REUTERS | Steve Crisp

Investment arbitration in the Arab Spring: first lessons

The civil unrest that was at the root of the Arab Spring has given rise to a series of investor state claims. Many of these have been brought against a Middle East and North Africa (MENA) host state in arbitration, typically under a bilateral investment treaty (BIT) between the country of the foreign investor and the host state. Arbitral proceedings are currently pending against Egypt, Libya and Syria. Only one case to date, Ampal v Egypt, has concluded in a final award and allows some limited insight into how investment tribunals may deal with claims that are a result of the Arab Spring. Most cases, especially ones brought against Egypt, have settled or are in the process of settlement, no doubt out of a concern to preserve a positive sentiment of foreign direct investment into Egypt. Others have determined for lack of jurisdiction. Still others that may ultimately result in a final award are presently pending and will probably not conclude before sometime in 2018.

One striking feature of the Ampal case is that it demonstrates that investor state arbitration in the Middle East is conceptually no different from investment arbitration elsewhere in the world. MENA tribunals are often made up of the same arbitrators that regularly serve investor state arbitration mandates in other parts of the world and typically rely upon case law precedent drawn from international investment arbitration more generally. That said, there might be one or the other distinguishing feature. No doubt, non-International Centre for Settlement of Investment Disputes (ICSID) tribunals that deal with investment disputes in the Middle East will need to ensure that their awards are enforceable in Middle Eastern target jurisdictions. Their awards therefore require strict compliance with the procedural idiosyncracies of arbitration in the Middle East and the notion of public policy prevailing there. In addition, the Ampal tribunal, to say the least, has demonstrated that the circumstances of the Arab Spring may provide some impetus to the further development of the interpretation of the core substantive protections typically available under international investment protection frameworks, to reflect the specific nature of events arising from the Arab Spring. In this context, it is worth looking in particular at the interpretation the Ampal tribunal has offered of the full protection and security (FPS) standard.

FPS standards typically place an obligation on host states firstly to protect foreign investments from actions of third parties, such as rebels or insurgents, and secondly not to take actions that may endanger the continued security of a foreign investment. So a host state has a duty to protect and a duty to abstain. Importantly, the duty to protect does not require attribution. A host state is responsible even for any inaction that facilitates a third party interference with a foreign investment. An FPS clause does not impose an absolute obligation, but only requires a standard of due diligence. One of the leading authorities is Wena v Egypt, where an ICSID tribunal found that the FPS standard imposed on Egypt “an obligation of vigilance, in the sense that [the state] shall take all measures necessary to ensure the full enjoyment of protection and security” of foreign investments. Pursuant to another ICSID tribunal (Asian Agriculture Products Limited (AAPL) v Sri Lanka), this lays down “an ‘objective’ standard of vigilance [which focuses on] what should be legitimately expected to be secured for foreign investors by a reasonably well organized modern State.” This appears to say that the objective FPS standard is not an “obligation of result”, but an “obligation of good faith efforts without special regard for the host State’s resources” (Biwater v Tanzania).

Recent ICSID tribunals appear to have loosened this standard somewhat. In Pantechniki v Albania, the sole arbitrator (Jan Paulsson) favoured a “modified objective standard”, which gives credit to the host state’s particular circumstances, such as its level of development and internal stability. In that case, Paulsson made a distinction between a host state’s refusal and inability to provide protection. Applied to the facts at hand, Paulsson found that the Albanian authorities were “powerless in the face of social unrest of its magnitude” and dismissed the claim.

In the recent Ampal case, the ICSID tribunal relied on a combined reading of the relevant case law. In that case, the foreign investor complained about a total of 13 attacks on the pipeline between Egypt and Israel that served the transport of natural gas from Egypt to Israel, the subject of the investment. More specifically, the foreign investor complained that, following the tensions of the Arab Spring, Egypt “failed to take reasonable precautionary, preventive, and remedial measures” to protect the physical security of the pipeline from attacks of saboteurs in breach of Egypt’s FPS obligations. The Ampal tribunal confirmed that Egypt was under no absolute obligation or strict liability, but had to comply with a standard of due diligence, which had to be assessed against the “particular circumstances in which the damage occurs”. The Ampal tribunal thus concluded that, taking account of the “political instability, security deterioration and general lawlessness [in the region], the first attack did not violate the FPS standard.” Relying on Pantechniki, the Ampal tribunal found that a government should not be made internationally responsible “for failure to plan for unprecedented trouble of unprecedented magnitude in unprecedented places.” That said, according to the Ampal tribunal, the subsequent attacks on the pipeline created a pattern of delayed measures or a failure to implement measures to ensure the safety and security of the pipeline and hence the investor’s investment in violation of its due diligence obligation.

The Ampal tribunal has further developed the test applicable to the FPS standard in international investment arbitration, taking account of the particular requirements arising from events that are the result of the Arab Spring. In this sense, it sets a valuable precedent for other investment claims going forward in the aftermath of the Arab Spring.

DWF LLP Dr Gordon Blanke

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