On 22 March 2013, the majority of an international tribunal (the “Tribunal”) found the State of Libya (“Libya”) and several of its government ministries (together, the “Respondents”) liable and ordered the Respondents to pay nearly a billion US dollars to the claimant, a large multinational conglomerate headquartered in Kuwait. The Tribunal found that the Respondents had hindered the development of a resort project and were in breach of contract, the Libyan Civil Code, Libyan law, and a regional investment agreement – the Unified Agreement for the Investment of Arab Capital into the Arab States (the “Treaty”). If categorised as a treaty-based arbitration (as opposed to a contract-based arbitration) the award would be the second largest on record (after that in Occidental v. Ecuador). This is particularly remarkable given that, unlike Occidental v. Ecuador, the relevant investment was at an early stage of development and was not operating as a going concern.
Mohamed Abdulmohsen Al-Kharafi and Sons Co. (the “Claimant”) planned to build a major beachfront tourist project in Shabiyat Tajura in Tripoli, Libya. To that end, the Claimant received a licence from the Libyan Ministry of Tourism (the “Licence”) to establish a five-star hotel, a service commercial centre, hotel apartments, restaurants and recreational areas (the “Project”). The investment period was for 90 years (including a seven year construction period). The day after receiving the Licence, the Claimant entered into a lease agreement with the Libyan Tourism Development Authority for 240,000m2 of State-owned land for the purpose of establishing the Project (the “Contract”). The Claimant then commissioned economic feasibility studies and project technical designs, and contracted with a construction management company.
The Claimant alleged that the Respondents failed to hand over the land free of “occupancies” and “impediments” which prevented the execution of the Project. According to the Claimant: the land was occupied by containers, pipes and other equipment belonging to another company; other individuals claimed ownership over parts of the land; and the Respondents had granted right of usufruct over the land to the Libyan Umma Bank. The Claimant additionally alleged that its workers had been assaulted by police and municipal guards who prevented them from taking over the Project land. Following one such incident in 2007, the Libyan Tourism Development Authority requested the Claimant to stop work and remove its equipment from the site.
In 2009, the Respondents proposed that the Claimant pursue an alternative plot of land for the Project. This proposal was rejected by the Claimant. Subsequently, in June 2010, the Minister of Economy cancelled the Licence. A few months later, the Claimant made a settlement offer of US$5 million to cover its lost expenditure. This offer was not accepted by the Respondents.
In May 2011, the Claimant notified the Respondents of the referral of the dispute to ad hoc arbitration. The arbitration, governed by Libyan law and the Treaty, took place in Cairo under the rules of Arbitration of the Cairo Regional Centre for International Commercial Arbitration. The Tribunal, consisting of Dr. Abdel Hamid El-Ahdab as Chairman and Dr. Ibrahim Fawzi and Justice Mohamed El-Kamoudi El-Hafi as his co-arbitrators, was constituted in June 2012. Justice Mohamed El-Kamoudi El-Hafi, who had been appointed by the Respondents, refused to sign the award.
The Decision of the Tribunal
The majority of the Tribunal dismissed a series of jurisdictional objections and found the Respondents to be in breach of: 1) the Contract; 2) the Libyan Civil Code; 3) Libyan investment law; and 4) the Treaty.
The Contract required the Respondents to “hand over” the land free of all occupancies and persons and to guarantee the absence of any physical and legal impediments that would hinder the commencement of the Project. The Tribunal found that the Respondents had failed to comply with this obligation.
Article 148 of the Libyan Civil Code required the Respondents to perform their obligations under the Contract in “good faith”. The Tribunal determined that the Respondents had not done so. It cited a list of examples of the Respondents’ actions that did not comply with this obligation, including: assaults on the Claimant’s workers and the related failure of the Respondents to take action in this regard; the Respondents’ failure to hand over the land in the condition agreed under the Contract; and the grant of the right of usufruct over the land to the Libyan Umma Bank. Accordingly, the Tribunal held that the Respondents violated their legal obligation under the Libyan Civil Code.
Libyan investment law prohibited the Respondents from “confiscating or freezing the project, or subject[ing] it to procedures having the same effect”. The Tribunal found that the cancellation of the Licence by the Minister of Economy “should be considered as a procedure similar to freezing and confiscation” in breach of Libyan investment law.
Finally, the Tribunal held that the Respondents were also in breach of the Treaty. Article 9 of the Treaty provides that the capital of an Arab investor shall not be subject to any measures affecting the assets of the investor which lead to confiscation, liquidation, freezing, or “any other action which infringes the right of ownership itself or prejudices the intrinsic authority of the owner in terms of his control and possession of the investment”.
The Tribunal found that the decision to cancel the Licence was “arbitrary” as the cause of the Claimant’s delay in commencing works was the Respondents’ own failure to hand over the land. The Tribunal identified several “elements” which, “separated or combined”, violated Article 9 of the Treaty in that they constituted “measures leading to the confiscation, liquidation, freezing and control of the investment”. These “elements” included the impediments faced by the Claimant in accessing the land, the granting of the right of usufruct to the Libyan Umma Bank and the “arbitrary” cancellation of the Licence.
Unprecedented Damages Award
The Tribunal ordered the Respondents to pay US$936.94 million in damages. This amount comprised: US$900 million as compensation for lost profits; US$30 million in compensation for moral damages; US$5 million representing the value of lost expenditure incurred by the Claimant; and US$1.94 million for arbitration costs and expenses. A four percent interest rate applies to all amounts awarded until full settlement.
The award of US$30 million for “moral damages” is significant and unprecedented. It provides another important benchmark for claimants seeking compensation for moral damage and represents a significant development from the award in Desert Lines Projects v. Yemen, where the claimant received US$1 million for “moral damages”. In that case, the tribunal emphasised that it had taken into account the particular “physical duress” exerted on the executives of the claimant (they were subject to arrest, threats and harassment) which affected their physical health, as well as the damage to the claimant’s “credit and reputation”. In contrast, the Tribunal’s decision in this case focused only on reputational damage. It did not provide a detailed explanation of its method for quantifying moral damages. Rather, the Tribunal simply noted that, in light of the “abusive cancellation” of the Project, US$30 million would compensate for the damage caused to the “worldwide professional reputation” of the Claimant – noting in particular the Claimant’s “reputation in the stock market, as well as in the business and construction markets in Kuwait and around the world”.
In relation to the lost profits component of the compensation awarded, the Tribunal noted that Libyan law permits the award of lost profits in circumstances where the damage results from a “real and certain” lost opportunity. The Tribunal considered four expert reports submitted by the Claimant which, on average, estimated the Claimant’s damage to be US$2.09 billion. The Tribunal held that this represented a “certain profit” that the Claimant could not realise due to the conduct of the Respondents. However, the Tribunal exercised its discretion to reduce the amount of compensation for lost profits to US$900 million. In explaining this reduction, the Tribunal took into consideration “recent developments in Libya” and emphasised the importance of promoting, rather than hindering, future “joint Arab economic cooperation”. The Tribunal expressed its hope that the award would provide an incentive to other Arab States to “support the completion of investment projects” and prevent the “collapse” of Arab investment “for generations to come”.
The amount of the award in this case is noteworthy given that the Project was not a going concern (construction had not even started). The readiness of the Tribunal to award considerable lost profits in such circumstances recognises the broad scope of investment protections and will provide reassurance to investors in projects at the pre-development stage. The award of US$30 million for moral damages also signals a warning to States that a breach of their international legal obligations towards investors could result in a compensatory award not only for direct damages and lost profits, but also for significant moral damages.
The award is of particular significance for Arab investors. In light of the recent political unrest in many Arab States, Arab investors should consider the inclusion of provisions providing for recourse to arbitration under the Treaty when negotiating contracts with States party to the Treaty. Where such protection exists, Arab investors should also consider pursuing arbitration to resolve disputes that fall under the scope of the Treaty. While the Treaty contains a number of the standard investment protection provisions, investors may find particular appeal in the Treaty’s expedited dispute settlement process, whereby decisions are to be rendered within six months of the date upon which an arbitral panel first convenes.
In relation to enforcement, the award will be of great interest to sovereign wealth funds. While the Tribunal rejected the Claimant’s attempted joinder of the Libyan Investment Authority as a defendant in the case, it nevertheless confirmed that the Libyan sovereign wealth fund, “regardless of the location of its investments, whether inside or outside Libya, remains an integral part of the State of Libya to which applies the arbitral award”. Accordingly, even where a State-owned investment fund plays no role in an arbitral proceeding, this decision indicates that its worldwide assets may be vulnerable to attachment in the event of an award against the State.