IBTBlog

The International Business Transactions Blog

Libya’s Foreign Investment Troubles

By Aaron Fellmeth, Faculty Co-Editor
and BethEl Nager, Law Student Editor

During the 2011 Arab Spring, Libya endured its first civil war. This war was fought between supporters of long time dictator Muammar Gaddafi and rebel groups with a range of agendas, from pan-Islamism to democratic republicanism. The war lasted over eight months and resulted in the death of Gaddafi and a new government was formed. Prior to 2011, Libya had begun the reconstruction of roads and infrastructure and had signed contracts with foreign investors to complete the updates. However, the civil war caused Libya to halt construction, resulting in numerous legal battles with foreign investors over the financial consequences. 

Strabag Investment Treaty Award 

Strabag SE, a Vienna-based engineering company, entered into a joint venture with a Libyan entity to create Al Hani General Construction Co. Al Hani entered into six contracts with the Libyan government to assist with the “suburban development in Libya” over a four-year period. These contracts included road construction and infrastructure design. However, due to the first civil war in 2011, Al Hani was forced to stop construction. During this time, company equipment was seized, stolen, and destroyed. Also, several construction locations were occupied by military forces, making progress impossible.

In 2015, Strabag filed a claim for breach of the Austria-Libya bilateral investment treaty (BIT) and seeking compensation for the joint venture’s losses. The BIT included a “war clause” providing that each party must promptly, adequately, and effectively compensate the other on nondiscriminatory terms for any loss “due to war or to other armed conflict” as well as “revolution, insurrection, civil disturbance,” or similar events, if not “required by the necessity of the situation.” . Strabag claimed that its property was requisitioned by military forces and destroyed under this clause, creating an obligation of compensation. It further claimed that its right to “full and constant protection and security” under the BIT had been violated. In June of 2020, a tribunal formed under the auspices of the International Centre for Settlement of Investment Disputes (ICSID) concluded that Libya breached its obligations under the BIT. 

The tribunal rejected the argument that the war clause precluded invoking the full protection and security clause, but it also rejected the “full protection” claim, finding that “it was not reasonably possible” for Libyan authorities to protect Al Hani’s assets during the conflict. However, it found that Al Hani’s property had been requisitioned, giving rise to an obligation of compensation. It further found that substantial equipment had been destroyed by Libya’s armed forces, rebels, looters, and even NATO bombardment. The tribunal found that Al Hani could only claim compensation for the losses caused by Libya’s armed forces, but it awarded damages based on its conclusion that these losses were not due to “military necessity.”

Libya then petitioned the U.S. District Court for the District of Columbia to vacate the award due to the advance payments Strabag had received in the course of the work progress. According to Libya, failing to account for these payments made the award incomplete. Libya also argued that the tribunal lacked jurisdiction and had impermissibly based its award on fairness rather than the contract and law. In declining to vacate, the court found that the tribunal had fully considered and rejected the set-off claim, that the tribunal properly exercised the authority to determine its own jurisdiction, and that its decision was based on law rather than fairness. The court also granted Strabag’s cross-motion to confirm the award, but it refused to allow a prejudgment bond. 

Nurol’s Jurisdictional Award 

Recently, the Paris Court of Appeal also upheld a treaty award against Libya in favor of Nurol Inşaat ve Ticaret A.Ş, a Turkish construction company that had had several agreements with Libyan state agencies before 2011. Libya had argued that the 2011 Turkey-Libya BIT never entered into force, and therefore the arbitral tribunal lacked jurisdiction.

At the start of the war, the construction locations were attacked and Nurol was forced to halt progress. After the war, both sides agreed to resume the projects, but the construction never restarted and Nurol evacuated Libya in 2014 after alleged threats by government officials. 

In 2016, Nurol initiated arbitration under the Turkey-Libya BIT with the International Chamber of Commerce (ICC) International Court of Arbitration, alleging the investment had been expropriated without compensation. Libya countered that the BIT was invalid, because Turkey had never validly notified Libya that ratification was complete.  Among other claims, Turkey also argued that the BIT does not cover investments that began before the BIT entered into force. The Paris court found the BIT to be effective because it did not require any specific notification of ratification, and it rejected Libya’s claim that the BIT did not protect investments begun before the treaty entered into force, as long as the dispute arose after the BIT entered into force, as it did in this case.

Conclusion 

Both claims reflect the challenges Libya has faced in dealing with foreign investments disrupted by the civil war.  Other arbitral awards and judicial appeals are pending, and Libya has prevailed in some of them.

EU’s New Export Regulation on Dual-Use Items

By BethEl Nager, Law Student Editor
and Aaron Fellmeth, Faculty Co-Editor

A new European Union (EU) Export Control Regulation was enacted on September 9, 2021. Through this rule, the European Commission (EC) strengthened the EU’s power over exports of “dual-use” goods. The dual-use classification applies to items that can be used by ordinary civilians but also have a technology component for use by military or security experts. These include such items as surveillance technologies, navigation and tracking equipment, lasers, encryption software, and toxic chemicals.  These new controls are intended to enhance protection for human rights in countries lacking appropriate safeguards.

The EU began the modernization of the export regulations in 2016 by replacing its prior regulations, dating to 2009 and adopted pursuant to consultations with the Wassenaar Arrangement, which was established in December of 1995. This arrangement coordinates dual-use export policy among 42 countries with advanced technological and manufacturing capabilities. The Wassenaar Arrangement works to protect the making of weapons, avoid the sale of dual-use goods to controversial and dangerous countries, and implement safe export policies. The EU has now assumed control over such export regulations to avoid variance in export policies among EU member states, although member states continue to review and grant exports licenses and to enforce the EU regulations.

The newest 2021 regulation by the EU Council of Ministers and Parliament has several components, with the intention of improving the current regulatory system:

  • The EU Export Control Regulation enhances controls over devices, technology and software not listed as controlled items by requiring a license if the exporter becomes aware that such items are intended for use by the importer for cyber-surveillance.
  • The term “exporters” was broadened to include natural persons and researchers who intend to transmit software or technology to a foreign country by electronic means.
  • The Commission is now authorized to change the list of controlled items by simplified procedures, adding flexibility and making it easier for the EU to respond to new concerns quickly as they arise.
  • Information exchanges between the Commission and the member state licensing authorities are now enhanced, and educational programs, such as the “capacity-building and training programme,” are being implemented to promote EU member state alignment with the regulation.

According to the EU’s Executive Vice-President and Commissioner for EU Trade, the regulation is necessary to respond to “emerging threats in an increasingly volatile world.”  These threats include more sophisticated cyber-surveillance, biotechnology, and more complex artificial intelligence, all of which can be used to violate human rights.

Arbitration Frustration in the EU Energy Sector: A Ban on Intra-EU Arbitration under the Energy Charter Treaty

By BethEl Nager
Law Student Editor

On September 2, 2021, the Court of Justice of the European Union (CJEU) issued a milestone ruling in Republic of Moldova v. Komstroy LLC, holding that the Energy Charter Treaty (ECT) could no longer be used in the European Union (EU). This new order prohibits the use of the ECT’s arbitration provision between EU countries, strengthening the EU’s control over energy investments. In addition, the EU is concerned about the binding nature of arbitral awards that have no possibility of a substantive appeal to EU courts and their juxtaposition with EU laws.

The Energy Charter Treaty 

The ECT, signed in 1994, is an international agreement that created a framework for cooperation between energy companies to strengthen the rule of law on energy issues and promote cross-border energy governance and international energy security. It allows  energy entities to sue foreign governments over government measures affecting energy resources. The ECT also provided for investment into energy-related businesses and set a baseline on legal guarantees for investors. For example, governments are not allowed to expropriate property without the permission of the owner without just compensation. Furthermore, the treaty offers investors the option to resolve energy-related disputes with other countries in court or through international arbitration.

Historical Background 

In the 2018 Achmea decision, the Grand Chamber of the CJEU determined that international arbitral decisions fell outside of EU institutions. An international arbitration agreement involving an investor and host state, both of which are in the EU, would preclude resort to the CJEU, even though the dispute might involve an interpretation of EU law. The court found that “a bilateral agreement between member states, under which investors from one member state can bring proceedings against another member state in an arbitral tribunal, contravene EU law.” Achmea effectively established that international arbitration is not an appropriate forum for bilateral investment treaty disputes when the dispute is between an EU member state and an investor from another EU member state, so-called “intra-EU disputes.” 

After this decision, there was conflict between different countries as to whether an international arbitral proceeding in intra-EU disputes violated EU law. In 2019, the Paris Court of Appeal asked for clarification regarding the application of the ECT. The Paris court needed direction prior to a hearing on a $49 million ECT award won by Komstroy, a Ukrainian organization, against the Republic of Moldova. In this situation, none of the parties voiced an ECT concern. Instead, the European Commission and various EU member states intervened.

The Komstroy Ruling

Between 2018 and 2021, there was great uncertainty about the applicability of the Achmea decision to existing treaties. In 2020, many of the EU countries agreed to halt implementing their bilateral investment treaties with other EU countries. Despite this agreement, some EU countries emphasized that the court’s ruling had “‘legal consequences’ for the ECT—a multilateral treaty whose signatories include non-EU states.” The goal was for the court to determine whether Achmea applied to the ECT. Eventually, the court clarified that any agreement entered into by an EU company is governed by EU law and thus cannot be arbitrated internationally.

The CJEU ruled in Republic of Moldova v. Komstroy LLC that the ECT’s arbitration process, which resolved longrunning controversies, would undermine the role of EU courts. This reflects that belief that conflicts surrounding EU laws should be handled within the EU court system. By negating the arbitration process, the CJEU invalidated the longstanding use of arbitration under the ECT in intra-EU disputes.  Many energy investors and countries are now concerned about the costs and legal uncertainty of disputes that may arise under the ECT, because a decision of the CJEU cannot in itself negate treaty obligations such as the ECT’s arbitration clause. This reversal of long-standing policy represents one of the EU’s many efforts to federalize legal procedures that might raise questions of EU law in some measure and therefore to create a unified interpretation of that law, but at some cost to the security of foreign investors in the EU energy sector, who may fear that the EU judicial system will be less impartial than an arbitral tribunal might be.

Blog Editors

Faculty Editors
Prof. Aaron Fellmeth
aaron.fellmeth@asu.edu

Prof. Victoria Sahani
victoria.sahani@asu.edu

Law Student Editor
BethEl Nager
ibtblog.editor@asu.edu

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