Entes v. Kyrgyz Republic and Sistem v. Kyrgyz Republic

A look at the conclusion of a case in which four parties had attempted to seize assets from Kyrgyzaltyn JSC, a gold mining company owned by the state of Kyrgyzstan, to satisfy the parties’ arbitral awards against the state
On June 15, 2017, the Supreme Court of Canada brought to an end six years of litigation that saw four applicants fail in their efforts to seize US$165 million in Ontario-based assets from a company wholly owned by the Central Asian state of Kyrgyzstan. The Supreme Court dismissed applications by two of the original four applicants, Turkish companies Entes Industrial Plants Construction & Erection Contracting Co. Inc., and Sistem Mühendislik Insaat Sanayi Ve Ticaret Anonim Sirketi (Sistem), which hold arbitral awards against Kyrgyzstan and were seeking leave to appeal a December 29, 2016 decision of the Court of Appeal for Ontario.

Ontario’s appellate court had, in turn, dismissed appeals from a July 11, 2016 decision of Justice Barbara Conway of the Ontario Superior Court of Justice. Justice Conway had dismissed the four applications that were heard together in June 2016, ruling in favour of Kyrgyzaltyn JSC (KJSC), a company that specializes in the development of gold deposits  in Kyrgyzstan, and declaring that its assets could not be seized in satisfaction of arbitral awards against its owner, Kyrgyzstan. The unanimous decision had upheld Justice Conway’s refusal to declare that the Republic had an ownership interest in KJSC’s shares of Centerra Gold, Inc., an Ontario public company that operates the Kumtor Gold Mine in Kyrgyzstan. KJSC’s shares in Centerra had been targeted by four separate parties that then held arbitral awards against Kyrgyzstan.

The first of the four applicants, Sistem, enjoyed early success against KJSC before Ontario’s courts, first in getting KJSC’s assets frozen and then obtaining a judgment allowing for the assets to be seized. The latter three applicants — Canadian company Stans Energy Corp., Latvian oligarch Valērijs Belokoņs, and Entes — sought to build on that success. At first these claimants all enjoyed similar early successes, obtaining matching Mareva injunctions and freezing tens of millions of dollars’ worth of KJSC’s shares in Centerra, while KJSC appealed the Sistem judgment. The tide began to turn in June 2015, when the first of the Mareva injunctions was set aside after the Ontario Divisional Court overturned a decision of Justice Frank Newbould because the applicant, Stans, had failed to make full and frank disclosure on the original ex parte motion for the Mareva, and because the arbitral award that Stans obtained from a Russian tribunal had since been set aside by Russian courts.
 
Later that month the Court of Appeal for Ontario set aside a judgment rendered by Justice Julie Thorburn in favour of Sistem and ordered a fresh hearing on the merits, as Sistem had failed to properly serve Kyrgyzstan in accordance with the State Immunity Act. Next, the Mareva obtained by Belokoņs was set aside in September, 2015 after Justice Wendy Matheson concluded that “the substratum for the [injunction] ha[d] been significantly compromised due to the recent appeal decisions” in Stans and Sistem. Shortly after, Justice Matheson struck an affidavit filed by Kyrgyzstan, setting out evidence that indicated Belokoņs had been engaged in money laundering and other suspect transactions through the Kyrgyz bank at the centre of his claim.

Justice Conway’s decision wove together New York contract law, Kyrgyz corporate law and Ontario procedural law. Justice Russell Juriansz, writing for the Court of Appeal, described her interpretation of a contract called the Agreement on New Terms (ANT) as “thorough and persuasive,” and concluded that the appellants’ case lacked “a solid conceptual underpinning.” 

Only Entes and Sistem remained as appellants by the time leave to appeal was sought at the Supreme Court of Canada; Stans had not joined the appeal to Ontario’s Court of Appeal, and Belokoņs did not seek leave to appeal to the Supreme Court after his award was set aside by the Court of Appeal of Paris due to the money-laundering concerns that Justice Matheson had declined to consider.

The applicants had argued that the ANT between Centerra, KJSC, Cameco Corporation (another shareholder), and Kyrgyzstan established Kyrgyzstan’s ownership interest in the Centerra shares. In the alternative, the parties argued that the shares were being held by KJSC on either an express trust or a resulting trust for Kyrgyzstan. Ultimately, none of the four applicants were able to demonstrate that Kyrgyzstan owned any interest in the shares, either by contract or trust. 

The applicants had relied on a recital in the ANT that described KJSC as holding the shares “on behalf of” Kyrgyzstan as evidence that the state has an ownership interest in the shares. Justice Conway observed that the recitals simply reflected the fact that the state was the sole shareholder in KJSC, and held that the operative clauses of the ANT did not demonstrate that the Republic had any ownership interest in the shares. Justice Conway considered both the recitals and operative clauses and concluded that the contract was unambiguous: KJSC owns the Centerra shares in its own right. 

These cases serve as important reminders of limitations on the enforcement of international arbitral awards and the extraordinary relief of the Mareva injunction.

Matthew Latella and Christina Doria of Baker & McKenzie LLP acted for Kyrgyzaltyn. 

George Pollack and Steven Frankel of Davies Ward Phillips & Vineberg LLP represented Sistem Mühendislik.

Robert Wisner and Stephen Brown-Okruhlik of McMillan LLP acted for Entes.

Robb Heintzman and Chloe Snider of Dentons Canada LLP represented Valērijs Belokoņs.

Lincoln Caylor, Ranjan Agarwal and Matthew Kronby of Bennett Jones LLP acted for Stans Energy before the Mareva set-aside; John Terry, Myriam Seers and Vitali Berditchevski of Torys LLP acted afterwards.

Aaron Rubinoff, Joël Dubois and John Siwiec of Perley-Robertson, Hill & McDougall LLP represented Kyrgyzstan.