{"id":5867,"date":"2018-12-21T08:32:43","date_gmt":"2018-12-21T14:32:43","guid":{"rendered":"https:\/\/www.iisd.org\/itn\/?p=5867"},"modified":"2024-08-09T18:29:14","modified_gmt":"2024-08-09T16:29:14","slug":"egypt-found-liable-for-the-shut-down-of-an-electricity-plant-during-the-2011-uprising-ksenia-koroteeva","status":"publish","type":"post","link":"https:\/\/www.iisd.org\/itn\/2018\/12\/21\/egypt-found-liable-for-the-shut-down-of-an-electricity-plant-during-the-2011-uprising-ksenia-koroteeva\/","title":{"rendered":"Egypt found liable for the shut-down of an electricity plant during the 2011 uprising"},"content":{"rendered":"

Uni\u00f3n Fenosa Gas, S.A. v. Arab Republic of Egypt, ICSID<\/span> Case No. ARB\/14\/4<\/h2>\n

In an award of August 31, 2018, an ICSID tribunal considered claims brought against Egypt by Uni\u00f3n Fenosa Gas (UFG), a Spanish company. The claims related to the UFG\u2019s gas supply to Damietta Plant, which was shut down due to the severe economic crisis and civil protests in Egypt in 2011. The tribunal dismissed all of Egypt\u2019s jurisdictional objections and upheld the FET<\/span> claim under the 1994 Egypt\u2013Spain BIT<\/span>, awarding UFG more than USD 2 billion in compensation.<\/p>\n

Egypt made several objections to the tribunal\u2019s jurisdiction and to the admissibility of the claims, which related to corruption, the absence of a protected investment and the contractual nature of the dispute.<\/p>\n

Corruption: Despite a few \u201cred flags,\u201d Egypt fails to discharge its burden of proof<\/h3>\n

Egypt submitted that UFG procured its alleged investments through corrupt and illegal means, thus in violation of Egyptian law and international public policy. Egypt advanced that, in order to maintain its investment, UFG selected a subcontractor, who later pleaded guilty in the United States for violations of the U.S. Foreign Corrupt Practices Act, in connection to bribes and kickbacks.<\/p>\n

In addition, Egypt contended that UFG\u2019s procurement of investment was replete with \u201cred flags.\u201d Specifically, it alleged that the investment was made in a country known for corrupt payments and that, in order to develop its investment, UFG partnered with a company whose employees had close personal relationships with Egyptian officials.<\/p>\n

Before analyzing the factual evidence, the tribunal made several important legal considerations. First, it stated that corruption would be fatal to UFG\u2019s claims as regards jurisdiction, admissibility and the merits. Second, it considered \u201cthe balance of probabilities\u201d to be the applicable standard of proof. Third, it underlined that timing mattered. Egypt raised allegations of corruption more than 15 years after UFG made its investment, which raised doubts as to the credibility of such allegations.<\/p>\n

The tribunal acknowledged that several payments received by UFG\u2019s local partners in regard to the development of the investment were indeed generous. However, the tribunal refused to second-guess the conditions behind these payments. It also acknowledged that UFG\u2019s local partners had certain access to senior decision-makers in Egypt. However, they were chosen by UFG primarily to act as lobbyists, which, by itself, did not evidence corruption, in the tribunal\u2019s view.<\/p>\n

Moreover, the tribunal underlined that the relevant events occurred more than 15 years ago before Egypt\u2019s allegations and, importantly, that neither UFG nor its local partner nor Egyptian governmental officials had ever been prosecuted by Egypt for criminal conduct in regard to UFG\u2019s investments.<\/p>\n

Therefore, the tribunal concluded that the plea of corruption raised by Egypt as a jurisdictional objection might have served a convenient tactical purpose. Accordingly, it dismissed the objection by concluding that Egypt failed to discharge its burden of proof.<\/p>\n

Subject-matter jurisdiction, contractual nature of dispute and parallel proceedings: Unpersuaded tribunal proceeds to the merits<\/h3>\n

Egypt then contended that UFG had failed to establish the existence of the investment protected under the BIT, since in 2007 UFG pledged to the Egyptian bank its shares in the investment and the associated rights, as security.<\/p>\n

Also, Egypt argued that the dispute was essentially contractual in nature and had been submitted to contract-based arbitrations. Egypt contended that UFG and its subsidiaries were engaged in an elaborate and improper strategy of \u201cclaim-splitting.\u201d Specifically, Egypt turned the tribunal\u2019s attention to three additional arbitrations under the auspices of the Cairo Regional Centre for International Commercial Arbitration (CRCICA) and ICC<\/span>, which significantly overlapped with the treaty-based ICSID arbitration. Egypt, therefore, asked the tribunal to either dismiss the claims advanced by UFG or stay the proceedings until the ICC and CRCICA tribunals resolved the contractual claims.<\/p>\n

The tribunal decided that UFG\u2019s acquisition of shares formed part of a broader business transaction, thereby satisfying the BIT\u2019s investment definition, as well as the Salini<\/em> test, and that the subsequent pledge to the bank did not affect the status of the investments. Accordingly, it dismissed Egypt\u2019s objection.<\/p>\n

Also, after analyzing the principles of res judicata<\/em> and lis pendens,<\/em> as well as the risk of double recovery and inconsistent decisions, the tribunal refused to stay or suspend the ICSID arbitration pending the results of the ICC and CRCICA proceedings.<\/p>\n

Merits: The customary plea of necessity fails again<\/h3>\n

UFG contended that Egypt had failed to afford its investments the protections granted by the BIT. It argued that its investments had suffered significant harm as a result of the decisions attributable to Egypt to curtail and cut the supply of natural gas to the Damietta Plant, which eventually resulted in the Damietta Plant\u2019s complete shut-down due to the lack of necessary gas supply.<\/p>\n

Egypt advanced that the contested decisions were not attributable to the state and, therefore, could not engage its international responsibility under the BIT.<\/p>\n

Alternatively, Egypt denied any violation of the BIT and, in any case, attempted to justify it by the customary plea of necessity contained in Article 25 of International Law Commission (ILC) Articles on the Responsibility of States for Internationally Wrongful Acts. Egypt asserted that the privatization of domestic electricity was the only way to safeguard Egypt\u2019s essential interests from a grave and imminent peril. According to Egypt, at the time the contested measure was adopted, the situation in Egypt was horrendous. It reached historic levels of violence and was out of control due to riots and clashes across the country. Police could not bring the situation under control, which constituted, in Egypt\u2019s view, \u201ca threat to the basic functioning of society and the maintenance of internal stability\u201d (para. 8.10). All this caused a dramatic drop in the supply of natural gas both internally and for export.<\/p>\n

The tribunal dismissed the necessity plea and concluded that Egypt frustrated UFG\u2019s legitimate expectations derived from the Ministry of Petroleum\u2019s undertaking in regard to the investment, thus violating the FET standard in the BIT.<\/p>\n

In order to reach this conclusion, the tribunal analyzed the letter dated August 5, 2000, in which the Egyptian Ministry of Petroleum fully endorsed the Natural Gas Sales and Purchase Agreement signed between UFG and EGPC, an Egyptian state-owned company. Importantly, in the contract, EGPC undertook to procure that Egyptian authorities did not to interfere with the rights of UFG under the contract and did not dictate or promulgate any regulation that could affect the rights of UFG or affect the capacity of UFG and EGPC to perform their contractual obligations.<\/p>\n

Based on the letter and the abovementioned contractual provision, the tribunal concluded that UFG legitimately expected that Egypt would not interfere in its contractual relationship with EGPC. It held that, by shutting down the Damietta Plant, Egypt deprived UFG of the possibility to perform its contract, thereby frustrating UFG\u2019s legitimate expectations. In analyzing the link between the FET standard and the concept of legitimate expectations, the tribunal was guided by Phillip Morris v. Uruguay<\/a>, Parkerings v. Lithuania<\/a>, Glamis v. United States<\/a> and Mobil v. Canada<\/a>.<\/p>\n

However, the tribunal decided that the other violations alleged by UFG related to performance of the contract and associated agreements signed between EGPC and UFG were not attributable to Egypt, as EGPC was a separate legal entity without any authority to bind Egypt by means of its conduct.<\/p>\n

In calculating the appropriate amount of compensation, the tribunal applied the principle of full reparation under customary international law (referring to the Chorz\u00f3w Factory <\/em>case and Articles 31 and 36 of the ILC Articles on State Responsibility) to wipe out, as far as possible, the consequences of Egypt\u2019s international wrongs. The tribunal concluded that, as a result of Egypt\u2019s unlawful conduct, UFG lost more than USD 2 billion in profits.<\/p>\n

Clodfelter\u2019s dissent: Investor failed to reasonably explain corruption-related matters<\/h3>\n

Mark Clodfelter\u2019s principal disagreement related to whether the investment was procured through corrupt means. He agreed that there had been no direct evidence of bribery or money passing hands from the UFG\u2019s partners to Egyptian decision-makers. However, the dissenting arbitrator noted that there was a tremendous and unexplained discrepancy between the local partner\u2019s involvement in the project and the compensation he was awarded. This clear red flag was sufficient, in the arbitrator\u2019s view, not to shift to UFG a burden of proving that there was no corruption, but rather to require UFG to provide the tribunal with a plausible and credible explanation as to such increased fees.<\/p>\n

Notes<\/em>: The tribunal was composed of William Rowley (claimant\u2019s appointee, Canadian and British national), Mark Clodfelter (respondent\u2019s appointee, U.S. national), and V.V. Veeder (president appointed upon the mutual agreement of the parties, British national). The award is available at https:\/\/www.italaw.com\/sites\/default\/files\/case-documents\/italaw10061.pdf<\/a> and the dissenting opinion of Mark Clodfelter is available at https:\/\/www.italaw.com\/sites\/default\/files\/case-documents\/italaw10062.pdf<\/a><\/p>\n

Ksenia<\/strong> Koroteeva<\/strong> is pursuing an LL.M. in International Dispute Resolution (MIDS) in Geneva. Previously, she worked as legal counsel and tribunal secretary at the Russian Arbitration Center (RAC).<\/p>\n