Legal implications of the "Arab Spring"

The political events in the Middle East in the context of the “Arab Spring” are also generating new legal aspects and challenges for doing business in the region.

The M ENA-Region was, due to its political, economic, legal and cultural peculiarities, never quite an easy playing field for foreign companies, especially not for SME’s. Nevertheless for many decades they operated by and large in a relative stable environment in which an insider was able to navigate reasonably and safely. All this has changed, since the protests of 2011 in Tunis and Egypt have ignited a process, during which autocratic heads of states were toppled (Tunis, Egypt, Libya, Yemen), civil war broke out (Libya, Syria, Yemen), and where in this on-going process ultimately even existing geographical boundaries of states might be changing (Syria, Iraq, Libya, Yemen) and new states (Kurdistan) as well as quasi-states (Islamic State/ IS) might be emerging. This process, perhaps better described as Arabellion instead of the largely discredited original Arab Spring, might even not stop at the –historically anyway somehow artificial – borders of Gulf Cooperation Council's monarchies in the Arab peninsula, which have been largely unaffected so far indeed by the changes and upheavals in their neighbourhood. At least some of them might in the long run not be able, to immunize their populace (especially the young generation) with financial largesse against the appeal of political and institutional change.

Legal impacts on doing business in the Middle East

The Arabellion had already its impact also on some legal issues with practical consequences for doing business in the region. Some of these issues have already been debated in International Arbitration Tribunals or – as the issue of “force majeure” - have an impact on the interpretation of on-going contracts or the drafting of new contracts. Other legal issues are still pending somehow in the future, however possible pitfalls should be taken into account already right now.

Investment Protection

is an important feature in international business, especially in times of political changes. The Middle East has been, even before the Arabellion, a good example. A change of government may result in review or even cancellation of contracts, concluded by the former government; constitutions, laws regulations and practices my change abruptly without previous notice and without intention of any kind of compensation; even privatisations may be rescinded years after being initially implemented. However not only changes and disruptions on the government- and state level may invoke the need for investment protection. Also disruption of infrastructure, transport- or supply-lines or internal riots, demonstrations, closures or boycotting measures by a local work-force or incited populace may impede the proper execution of a contract or the proper implementation of an investment project. Such impediment of the fulfilment of investment contracts – or even in some cases normal commercial contracts - may amount to an investment issue according to bilateral investment treaties (BIT’s) or international investment conventions, the most important and widespread of which is ICSID (International Convention on the Settlement of Investment Disputes). There are already some cases forwarded to an ICSID –Arbitration tribunal, where the underlying reasons are related to political changes in the course of the Arabellion.

A case in point for this is the post-revolutionary Egypt, which has experienced two” revolutions” since 2011: first the toppling of the former longstanding President Hosny Mubarak and then again the deposition of his successor Mohammed Morsi by the chief of staff, Abd el-Fattah as- Sisi, who, albeit in the meantime being legitimised by a popular presidential election, is basing his extensive power mainly on the Egyptian army.

Several claims by investors against the Arab Republic of Egypt (ARE) were brought in front of an ICSID Arbitral Tribunal. Few are already decided, most of them still pending. Some of these cases deal with important issues and topics of International Investment Arbitration, as developed and elaborated over the last decades. Some cases deal f. i. with the question of “unlawful expropriation”, i.e. whether an investor can challenge those acts by which the new (post-revolutionary) government has cancelled or reversed certain investment projects, initiated and concludes under the tenure of the former government. The root of these cases is the tension between legal certainty for foreign investors through bilateral investment treaties and the reforms measures taken by the new government after the “revolution”.

A very prominent case deals f. i. with the cancellation of a politically sensitive deal for delivery of gas to Israel , signed under the former Mubarak-regime with a private consortium . The new Egyptian government cancelled the contract because it was of the opinion, that the gas-price fixed in the contract was by far too low and caused the Egyptian state great damage. For the investor (the claimant in this case) this cancellation amounted to an unlawful expropriation according to the applicable BIT as well as according to ICSID.[1] In another case the claim of an Indonesian investor relates to an Egyptian court decision, which has annulled the acquisition of a textile company, the investor (claimant) had acquired an a privatization scheme. According to the previous decision of an Egyptian court this privatization was illegal, because the state-assets were given for an allegedly political cheap price to cronies of former President Hosny Mubarak.[2]

Similar cases, dealing with claims of unlawful expropriation concerning oil operations and exploitation services or the acquisition of shares are pending in front of ICSID arbitration tribunals against the state of Tunis and Oman. A very interesting case in front of an ICSID arbitration tribunal claims that Egypt improperly overturned a land purchase deal authorized by the previous regime. This still pending case is of special legal interest insofar as it also deals with allegations of corrupt dealings by the investor (the claimant) with the former regime. In 2011, i.e. one year before the ICSID –case was registered, an Egyptian court had sentenced the investor (claimant), a businessman from the UAE, to five years in prison and a fine of over $US 45 million for acquiring land for the development a luxury resort from Egypt’s ex-president Hosni Mubarak at below-market prices. This case touches the famous “estoppel” doctrine, which is a central pillar of international investment arbitration[3]. The arbitration tribunal will have to deal with the question, whether a State can invoke the investor‘s corruptive conduct when state organs played a part or knew about the illegality and accepted it (‘estoppel’). In a former ICSID case the arbitration tribunal stated that the principle of fairness should prevent the government from raising violations of its own law as a jurisdictional defence when it knowingly overlooked them and … endorsed an investment which was not in compliance with its law”.[4]

As in the mentioned cases concerning “unlawful expropriation” or the impact of the “estoppel principle”, there are also a number of many other important principals of international investment laws as elaborated especially by ICSID –arbitration tribunals, which will be applied and possibly further developed in the pending ICSID cases related to Arabellion-issues in Egypt or other Arab states. Among this is the question, whether an investment is excluded from the scope of the BIT protection, if it does not comply with national law of the host state. In this regard a former ICSID arbitration tribunal was not in favour to the claim of the investor, stating that “…nobody can benefit from his own wrong - understood as the prohibition for an investor to benefit from an investment effectuated by means of one or several illegal acts”.[5]

Another core issue of International Investment Law to be dealt with in some ICSID cases against Egypt and other “Arab Spring States “ is the question, whether the applicable BIT or the ICSID-Convention provide full protection of investments not only against violence by State organs, but also against violence stemming from non-State actors. In a former case of a private investor (Wena Hotels) versus the state of Egypt, the arbitration tribunal stated: “The tribunal agrees with Wena that Egypt violated its obligation to accord Wena's investment full protection and security; …there is substantial evidence that Egypt was aware of (the employees of) EHC's (a private company) intentions to seize the hotels and took no actions to prevent EHC from doing so. Moreover, once the seizures occurred, both the police and the Ministry of Tourism took no immediate action to restore the hotels promptly to Wena's control”.[6]

Other core issues of international investment law will inevitably emerge with the political and military developments. As for Syria or for Iraq or Libya for example the question will be relevant, whether armed conflicts affect the continued application of bilateral investment treaties – according to the UN ILC Draft articles “ not ipso facto…” – or whether the conduct of an insurrectional movement, shall be considered an act of the state. According to the UN ILC Draft articles the answer is yes, when the insurrectional movement becomes the new government of the state or it can establish a de facto state and the answer is no, when the insurrectional movement is finally unsuccessful.

Force Majeure

The current situation in some parts of the Middle East is not only relevant in the field of public or private international law or the field of investment treaties, where at least on one side of the conflict a state or state entity is involved. There is also a host of issues that can impede proper execution of private commercial contracts, a very prominent of which is the question of force majeure. Companies may be forced to repatriate workers due to civil or military unrest, work has to be suspended, delayed or completely abandoned. In normal circumstances, delays or other impediments to performance can give rise to claims for damages for breach of contract. In circumstances where it is claimed that the cause of the delay was either unforeseeable or beyond the control of the parties, a right to recover damages may not arise.

As regards to the definition or repercussions of force majeure most of the Arab states follow the Egyptian civil law, which is inspired by French Civil Law principles. According to these principles a differentiation has to be made between impossibility (an extraneous event makes performance of contractual obligation impossible which renders the obligation suspended -Art. 373 EGY Civil Code) and imprevision - an extraneous event, which makes performance of contractual obligation onerous and in case of which a judge can amend the contract to restore the contractual balance (Art. 147 EGY Civil Code). In both cases exceptional circumstances of general application (revolution, war, civil war, strike, power cuts, currency restrictions etc.) are required, which were not foreseeable when the contract was made. In English law, force majeure is essentially a creature of contract and thus - unlike the continental civil law tradition, where a general clause can give a wide flexibility for reasoning and interpretation - the wording of such a clause in the contract is key and needs to be considered carefully. It will therefore vary in meaning and scope depending on the particular wording used in each case. Generally, force majeure will be defined by reference to events that are beyond a party's reasonable control and may be limited to a specified category or list of events (for example, war, acts of God or natural disasters). For example, an act of terrorism is not considered an act of war and therefore would not excuse a delay in performance under force majeure wording, which only covers acts of war. In addition, the party seeking to rely on the clause must show that it has taken all reasonable steps to avoid or at least mitigate the effects of the disrupting event and has complied precisely with the prescribed notice requirements.

The difference between Civil Law tradition and Common Law tradition can lead to different rulings, as can be shown by the example of recent cases in Iraq, especially with regard to contracts with the government, public sector entities or state-owned companies. In most Arab countries such contracts are governed by special regulations, which define force majeure according to the continental European civil law tradition. In Iraq, contracts entered by the government and most public entities, are subject to a specific Public Government Contracts Law. This law requires that the disrupting event be unforeseeable to the party, which invokes force majeure. The application of this law has recently created some problems insofar that some parties incorporated clauses into their contracts, which recognized expressly the security situation as it then existed. Iraqi courts held in some cases, that security problems in the country cannot be considered unforeseeable and that parties take on this risk, when they enter in contracts in the Iraqi market. Therefore a party was not entitled to rely upon security risks as an excuse for the disrupted or delayed implementation of a contract.

Other current and future legal issues

Apart from the predominant issue of force majeure, there are numerous other legal issues related to the Arabellion, which are either already on the table or will emerge with time in the course of the political developments.

Security is a key concern for any company active in the region, actually especially in Libya, Syria and Iraq (not to mention Yemen, which has been since a long time a no-go country for international companies).Many companies hire body-guards and security providing companies. To do business under such conditions raises a number of intricate legal questions about the regulatory framework for security services, especially in areas, where state control has effectively ceased. Another legal topic relates to the conclusion of oil contracts with others like sovereign states, a topic, which is already of actual importance as regards such contracts with the government of the more or less autonomous “Kurdistan” in Erbil and may be in future become also relevant in Libya, Iraq or Syria, where such contracts might have to be concluded with non-state actors like tribal leaders, militia leaders or – not to be ruled out entirely– a governing body in the self-proclaimed Caliphate of IS in current Syria and Iraq.

Legal topics related to state succession might be another issue. Given the situation in Syria, Iraq, Libya or Yemen, the map of the new Middle East may finally look distinctively different from what we see today. Any business lawyer dealing with the region is well advised to be prepared that states will disintegrate, that new states will emerge, that borders will change and to prepare a legal scenario for the effects this has on international agreements and contracts with government or with private counterparts.

Finally sanctions are a longstanding reality when doing business with some countries in the Middle East; actual examples are Iran, Syria and Libya. Compliance lawyers have to deal with the question, how sanctions can affect contracts and corporate compliance and deal with the different layers of supranational, international and national bodies imposing trade restrictions.

In conclusion, the upheavals in the Middle East in recent years have accentuated or initiated a host of issues of public law or civil and commercial law, issues which require the utmost care and diligence in order to navigate safely and successfully through a region, which nevertheless is and will continue to be an important market for German and international business.

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1] Footnotes: The undermentioned cases are published under the following website: https//icsid.worldbank /apps/ ICSIDWEB /cases

1) Ampal-American Israel Corporation and others v. Arab Republic of Egypt, ARB /12/11, May 23, 2012),

[2] Indorama International December 02, 2011Finance Limited v. Arab Republic of Egypt, ARB/11/32

[3] Hussain Sajwani, Damac Park Avenue for Real Estate Development S.A.E., and Damac Gamsha Bay for Development S.A.E. v. Arab Republic of Egypt , ARB/11/16

[4] (4) RDC v. Guatemala, Second Decision on Objections to Jurisdiction, ICSID ARB/07/23, 18 May 2010, para. 146

[5] Inceysa Vallisoletana S.L. v. Republic of El Salvador, Award, 2 August 2006, ARB/03/26 , paras 231, 240 ff).

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Dieser Artikel wurde zuerst veröffentlicht in Business Law Magazine (BLM)-No 1-March 5, 2015; www.business-online.de