Jones Day

Arbitration Team of the Month #12

Introduction

Airlines and the business of air transportation are, by nature, designed to extend beyond their home State. Disputes that arise in international operations may be resolved by international arbitration if stipulated in the relevant international investment agreement (IIA) as a dispute settlement mechanism. Like any other kind of property value, assets of the airline companies can be defined as “investment,” provided that they meet the requirements of the specific IIA. In March 2021, Jones Day has helped Egypt defeat two parallel treaty claims over Metrojet Flight 9268, adding to the investor-State arbitration jurisprudence in the air transportation field. This month, Jus Mundi is pleased to bring light to Jones Day’s International Arbitration team, along with an interview with Jean-Pierre Harb.

Victories analysis: MetroJet v. Egypt and Prince Group v. Egypt

Facts

• Both arbitrations were related to the plane crash of Metrojet Flight 9268 in 2015.
• Metrojet (a trademark of Kogalymavia) was a Russian airline (now in liquidation), which offered flights to Egypt.
• Prince Group is a Turkish tour operator, which offered passengers holiday tour packages.
• On October 31, 2015, Airbus A321-231 (Metrojet Flight 9268) crashed on the Sinai Peninsula following its departure from Egypt en route to Russia.
• All 224 passengers and crew on board were killed, the majority of which were Russian tourists.
• It is claimed that the cause of the crash was most likely an onboard explosive device.
• In 2017, Metrojet and Prince Group filed their claim pursuant to the Egypt-Russia Bilateral Investment Treaty (BIT) and the Egypt-Turkey BIT.
• Both arbitrations were heard in parallel by identically constituted tribunals but were not consolidated.

Tribunal constitution

• Christopher John Greenwood President
• Stephan Hobe Appointed by the investor
• Christopher Thomas Appointed by the State

Tribunal’s decision

On March 18, 2021, the UNCITRAL tribunal issued two unanimous awards: one dismissing the claim brought by Metrojet on jurisdictional grounds; the other finding the arbitration launched by Prince Group was inadmissible.

• In the Metrojet case, the tribunal declined jurisdiction after it found that the charter airline does not constitute an investment on the territory of the host State under the Russia-Egypt BIT.
• In the Prince Group case, the tribunal ruled the claim was inadmissible as the Egypt-Turkey BIT requires investors first to litigate their dispute before local courts for two years.

Legal rationale

MetroJet v. Egypt

• Regarding Egypt’s ratione materiae objection, the tribunal first stressed that the BIT’s definition of “investment” included a territorial link with the host State, as the term covered in the article “shall denote all kinds of property values […] invested […] on the territory of the other Contracting Party”.
• The tribunal then went on to decide whether the charter airline had a sufficient level of activity in Egypt. While rejecting the “inflexible set of criteria” derived from the Salini test in ICSID arbitrations, the tribunal adopted a “holistic” approach with certain limits required to determine a protected investment under the BIT.
• Finally, the tribunal concluded that it lacked jurisdiction to decide the case after it noted that Metrojet had failed to fulfill its burden of proof concerning the evidence of its investment in Egypt. Therefore, the case was dismissed “with prejudice,” and Egypt was awarded two-thirds of the State’s legal fees.

Prince Group v. Egypt

• With respect to Egypt’s ratione voluntatis objection, particularly on the BIT’s two-year local litigation provision, the tribunal first considered that Egypt’s objection had been raised in a timely fashion before the case was bifurcated.
• The tribunal then turned to interpret the local litigation provision in accordance with the principles set out in the Vienna Convention on the Law of Treaties (VCLT). It held that even though the English text shall prevail as the BIT provided, the wording must be intelligible.
• While the ordinary meaning of the provision did not provide any guidance in interpreting its meaning, the tribunal then turned to the BIT’s object and purpose. It held that the provision should be interpreted in good faith.
• The tribunal went on to the supplementary means of interpretation. It concluded that without any evidence on the BIT’s negotiation history, the intention of contracting States on the local litigation requirement could not be indicated.
• Finally, the tribunal adopted the respondent’s Arabic translation, which supported a mandatory reading of the local litigation requirement. The tribunal reasoned that it indicated the intention of the contracting States and coincided with the respondent’s Turkish translation.
• Consequently, the tribunal concluded that the BIT’s two-year local litigation provision was mandatory and ruled that the claim was not admissible. Therefore, the case was dismissed without prejudice.

Interview with Jean-Pierre Harb

1. Congratulations on the victory of the MetroJet v. Egypt case! What are your thoughts on the tribunal’s reasoning concerning the territoriality requirement of the “investment”?

Thank you for the congrats. The collective effort of the entire legal team, including the Egyptian State Law Authority, was instrumental to achieving this result. We are proud of our results in high-value sovereign representations and delighted in this case that we managed to convince the tribunal to follow Egypt’s arguments on jurisdiction. In particular, the tribunal agreed with us that Metrojet’s charter airline activities between Russian and Egypt, without any permanent presence in Egypt, lacked the territorial link with Egypt, and therefore did not qualify as a “protected investment” under the treaty between Russia and Egypt. Indeed, the claimant operated its charter business out of its Russian base. It targeted Russian customers, generated revenues in Russia, directed most of its spending in Russia, and had not set up any kind of presence in Egypt. Such a business model clearly lacked the territorial link mandated by the BIT. BITs have a limited scope for protection of investments and protection is subject to certain conditions being fulfilled, such as the need to effect an investment in the territory of the host state. The tribunal correctly insisted on this point at the beginning of the Award.

Jones Day also represents investors against sovereigns. Generally speaking, it is important to remember that if we want to preserve ISDS to encourage foreign investments, the system should not be abused and decisions should not encourage frivolous claims against states. Bringing unwarranted claims is counterproductive and threatens the protection offered in BITs to genuine investments because states facing abusive claims from so-called investors will either sign treaties offering very light protection to investors or simply walk away from instruments designed to protect genuine investments.

2. Congratulations also on the Prince Group v. Egypt case! What do you think of the tribunal’s approach interpreting “local litigation period” as mandatory by adopting the Arabic translation of the provision?

Although the MetroJet and Prince Group cases were run in parallel by the same tribunal, the main issues were different and the claims were brought under different BITs.

On the mandatory local litigation period, the tribunal agreed with our position that the English version of the BIT, which is the prevailing language in case of contradiction with the other authentic languages, lacked clarity. For that reason, the tribunal had to go through a thorough interpretation exercise under the Vienna Convention on treaty interpretation and referred to other cases involving treaties signed by Turkey which included similar language on the local litigation period. However, the tribunal found that such supplementary means of interpretation did not provide any clarity as to the contracting states’ intention with respect to the local litigation provision. The tribunal then turned to the Arabic and Turkish versions of the BIT, which are the authentic languages, and found that our translation of the Arabic provision clearly suggested that the local litigation requirement was mandatory. Similarly, we advocated that the Turkish version supported a mandatory reading, while the claimant’s translation supported an optional reading. However, the tribunal emphasized that the claimant had initially accepted the accuracy of our translation, and only took issue with it after the hearing. Eventually, the tribunal followed our reading of the BIT and concluded that the BIT contained a mandatory two-year local litigation requirement.

3. The Paris office of Jones Day has been regarded as a serious player in ICC arbitrations. Can you tell us more about your work in international commercial arbitrations and about your approach to handling cross-border arbitration?

Jones Day’s Paris arbitration team is often involved in ICC arbitration given its proximity to the ICC, but we also handle cases under different rules. The MetroJet and Prince Group cases are a good illustration. Nevertheless, we have in-depth expertise and know-how within our team of ICC arbitration practice and usage. We are involved in ICC arbitrations relating to disputes in various industries, including shareholder disputes, pharmaceutical, energy, but also a substantial part of our cases are in the field of construction. As Paris is a hub for international commercial arbitration, our team is composed of talents from various parts of the world and has the capability to work in various languages other than English and French, such as Spanish, Italian, Portuguese, Arabic, Romanian, and Turkish. However, unlike others who choose to group most of their arbitration lawyers in two or three offices, Jones Day’s fully integrated model makes our international arbitration practice jurisdiction-agnostic. This allows us to operate as a single integrated team across the globe with shared resources and one common strategy. It means that the firm’s arbitrations are often staffed between two or more offices and we staff matters to suit the dispute across jurisdictions through strong cross-border collaboration.

4. Can you share your experience as an arbitrator with us, compared to acting as a counsel in arbitration proceedings? What’s the difference between these two roles, which one do you like more, and what is your advice to young arbitrators?

I received my first appointment as an arbitrator 10 years ago, after acting as counsel for more than 10 years. I mention the first appointment because this is the most difficult one to obtain as, naturally, it is difficult to be trusted in this role without showing any track record. It is easier now to gain a first appointment thanks to growing awareness of the importance of diversity and willingness among arbitral institutions to open the pool of arbitrators to newcomers. So I encourage the young generation to train for and invest in the arbitrator’s role because I am convinced that to become a good counsel in arbitration you need to have experience as an arbitrator, and vice versa. In your counsel role, the arbitrator’s experience allows you to better meet the tribunal’s expectations in terms of advocacy and procedural choices. As arbitrator, your experience as counsel is key to making the right decisions procedurally and to cutting through the noise of arguments. Having said that, there is a clear choice to be made for the predominant activity. Working for a large international law firm, with the expectations of its partners and its billing rate structure, is not compatible with sitting predominantly as an arbitrator. My work as arbitrator represents roughly between 20% and 30% of my overall activity which remains focused on working as counsel. Often, the arbitrator’s work becomes my night job. But I still greatly enjoy each experience sitting as an arbitrator.

5. You routinely represent clients in pre-arbitration phases. What’s your insight on the use of mediation as a tool for investor-State dispute settlement?

Pre-arbitration steps, including mediation, are often very useful, if not to reach an amicable settlement, at least to test the strength of the other side’s arguments. In my experience though, there are lower prospects of reaching an amicable solution in ISDS than in commercial disputes. Indeed, before escalating the dispute, investors have often tried, sometimes for many years, to find alternative ways of settling the dispute with the state entity. Amicable solutions through mediation or negotiation often require concessions from both sides. For obvious reasons, it is more difficult for the State’s representatives to agree on concessions on behalf of the State, than for the representative of a corporation who can more easily obtain a clear mandate for a settlement. Adding to that, it is more complex for sovereigns to take into account a conciliator’s recommendation and finally it can take longer to secure approvals from political and State organs for a settlement. Investors often are not willing to wait for such a lengthy process and resort to the dispute mechanism as soon as the pre-arbitration conditions are fulfilled.

6. Given your particular experience with arbitration in the Middle East and Africa, could you tell our readers what important considerations the parties should be aware of when arbitrating under Sharia Law?

We are currently acting as counsel in construction cases where Sharia has come into play. Specifically, it filled in gaps in the contracts with respect to the various impacts the pandemic had regarding the performance of work on-site. I also recently arbitrated a dispute where Sharia principles on damages were applied and attenuated to freely negotiated contractual provisions. Overall, the impact of Sharia is particularly important in the Kingdom of Saudi Arabia, where the demand for international arbitration is booming. Sharia may sound exotic for some, but for the most part it simply dictates the application of concepts based on fairness, very much like principles found in civil or common law jurisdictions. One difficulty is the lack of predictability of the solution by the decision-maker applying Sharia. As Sharia is a collection of principles, it is often much more flexible in its application than civil codes or common law systems. However, a corollary to such flexibility is uncertainty of results because, on the one hand, the interpretation and application of Sharia principles to any particular set of circumstances lies with the judge; and on the other hand, the Saudi legal system does not follow the principle of binding precedent (as compared to English law for example, where precedent has significance); and therefore Saudi judges are free to interpret and apply Sharia principles as they consider appropriate to achieve a just and fair resolution to a dispute.

Among the main characteristics of Sharia applied to commercial relations are principles with which we are all familiar, such as sanctity of contracts, the requirement to interpret particular provisions in coherence with the whole contract, and principles of fairness and good faith in the performance of contracts. Sharia law does not enforce contracts or provisions under which one party unfairly exploits the other party or gains unjustly at their expense. The broad and general nature of Sharia law, combined with the lack of binding judicial or legal precedents, means that Saudi courts or arbitral tribunals enjoy discretionary powers in their review and interpretation of commercial documents and they use those powers to give what they consider to be an equitable outcome.

Parties should also be aware that there are other principles in Sharia with which they may be less familiar, such as the prohibition of Riba. This fundamental Sharia principle holds that individuals should be rewarded for the effort they expend in an amount exactly proportional to that effort. In the same way, damages are generally awarded in Sharia law only to the extent necessary to make a harmed party whole. Some contractually agreed provisions may thus be thwarted under these principles. In the same vein, contractual damages are limited to actual damages and within the parties’ expectations. Indirect, consequential, and special damages are generally not awarded. Therefore, a damages clause may not be strictly applied.

Therefore, some arbitrators or judges will not hesitate to modify or ignore strict contractual terms which impose inequitable obligations if doing so allows them to reach an outcome they consider fair and just under the Sharia. Practically this means that arbitrators may get closer to the power to decide in equity, despite the lack of such a mandate granted by the parties. Parties should thus be aware that some contractual provisions may be ignored or amended under a strict application of Sharia for the sake of achieving “better justice”.

Presentation of the firm

Jones Day‘s international arbitration practice consists of experienced disputes lawyers in offices across the United States, Europe, the Middle East, Asia, Latin America, and Australia. The practice serves leading clients in some of the most prominent and complex disputes from many sectors, including telecoms, transport, life-sciences, energy, construction, oil and gas, as well as state entities. The firm’s multilingual practice has substantial experience undertaking commercial arbitration and investor-state arbitration proceedings. The investment treaty arbitration team dates back to the early 2000s, when Jones Day acted as counsel for the Loewen Group in the first ever investor-State arbitration against the United States under Chapter 11 of NAFTA – the first modern denial of justice case for damages alleging discriminatory treatment in domestic litigation.

Gregory Shumaker heads the international arbitration practice.

Key clients

• For sovereign States: Kyrgyzstan, Laos, Egypt, Togo.
• For private clients: IBM, Total, Engie, Endesa, Visor, World Wide Minerals, Alhambra Resources, Chevron, Boeing, Siemens, Hilton Worldwide, Gazprom Export, Citgo, Petrocom, Sherwin Williams, Cemex, Orange S.A..

Track-record highlights

• In 2019, the firm helped World Wide Minerals obtain a US$50 million UNCITRAL award against Kazakhstan over a uranium export license. The tribunal upheld jurisdiction and ruled in 2015 that Kazakhstan was bound by the Canada – USSR BIT as a legal successor to the Soviet Union. The case represents the first time that a CIS state has been held answerable to treaty claims as the legal successor to the USSR.
• In 2020, Jones Day obtained a landmark ruling for GE Energy from the US Supreme Court, which ruled that the New York Convention does not prevent non-signatories from enforcing arbitration agreements under principles of equitable estoppel. The Supreme Court’s decision is an important victory for international commercial arbitration—and, indeed, for all businesses engaged in international commerce.
• In 2019, the firm acted as the lead defense team for Hyundai Heavy Industries Co., Ltd in a USD 8 billion ICC arbitration arising out of the design and construction of the offshore facilities on the Barzan project in Qatar. The dispute between the parties arose from alleged defects in the offshore facilities and the steps required to make good the facilities and bring them on line. The dispute was settled in our client’s favor.
• In 2018, Jones Day defeated a US$ 1 billion claim brought by Saipem against a consortium formed by ENI and Sonatrach in connection with an EPC project for a LNG plant in Algeria.
• In 2014, the firm helped Egypt’s Orascom Construction Industries and Consolidated Contractors Company win a US$80 million commercial award concerning a high-profile real estate venture in the Egyptian capital.
• In 2014, the firm represented Federal Elektrik Yatirim ve Ticaret A.S. and three other claimants in an ICSID arbitration against Uzbekistan seeking millions of dollars of compensation under the Energy Charter Treaty and the Turkey-Uzbekistan BIT. The issues involved Uzbekistan’s treatment of the claimants’ investment in the natural gas industry of Uzbekistan and have since settled on favorable terms.
• In 2013, the firm successfully defended Texas Keystone Inc., a US oil and gas company based in Pittsburgh, Pennsylvania, against Excalibur Ventures’ $1.6 billion claim for an interest in various petroleum fields in Iraqi Kurdistan. The 57-day trial was the longest and one of the most complex held in London’s Commercial Court this judicial year. In addition to handling the English proceeding, Jones Day also acted for Texas Keystone in the related ICC arbitration in New York and in three separate district court proceedings across the US.

Pending instructions

• The firm represents Canadian mining company Alhambra in ICSID annulment proceedings to partially annul an award in favor of the investor.
• The firm represents French telecoms group Orange in a US$500 million ICSID claim against Iraq over its investment in a mobile phone operator.
• The firm represents a US engineering company Omega Engineering and its CEO Oscar Rivera in an ICSID claim against Panama over a series of construction projects.
• The firm represents Estonian construction company AS Windoor in a US$30 million ICSID claim against Kazakhstan over real estate dispute.
• The firm represented Kyrgyzstan in an ICSID claim brought by a group of Uzbek investors over the alleged expropriation of hotel properties.

Table of international arbitration cases involving Jones Day

Jones Day is currently acting as counsel in multiple investor-State and commercial arbitration cases.

We selected a few recent ongoing cases of Jones Day in the table below.

Please click here to see all types of cases (investor-State, inter-State, and commercial arbitration) involving Jones Day available on Jus Mundi.

[table id=24 /]

(Note*: This table is not exhaustive.)

Spotlight – the Metrojet v. Egypt and Prince Group v. Egypt team

• Jean-Pierre N. Harb (Partner)

Jean-Pierre Harb has extensive experience in international commercial arbitration and construction law. He routinely represents clients in pre-arbitration phases and acts as lead counsel or co-counsel in ad hoc and institutional international arbitration proceedings. He also regularly serves as chairman, sole arbitrator, and party-appointed arbitrator in such proceedings. Jean-Pierre has significant experience in jurisdictions beyond France, particularly in the Middle East and Africa. He conducts arbitration in civil construction, engineering, procurement, oil and gas projects, aviation, hotel management, development projects, shareholders and joint venture disputes, distribution, and service agreements.

Jean-Pierre Harb is among the few construction arbitration lawyers practicing in a civil law system (such practice being more common among lawyers from common law countries) with a particular focus in the Middle East and North Africa. His fluency in Arabic gives him a distinct advantage over his peers. He has appeared at numerous conferences as a speaker on international arbitration and lectured on the notion of investment in investment treaty arbitration and on international commercial arbitration.

• Ileana Smeureanu (Associate)

Ileana Smeureanu concentrates her practice on international commercial and investor-State arbitration. She represents clients from Europe, Africa, and the Middle East throughout the arbitration process, covering a wide range of disputes and various jurisdictions. Before joining Jones Day, Ileana worked in London as a research assistant to a renowned international arbitrator and was an associate with the International Law Institute (ILI) in Washington, DC. During her doctoral studies, Ileana trained with the ICC Court of Arbitration, the Singapore International Arbitration Centre, and four international law firms in Paris and Singapore. Ileana is the author of the book Confidentiality in International Commercial Arbitration (Kluwer Law International, 2011). She coauthored the English translation of the Romanian arbitration law (ICCA International Handbook on Commercial Arbitration, 74th Suppl., May 2013) and has published and spoken on numerous topics with a special focus on Eastern Europe. She is a member of the New York State Bar Association, the Bucharest Bar Association, and the young international groups of several prominent arbitral institutions.

For more information on Jones Days Global Disputes practice, click here.

Congratulations to the team again. Jus Mundi wishes them good luck for the future!