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International arbitration plays key role in gas deal, Egypt’s future

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Workers walk past gas pipelines. Photographed by Reuters

Almasry Alyoum | Thu, 11/08/2011

International arbitration plays key role in gas deal, Egypt’s future

Maggie Hyde

In violation of international agreements, natural gas has not flowed for months across the Sinai desert through the pipeline that connects Israel and Jordan to Egypt. Since former President Hosni Mubarak’s fall in February, political uncertainty and intermittent attacks have halted its delivery.

The stoppage has more far-reaching effects than just increasing Israel’s fuel costs, though. It could also put into action a business arbitration case that could end up costing, or rewarding, the Egyptian government with billions of dollars. Arbitration is the practice by which two parties agree on a professional, third party arbitration judge who rules over the case.

In this case, arbitration proceedings would be presided over by a non-state third party, and could cost Egypt up to US$8 billion in recompense, as mentioned by Yosef Maiman, CEO of Ampal, which is part of Eastern Mediterranean Gas Company (EMG), to Reuters. But arbitration proceedings could also reveal the corruption that many believe was inherent to the deal.

A suspicious gas deal

The deal that brokered the sale of one of Egypt’s most precious resources to one its most hated neighbor is widely considered evidence of the rampant corruption under the former president. One of the corruption charges he currently faces is the accusation that he, along with former Petroleum Minister Sameh Fahmi and notoriously corrupt businessman Hussein Salem, profited from selling gas to Israel at below-market prices.

The gas-to-Israel deal was signed by the state-owned Israeli Electric Corporation and the Eastern Mediterranean Gas Company (EMG). EMG is a testament to the complex web of modern finance: its ownership is shared by American investors, Israeli corporations, the Egyptian state oil company, a Thai petroleum company, and a smattering of international shareholders.

Salem, a close confidant of Mubarak, is another owner. In June, he was arrested in Spain and accused of corruption, squandering public money, and money laundering. He remains in Spain awaiting extradition.

The gas pipeline, built in 2008, is part of a 20-year-long deal that guarantees the Israel Electric Corporation natural gas from Egypt at a below-market price. Most people believe that there are political conditions that accompany the deal.

Since Mubarak’s departure, the protest movement has called for an end to the deal and alleged behind-the-scenes political conditions with it. This coincided with no less than five attacks on the Sinai pipeline transmitting gas since February. The perpetrators are unknown.

The deal is also considered invalid because the People’s Assembly, the lower house of the Egyptian parliament, did not have the opportunity to vote on it, while Egyptian law states that sales involving Egyptian petroleum products cannot be exported without that body’s approval.

In response to popular cries, Prime Minister Essam Sharaf in April asked for all gas export contracts with Israel and Jordan to be revised.

In the meantime, in May, EMG entered arbitration proceedings, on the basis of an investment treaty between the United States and Egypt, since some of the investors are originally from the US. Bilateral investment treaties usually specify the rights of foreign investors, giving them legal grounds to pursue a case.

On the other side of the table in the arbitration case is Egypt’s interim government.

The case is still in its early stages. It remains to be seen how parties will plead, or whether the Egyptian government will allege corruption on the part of the investors.

But the method of arbitration, through which the dispute will be settled, seems as if it will affect both this deal and Egypt’s future in commerce.

If investors succeed in proving to an arbitrator that the Egyptian government is violating its contractual obligations by reexamining the gas deal, Egypt’s interim government can be forced to pay out billions.

When business deals go awry

As the business world has gotten increasingly global and complex, arbitration has emerged as the solution when agreements go bad on an international stage.

"What it really is, is cross-border justice,” said Karim Hafez, senior partner at the Hafez law firm in Cairo, which practices international arbitration for a host of high-profile clients, including the Egyptian government and gas companies.

The firm’s website, which does not disclose details of its cases, lists some of its most recent cases as acting on behalf of a Middle Eastern State in arbitration involving a US$2.2 billion infrastructural project, acting for a Middle Eastern oil and gas operator against the government of Egypt for breach of terms related to a gas sale agreement, and, most recently, acting on behalf of the government of Egypt “in a multi-billion dollar dispute involving the long-term cross-border sale and transmission of gas to the Israel Electric Corporation.”

In a teleconference interview from Paris, Hafez confirmed his firm’s involvement in the early stages of the proceedings, saying this limited him from talking in specific terms about the case. The process of arbitration, though, he said he was happy to explain.

"Both sides are concerned about hometown justice," he said. “So they find a neutral third party.”

There are two types of arbitration, commercial and investment, he added. Commercial arbitration is reserved for arguments over a sale or transaction. A commercial dispute can emerge over a sale of property or capital. It is being used to sort out the case of Omar Effendi Stores, the Egyptian franchise, which under Mubarak privatized and sold to the Anwal United Trading Company of Saudi Arabia. The sale is believed to have been at a less-than-fair price.

Investment arbitration is for when investors have an objection or believe they’re not given their due, for example, when a state seizes a foreign investor’s property without reason. In these cases investment arbitration is often conducted between a sovereign state and foreign investors.

The real benefit of arbitration, many say, is that if two parties have a contract and enough money, they can settle an issue without having to get their hands dirty in local courts, which are less expedient.

The process, which has been used in Egypt regularly by foreign investors, can be more expedient than a regular court case, but also sometimes exponentially more expensive.

According to two Cairo lawyers who practice arbitration, it’s a practice that is taking off in Egypt but still largely misunderstood.

It can and does deliver justice, they said.

“There’s a lot of rubbish talked about arbitration,” Hafiz said. “It’s not mediation. Though the process may seem genteel, it’s pugnacious.”

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“Solomon was one of the first arbitrators,” says Mohamed Madkour, senior associate at Hegazy and Associates in Cairo. “He didn’t use any law. He was very smart at using logic.”

Others explain it as the oldest system of dispensing judgment.

“Solomon was one of the first arbitrators,” said Mohamed Madkour, a senior associate at Hegazy and Associates, another Cairo-based law firm that practices arbitration.

Madkour, who has masters in arbitration and Islamic law from the Sorbonne University in Paris, said that the ancient king had a gift for revealing the truth.

“He didn’t use any law,” he said. “He was very smart at using logic.”

Better than a broken judicial system?

In arbitration, the disputing parties often choose an established arbitration center, which provides its own list of certified arbitrators, and set procedure.

In Egypt, arbitration has long been the preferred option for foreign companies coming to the country, due to the hazards of local courts.

"It’s not a secret that the judicial system is slow and not very effective,” said Madkour.

Investors don’t want the risk of investing in a state where their assets could be seized arbitrarily, or where they have no recourse. Most Egyptian judges, both lawyers said, are also not known for their business acumen.

"It gives [foreign investors] more comfort knowing that the judge… understands business," said Madkour.

The issue is not only one of competence. With judges serving as consultants on issues they might later be making rulings on, and Egyptian courts also don’t give an impression of impartiality, said Hafez.

“You can see how the judicial process here might look in the eyes of a foreign investor,” he said.

For investors to be able to bring an arbitration case against a foreign state there must be a bilateral or multilateral investment treaty between the home country of the investor and the country of the investment.

Egypt, like many modern countries, has a host of treaties with its close partners in trade. The EMG investors are filing their arbitration proceedings under Egypt’s bilateral investment treaty with the United States, signed under Ronald Reagan.

The US-Egypt treaty states, “foreign investors are to be accorded treatment in accordance with international law and are to be treated no less favorably than investors of the host country.”

The treaty also specifies that investors have the recourse to third-party arbitration proceedings.

The terms of some of these treaties, Hafez said, though, were not well negotiated and could mean that Egypt does not get a good deal in some cases.

“Unfortunately it used the excuse of bilateral investment treaties as useful photo-ops with visiting heads of state,” he said, explaining that they were thought of as a diplomatic diversion, rather than as a legally binding commerce agreement.

These ill-thought-out treaties, Hafez said, have resulted in settlements not beneficial to the Egypt.

“The state became, unwittingly, the victim of its own misdeeds,” he said.

Arbitration vs. corruption

Although the gas deal arbitration is not formally being filed as a corruption case, arbitration proceedings could still uncover misconduct. If the state uses allegations of corruption among former officials and investors as a defense, then the arbitration court could end up deciding the case in Egypt’s favor.

The question is, in arbitration proceedings, can the Egyptian government plead its own corruption and win?

There’s a chance, according to Hafez. Arbitration judges, he said, have, no long-term professional interests or emotional allegiances that might influence their rulings, making them a better judge in matters of intra-government misconduct.

“An Egyptian judge is probably less likely or ready to condemn the actions or wishes of state officials,” he said.

If the investors in a case such as the gas deal are to blame, said Hafez, the arbitration proceedings can be an opportunity for Egypt to restitute funds.

“If I were representing the state in a suit brought by investors, I would argue corruption as a defense,” he said.

And if the foreign investors knowingly entered into or were instrumental in a corrupt deal, he said, an arbitrating judge could end up ruling against them, giving a reward to the government of Egypt.

“An investor who corrupts state officials should have only himself to blame,” he said. “It’s perverse. These so-called investors should not be allowed to take refuge in a law they formerly spurned.”

The future of business disputes

Arbitration is a growing practice around the globe, and Egypt looks like it is going to see more cases as well.

No comprehensive statistics exist on international arbitration, but according to the International Chamber of Commerce, the leading arbitration center located in Paris, requests for arbitration are increasing exponentially.

Between the years of 1923, when the center opened, and 1975, the center fielded nearly 3000 requests for arbitration. Between 1976 and 1987, there were 6000 cases. In the past 24 years, there have been about 11,000.

And as both lawyers said, contracts allowing for arbitration have long been a condition for foreign companies agreeing to invest in Egyptian projects.

But if the Egyptian government continues to interfere in property of foreign investors without reason or process, it could have many more arbitration cases on its hands than just the gas deal, Madkour said. A witch-hunt atmosphere now, he said, would only hurt Egypt in the long run.

“Egyptians are now eager for reparation,” he said of the popular anger at corruption among former regime officials. “But at the same time, terminating investments without a legitimate reason will lead to an arbitration case against the government.”

Potential investors will be scared away in this sort of environment, Madkour said, further hurting Egypt’s economy and reputation as a safe place for foreign investment. If Egypt could be proactive and preemptively settle with some investors, such as those involved with the gas deal, he said, such negative fallout may be avoided.

“Sometimes,” he said. “A bad settlement is better than a good case.”

Cairo is home to Egypt’s own arbitration center, opened in 1979, works mainly in commercial arbitration. The center is starting to make ventures into investment arbitration and possibly, sports arbitration, according to Khaled Osman, head of dispute management at the Cairo Regional Center for International Commercial Arbitration.

The Cairo center’s draw is that it’s cheaper than the high-powered ICC center in Paris and others in Europe and the US.

He said he’s seen the number of arbitration proceedings rise, though he has no statistics on hand. Arbitration, though, is here to stay, Osman said.

“As long as there are more investments, more disputes will arise, and they can come here to arbitrate,” he said.

For Hafez, arbitration is one of country’s best hopes at seeing corrupt business deals settled fairly. He said Egypt’s judicial system has a long way to go before it can administer real justice in these cases.

"I don’t think we have yet understood the significance of checks and balances," said Hafez.


 source: Almasry Alyoum