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High threshold for counterclaims (investment treaty)
Practical Law UK Legal Update Case Report 5-506-1444 (Approx. 4 pages)
High threshold for counterclaims (investment treaty)
by PLC Arbitration
| Published on 18 May 2011 • International |
In Paushok and others v Government of Mongolia (UNCITRAL Arbitration Rules) Award of 28 April 2011 on Jurisdiction and Liability, the tribunal considered, among other things, whether it had jurisdiction over the respondent’s counterclaims.
Speedread
In Paushok and others v The Government of Mongolia (UNCITRAL Arbitration Rules) Award of 28 April 2011 on Jurisdiction of and Liability, the tribunal found that it did not have jurisdiction over counterclaims raised by the respondent, Mongolia, because:
- They were directed against a company which was not a party to the arbitration.
- They did not have a close connection with the claimants' claims.
- Acceptance of jurisdiction over of some of the counterclaims would have constituted an exorbitant extension of the extraterritorial application of Mongolian public laws.
The decision confirms that the possibility of raising counterclaims in investment treaty arbitration under the UNCITRAL Arbitration Rules is limited. In particular, tribunals do not necessarily have jurisdiction over counterclaims arising out of the public law of the host state, even if the primary claims concern these laws.
Here, the counterclaims were directed against a company controlled by the claimants, which was not a party to arbitration. The decision shows that one of the requirements to be satisfied for the tribunal to have jurisdiction over the counterclaims is that the respondent must submit evidence proving a link between the claimants and the alleged breaches of law committed by that company.
Background
Article 19(3) of the UNCITRAL Arbitration Rules provides:
"In his statement of defence, or at a later stage in the arbitral proceedings if the arbitral tribunal decides that the delay was justified under the circumstances, the respondent may make a counter-claim arising out of the same contract or rely on a claim arising out of the same contract for the purpose of a set-off." (Emphasis added.)
Article 6 of the bilateral investment treaty (BIT) between the Russian Federation and Mongolia provides:
"Disputes between one of the Contracting Parties and an investor of the other Contracting Party ... shall, whenever possible, be settled through negotiations.
If a dispute cannot be settled in such manner within six months from the moment of its occurrence, it may be referred to: ...
(c) an ad hoc arbitral tribunal in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL)." (Emphasis added.)
Facts
The claimants were a Russian national, and two Russian companies in which he was a sole shareholder, who invested in gold, oil and gas exploration in Mongolia. The claims advanced by the claimants were based on alleged BIT violations concerning, among other things, changes to the Mongolian tax regime and employment law. The respondent raised counterclaims alleging that the Mongolian gold mining company controlled by the claimants:
- Owed certain taxes, fees and levies to the respondent.
- Violated its obligations under a gold exploration licence agreement.
- Violated its environmental obligations towards Mongolia.
- Was liable in damages for gold smuggling.
- Failed to comply with an order issued by an English court against that company.
Decision
The tribunal decided that it did not have jurisdiction over the respondent's counterclaims.
It found that:
- Even though Article 19(3) of the UNCITRAL Arbitration Rules referred to counterclaims "arising out of the same contract", it was, in principle, wide enough to encompass counterclaims in the context of investment treaty arbitration. The language of Article 6 of the BIT was also wide enough to encompass disputes giving rise to counterclaims.
- However, a counterclaim must have a close connection with the primary claim to which it was a response. A counterclaim should constitute an indivisible part of the claimants' claims or create a reasonable nexus with the claims. The counterclaims did not satisfy this requirement.
- All of the counterclaims concerned a company which was not party to the proceedings. The respondent had presented no evidence linking the claimants with any of the alleged breaches.
- The respondent's counterclaims concerning taxes, levies and fees arose out of Mongolian public law, over which the Mongolian courts had exclusive jurisdiction. Acceptance of the counterclaims by the tribunal would have constituted an exorbitant extension of the extraterritorial application of the respondent's public laws. This would have violated a "universally accepted rule that public law must not be extraterritorially enforced."
In reaching these conclusions in respect of the counterclaims, the tribunal was assisted by the approach of the tribunal in Saluka Investments BV v Czech Republic, Decision of 7 May 2004 on Jurisdiction, over the Czech Republic's counterclaim.
Comment
The decision confirms that the possibility of raising counterclaims in investment treaty arbitration under the UNCITRAL Arbitration Rules is limited.
The decision shows that tribunals will not have jurisdiction over counterclaims arising out of the public law of the host state, even if the primary claims concern these laws.
Furthermore, counterclaiming respondents must establish a sufficient nexus between the claims and the counterclaims. Here, the counterclaims were directed against a company controlled by the claimants, but which was not a party to arbitration. The respondent had failed to provide evidence proving a link between the claimants and the alleged breaches of law committed by that company.