REUTERS | Darren Whiteside

Investment arbitration in the Middle East: basic trends and developments (Part 2)

This is the second part of a blog on basic trends and developments in investment arbitration in the Middle East. Part 1 discussed in some detail the procedural framework for bringing investor claims against a Middle Eastern host state, highlighting in particular potential avenues of redress under national investment laws, bilateral investment treaties (BITs), multilateral investment treaties (MITs) and free trade agreements (FTAs). Of particular interest is recourse under two MITs that are specific to the Middle Eastern region:

The OIC Agreement and the Arab Investment Agreement have had little visibility over the course of their lifetime, but deserve attention from international investors as viable means to enforce investor-state claims against target host countries in the Middle East. For the avoidance of doubt, the majority of Middle Eastern countries are all party to the OIC Agreement and the Arab Investment Agreement.

Part 2 endeavours to introduce qualifying investors to some instructive case law precedent under these two MITs, which has remained largely under-reported in relevant part to date.

The OIC Agreement

The body of case law precedent under the OIC Agreement is very limited. To date, there has only been one single reported case, although it is possible that others are pending, concealed from the public eye, under the cloak of confidentiality. Hesham Al-Warraq v Republic of Indonesia, to which reference has already been made in Part 1, implicitly confirmed that article 17 of the OIC Agreement allowed an investor directly to proceed against a host state in arbitration, and that investor safeguards granted by the OIC Agreement applied both to direct and indirect investments. As mentioned in Part 1, Al-Warraq also confirmed that the most favoured nation (MFN) clause contained in the OIC Agreement allowed the importation of fair and equitable treatment (FET) protection from other, more favourable treaty sources signed by Indonesia, including relevant BITs.

In addition, even though the tribunal found that Indonesia had committed various instances of denial of justice, it dismissed the investor’s claims for FET protection given considerations of inequity (“clean hands” doctrine). The tribunal also denied claims of expropriation and the adequate protection and security standard under the OIC Agreement on the basis of the evidence before it (and in particular given that the measures adopted by the Indonesian government qualified as a permissible preventive measure under article 10(2)(b) of the OIC Agreement).

The Arab Investment Agreement

The Arab Investment Agreement has given rise to a greater number of cases than the OIC Agreement, although case law precedent overall remains limited. To date, there have been around six instances at least in which the Arab Investment Court (AIC) or a tribunal appointed under the Arab Investment Agreement has rendered a decision. A further seven have been reported to be pending at the time of writing.

In what is believed to be the very first reference to the AIC (see Tanmiah v Tunisia, decision of the AIC, 12 October 2004), a Saudi investor, Tanmiah, brought proceedings against the Tunisian government, in the person of the Tunisian Prime Minister, and the Committee of Organisation of Mediterranean Games (COMG), claiming compensation in a total amount of US $68 million, including moral damages. In support of its application to the AIC, the investor alleged the nullification by the Tunisian local courts of the original arbitration clause contained in its marketing contract with the Tunisian authorities.

In response, the Tunisian government and the COMG raised jurisdictional objections, challenging the locus standi of the Tunisian Prime Minister, it being the Office of State Litigation that represented the Government in litigation before the courts pursuant to article 3 of the Tunisian Law No. 13/1988. The COMG challenged the investor’s status as a person making a qualifying investment within the meaning of the Arab Investment Agreement. In any event, even if there was competent jurisdiction, Tanmiah had failed to make payments under the underlying contract and the COMG was therefore excused by virtue of the application of the principle non adimpleti contractus, which was a binding contract law principle throughout the Arab world.

On the question of jurisdiction, the AIC found that, given the silence of the Arab Investment Agreement on the subject, the AIC had discretion to decide on the point of proper representation on a case-by-case basis. It concluded that, in the present circumstances, the case was properly brought against the Tunisian Prime Minister. In addition, on the basis of Order No. 338/1997, the President of the COMG, who concluded the underlying marketing contract with the Saudi investor, did so under the authority of the Tunisian Prime Minister, which in turn bound the Tunisian government and made it ultimately responsible for the execution of the contract. Further, the AIC found that there was an investment within the meaning of the Arab Investment Agreement given that the marketing contract was entitled “investment agreement”, without, however, examining whether the investor’s activities under the contract satisfied the requirements of investment under article 1 of the Arab Investment Agreement.

On the merits, the majority of the AIC concluded that because Tanmiah had failed in its own payment obligations, the Tunisian government was excused on the basis of the application of the principle of non adimpleti contractus, even though the President of the AIC found, in a dissenting opinion, that both parties were in breach of contract.

In a second case arising under the Arab Investment Agreement (see Munira Abdelhafedh and Rashed Mustapha v United Arab Emirates, decision of the AIC, 30 August 2006), the AIC found that it lacked competence to hear the case on the ground that the expulsion of the claimants was motivated by the claimants’ violation of drug regulations prevalent in the UAE. Upon review of the decision by the AIC pursuant to the Arab Investment Agreement, the court found that Mr. Mustapha’s end of service did not amount to an investment, nor did Mrs. Abdelhafedh’s shop, restaurant and farm, as they did not involve a qualifying transfer of capital contrary to the terms of the Arab Investment Agreement.

In Lido Hotel Jizza v Egyptian Minister of Finance, decision of the AIC, 21st August 2007, Lido Hotel Jizza (a partnership between Mrs. Aida Barakat, a Kuwaiti national, and Mr. Muhammad Barakat, an Egyptian national) brought a claim against the Egyptian Minister of Finance in his capacity as the Head of Customs for compensation, including moral damages, in a total amount of 1 million Egyptian pounds for civil and criminal actions initiated by Customs against Lido Hotel Jizza, in relation to equipment imported from abroad for its hotel business. Dismissing the Minister of Finance’s jurisdictional objections, the AIC found itself competent to hear the case on the basis of Mrs. Barakat’s Kuwaiti nationality (even though Mrs. Barakat was, strictly speaking, not the claimant, but only a shareholder in the claimant). On the merits, the AIC found that there was no evidence that Customs had abused their right to litigate under Egyptian law.

In Said Al Khoury in his capacity as Chairman of Consolidated Contractors Company v. The Arab League, decision of the AIC, 6 December 2010, the AIC declined jurisdiction on the basis that The Arab League did not qualify as a member state within the meaning of the Arab Investment Agreement, only disputes between investors and member states qualifying for resolution before the AIC.

In Horizon Tourism Company v Egypt, decision of the AIC, 27 April 2011, the AIC dismissed Egypt’s jurisdictional objections on the basis that the owner of the Egyptian claimant company was a Saudi national and that capital for investment in the hotel project in dispute had been transferred from Saudi Arabia. The court also rejected a “fork in the road” argument advanced by Egypt, given that the claimant’s election to resort to the local Egyptian courts was in relation to elements of the dispute that were not before the AIC. The case was subsequently reported as having been dismissed on the merits.

Finally, in Mohamed Abdulmohsen Al-Kharafi & Sons Company v Libya, Award, 22 March 2013, which is believed to have produced the first arbitral award under the Arab Investment Agreement, a Kuwaiti investor, who had entered into a Built-Operate-Transfer contract with the Libyan Tourism Development Authority in 2006 to establish a tourism complex in Egypt, was awarded US $930 million in damages. This case sets an instructive example of how arbitration can serve as an alternative to proceedings before the AIC for the resolution of disputes under the Arab Investment Agreement. Subsequently, the award was successfully enforced before the Egyptian courts (see decision of the Cairo Court of Appeal, 5 February 2014).

By way of conclusion, it is safe to say that even though the OIC Agreement and the Arab Investment Agreement have not always been interpreted in ways consistent with international investment law, they do offer promising avenues to qualifying international investors for recourse against Middle Eastern host states. In the history of international investment law, these instruments have remained comparatively muted, but deserve full attention by qualifying investors in their pending and future investment endeavours.

DWF LLP Dr Gordon Blanke

Share this post on: