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.

Leave a Reply