In 2011 National Gas S.A.E. (“National Gas” or the “Claimant“), an Egyptian gas company, lodged a claim at the International Centre for Settlement of Investment Disputes (“ICSID“) against Egypt under the 1997 Egypt-United Arab Emirates (“UAE“) Bilateral Investment Treaty (the “BIT“) for more than USD 36 million. On 3 April 2014, the ICSID arbitral tribunal constituted to hear National Gas’ claim (the “Tribunal“) issued its award. While the award is not yet public, reports indicate that the Tribunal dismissed the claim for lack of jurisdiction because National Gas was not under “foreign control” and therefore did not satisfy the nationality requirements under the ICSID Convention (the “Convention“).
In 1999 the Egyptian General Petroleum Corporation (“EGPC“), a State-owned entity, signed a 20-year concession with National Gas for the latter to operate natural gas networks in Egypt’s Sharqiya governorate. The concession agreement allegedly contained a stability clause protecting National Gas from any adverse changes to Egypt’s laws and regulations.
However, in January 2003 the Egyptian Prime Minister modified Egypt’s longstanding policy of pegging the Egyptian pound to the US dollar. Consequently between 2003 and 2006, the official exchange rate of the US dollar to the Egyptian pound increased from EGP 3.69 to EGP 5.9. In the case of National Gas, it had undertaken loans payable in US dollars in order to finance the concession with EGPC, while its income streams under the concession agreement were payable in Egyptian Pounds. EGPC and National Gas could not come to agreement on the level of compensation owed as a result of the floatation.
As a result, in February 2008 National Gas filed an arbitration claim against EGPC before the Cairo Regional Centre for International Commercial Arbitration (“CRCICA“). The CRCICA tribunal ruled in favour of National Gas in 2009, awarding it the equivalent of USD 136 million. EGPC sought to set aside the award in the Cairo Court of Appeal on the basis that the arbitration clause in the concession agreement was not approved by the competent authorities, as required by Egyptian law. The Cairo Court of Appeals agreed, issuing a decision in May 2010 nullifying the award. However, only days prior to the Cairo Court of Appeals’ decision, National Gas obtained recognition of that award from the Paris Court of First Instance. The decision of the Paris Court of First Instance was upheld by the Paris Court of Appeals in 2011.
National Gas filed its request for arbitration with ICSID under the BIT in March 2011. It claimed denial of justice by the Egyptian courts and that its right to arbitrate under the concession agreement had been expropriated by Egypt. The Tribunal consisted of V.V. Veeder, L. Yves Fortier and Brigitte Stern.
Egypt filed preliminary objections, arguing that the Tribunal lacked jurisdiction because National Gas did not qualify as a foreign investor under the Convention. National Gas is an Egyptian company 90% owned by several UAE entities, which in turn are owned by Mr Ginena, a Canadian-Egyptian national. The Tribunal held a jurisdictional hearing to consider Egypt’s objections.
The jurisdiction of ICSID extends to any legal dispute arising directly out of an investment between a Contracting State of the Convention “and a national of another Contracting State.” However, Article 25(2)(b) of the Convention provides an exception to that rule. Locally incorporated companies may qualify as a “national of another Contracting State” if it has been agreed, for example through a bilateral investment treaty, to treat such companies as nationals of another Contracting State “because of foreign control”. Article 10(4) of the BIT contains such an agreement between Egypt and the UAE. National Gas argued that it met the requirements of a foreign investor under Article 25(2)(b) as the BIT contained an agreement to treat it as such due to its foreign control by UAE entities.
Egypt retorted that it was not sufficient to rely on the definition of foreign investor in the BIT to fulfil the requirements of Article 25(2)(b). Egypt argued that the foreign control must be proven and that the Tribunal should pierce the corporate veil to reveal the UAE companies as shell companies, ultimately owned by Mr Ginena, a Canadian-Egyptian citizen. Therefore, the Claimant was ultimately controlled by an Egyptian national, making it ineligible to bring a claim against Egypt under the Convention.
The Tribunal held that the agreement to treat the investor as a foreign investor in the BIT alone was not sufficient to establish jurisdiction and that the Claimant must meet a “subjective” test of consent and an “objective” test of “foreign control” under Article 25(2)(b) of the Convention. It cited Vacuum Salt v. Ghana1 and Autopista v. Venezuela2 as examples where tribunals affirmed the need to take into account the true control relationship for purposes of the Convention.
The Tribunal held that National Gas was an Egyptian company owned by UAE entities and thus met the “subjective” test of consent in the BIT. Nevertheless, the Tribunal accepted Egypt’s argument that National Gas failed the “objective” test of “foreign control” because the UAE companies that owned National Gas were shell companies ultimately owned and controlled by Mr Ginena, an Egyptian-Canadian national. The Tribunal found that if it accepted jurisdiction, it would be inconsistent with the object and purpose of the Convention.
National Gas invoked in the alternative the Canada-Egypt Bilateral Investment Treaty to argue that Mr Ginena’s indirect holding in National Gas meant that the investment fulfilled the criteria of objective “foreign control” under Article 25(2)(b) because he was a Canadian national. The Tribunal dismissed this alternative argument by National Gas, holding that it was untimely (it was not in the request for arbitration), that Mr Ginena was not a party to the arbitration and that Canada was not a Contracting State to the Convention at the time National Gas filed its claim.
The Tribunal’s finding that foreign control under Article 25(2)(b) must be objectively determined is similar to the majority in TSA Spectrum v Argentina.3 The majority in TSA Spectrum v Argentina held that while there can be an agreement to treat an investor as a foreign investor because of foreign control, “the existence and materiality of this foreign control have to be objectively proven”4. Similarly, the Vacuum Salt v Ghana tribunal ruled that the existence of foreign control was not presumed and needed to be established as a matter of fact.5 In the same line of reasoning, a noted commentator, Professor Christoph H. Schreuer, has stated that the words “because of foreign control” in Article 25(2)(b), “suggest that control is an objective requirement that cannot be replaced by an agreement.”6
ICSID tribunals have not consistently pierced the corporate veil to reveal the objective control of the investor. Some tribunals have declined to pierce the corporate veil beyond the first layer to determine where the ultimate control lies, and have held, for example, that control through an intermediate foreign holding company fulfils the jurisdictional requirements of Article 25(2)(b).7 Other tribunals, by contrast, have pierced the successive corporate layers in order to reveal the control of the investor.8 Professor Schreuer argues that “the better approach would appear to be a realistic look at the true controllers thereby blocking access to the Centre for juridical persons that are controlled directly or indirectly by nationals of non-Contracting States or nationals of the host State.”9
In this case Egypt successfully challenged the objective existence of foreign control over the local investment vehicle. The Tribunal appears to have adopted similar reasoning to that of Vacuum Salt v Ghana and TSA Spectrum v Argentina by examining the facts to determine objectively whether foreign control over the local company existed, instead of merely accepting that the UAE companies controlled National Gas. Effectively, the Tribunal pierced the corporate veil beyond the first layer of UAE companies, which led the Tribunal to find that foreign control did not exist and to dismiss the claim for lack of jurisdiction.
This serves as a reminder that structuring investments to satisfy the jurisdictional requirements under the Convention and the applicable international investment agreement, and thus benefit from treaty protection, must be done with care. Whilst meeting the definition of foreign control under an international investment agreement may create a strong presumption of actual foreign control, it may not be sufficient to meet what some tribunals have regarded as the “objective” jurisdictional requirement of foreign control under the Convention. It would be prudent for a foreign investor to ensure that it exercises effective control over a local investment vehicle before it decides to rely on the exception to the nationality requirement contained in Article 25(2)(b) of the Convention.
(1) Vacuum Salt Products Ltd. v. Republic of Ghana, ICSID ARB/92/1, Award, 19 December 2008.
(2) Autopista Concesionada de Venezuela, C.A. v. Bolivarian Republic of Venezuela, ICSID ARB/00/5, Decision on Jurisdiction, 27 September 2001.
(3) TSA Spectrum de Argentina, S.A. v. Argentine Republic, ICSID ARB/05/5, Award, 19 December 2008 (G. Aldonas filed a dissenting opinion, arguing that the Tribunal should have executed the intent of the parties, as reflected in the language of the investment treaty, in order to “vindicate the bargain they reached.”).
(4) TSA Spectrum de Argentina, S.A. v. Argentine Republic, ICSID ARB/05/5, Award, 19 December 2008, paragraph 147.
(5) Vacuum Salt Products Ltd. v. Republic of Ghana, ICSID ARB/92/1, Award, 16 February 1994, paragraphs 35-37.
(6) C. Schreuer, The ICSID Convention: A Commentary, p. 312, paragraph 813 (2010).
(7) Amco Asia Corporation and others v. Republic of Indonesia, Decision on Jurisdiction, ICSID ARB/81/1, 25 September 1983, paragraph 14(ii); Aguas del Tunari v. Bolivia, Decision on Respondent’s Objections to Jurisdiction, ICSID ARB/02/03, 21 October 2005, paragraphs 280-281.
(8) Société Ouest Africaine des Bétons Industriels v. Senegal, ICSID ARB/82/1, Decision on Jurisdiction, 1 August 1984; TSA Spectrum de Argentina, S.A. v. Argentine Republic, ICSID ARB/05/5, Award (Majority), 19 December 2008.
(9) C. Schreuer, The ICSID Convention: A Commentary, p. 323, paragraph 849 (2010).