THE AUTHORS:
Chiraz Abid, Associate at Altana Law Firm
Joséphine Hage Chahine, International Arbitration Lawyer and Lecturer at Sorbonne University
Private Interests of Individuals and Their Legitimate Expectations Are Part of the Egyptian International Public Policy: a Peculiar Equation!
I. Summary of the Facts
On 8 June 2006, the Libyan Government and the Kuwaiti Company “Mohamed Abdul-Mohsen Al-Kharafi” (hereinafter referred to as “Al-Kharafi Company”) concluded a Lease Agreement (hereinafter referred to as “the Contract”) for a period of 90 years over a land in the Tajura beach area (Tripoli, Libya) for the purposes of building a Touristic Investment Project (a five-star hotel, a commercial shopping center, hotel apartments, restaurants, etc.).
Al-Kharafi Company did not start the construction works alleging that the Libyan authorities failed to secure access to the Contract’s location and to remove all legal and physical obstructions.
In May 2010, the Libyan Minister of Finance issued a decree revoking the previously obtained approval granted for Al-Kharafi Company regarding the Project, on the grounds that Al-Kharafi Company failed to fulfill its contractual obligations, thus terminating the Contract.
The latter Contract contained an arbitration clause that referred to the provisions of the Unified Agreement for the Investment of Arab Capital of 1980 (hereinafter referred to as the “Arab Unified Investment Treaty”).
Based on this clause, Al-Kharafi Company initiated an ad hoc arbitration seated in Cairo with a tribunal of three members. The applicable law on the merits was Libyan law and the applicable procedural rules were those of the Cairo Regional Center of Commercial Arbitration (“CRCICA”).
II. The Award
On 22 March 2013, the Tribunal rendered its award, according to which the termination of the Lease Agreement by the Libyan authorities was unlawful insofar as it amounted to expropriation, which is prohibited by virtue of Libyan law and the provisions of the Arab Unified Investment Treaty. The Tribunal granted Al-Kharafi Company the total amount of USD 936,940,000.00. Plus an annual interest rate of 4% for the total value of the awarded amount, divided as follows. To be paid jointly and severally by the Libyan State, the Ministry of Economy, the General Authority for Investment Promotion and Privatization Affairs and the Ministry of Finance in Libya:
- USD 30 million for moral damages;
- USD 5 million representing the value of losses and expenses;
- USD 900 million in compensation for lost profits resulting from real and certain lost opportunities;
- 940 thousand as arbitration costs and fees.
III. The Annulment Proceedings
The Libyan entities filed a motion to set aside the award before the Cairo Court of Appeal.
By decision of 5 February 2014, the Cairo court of appeal dismissed the annulment request on the basis that the arbitration is governed by the Arab Unified Investment Treaty and its annexes, and therefore the resulting award is final, binding and not challengeable before the seat’s jurisdiction. Article 2 (8) of the Annex: “[…] Decisions of the arbitral panel rendered in accordance with the provisions of this article shall be final and binding. Both parties must comply with and implement the decision immediately it is rendered unless the panel specifies a deferral of its implementation or of the implementation of part thereof. No appeal may be made against arbitration decisions […]”.
The Libyan entities filed a motion against the Cairo court of appeal’s decision before the Egyptian court of cassation.
On 14 November 2015, the Egyptian court of cassation issued its decision (hereinafter referred to as the first decision of the Egyptian court of cassation) reversing the Cairo court of appeal’s decision, on the grounds that even though the Arab Unified Investment Treaty and its annexes explicitly prohibit the challenging of the arbitral award through ordinary and extraordinary means, they do not explicitly prohibit filing a specific and therefore special annulment procedure. More precisely, annulment procedures of arbitral awards are not considered as ordinary or extraordinary means of recourse as defined by the Egyptian code of civil and commercial procedures and thus do not fall under the explicit prohibition set forth in the Treaty. Consequently, the Egyptian court of cassation ruled that the annulment procedure is admissible, and that the competent court (i.e. the court of appeal of Cairo) must decide on all the grounds raised by the Libyan entities to annul the award.
On 6 August 2018, the Cairo court of appeal rendered its decision and concluded that it lacked competence to rule on the annulment of the award, insofar as the arbitration at hand was conducted according to the Arab Unified Investment Treaty, which has set forth “an Arab court of Investment” (i.e. an independent special regional judicial body) exclusively competent to address requests to annul the awards.
The Libyan entities challenged the aforementioned decision before the court of cassation of Egypt.
On 10 December 2019, the court of cassation quashed the decision of the court of appeal on the grounds that the first decision of the court of cassation (of 14 November 2015) that admitted the court of appeal’s competence to rule on the annulment request has res judicata The court of cassation referred the matter to the Cairo court of appeal. Even if under Egyptian law, the Court of Cassation is bound to decide on the merits if the challenge is presented for a second time, this obligation is not applicable if the case is being reviewed on one degree. Insofar as annulment requests are brought before the court of appeal on a first-degree basis, this obligation does not apply.
IV. The Decision of the Cairo Court of Appeal of 3 June 2020 – First Commercial Circuit, formerly, the Seventh Circuit
The Cairo court of appeal annulled the award. Article 53 of Egyptian law of Law No. 27/1994 Promulgating the Law Concerning Arbitration in Civil and Commercial Matters (amended by Law n° 9/1997) provided as follows:
“1. An arbitral award may be annulled only: a) If there is no arbitration agreement, if it was void, voidable or its duration had elapsed; b) If either party to the arbitration agreement was at the time of the conclusion of the arbitration agreement fully or partially incapacitated according to the law governing its legal capacity; c) If either party to the arbitration was unable to present its case as a result of not being given proper notice of the appointment of an arbitrator or of the arbitral proceedings, or for any other reason beyond its control; d) If the arbitral award failed to apply the law agreed upon by the parties to govern the subject matter in dispute, e) If the composition of the arbitral tribunal or the appointment of the arbitrators was in conflict with this Law or the parties’ agreement; f) If the arbitral award dealt with matters not falling within the scope of the arbitration agreement or exceeding the limits of this agreement. However, in the case when matters falling within the scope of the arbitration can be separated from the part of the award which contains matters not included within the scope of the arbitration, the nullity affects exclusively the latter parts only; g) If the arbitral award itself or the arbitration procedures affecting the award contain a legal violation that causes nullity.The court adjudicating the action for annulment shall ipso jure annul the arbitral award if it is in conflict with the public policy in the Arab Republic of Egypt”
on the basis that ordering a compensation of about USD 1 billion is:
- A breach of the principle of proportionality of compensation, which is an established principle of the collective rules of public policy insofar as it relates to the interests and rights of individuals and safeguards their legitimate expectations; and
- An abuse of the arbitral power and a breach of the mandate by not safeguarding a fair and complete trial.
V. Comments
A. As regards the breach of public policy – Article 53(2) of Egyptian law of Law No. 27/1994
Libyan law, which is the applicable law to the merits, provides for the entire compensation of the damage, which includes compensation of the actual losses and of the loss of profit Article 224 of the Libyan civil code. Egyptian law (according to which the award will be scrutinized before the Cairo Court of appeal in the context of a challenge) provides for the same rule in Article 280 of the Civil Code Article 280 of the Egyptian code des obligations et des contrats.
According to the Cairo court of appeal, compensation for missed opportunity must be based on realistic justifications and sufficient evidence to show its likelihood. It added that the mechanism of contractual liability is neither a penalty nor a “civil” sanction and that the quantum of the afforded amounts should be proportionate with the suffered harm. It has therefore considered that the amount ordered by the Tribunal (i.e. USD 900 million) to compensate the loss of profit was disproportionate insofar as the disputed project has not been implemented in any of its main steps and that the expert reports on which the Tribunal based its decision were established with data provided by the Claimant itself and contained unrealistic conclusions.
The Cairo court of appeal referred in its decision to Article (9) of the Arab Unified Investment Treaty which provides that compensation awarded to the Arab investor in case of expropriation should be fair Article 9 of the Arab Unified Investment Treaty: “[…] 2 It shall, however, be permissible to (a) Seize property for the public benefit in accordance with the authority vested in the State or its institutions to perform their functions in implementing public projects, provided that this is done on a non-discriminatory basis in return for fair compensation […]”
This reference to a regional instrument which is integrated in the Egyptian legal framework allowed the Cairo court of appeal to justify the international (or at least regional) nature of the principle of proportionality of compensation, insofar as the Signatory parties of the Treaty (i.e. the countries member of the Arab League) have expressed unanimously a consensus over this principle. Such reference to international instruments has also been made by the court of appeal of Paris in the Democratic Republic of Congo v/s Société CUSTOMS AND TAX CONSULTANCY LLC case Paris Court of Appeal of 16 May 2017, n° 15/17442, Free translation: “Considering that the United Nations Convention against Corruption signed in Merida on October 31, 2003, in force as of December 14, 2005 and signed by 178 States, expresses an international consensus on the fact that one of the main tools for preventing corruption consists in setting up public procurement systems based on the transparency of calls for tenders, the competitive process and the setting forth of objective and predetermined criteria for the selection of tenderers” and in the MK Group case Paris Court of Appeal of 16 January 2018, n° 15/21706, Free translation: “On December 14, 1962, the United Nations General Assembly adopted a resolution on the permanent right of sovereignty of peoples and nations over their natural wealth and resources”.
However, such reference is insufficient to demonstrate the public policy nature of the principle of proportionality of compensation, notably that the Cairo court of appeal connected the latter principle to the interests and rights of individuals, i.e. to private interests, by opposition to public interests, such as the fight against terrorism, genocide, slavery, drug trafficking, trading of stolen property, trafficking of human organs, corruption and money laundering.
Even though the Cairo court of appeal stated that the breach of public policy is easily recognizable by merely reading the paragraphs of the award, without in-depth material scrutiny or review, this reference to Article 9 of the Treaty is proof that it had conducted a review of the merits of the award, insofar as the Cairo court of appeal went through the substantial provisions of the applicable law (among which the principle of proportionality of compensation set forth in the Arab Unified Investment Treaty) and assessed how the tribunal applied them to the case at hand. Moreover, the said court drew “on-the merits” conclusions, by considering that the expert’s reports were “flawed” and that the Tribunal granted a disproportionate amount, while the determination by the arbitrators of the quantum of the damage is subject to the principle of “appreciation souveraine”.
It is interesting to draw a parallel between the decision at stake and a recent decision of the Paris court of appeal of 25 February 2020 Société Prakash Steelage Ltd. V. Société Uzuc S.A., Paris court of appeal, 25 February 2020 according to which “ordering payment of punitive damages is not, in itself, contrary to French international public policy, unless it is disproportionate with the suffered harm and the breaches by the debtor of its contractual obligations”. More precisely, both decisions have in common to have ruled that a disproportionate compensation is contrary to international public policy. However, and unlike the Cairo court of appeal, the reasoning of the Paris court of appeal contains a blatant contradiction insofar as the word “punitive” is by definition disproportionate. At least, the decision of the Cairo court of appeal, even though criticizable, has the advantage of not containing such contradiction.
It also worth mentioning that the Cairo court of appeal referred many times to the requirements of justice and fairness, which could be seen as an “ex aequo e bono” decision, even though the parties’ did not grant such possibility to the arbitrators and let alone to the Cairo court of appeal.
B. As regards the breach of the arbitrators’ mandate and abuse of power by not safeguarding a fair and complete trial – Article 52 (1) (g) of Egyptian law of Law No. 27/1994
The Cairo court of appeal characterized a breach of the arbitrators’ mandate and a breach of due process and annulled therefore the award. However, both of the aforementioned breaches lack in fact as it will be demonstrated here below:
It should be recalled that a breach of the mandate (provided for in Article 52 (1) (f) of Egyptian law of Law No. 27/1994) amounts to addressing matters that fall outside the scope of the arbitration agreement (ultra petita), to a failure to apply the law agreed by the parties or to ruling ex aequo e bono without the parties’ consent. The abuse of power is not expressly provided for in Article 52 (1) (f) of Egyptian law of Law No. 27/1994 and can be assimilated to the breach of mandate.
In the case at hand, ordering compensation of about USD 1 billion cannot constitute a breach of the arbitrators’ mandate nor an abuse of power. On the contrary, it is the exact application by the arbitrators’ of their mandate (i.e. finding whether the Libyan authorities were liable for the termination of the lease agreement and the contractual liability therefrom) which have used their “pouvoir souverain d’appréciation” in order to quantify, inter alia, the loss of profit.
In addition, it does not result from the Cairo court of appeal’s decision that the Tribunal failed to safeguard a fair and complete trial by ordering compensation of about USD 1 billion: no breach of due process has been claimed by the aggrieved party, and nor has the Court of appeal characterized it ex officio.
Conclusion:
The Cairo court of appeal considered that the principle of proportionality of compensation is part of the Egyptian public policy insofar as it aims at safeguarding the interests of individuals and their legitimate expectations. It has ruled that a compensation for the loss of profit of approximately USD 1 billion is disproportionate and annulled the award consequently. Such decision, from which it can hardly be understood how parties’ interests and expectations were elevated to international public policy principles, amounts to a review of the award’s merits and jeopardies the efficiency of the arbitration institution and will probably deter parties from choosing Cairo (i.e. the seat of the competent jurisdiction for challenging the award) as the arbitration’s seat.
ABOUT THE AUTHORS:
Chiraz Abid, Doctor of Law, Associate at Altana Law Firm, Arbitration and Construction Litigation Department.
Joséphine Hage Chahine, International arbitration lawyer registered at the Paris and Beirut Bars, lecturer at Sorbonne University.
