of three Stati companies for the period of three consecutive years. In those letters dated 21 August 2019, KPMG noted that the evidence of the Stati Parties’ fraud provided by Kazakhstan was “material to the accuracy of the audit reports and financial statements” issued by its auditors (“KPMG Letters”).
On 11 February 2021, the Luxembourg Court of Cassation granted the Republic of Kazakhstan’s cassation application and annulled the judgment of the Luxembourg Court of Appeal dated 19 December 2019 in its entirety. The court came to the conclusion that the Court of Appeal had violated due process by relying on exhibits, namely the above discussed KPMG Letters, and for closing procedural stage but not allowing an inter partes debate on the same important evidence through exchange of briefs. On that basis, the Court of Cassation decided that the judgment of the appeal court violates due process and should therefore be declared null. The case will now be heard again by a different chamber of the Luxembourg Court of Appeal. It should be noted that the Court of Cassation does not frequently void lower court’s decisions.
As previously reported, through another landmark decision dated 8 January 2021, the Luxembourg district court recognised the seriousness of the criminal complaint filed by the Republic of Kazakhstan against the Stati Parties with the Luxembourg law enforcement authorities, and stayed the validation of the Stati Parties’ title under the award until the criminal procedure comes to an end. After reviewing the evidence of the Stati Parties’ fraud and the various expert opinions submitted by Kazakhstan, the district court found that there is a sufficient nexus between Kazakhstan’s fraud case and the Stati Parties’ purported civil claims under the arbitral award against Kazakhstan. Now with the recent judgment of the Court of Cassation in the case, the Stati Parties’ alleged title under the award in Luxembourg is without basis altogether.
It is Kazakhstan’s position that the reason why the KPMG Letters were not the object of good faith inter partes debate in Luxembourg is because of the suppression of such evidence by the Stati Parties. In fact, it has become evident that not only this crucial evidence has been suppressed, but also the unearthed correspondence between KPMG and the Stati Parties dated 2016, where the auditors explicitly questioned the accuracy and legitimacy of the financial information in the Stati Parties’ books relating to their investments in Kazakhstan. This will all be now presented to the Luxembourg Court of Appeal.
Moreover, Kazakhstan’s position and the Stati Parties’ illicit pattern of conduct, in particular as arbitration and litigation parties, have been confirmed by recently obtained independent legal opinions of two worldwide leading experts in international arbitration, Professor George Bermann and Professor Catherine Rogers, which Kazakhstan also plans to bring to the attention of the Luxembourg judiciary.
Professor George Bermann provided an independent opinion, analysing the whole factual background and determining the legal implications of the parties’ conduct in the Stati dispute. Professor Bermann came to a number of conclusions, inter alia, finding that the Stati Parties operated their fraudulent machinery through a “deceptive corporate structure” and “sham companies,” by means of which the Statis were able to “enrich themselves at the expense of others.” The expert also determined that “[t]he Statis’ misconduct thus thoroughly compromised the legitimacy of the Arbitration and resulting Award, both as to liability and damages,” making the Award in question “a product of gross deceit [which] is unworthy of recognition or enforcement under the New York Convention.” In Professor Bermann’s opinion, the Statis’ “fraud did not end with the Kazakh operations, the Arbitration or the post-Award Proceedings. It is continuing today by ongoing misrepresentations in the actions pending in various courts.”
Professor Catherine Rogers also reviewed the operative facts, focusing principally on the ramifications of KPMG in August 2019 taking the extraordinary step of withdrawing all of their audit reports for the financial statements relied upon by the Stati Parties. Professor Rogers found that “the tribunal’s decision‐making would have been affected by a determination by the Stati Parties’ own independent professional auditors that their financials were completely unreliable and had been procured through material misstatements or omissions.” The expert is also of the opinion that “this new evidence would have raised independent concerns that the Stati Parties had engaged in underlying fraud and corruption that should preclude them altogether from bringing claims in investment arbitration.”
“We welcome the judgment of the Luxembourg Court of Cassation and look forward to defend our case on fraud before the Luxembourg Court of Appeal. We are optimistic about our chances, as the Stati Parties’ fraudulent schemes have now been confirmed by major legal and financial independent experts, while we have seen zero counter evidence in this regard from the Statis,” says Marat Beketayev, the Kazakh Minister of Justice.