When Public Interests, State Strategy, and International Law Clash in One Confidential Commercial Arbitration

Ira Ryk-Lakhman*

Much ink has been spilt throughout the years on States’ and the public interest’s role in international commercial arbitration. These issues are of particular importance where the litigants in a given arbitration come from neighboring – and not necessarily allied – states, and even more so when the particular neighborhood in question is the volatile Middle East and the case concerns natural resources. The recent International Chamber of Commerce (ICC) Award, rendered 6 December 2015, in the matter of East Mediterranean Gas Company (EMG) against the Egyptian Natural Gas Holding Company (EGAS), the Egyptian General Petroleum Corporation (EGPC), and the Israel Electric Corporation (IEC) – is perhaps the best illustration of how public international law, international strategy and relations, and the public interests – all collide in one confidential commercial arbitration between corporations. It is suggested that apart from the known (or rather, confidential) aspect of the private commercial arbitration, there is a less known, yet public, inter-State aspect to the case.

Private Commercial Arbitration

IEC is a governmental public company, whose shares are almost entirely (99.846%) held by the State of Israel. IEC is a vertically integrated utility, solely providing and supplying services in the electrical interface (officially declared as a monopoly on 5 January 1999 by the then General-Director of the Israeli Antitrust Authority). In July 2005 IEC entered into a natural gas supply agreement with EMG. According to the agreement, starting 2008 and over a period of 15 years, with an option to extend the agreement for 5 additional years, IEC shall purchase from EMG approximately 25 billion m3 of gas. The long and detailed agreement stipulated the risk and responsibility allocation between the parties (using Israeli territorial boundaries as a shifting point). It further provided detailed compensation mechanisms for cases of various contractual breaches, and prescribed the circumstances for the agreement’s suspension and termination.

The contractual period officially commenced on 1 July 2008 (after a 2 months trial period). Since the early days of the contract’s life, both parties raised various contentions concerning the contract’s performance. Namely, IEC contended that EMG repeatedly failed to meet its obligations, while the latter argued that circumstances outside its control (namely, supply and demand, regulatory difficulties causing overall gas shortage in Egypt, etc.) prevented it from fully complying with the contract. Consequently, the contract was amended on 5 occasions, starting September 2009, so to include revised gas prices and reduced purchasing volumes of gas.

The events subject matter of the ICC Award began in 2011 with the Arab Spring and the end of the Mubarak era. Since February 2011 more than a dozen of attacks and explosions in the proximity of EMG’s pipelines harmed the gas supply. Ultimately, the annual supplied volume of gas for 2011 amounted to barely 30% of the contractually prescribed quantity. On November 2011, an EMG gas pipeline was damaged in 2 subsequent explosions in Bir El Abd, the northern Sinai desert. According to Israel’s Ministry of National Infrastructures, by 5AM 10 November 2011, the gas flow to Israel was brought to a complete halt. The Egyptian Ministry attributed the events to terrorist attacks, while EMG contended that the events constitute “Force Majeure” entitling it to, again, suspend the gas supply to IEC.

EMG is a Joint Venture between US, Thai, German, and Israeli investors, and the Egyptian State oil company.  EMG was party to a “tripartite gas agreement” with EGAS and EGPC, the purpose of which was to enable gas export from Egypt to Israel and Jordan. According to this agreement, EGPC & EGAS were to guarantee a steady gas flow through EMG’s pipelines.  As a result of the described events, in July 2011 EMG’s shareholders announced that they would commence proceedings against EGPC & EGAS, seeking compensation for the damages inflicted due to EGPC & EGAS’ failure to meet their contractual obligations. Additionally, EMG named IEC as third respondent in these proceedings, seeking a declaratory relief that EGPC & EGAS are responsible for the failures to supply gas. Following EMG’s ICC claim, and after a steady gas supply of less than 30 days for the year 2012, on 22 April 2012 EGPC & EGAS terminated their agreement with EMG, alleging that EMG failed to pay for past gas deliveries. EMG (and IEC) in turn argued that the termination constituted repudiation. Notably, though IEC argued that the termination forced it to opt for more expensive fuels to produce electricity, EMG’s agreement with IEC was not ipso facto terminated.

 On 6 December 2015, a tribunal composed of Fernandes-Armesto (chair), and Marrin and Gürzumar (appointed by the ICC) rendered the Award. The Tribunal mostly found in favour of EMG and ordered EGPC & EGAS to pay USD 288 million (and pre-award interest) in compensation. Additionally, the Tribunal sided, to a certain extent, with EMG ordering EGPC & EGAS to pay additional USD 1.7 billion to IEC for the damages for the disrupted gas supply. No grand parties were registered in Egypt when the outcome of the proceedings became public, on the contrary. Almost simultaneously with the release of the Award, EGPC & EGAS announced their intention to apply for the Award’s annulment in the Federal Tribunal of Switzerland.

International, Public, and Inter-State Arbitration

An important piece of information is required to properly understand the puzzle. One of the highly debated topics in Israel today, and has been for over a year, is the contested “Natural Gas Deal” (currently pending final governmental approval).

In a nutshell, in 2010 the Leviathan gas field, one of the largest offshore gas finds of the first decade of the 21st century, was discovered. Leviathan is located in the Mediterranean Sea off the coast of Israel, less than 50km away from the Tamar gas field where substantial gas reserves were discovered in 2009, and about 100km away from the Karish and Tanin fields where gas discoveries were made in 2012 and 2013 respectively. According to official governmental estimations, the gas volume in these reserves amounts to over 900 billion m3 which may provide for Israel’s needs for 38 years (29 years if partially exported). And here’s the rub: the licenses to these fields are held by investors, with whom the Israeli government has been negotiating the sale and supply of gas. Simultaneously, the licenses’ holders, with Israel’s support, have been negotiating gas export and supply agreements to neighboring States. In April 2014 Nobel Energy (holder of 39.66% of the rights in Leviathan) signed a Memorandum of Understanding with the Jordanian Electricity Company for the export of gas to Jordan. The final agreement was scheduled for signing for 22 January 2015 in Washington DC in the presence of the Israeli, Jordanian, and US heads of State. However, no agreement was signed due to the disapproval the General Director of the Israeli Antitrust Authority expressed of the agreement. Similarly, on 25 November 2015, the fields’ developers announced that a preliminary deal was reached between them and Dolphinus Holdings, a company that represents non-governmental, Egyptian industrial and commercial consumers. According to this agreement, the production is to commence in 2020 and is expected to supply Egypt with some 4 billion m3 of gas over a period of 10-15 years. The planned method to export the Israeli gas to Egypt is by using EMG’s existing pipelines – same ones used to import gas from Egypt to Israel.

The Israeli government approved and encouraged these export agreements in the framework of the Deal, citing in support – regional strategy, security interests, and international relations. The official position of the Israeli Ministry of Foreign Affairs (1 July 2015) argued that “the discovered gas reserves constitute a pivotal strategic asset. Beyond the commercial and economic aspects, the gas serves as a catalyst in Israeli foreign relations, and contributes to the regional stability… [It] supports the development of diplomatic relations and political ties with countries in the Middle East, promoting regional cooperation, and consolidates Israel’s position as a major player in the global gas market, thus promoting Israeli political and economic interests in the world.” This position is also used by Israeli PM Netanyahu to support to use of a never-before-triggered provision to circumvent antitrust scrutiny, and bring to the final approval of the Deal. Importantly, this position is highly contested and debated in Israel, facing substantial objections from Israeli Parliament, public, press, and academia. Nonetheless, PM Netanyahu is not alone in his perception of the strategic regional value natural resources entail. A similar, if not verbatim, view was put forward on 9 December 2015 in a meeting between Greek PM Tsipras, Egyptian President el-Sisi, and Cypriot President Anastasiades. During this meeting President Anastasiades opined that “[t]he discovery of significant hydrocarbon reserves in the east Mediterranean and at Zohr, can and must be a catalyst for wider regional cooperation.”

And here is the point where the [Israeli] public interest, the [Israeli] governmental international agenda, and the private arbitration clash yet again. Once the Award was rendered the Egyptian government (reportedly) instructed EGPC & EGAS, the State-owned instrumentalities regulating gas and fuel, to suspend all negotiations for the export of gas from the Israeli fields to Egypt. On the same day, Israel’s Minister of National Infrastructure announced that “Israel attributes great importance to the security and energy ties with Egypt, and hopes that due to these close bilateral relations, it will be possible to proceed and advance the gas [agreements] in the near future.” He added, however, that “in any event, Israel must expedite the exploration and development of the discovered gas fields, thus we shall continue to advance export possibilities, not only to Egypt but to other neighboring States as – Jordan, Turkey, Greece, and even Western Europe.”  The Minister did not mention the Award in his announcement in a single word, nonetheless the timing and content of his announcement is self-explanatory. This announcement was perceived, and duly so, as signaling to Egypt that IEC (or rather, Israel) will not pursue the Award’s enforcement, so to expedite the export agreements. Moreover, a day after the Award was rendered PM Netanyahu announced his intention to send a special envoy to Egypt to “resolve the issue”.  Put differently: Israel is willing to “waive” the IEC compensation in the framework of a “lump-sum” export deal from Leviathan to Egypt.

Ostensibly, neither Israel nor Egypt were parties to the ICC proceedings, it is however abundantly clear, that the Award is only a small fraction in a much wider geopolitical puzzle between the real actors – the States. Seemingly, the Egyptian instructions to suspend export negotiations revealed that we are not dealing here with a mere case of confidential commercial arbitration between 3 corporations. We are clearly playing a different ball game.

Considered this way, various legal questions may be duly raised. First, from the procedural aspect pertaining to the confidential nature of the ICC proceedings, asking should these proceedings, and Award, not be made public given the clear public and international interests involved? Second, raising questions of States’ control and attribution; what are the grounds for Egypt’s (alleged) ability to suspend negotiations and agreements between Dolphinus – a non-governmental Egyptian company, and other non-governmental corporations? More pointedly, one will rightly ask – can the State of Israel, the main owner of IEC, “waive” the compensation awarded to IEC in proceedings to which Israel was not a party? More so, can Israel do so in the framework of an export deal which will directly and mainly benefit non-governmental corporations, which it does not own? Third, a close examination of IEC reveals that in a long pedigree of cases, the Israeli Supreme Court considered it to be a “Hybrid-entity” which is bound by enhanced obligations to the public. If so, can IEC, minded of its public/administrative nature and enhanced obligations “waive” its compensation in the framework of an export deal to which it is not privy? Furthermore, and to recall, after the explosions subject-matter of the ICC Award, IEC opted for more expensive alternatives to the Egyptian gas, raising consumer electricity prices by 30%. Thus, it was the Israeli public who bore the costs of EMG’s pipeline explosion, should it not have a say in the possible waiver of any compensations IEC was awarded thereof?

Nevertheless, there is something to be said about a State’s right to act in conformity with its essential – including security – interests, and prioritize these over other trade and investment considerations (here, the Award). There is also something to the very subtle use of terminology; the key distinction here being between a “waiver” of a right to receive money on the one hand, and peaceful international “settlement”, on the other. Indeed Israel is principally entitled to invoke Diplomatic Protection vis-à-vis Egypt. However, it seems slightly artificial to suggest that Israel exercises Diplomatic Protection against Egypt’s reluctance to abide the Award, just so it can “waive” the Award. But is this not what Diplomatic Protection is practically all about – a State acting on behalf of its national in means of peaceful settlement and as it sees fit?

Finally, and bringing the issue closer to the currently debated TTIP deal and Investor-State Dispute Settlement, one may wonder if proceedings of this nature should not be adjudicated transparently in an international court in lieu of arbitration, so as to take these interests into account? Or is it not preferable to have in these cases a confidential arbitration which leaves the real players – the States – more wiggle room?


Notably, there are additional pending proceedings between the parties: EGPC & EGAS commenced arbitration against EMG under a Gas Supply and Purchase Agreement (GSPA) under the rules of the Cairo Regional Centre for International Arbitration (CRCIA). Additionally, 2 investment claims (ICSID and UNCITRAL) were filed by the Israeli entities investing in EMG under the US-Egypt BIT, Germany-Egypt BIT, and the Poland-Egypt BIT.


Ira Ryk-Lakhman, MPhil/PhD student Faculty of Laws, University College London; Associate in the private sector, specializing in commercial litigation and dispute resolution (Tel Aviv). The views expressed in this paper are solely those of the author and not necessarily represent those of the author’s professional affiliation.   ira.lakhman.14@ucl.ac.uk.

Call for Papers: Bucerius Law Journal Conference on International Investment Law & Arbitration

Supported by Neil Kaplan and Doak Bishop

In collaboration with Neil Kaplan QC CBE and R. Doak Bishop, the Bucerius Law Journal is proud to announce its first conference on International Investment Law & Arbitration. The conference will take place in the facilities of the Bucerius Law School in Hamburg, Germany on 22nd and 23rd April 2016.

The Bucerius Law Journal was established in 2007 (http://law-journal.de/en/) as a cooperative effort of students and faculty of the Bucerius Law School, one of Germany’s leading law schools. Since then, the Bucerius Law Journal’s mission has been to provide a platform for young and ambitious scholars to publish their work. In line with that goal, the conference is similarly tailored towards international upcoming scholars (research assistants, graduate students, doctoral candidates and young lawyers) with a research interest in Investment Law & Arbitration.

The conference will be based on the scholarly papers of the participants and will feature a strong focus on panel discussions of pre-selected aspects of International Investment Law & Arbitration. To enable such discussions, the selected papers will be circulated between the participants prior to the symposium to allow every participant to familiarize himself with the issues of his or her panel. There will be 6 Panels each consisting of 3 participants which will be moderated independently relating to the following topics.

For more details, please see the complete Call for Papers.

Right to Regulation & Investment Court System: Alternative to ISDS? (Part I)

   by Pratyush Nath Upreti, Upreti & Associates*

Intellectual Property is sexy! Its romantic endeavor with other branches of law makes it appealing for IP scholars. This romance can be seen through the lens of the global Intellectual property regime. In today’s industrialized world, the landscape of the intellectual property is changing. Mostly, all forms of ‘intellectual property’ have raised debate in the trade agreements domain, making it an important aspect of trade negotiation. The open market economy encourages the developed countries to opt for Investment/Trade Agreement such as Free trade agreement (FTA), Bilateral Investment Treaties to attract investors by strengthening IP regimes. It is evident that IP as incentive commodity has turned into assets, trading commodity.

Similarly, the expectation of investors is increasing. Recent cases such as Philip Morris v. Uruguay have revealed the complexity and potential overlap between intellectual property, Investment Law, and Trade Law. The nature of claims raised in such cases has raised serious concerns regarding state’s sovereign right to regulate, which is reflected in the ongoing negotiation of Transatlantic Trade and Investment Partnership (TTIP). The recent public consultation report on investment protection and investor-to-state dispute settlement (ISDS) in the TTIP reveals that the Commission received a total of nearly 15,000 replies and an overwhelming majority showed concern to the inclusion of ISDS in TTIP.

One of the aspects is the EU Right to regulate provisions in the Investment Agreement. The concern raised is that the ISDS would be a potential limitation to the rights of government to regulate on public interest. Earlier September, European Commission published a draft text of the Investment Chapter in the proposed Transatlantic Trade and Investment Partnership (TTIP) between the EU and the US, propose the ‘Investment Court’, which has generated discussion.

Right to Regulation

According to the report from the Swedish National Board of Trade, the term ‘right to regulate’ is misleading. The report refers right to regulate as ‘to the extent to which the state can legislate and make decisions without running the risk of being found in violation of the treaty and having to pay damages’. It has been an established principle of state sovereign right to regulate on public, health and environment affairs. But the diverse opinions of tribunals and increasing legitimate expectation of Investor has seriously narrowed the state right to regulate.  The very fundamental question is to what extent can investors expectations rise?

In Eli Lilly vs. Canada under the North American Free Trade Agreement (NAFTA), Eli Lilly a pharmaceutical company invoked investment claims under UNCITRAL rules, on the ground that the patent invalidation by a Canadian Court violated a principle of fair and equitable treatment, including Lilly’s legitimate expectation about the treatment of its investment and Canada’s obligation to refrain from conduct that is arbitrary, unfair, unjust and discriminatory. Further, it was argued that ‘Lily was entitled to reasonably rely on the stability, predictability, and consistency of Canada’s Legal and business framework existing at each stage of the establishment, expansion, and development of Lilly’s Investment.

The above cases raised a fundamental question on the scope of application of ‘fair and equitable treatment or reasonable expectation of investment’ under intellectual property investment claims. The investor expectation should not be subjective and not all investor expectations are legitimate. Moreover, the arguments put forward by the claimant in Lilly directly come in conflict with state sovereign right to regulate the domestic Intellectual Property. The investor completely ignores the difference between the pre-existing rights and post-existing rights. Both the pre and post rights have limitation. The right does not arise if a prerequisite is not fulfilled. Similarly, once rights are acquired, they cannot be absolute; they are subject to changes on several grounds.

In practice, fair and equitable treatment and full protection and security are not absolute, there being limitations. Parkerings-Compagniet AS v. Lithuania tribunal analyzed the state sovereign power to regulate lies on higher foot then claims of free and equitable treatment. The Tribunal stated:

 

“It is each state’s undeniable right and privilege to exercise its sovereign legislative power. A state has the tight to enact, modify or cancel a law at its own discretion. Save for the existence of an agreement, in the form of a stabilization clause or otherwise, there is nothing objectionable about the amendment brought to the regulatory framework existing at the time an investor made its investment. As a matter of fact, any businessman or investor knows that law will evolve over time. What is prohibited however is for a State to act unfairly, unreasonably or inequitably in the exercise of its legislative power.”

Similarly, in Chemtura v. Canada, the tribunal upheld the Canadian government’s right to legislate laws based on scientific reviews and dismissed the investor’s claims. However, critics of ISDS have raised that such limitation of state right to regulate may bring regulatory snare. Therefore, Europe is trying to narrow down the scope of provision under the agreement to avoid vague interpretation by a tribunal. The previous agreements such as CETA and EU Singapore FTA, were drafted in a way to have a higher benchmark on the right to regulate.

For example under CETA, Article X.9 clears list down the contents of fair and equitable treatment such as (i) denial of justice in criminal, civil or administrative proceedings (ii) fundamental breach of due process (ii) arbitrary conduct and among others. The closed list avoids unwarranted interpretation by the tribunal, which may affect state right to regulate. Similarly, Article X.11 excludes expropriation claims on compulsory license and exclusively explains that indirect expropriation occurs when measure substantially deprives the investor property right such as (i) right to use (ii) enjoy and dispose of its investment (ii) transfer of title or seizure. In spite of such approach, public outcry on ISDS provisions seems to be a major hurdle for the European Union.  Therefore, to negate such a scenario and create a positive public opinion on TTIP, the Commission has proposed ‘Investment Court’ to address Investor claims.

Investment Court: Coffin for ISDS?

The concept of ‘Investment Court’ has been floating through Commission Draft Text of TTIP, which opens with a disclaimer that the document is solely for internal purpose and the commission will consult with the EU’s Member States and discuss the proposal with the European Parliament before presenting it formally to the United States.  The said EU proposal for an Investment Court is described as ‘over ambitious’ and deprives investors of the traditional possibility to choose their arbitrator. The proposal establishes a two tier court system; Tribunal of First Instance (tribunal) and Appeal Tribunal. The tribunal will follow the existing international arbitration rules of ICSID and UNCITRAL. Similarly, Article 13 allows the tribunal to apply only international law and interpret agreements in accordance with customary rules of interpretation. The provision expressly argues that the tribunal is not obliged by domestic interpretations of the law and the tribunal shall not have jurisdiction to determine the legality of a measure under the domestic law of the disputing party.

One of the criticisms of ISDS was the lack of transparency and maverick arbitrators. The proposed Investment Court has overcome such criticism. According to Article 11 of the proposal, judges of the Tribunal and members of the Appeal Tribunal must be persons whose independence is beyond doubt. Similarly, judges shall not be affiliated with government or organizations and also upon appointment, they shall refrain from acting as counsel in any pending or new investment protection disputes under this or any other agreement or domestic law.  In addition, the party to the dispute may challenge the appointment of the judge if it considers that the judge or member has a conflict of interests.

The very fundamental principle of investment arbitration is the investor’s active role in the appointment of an arbitrator. The proposed draft takes away this privilege of investors. However, the proposed draft gives an opportunity to the United States and the European Union to appoint permanent judges to the Appeal Tribunal and also to the Tribunal of First Instance.

This makes me suspicious regarding the possible political appointment of judges. This is very much possible, considering the worries of EU. Moreover, such pro-state judges will keep in mind to avoid unnecessary interpretation which limits the state’s right to regulation.  I believe that the investors cannot accept such an appointment process as the very fundamental reason for the involvement of investors in the appointment process was to avoid political interference. Therefore, I think the Commission should reconsider the appointment of judges and – if needed – some share should also be given to investor to balance the appointment process.

The proposed draft clearly fills the demand for more transparency in the arbitration process by abiding with the ‘UNCITRAL Transparency Rules’ and lists down documents to be publicly made available upon request. Additionally, it goes beyond and allows disclosure of third party funding to the parties.  This is indeed a very important aspect of the proposed draft.

In the end, I conclude that the proposed Investment Court seems a way to avoid ISDS. Moreover, it looks that proposal aims to gather positive public opinion on TTIP. The major question is even if the proposal of Investment Court System is accepted, then will it be applied retrospectively to all previous several Investment Agreement to which EU is member? If not, then there is always a scope of diverse opinion, which may narrow the state right to regulate. Time will tell whether ‘Investment Court’ is coffin to ISDS or muffin to the EU trade policy.

Let time be the protagonist.


Pratyush Nath Upreti recently completed Advanced Master (LLM) Intellectual Property Law & Knowledge Management (IPKM) from Maastricht University, Netherlands.  He is also an active member of New IP Lawyer’s, a wing of school of Law and its research centre SCule (Science, Culture and the Law) under University of Exeter, United Kingdom. He can be reached by p.upreti@student.maastrichtuniversity.nl