Ampal-American Israel Corp. and others v. Arab Republic of Egypt, ICSID Case No. ARB/12/11
After finding jurisdiction in a separate decision, a tribunal at the International Centre for Settlement of Investment Disputes (ICSID) issued a decision on the merits, finding Egypt in breach of several provisions of the United States–Egypt bilateral investment treaty (BIT). Another decision on quantum and costs is still pending.
Factual background and claims
The Claimants are a group of U.S.-incorporated companies who are shareholders of the East Mediterranean Gas Company S.A.E. (EMG), a tax-free zone company incorporated in Egypt. EMG’s main purpose was to purchase natural gas at the source and export it to Israel through a pipeline. The Egyptian General Petroleum Company (EGPC), a state-owned company, and EMG signed a preliminary agreement for the sale of natural gas in 2000. EGPC and EMG further entered into a Source Gas Sale Purchase Agreement (GSPA) and a Tripartite Agreement in 2005, together with the Egyptian Natural Gas Holding Company (EGAS), which is also a state-owned company. Egypt gave a license to EMG to continue to operate under the private tax-free zone regime in 2006 and the following year it extended EMG’s tax-exempt status until 2025.
Claimants alleged that Egypt carried out the following measures that destroyed their investment: first, that Egypt revoked EMG’s tax-exempt status in 2008 by enacting a new law; second, that Egypt coerced them into signing an amendment of the GSPA by withholding gas from EMG; third, that even after the amendment was signed, Egypt did not comply with its obligations under the GSPA; fourth, that Egypt failed to protect its pipeline from thirteen attacks during the Arab Spring, delivering no gas to EMG for months; and fifth, that Egypt made up contractual grounds to terminate the GSPA to carry out government policy in order to discontinue all exports to Israel. As result of these measures, Claimants argued that Egypt breached relevant provisions of the BIT, including the fair and equitable treatment (FET) clause, the umbrella clause, the full protection and security clause, as well as the expropriation clause.
The tribunal first analyzed the issue of attribution. Preliminary, the tribunal stated that the issue of attribution was analyzed only for purposes of assessing the Claimants’ claims against Egypt of breach of the BIT based on actions or omissions of EGPC/EGAS.
Claimants argued that EGPC/EGAS’ conduct was attributable to Egypt in virtue of Articles 4, 5, 6, 8 and 11 of the ILC Draft Articles on State Responsibility (ILC Articles). Conversely, Egypt argued that the ILC Articles do not provide any basis for attribution.
The tribunal sided with the Claimants and concluded that EGPC/EGAS are state organs under Article 4 of the ILC Articles. The tribunal based its decision on evidence pursuant to Egyptian law, which stated that EGPC is a public authority and that it is overseen by the Ministry of Petroleum. Similar evidence was found regarding EGAS, which is wholly-owned by EGPC and it is chaired by the Minister of Petroleum. The tribunal also found that EGPC/EGAS’ actions were attributable to Egypt under Article 8 of the ILC Articles since both acted at all times under the state of Egypt’s direction and control. The Tribunal finally held that Egypt acknowledged EGPC/EGAS’ acts as its own under Article 11 of the ILC Articles since it ratified the termination of the GSPA.
2. Revocation of the Tax-Free License constituted an Expropriation
The tribunal first analyzed whether the tax-free license constituted an investment under the BIT. Based on the wording of the BIT, it concluded that the license was an investment. The tribunal then held that the revocation amounted to a direct taking of Claimants’ investments and that the inclusion of EMG within the tax-free zone system was a fundamental part of the economic structure of the investment. It thus concluded that the revocation of the tax exemption was tantamount to an expropriation. The tribunal held that the expropriation complied with some of the conditions for expropriation set forth in the BIT, such as public purpose and non-discriminatory treatment. However, it did not comply with prompt and adequate compensation.
Claimants also submitted that EMG would have retained its tax-free zone status after 2025 and claimed damages beyond that year. Egypt alleged that this claim was speculative. The tribunal agreed with Egypt and rejected this claim.
3. Claim regarding the Execution of the First Amendment Dismissed.
The tribunal held that the Claimants failed to prove that they were coerced into signing the first amendment. On the contrary, the tribunal found that it was in the Claimants’ interest to negotiate and execute an amendment to the GSPA.
4. Delivery failures from the first amendment of the GSPA until the outbreak of the Arab Spring Revolution
The tribunal held that it did not considered that Egypt failed to observe its undertakings during this period, and rejected the Claimants’ claim for alleged losses.
5. Delivery failures from the outbreak of the Arab Spring Revolution until the termination of the GSPA
The Claimants submitted that Egypt breached the full protection and security clause under the BIT by not having taken the necessary steps to prevent the attacks. On the other hand, Egypt submitted that those attacks were force majeure events under the GSPA.
Noting that its jurisdiction derives from the BIT, the tribunal indicated that it should apply the BIT standard rather than any contractual standard (force majeure). Based on previous decisions, the tribunal held that the duty imposed by the international standard upon the host state is not one of strict liability, but one of due diligence to protect the investor’s investment.
The tribunal also noted that another tribunal in an ICC arbitration regarding contract matters—in which EMG, EGPC, EGAS and Israel Electric Corporation (IEC) were parties—had issued a final award. The tribunal held that it was entitled to refer to, and to rely upon, the findings of the contract tribunal, provided the award was binding on the parties. Since the Claimants were not part of the ICC arbitration, the tribunal relied on the decisions in RSM v. Grenada, and Apotex Holdings v. USA to conclude that the Claimants were in privity of interest with EMG and that Egypt was in privity of interest with EGPC and EGAS. As a result, the tribunal held that the findings of the ICC tribunal, which were relevant to the claims before this tribunal, had a res judicata effect between the parties in this proceeding.
Based on the finding of facts of the ICC arbitration and its own evaluation of the evidence presented about the same factual matters, the tribunal concluded that Egypt failed to take material steps to protect the Claimants’ investment from damages in reaction to the attacks on the pipeline. This was specially revealed by an EGPC/EGAS technical report of July 2011 (5th attack). Therefore, the failure by Egypt to take steps to protect Claimants’ investment from the 5th attack constituted a breach of the obligation of due diligence that Egypt had to exercise to ensure full protection and security of Claimants’ investment.
6. Termination of the GSPA
The tribunal first analyzed the termination of the GSPA and stated that the breach of the GSPA was considered only to determine whether there has been a breach of the BIT. To reach a conclusion, the tribunal took into consideration the decision of the ICC tribunal, which found that EGAS termination of the GSPA was unlawful, and also took into consideration its own evaluation of the evidence presented. The tribunal concluded that EGPC/EGAS wrongfully terminated the GSPA.
The tribunal then analyzed whether the wrongful termination of the GSPA constituted an unlawful expropriation under the BIT. In this regard, the tribunal first examined whether the rights conferred to the Claimants by the GSPA constituted an investment protected under the BIT. Based on the wording of the BIT, the tribunal found that the Claimant’ property interest in the GSPA was an investment protected under the BIT. Then, the tribunal studied the conditions set forth by the BIT for expropriation (public purpose, due process, non-discrimination, prompt and adequate compensation) and found that none of the conditions were complied with. As a consequence, the tribunal found that Egypt unlawfully expropriated Claimants’ property interest in the GSPA by unlawfully terminating the contract.
Notes: The tribunal was composed of L. Yves Fortier (President, Canadian national), Francisco Orrego Vicuña (appointed by the claimants, Chilean national); and Campbell McLachlan (appointed by the respondent, New Zealand national). The award, dated February 21, 2016, is available at https://www.italaw.com/sites/default/files/case-documents/italaw8487.pdf. The decision on jurisdiction, dated February 1, 2016, is available at https://www.italaw.com/sites/default/files/case-documents/italaw7310.pdf.
Claudia Maria Arietti Lopez is a Paraguayan lawyer and holds an LL.M. in International Business, Regulation and Arbitration from New York University School of Law.