Egypt and Investor-State Dispute Settlement:The Russian roulette effect of domestic laws by T.Badawy

As the most active African player in the investor-state dispute settlement (“ISDS”) world, second to none on the continent, one must wonder why Egypt is the primary target of investor claims notwithstanding its efforts to attract foreign investors. With an active Investment Ministry and a generally efficient Investment Authority, Egypt must be doing something right; but why is it that there are so many Investor-State arbitrations against Egypt?

Over 30 cases adjudicated by the International Centre for Settlement of Investment Disputes (“ICSID”) alone involve Egypt. While Egypt was able to win a few notable cases, the scale may soon tip in favor of investors, however, as several new cases are currently being disputed before ICSID. 

The primary question, though, lies not in the improvement of Egypt’s record, which is largely due to its ability to select competent counsel, but in the reasons that caused such a high number of cases to be filed in the first place. In other words, Egypt should focus on conflict prevention rather than conflict resolution.  There are several reasons for the surge in cases against Egypt in recent years, [2] four of which stand out:

I.                 THE DANGERS OF CONFLICTING LEGISLATION

In 2000, East Mediterranean Gas (“EMG”) was established as a free zone company for the purpose of exporting gas to neighboring States. EMG’s free zones status attracted investors from several jurisdictions, including the USA and Poland. However, in 2008, EMG’s free zones status was unexpectedly revoked, which led to the imposition of a 20% corporate tax on the company. With negotiations failing, Polish and US investors brought investment claims against Egypt under the applicable bilateral investment treaties (“BITs”) for creeping expropriation resulting from the withdrawal of the tax breaks and other breaches. ICSID and UNCITRAL tribunals sided with the claimants, costing Egypt both time and money (see Ampal v. Egypt, ICSID Case No. ARB/12/11 (“Ampal”); and Maiman and others v. Egypt, PCA Case No. 2012/26 (“Maiman”)).[3] This could have been avoided but for the hasty decision to suddenly and unexpectedly withdraw the tax benefits granted to EMG.

The EMG cases bring to light the classical tension between a State’s freedom to legislate and an investor’s right to a safe, secure, and predictable investment. While an analysis of this dichotomy is beyond the scope of this article, the fact remains that by failing to consider the investors’ interests, the haphazard manner in which members of parliament (“MPs”) and other officials proceeded with legislating without assessing the impact of their actions on investors put the country at risk of facing claims by disgruntled investors.

An important area to be cautious is the Law on Special Economic Zones. This law was promulgated in 2002 to offer incentives and tax breaks to industrial projects operating within designated special economic zones. This naturally attracted foreign investors to these industrial zones, where they established impressive industrial projects, including Africa’s largest manufacturer of fiberglass pipes. However, ten years later, the Income Tax Act (a completely different law) was amended to specifically impose a 20% withholding tax on short-term loans repaid by projects within the zone.[4] Admittedly, while this withholding tax did not appear to affect projects within special economic zones (special economic zones have proved to be a success thus far), in 2016 Egyptian legislators spiced things up a little by enacting a Value Added Tax Law to “override any conflicting provision under a different law” including the Law on Special Economic Zones. There is a need to be vigilant and to avoid situations of legal uncertainty that can fuel future investment disputes against Egypt.

While investors have successfully brought claims against Egypt under various BITs, we have yet to witness a case challenging the gradual withdrawal of incentives offered by the Law on Special Economic Zones. For this reason, it is essential for Egyptian legislators to learn from the lessons of the past and avoid, in their keenness to legislate, creating to domestic conflicts of laws.

II.               LAWS DO NOT ALWAYS REFLECT ACTUAL PRACTICE

As in the case of economic and investment laws, Egyptian MPs must also consider the impact of non-economic laws on investors. To this end, and in line with the importance of ensuring predictability for both States and investors, States must ensure that their laws reflect actual practice, otherwise the risk of successful investor claims increases.

The first case that comes to mind is the oft-cited Waguih Elie George Siag and Clorinda Vecchi v. Egypt, ICSID Case No. ARB/05/15 (“Siag”), which turned on the tribunal’s approach to interpreting a provision of Egypt’s Citizenship Law which, in practice, was not applied. The facts, as outlined by the award on jurisdiction, suggest that Mr. Siag, an Egyptian by birth, owned a tourist development project in Egypt. In March 1990, he applied for Lebanese citizenship, which he acquired in June 1990.  Three years later, in May 1993, he obtained Italian citizenship through his marriage to Clorinda Vecchi, the co-claimant.

Mr. Siag’s project faced certain difficulties that ultimately led him to initiate an ICSID claim against Egypt under the Italy-Egypt BIT despite the fact that he appeared to consider himself Egyptian following his acquisition of Lebanese and Italian citizenship, which should have precluded the tribunal from hearing the case.[5] However, Mr. Siag’s lawyers relied on a provision of Egypt’s Citizenship Law (Article 10(3)) that is rarely -if ever- applied, to argue that he had lost Egyptian citizenship by the force of law in 1991, one year after his acquisition of Lebanese citizenship since he did not notify the Egyptian authorities of his wish to retain Egyptian citizenship following naturalization.

In his support was an expert opinion by Professor Fouad Riad, the leading authority on Egyptian citizenship law at the time, and a High Administrative Court judgment, although a reading of the judgment reveals that it dealt with a different question, and that the Court’s relevant remark was clearly obiter dictum. In other words, there was no precedent supporting Mr. Siag’s claim. The tribunal indulged, notwithstanding Egypt's legitimate claim that the claimant’s interpretation of the Article in question was not supported by jurisprudence or practice. In other words, Egypt maintained that Article 10(3) of the Citizenship Law was for all intents and purposes a dead-letter law.

The tribunal also ignored the fact that following his acquisition of Lebanese citizenship, the trinational residing in Egypt (i) acted before the commencement of his investment (and thereafter) as an Egyptian citizen; (ii) was provided by the government with numerous Egyptian nationality certificates between 1991 and 1997; and (iii) made several declarations concerning his nationality status to the Egyptian authorities for the purpose of his project (i.e. represented himself as an Egyptian before Egyptian regulatory bodies).

Mr. Siag won based on a provision of the Citizenship Law that was not applied in practice (at least at the time the cases were disputes). Leaving any comments on the tribunal’s reading of the Citizenship Law aside, the Siag arbitration raises an important question of significant relevance to investment arbitration; that of the gap between what the law says on paper, and how it is applied in practice. The tribunal applied the letter of the law, disregarding how it's interpreted and applied in practice. 

In the absence of a consistent approach by tribunals as to how to deal with the gap between law and practice, both investors and States risk being penalized due to unpredictability. In Siag, had the tribunal deferred to the State’s application of its own law, the outcome would have been very different. While such unpredictability, which is at odds with both the investors’ and States’ legitimate expectations, is a result of the inconsistent approach by tribunals towards this issue, fundamentally, it can be avoided if States ensure their laws reflect practice. 

III.              THE ATTRIBUTION CONUNDRUM

Understanding the rules of attribution is fundamental to determining whether the acts of third parties can be ascribed to a State for the purpose of defining its responsibility for wrongful acts. When domestic laws do not clearly outline the relationship between entities, confusion ensues, and so does the risk of liability.  Here is a brief explanation. 

It is common for the Egyptian government to contract with investors through government-owned statutory bodies that were converted from “public authorities created in the public interest” to authorities acting as commercial entities (e.g., the Suez Canal Authority (“SCA”) or the “Authority”) or referred to as corporations or companies (e.g., the Egyptian General Petroleum Corporation (“EGPC”), the Egyptian Natural Gas Holding Company (“EGAS”)). 

While for purposes of attribution to the State these institutions may arguably be considered independent from the State (since they appear to take the form of corporations), the challenge with this argument is that the constitutive statutes of these so-called corporations send mixed signals to investors and tribunals regarding these entities’ real nature. For example, the SCA’s constitutive statute provides that the Authority “has an independent budget” a fact that suggests it is separate from the State, before adding in the same Article that such a budget is to be “subject to the supervision of the Accountability State Authority” and “ratified by Presidential decree”.[6] An investor must wonder if the SCA is genuinely independent, why is it regulated by law and not governed by a corporate bylaw? Why is its budget subject to the supervision of the government? And why does the President have to burden himself every year with issuing a decree ratifying that budget? Despite the foregoing, the tribunal in Jan de Nul N.V., Dredging International v. Egypt, ICSID Case No. ARB/04/13 (“Jan de Nul”) found that the acts of the SCA could not be attributed to the State, a conclusion that was made easier by the fact that in this specific dispute, the SCA’s impugned acts were purely commercial. Does this mean that if such acts were not purely commercial, the tribunal would have ruled otherwise? The answer is not entirely clear, and the confusing manner in which the SCA’s constitutive statute is drafted does not provide any concrete answer either. 

In the absence of clear boundaries between the State and statutory bodies acting on its behalf, investors will not shy away from filing Investor-State arbitrations in the hope of having tribunals determine that a connection with the State can be established. Armed with local counsel that can provide rational and contextual explanations of such cryptic constitutive statutes in light of applicable domestic jurisprudence, the investors’ chances of success will increase, which is exactly what happened in arbitrations involving EGPC, another government-controlled entity, whose opponents were represented by a team of international and local counsel familiar with the intricacies of Egyptian administrative law, the domestic law governing attribution matters. While EGPC is referred to in English as a “corporation”, which suggests that it is an independent corporate entity, the claimants in Maiman and Ampal demonstrated that it is a corporation in name only, since an examination of EGPC’s constitutive statues revealed that it is:

§   An entity that has no shareholders, partners, or quota holders;

§   its structure does not contain a general assembly;

§   the Board of Directors is not subject to the oversight of a general assembly (as is typical of corporations); but is subordinate to the Minister of Petroleum; and

§   its board of directors is mostly composed of Government officers acting in their official capacities.

The clear control of the government over EGPC has cost Egypt at least two recent Investor-State arbitrations involving EGPC and its subordinate entities (Ampal and Maiman). 

The problem with attribution is not limited to the SCA and EGPC. Similarly structured entities exist in several other industries including mining, rail transport, telecommunications, and aviation and airport affairs to name but a few. With investments increasing in these sectors, and as the relationship between these statutory bodies and the State remains ambiguous, one would expect more arbitrations in the future, more uncertainty, and more money spent on lawyers and arbitrators.  

IV.             INEFFECTIVE BLOCKING LEGISLATION

To engage in business in Egypt, foreign investors must set up a local entity, which can take the form of an incorporated special purpose vehicle (“SPV”). These local SPVs often execute administrative contracts that contain arbitration clauses. However, Egypt has enacted blocking legislation amending the Arbitration Act to subject the initiation of commercial arbitrations involving administrative contracts to the approval of the concerned Minister. This is a public policy norm.[7]  Without such an approval, Egyptian administrative courts would have automatic jurisdiction. The Minister will rarely grant such an approval absent higher national interests.

An administrative contract under Egyptian law is a contract that is:

§   Executed by or on behalf of a public law person;

§   In relation to the management or functioning of public utility; and

§   that contains exorbitant clauses (e.g., discretion to amend terms, termination in public interest, amend prices following a regular review process).

This means that most supply and infrastructure-project-agreements concluded with the government will be deemed administrative contracts that may not be resolved by means of commercial arbitration unless the Minister deems otherwise.

While such blocking legislation may preclude SPVs from filing commercial arbitration against the State, it does not prevent these SPVs’ shareholders from initiating Investor-State arbitrations since their activities in Egypt (including owning shares in a local SPV) qualify as an “investment” under most applicable BITs. It follows that while under a build operate and transfer (“BOT”) contract for the construction of a refinery, airport, or similar structure, the SPV contracting with the government may fail to secure the Minister’s approval to exchange swords in commercial arbitration, the SPV’s shareholders will not be precluded from soliciting the ISDS mechanism.

Needless to say that many claimants resorting to ICSID recognize that it has greater benefits than commercial arbitration, chief among which are publicity of the cases and easier enforcement procedures. The blocking legislation, therefore, may not be so effective after all, and may actually be more counterproductive. This calls for a careful reconsideration of the efficacy and need for such blocking legislation.

CONCLUSION

Egypt is an investor-friendly State that strives to offer investors significant opportunities for growth. Yet despite having an active Ministry of Investment, it has struggled with a large number of ICSID and other Investor-State claims which could have been avoided but for structural legislative challenges. Absent legislative amendments, the risk of investor claims will persist. There is therefore an urgent need to address the rising trend of investment disputes through a dispute prevention lens that addresses the structural roots of the problem to guarantee Egypt’s continued ability to attract foreign investors.