The First Claimant is a wholly-owned subsidiary of the Second Claimant and was established, for the purpose of owning the First Claimant's interest in the venture in question and claims as the Second Claimant's successor in interest.
"the Government of the Arab Republic of Egypt and the SPP Group jointly agree to:
1. Accept in principle the general and specific points contained in this proposal.
2. Appoint representatives fully empowered to negotiate a detailed formal agreement."
i) a tourist village on the Pyramids plateau, including hotel, tourist villages, artisans markets, conference center, an Egyptology centre, a golf course and recreational facilities, including public gardens, an artificial lake and sports installations;
ii) a similar tourist town at Ras-El-Hekma on the Mediterranean coast.
1. Ministry of Tourism, representing the Government of the Arab Republic of Egypt and represented by the Minister of Tourism, His Excellency Mr. Ibrahim Naguib.
2. Egyptian General Organisation for Tourism and Hotels (EGOTH), represented by General Ahmed Zaki.
3. Southern Pacific Properties Limited (SPP), represented by Messrs. David Gilmour and Peter Munk.
"Whereas EGOTH and SPP have been negotiating with regard to the possibility of establishing a series of international tourist destination complexes within the A.R.E. as outlined in their submisson of April and their letter of 23rd of July 1974 to the Chairman of EGOTH to be developed as interlinked residential standards on sites mutually agreed upon and set out in Appendix "A"
Whereas the Ministry of Tourism approved granting both 2nd and 3rd party the right to develop the areas as shown in the attached maps in the Pyramid's area and Ras-El-Hekma Zone.
This agreement is issued in accordance with laws No. 1 for the year 1973 relating to Hotels, Installations and Tourism, and law No.2 for the year 1973 relating to the supervision by the Ministry of Tourism on touristic sites and the development of such areas, and law 43 for the year 1974 relating to Arab and foreign funds invested in the A.R.E. with particular reference to government guarantees long-term tax holidays, exemptions from import custom duties, etc..."
The Heads of Agreement went on to provide as follows:
"2. Both 2nd and 3rd parties undertake to incorporate promptly an Egyptian joint venture company of which 40 percent would be subscribed by EGOTH and 60 percent by SPP (For the Pyramid area) and 30 percent by EGOTH and 70 percent by SPP (For Ras-El-Hakma).
3. Each complex will be developed according to a detailed Master Plan prepared and submitted by SPP and approved by EGOTH in accordance with and as shown in the attached maps. Construction will be effected in accordance with an agreed schedule indicating priorities (Appendix A").
4. FIRST party will secure the title of property and possession of land and both First and Second party undertake to transfer Right of usufruct to the joint company as its part of the capital investment.
Both MT and EGOTH undertake to transfer such right to the joint company immediately upon incorporation, any balance being transferred not later than 90 days there-after.
It is agreed that the joint company will be free to rent lease manage promote or assign any site, construction, recreational, residential or commercial facilities in both local and foreign markets provided that they are developed and utilised in accordance with the approved Master Plan, and excluding the areas which are designated for public use within the project.
5. Both MT and EGOTH herewith undertake to assist in obtaining and expediting all the necessary local approval for the execution of the developments in accordance with the Master Plan. MT will further more take appropriate measures to ensure the provision of basic infrastructure by the Government to the boundaries of the sites.
6. SPP undertakes to provide and/or arrange all the necessary technical expertise including all fields of engineering design and architecture together with the finance necessary as needed for the construction, management and marketing of the development in accordance with the approved Master Plan.
7. Both MT and EGOTH warrant that it will not enter into any similar agreement which might in any way reasonably be construed to be direct contradiction for harm for areas shown under Appendix "A".
8. Both MT and EGOTH warrant that they will ensure that such industrial projects that could pollute the development areas will not be allowed in the environs of the areas shown under Appendix "A".
9. All parties agree that the management control of the Joint Venture Company shall lie with SPP including all accounting and reporting procedures which shall be in accordance with recognised international practice. However in all matters relating to the policy of tourist activities in the A.R.E. such as but not limited to Hotels, restaurants casinos, the approval of the second party should be secured.
"13. EGOTH will endeavour to ensure that SPP shall have the right to repatriate its share of the profits in full according to. Article 22, paragraph 2, of Law No. 43 of 1974. EGOTH and SPP agree that application be made under Article 16, paragraph 4, of the Law No. 43 of 1974 for ETDC to be exempted from taxes for a period of 8 (eight) years and that the commencement of this period should be the first day of the financial year following the date on which a total of 4,000 (four thousand) bedrooms are completed and are being operated by ETDC...
15. EGOTH shall assist in obtaining all necessary permits and visas for access to both project sites by SPP Personnel, consultants and contractors, and will assist with the obtaining of maps, photographs, engineering data and information, and shall assist in acquiring permits for obtaining materials and supplies necessary for the projects.
16. SPP undertakes to provide and/or arrange all necessary technical expertise and highly qualified experts in planning, architecture, engineering, finance, construction, marketing and other aspects, but shall be permitted by EGOTH to employ both local and foreign persons within the limits stated in Egyptian laws, and ETDC undertakes that in Egypt at least ninety percent of the persons employed and eighty percent of the wages paid on each project shall be Egyptian. Furthermore, ETDC will ensure that, wherever possible, Egyptians will be appointed to senior management positions and that it will train qualified Egyptians for such management positions.
17. It is understood that SPP will be incorporating a holding company to own its shareholding in ETDC and it is agreed that SPP shall have the right to assign its rights, privileges, duties and obligations under this Agreement to this company in which SPP will have a controlling, but not necessarily majority, interest and in which it controls and directs management, provided the company satisfies EGOTH. EGOTH shall also have the right to assign its rights, privileges, duties and obligations under this Agreement to any of its public sector Government affiliates.
18. This Agreement is written in Arabic and in English. The English version shall be binding in the event of any dispute.
19. EGOTH and SPP shall be the original shareholders of ETDC. The Representatives of both parties on the Board of ETDC shall respectively execute the Articles of this Agreement.
20. Any disputes relating to this Agreement shall be referred to the arbitration of the International Chamber of Commerce in Paris, France.
21. This Agreement is made in accordance with Law No. 1 for the year 1973 relating to Hotels, Installations and Tourism, and Law No. 2 for the year 1973 relating to the supervision by the Ministry of Tourism on tourist sites and the development of such areas, and Law No. 4 for the year 1974 for development and reconstruction, and Law No. 43 for the year 1974, relating to Arab and Foreign Funds invested in the Arab Republic of Egypt.
22. The non-performance or delay in performance by EGOTH, SPP or ETDC, or any of them, of any obligation under this Agreement shall be excused if any to the extent that such non-performance is caused by Force Majeure. The period of any such non-performance or delay, together with such period as may be necessary for the restoration of any damage done during such delay, shall be added to the time given in this Agreement for the performance of such obligation dependent thereon and to the term of this Agreement.
Force Majeure within the meaning of this Article 22 shall mean any Act of God, insurrection, riot, war, strike and other labour disturbances, fires, floods’, or any other cause not due to the fault or negligence of EGOTH, SPP or ETDC, or any of them, provided that any such cause is beyond the reasonable control of EGOTH, SPP and ETDC, or any of them.
23. It is understood that immediately after the signing of this Agreement all parties shall take prompt action to execute their immediate responsibilities within a period not to exceed at all events 9 (nine) months."
"It is understood between contracting parties (EGOTH) and (SPP) in concern of the agreement signed on the 12th December 1974, that obligations which lie on EGOTH are subject to the approval of the competent governmental authorities and that the feasibility study prove the profitability of the projects."
On the 12th December, 1974 Mr. Osman A. Osman, Minister of Housing and Reconstruction, wrote to SPP stating (inter alia) as follows:
"It is naturally essential that basic infrastructure is provided by the Government to the boundaries of each of the project sites, so that the facilities which ETDC provides may be linked up with the national system. This was provided for in the Heads of Agreement signed on 23rd September, 1974, between EGOTH, SPP and the Ministry of Tourism.
This infrastructure will include the provision of roads, water, power, telephone, and other necessary public utilities sufficient for the adequate development of each project, to the boundaries of each site at no cost to ETDC.
We would like to assure you that such infrastructure will be provided according to the terms of the above mentioned Agreement. However a time schedule should be submitted from you for revision and approval by the Ministry of Housing and Reconstruction."
"Position is the same regarding company irrespective of possible internal administrative changes. Kindly proceed with commitments according to official agreements."
In fact EGOTH was by Decree No. 50 of the 1976 transformed into a company named the Egyptian General Company for Tourism and Hotels retaining the acronym EGOTH and succeeding to all the assets and liabilities of its predecessor.
a. Presidential Decree No. 475 of 1975, dated May 22, 1975, allowing Defendant EGOTH to develop and use the project sites for tourist purposes, either alone or with one of the companies in which it is a partner.
b. Resolution of the Board of EGOTH of October 19, 1975, irrevocably transferring to ETDC the right of usufruct to the project sites.
c. Letter of February 3, 1976, from EGOTH to ETDC specifically defining the initial 4,000 acres Pyramids Oasis site to which the right of usufruct had been transferred to ETDC.
d. Registration on January 5, 1977, under No. 48 in the Giza Real Estate Office of ETDC’s right of usufruct to the above 4,000 acres.
27th May, 1978 - Decree No. 90 by the Minister of Cultural Information declaring the land in question to be public domain. This had the effect of invalidating the transfer of land to EGOTH or the transfer of the usufruct from EGOTH to ETDC.
28th May, 1978 - The General Investment Authority withdrew the approval of the project by Resolution No. 1/51-78.
29th May, 1978 - EGOTH instructed ETDC to stop work and on the 5th June, 1978 the Ministry of Tourism gave ETDC similar instructions.
30th May, 1978 - EGOTH commenced court action, as a result of which the Giza Court on the 3rd June, 1978 sequestered the assets of ETDC and placed the company in judicial receivership.
19th June, 1978 - Presidential Decree. No. 267/1978 cancelling Presidential Decree No. 475/1975, which had designated the lands of the Pyramids Plateau for touristic exploitation and which had been the basis upon which EGOTH had acquired ownership of the land and transferred the usufruct title to ETDC.
As a result of these actions taken by the Arab Republic of Egypt the whole joint venture has been stopped, all works in progress have been discontinued, the labour force has been demobilised and much equipment and partially completed work abandoned. The project's teams have also been disbanded.
"Foreign investments... are governed by the attached law."
In Article 3 of the Law itself it is provided that tourism is one of the fields in which investments made in projects in need of international expertise requiring foreign capital may be approved. Article 4 provides that capital invested in the Arab Republic of Egypt under the provisions of the law should take the form of participation with public or private Egyptian capital. Article 6 provides:
"Capital invested in the Arab Republic of Egypt under the provisions of this law irrespective of the nationality or domicile of its owner shall enjoy the guarantees and privileges set forth in this law."
Article 7 provides:
"Projects may not be nationalised or confis-cated. The assets of such projects cannot be seized, blocked, confiscated of sequestrated except by judicial procedure."
"Investment disputes in respect of the implementation of the provisions of the law shall be settled in a manner to be agreed upon with the investor, or within the framework of the agreements in force between the Arab Republic of Egypt and the investor's home country, or within the framework of the Convention for Settlement of Investment Disputes between the State and the nationals of other countries to which Egypt has adhered by virtue of Law Number 90 of 1971, where such law applies. Disputes may be settled through arbitration. An arbitration board shall be constituted, comprising a member on behalf of each disputing party and a third member acting as chairman to be jointly named by the said two members. Failing agreement on the nomination of the third member within thirty days of the appointment of the second member, the chairman shall be chosen, at the request of either party, by the Supreme Council of Judicial Bodies from among Councillors of the Judiciary in the Arab Republic of Egypt. The arbitration board shall lay down its rules of procedure unrestricted by the rules contained in the Civil and Commercial Code of Procedures, save the rules which relate to the basic guarantees and principles of litigation. The board shall see to it that the dispute is expediently resolved..."
It follows that the Claimant in future disputes might well have been either the Egyptian Govern-ment or EGOTH or both. Indeed, as we have noted, there is a Counterclaim by EGOTH in this very arbitration. Such claims might well arise from the identical alleged default on the part of the foreign investor. It would be an inconvenient situation in which one Egyptian party had to sue or claim in proceedings in an Egyptian domestic arbitration and the other in an international forum. The same would apply to claims by the foreign investor against both the Government and EGOTH, especially as in many respects the Government and EGOTH assumed identical if not joint obligations.
Prima facie the signature (and stamp) of the Minister of Tourism with the words "approved, agreed and ratified" would suggest that the Government was a party to the December Agreement. However, reasons have been advanced by the Government in support of their contention that these words do not mean what they say. In the first place, it is pointed out that, although originally the draft Agreement was between three parties, this was deliberately reduced to two. Secondly, much of the wording of the body of the Agreement is more appropriate to a bi-partite rather than a tripartite Agreement. Thirdly, it is contended that the signature of the Minister should be ascribed to powers that he has as Chairman of the Assembly of EGOTH (representing the owner) to approve or disapprove of such a transaction and thus as authenticating the adherence of EGOTH rather than the Government to this transaction. Alternatively, it was suggested that the Minister, even though acting as Minister and not as Chairman of EGOTH, was only exercising his supervisory power in approving the agreement on behalf of EGOTH (Autorite en tutelle). Given the crucial importance of this question these points have to be carefully considered.
The reasons why this Tribunal feels unable to accept the contentions put forward by the Government can be stated as follows.
1. It reaffirmed in the context of the redefinition of the Agreement between SPP and EGOTH the support of the Government promised in the September Agreement.
2. It committed the Government to the support of the project as defined in both Agreements.
3. It consequently committed the Government not to take any steps which would prevent that project being carried through to completion.
We hold that in the light of the evidence submitted to us this support of the Government was contractual in nature. Thus, by contractually undertaking a number of obligations under the December Agreement, the Government became a party to it and engaged its responsibility with respect to the performance of the said obligations.
By so doing, the Government necessarily extended its Agreement to the mechanism provided for the settlement of disputes, i.e., to clause 20, reading as follows:
"Any dispute relating to this Agreement shall be referred to the arbitration of the International Chamber of Commerce in Paris, France."
We accept the principle that acceptance of an arbitration clause should be clear and unequivocal: However, in the December Agreement we see no element of ambiguity. The Government, in becoming a party to that agreement, could not have reasonably have doubted that it would be bound by the arbitration clause contained in it.
It follows that any disputes relating to the extent of the Government's obligations assumed by its signature and as to whether there has been any breach of those obligations is within the scope of the arbitration clause. We therefore consider that the disputes submitted to us and referred to in the Terms of Reference are within the scope of that submission.
SPP incorporated SPP(ME) on October 18, 1974. On November 23rd, 1975 SPP contracted with EGOTH to form ETDC. After the formation of ETDC, SPP(ME) held a 60% share in ETDC. Thereafter, the government and EGOTH dealt with SPP(ME) as the party to whom SPP had assigned its rights, privileges, duties and obligations as contemplated by Article 17 referred to above. There does not seem to have been any formal document of assignment, but in our judgement, the facts summarised above show that such an assignment was treated by all parties as having taken place. In our judgement, therefore, SPP(ME) has a title to sue in respect of the rights of the foreign investor under this joint venture. If this were not correct, the consequence would be that the true Claimant would be SPP rather than SPP(ME). SPP has been made additional Claimant in this proceeding, as its interest may appear, in respect to residual rights and obligations, if any, remaining to it. However, we do not consider there is any residual interest relevant to the matters in dispute in this arbitration, and SPP Middle East may be treated as the only effective Claimant.
The Defendants refute "The Claimant's argument in favour of the so-called 'denationalisation' of the applicable law", coming to the conclusion that "the law governing the substantive issues could be nothing but the Egyptian legal system" (Government's Supplementary Statement of Argument, p.13, referring to Government’s Rejoinder and Statement of Argument, pages 104-130).
The literature (doctrinal contributions, resolution by international organisation, judicial and arbitration precedents) on this debated subject is extensive. In concrete terms the basic issue to be dealt with is whether contracts between States and private Law persons can be removed at least to a certain extent from domestic law and made subject to International Rules.
The theories which have emerged on the subject differ sometimes to a considerable extent. Some have gone so far as to invoke under certain circumstances full "denationalisation" of international contracts to the extent that they should only be governed by Rules and Principles drawn from International practice and Trade usages. Others do not discard the reference to domestic laws, provided, however, that even when placed within the legal framework of a domestic system, arbitrators are empowered to apply those principles of international law which ensure protection to the contractual rights of the private party vis-a-vis the sovereign state.
In the field of international investments the problem has been expressly dealt with in Article 42(1) of the ICSID Convention reading as follows:
"The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party of the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable".
Obviously the specific proviso of art. 42 only applies to investment agreements and disputes that may arise thereunder. However, we take the view that
"in the world today, there is no reason why this solution should be limited to a particular category of state contracts. In other words, the rule formulated in article 42 can be considered as illustrative of a principle of wider application (Delaume, State Contracts and Transnational Arbitration, in Am. J. Int. L., 1981, p. 786)."
May we observe, ad abundantiam, that failing contractual designation of the governing law the same result (i.e. reference to the law of the host country) would also normally be achieved by applying the ordinary principles on conflict of laws.
In the case at issue the governing law is, in our opinion, the law of Egypt. The Agreements were both made in Egypt. The place of performance was almost entirely Egypt. There are numerous references to Egyptian law in the agreements. However, the further issue remains to be decided, i.e. whether the law of Egypt should be deemed to include the general principles of international law already mentioned.
Claimant's arguments in the affirmative are supported by the opinion of Egyptian law specialists aimed at demonstrating that principles of international law such as "pacta sunt servanda" and "just compensation for expropriatory measures" are not incompatible with the Egyptian legal system.
We perused these legal opinions rendered by Dr. Gamal el Oteifi and Mr. Hamed Mansour (Claimant's Exhibits 191, 192, 205) together with the opinion of Professor Fouad Riad submitted by Defendants (Defendants' submission of January 21, 1981). Both Dr. Oteifi and Mr. Mansour point out that these principles are deeply rooted in the Egyptian legal tradition, characterised by the general rule of "siyadat el kanoun", i.e. supremacy of the law (Mr. Mansour's opinion, at p.50). They further specifically refer inter alia to Articles 147 and 148, Egyptian Civil Code (Dr. Oteifi's opinion, at p.8; Mr. Mansour's opinion dated 15th December, 1981, at p.50) and to Articles 34 and 35 of the Egyptian Constitution (ibid, at pages 6-and 52 respectively), expressly stating that "the contract makes the law of the parties" and that "private ownership is safeguarded...and may not be expropriated except for public use and with just compensation".
Professor Riad's opinion deals with the position of public enterprises with respect to the State in international transactions. No specific reference can be found there to the problem of the coherence of Egyptian law with the general principles of international law as illustrated above. We shall revert to the opinion of Professor Riad when touching upon the issue of force majeure (paragraph 61).
The impact of Law no. 43 of 1974 upon the Egyptian legal system is a further decisive elements in support of Claimants' contention. This law makes specific reference to the ICSID Convention, signed and ratified by Egypt on February 11, 1972, and May 3, 1972, respectively, and entered into force for Egypt as of June 2, 1972.
We have found that Interactional Law Principles such as "Pacta Sunt Servanda" and "Just compensation for expropriatory measures" can be deemed as part of Egyptian Law. The adherence to the ICSID convention should then be treated as conclusive evidence of Egypt's declared intent to abide by these principles, which indeed represent the basic philosophy adopted by the Convention's drafters.
Last but not least, art. 13(5) of the ICC rules unequivocally states that "in all cases the arbitrator shall take into account the provisions of the contract and the relevant trade usages. In the opinion of a learned writer (Fouchard, L’Arbitrage Commercial International, Paris, 1965, para. 175, at p.101),
"Le veritable fondement de la capacite de l’Etat de compromettre dans le commerce international serait alors un usage commercial international, decoulant d'une pratique universelle (a laquelle meme l'Etat francais n'a pu deroger) et d'un principe general de droit que l'on retrouve dans tous les systemes juridiques, meme les moins favourables, a priori, a la capacite de compromettre des personnes de droit public".
For the foregoing reasons we find that reference to Egyptian law must be construed so as to include such principles of international law as may be applicable and that the national laws of Egypt can be relied upon only in as much as they do not contravene said principles.
We have already found that the Government was a party to the December Agreement including the ICC arbitration clause (paragraph 46) and that the general principles of international law are the ultimate yardstick for the adjudication of Claimant's Claim. Defendants plead, sovereign immunity to justify a course of action which would otherwise amount to a breach of contract.
The issue is whether submission to international arbitration by States and public entities should be regarded as an implicit waiver of immunity thus preventing concurrent application of other international or municipal rules granting sovereign immunity.
In finding upon the governing law we implicitly answered in the affirmative. It would indeed be frustrating to recognise full force and effect of general principles of international law aimed at protecting foreign investors and then admit that a state may, before an arbitral tribunal, rely upon domestic or international principles granting sovereign immunity as an excuse for acts amounting to contractual breaches.
As pointed out inter alia by Luzzatto, International Commercial Arbitration and the Municipal Law of States, in Academy of International Law (Extract from the Recueil des Cours, Volume 157), p.93:
"Sovereign immunity has been frequently invoked by States with a view to getting rid, either of theobligation to arbitrate, or of the duty to execute the award. There should be, however, no doubt, in this connection, that an agreement to arbitrate constitutes an implicit waiver and that therefore international or municipal rules granting sovereign immunity should not apply. This view, which had already been taken by some writers and courts, has been upheld recently by the United States District Court for the District of Columbia, in Ipitrade International SA v. Federal Republic of Nigeria. The court relied upon the Foreign Sovereign Immunity Act of 1976 and on its legislative history, particularly on a statement in the Congressional. Committee Report on the Jurisdiction of United States Courts in Suits Against Foreign States of 9 September 1976, but the principle would seem to apply anyhow as a general rule. The jure imperii or jure oestionis character of the subject-matter of the agreement should therefore be irrelevant".
The preliminary award in the ICC case No. 2321 (1974), Yearbook Commercial Arbitration, Vol. I (1976), pp. 133 et seq., at p. 135, came to the same conclusion in the following eloquent terms:
"I must admit that I have found some difficulties to follow a line of reasoning that a State, just because of its supreme position and qualities, should be unable to give a binding promise. The principle of pacta sunt servanda is generally acknowledged in international law and it is difficult to see any reason why it should not apply here. A sovereign State must be sovereign enough to make a binding promise both under international law and municipal law. As to the latter aspect of the question I was informed by the Counsel of the First Defendant that according to both... and English law the capacity of the State to enter into arbitration clauses was not restricted as such and that also the State could be sued in its own courts. To require or assume then that a promise of a State to submit to arbitration, in' order to be binding has to be confirmed in the face of the arbitrator, would probably impair the sovereignty of a State and its dignity more than the arbitrator’s performance of his task, conferred upon him in accordance with what the parties once have agreed upon. The issue whether the subject matter of the present dispute is a matter jure gestionis or jure imperii has also been argued by the parties on each side. From what I have said above it follows that this distinction is of no relevance once the parties have agreed upon arbitration".
It is beyond dispute that the Government can be sued before Egyptian municipal courts. Defendants willingly argued that the suit by ETDC is the only available remedy to seek compensation for the cancellation of the Project. As to the capacity of the State, under Egyptian law, to enter into arbitrations agreements we refer again to the statements made by Dr. Oteifi (opinion, at pages 5 and 6) and by Mr. Mansour (opinion, at p.5). The Government emphasises the requirement of an explicit waiver of immunity, thus apparently confirming the admissibility in principle of such waiver under the laws of Egypt:
"The Government’s waiving of its judicial immunity cannot be presumed or implied. The agreement to arbitrate - domestically or internationally - should be explicit and expressly indicating a definitely conscious will to that effect 'en connaissance de cause' and in conformity with the established rules relating to the limitations on the exercise of said exorbitant power deviating from the requirements of the international legal order".
As pointed out in paragraph 46, the December Agreement contained no element of ambiguity whereby the Government, in becoming a party to it, could have reasonably doubted as to its being bound by the arbitration clause contained therein. As to the necessity of an express waiver we cannot accept the Government's argument nor do we find that recognition of an implicit waiver be submission to arbitration represents, in the light of doctrinal and jurisprudential evolution of international arbitration, a deviation from the requirements of the inter-national legal order.
As pointed out above, this conclusion is supported by well known doctrinal authorities and by equally well known international precedents. Claimants have cited the opinion of several learned writers and we deem it unnecessary to weight this award with further citations "ad pompam". May we only recall, as a summary conclusion, the recent opinion stated by Delaume, op. cit., p. 786:
"In the absence of an express waiver of immunity, the question arises whether submission to arbitration should be regarded as an implicit waiver of immunity. The overwhelming weight of authority calls for an affirmative answer. Decisions of arbitral tribunals, treaty and statutory provisions found in the European Immunity Convention, the SIA, and the FSIA, and the pronouncements of domestic courts, all concur that a state party to an arbitration agreement is precluded from asserting its immunity in order to frustrate the purpose of the agreement".
The author makes several citations in support of his statement (ibid., footnotes 16 to 20). A further useful reference to the evolution of this issue in historical perspective can be found in the reports of the yearly conferences of the International Law Association, where attention is constantly devoted to the subject of arbitration between Governments (and Government-controlled bodies) and foreign business firms.
Numerous international precedents (arbitral as well as judicial) have been submitted by both Claimants and Defendants.
We do not propose to deal with all these in detail. It is, we think, satisfactory to merely summarise a number of conclusions which are pertinent with regard to the case at issue.
In the LIAMCO, the B.P. and the TEXACO awards (20 ILM at p.35, 53 ILR at p. 329, 17 ILM, at p. 3 respectively) the arbitrators diverged to a considerable extent (see Stern, Trois Arbitrages, Un Même Problème, Trois Solutions, Rev. Arb., n.l. 1980 at p.5). However, in the LIAMCO and BP cases they substantially agreed that the law of Libya was the proper law of the concession, but only to the extent that it was consistent with the principles of international law. In the event of inconsistency between the two legal systems, the general principles of law should govern.
In this arbitration as Claimants themselves, as pointed out in paragraph 53, do not seek to attack the Government action as either legally invalid or as an improper exercise of soverign power.
Reference to the Libyan cases is made only with a view to stressing the common principles emerging from the three arbitrations whereby the executive or even the legislative act of a sovereign power can be treated as a breach of contract. This finding leads to the conclusion that the principle "pacta sunt servanda" (common to both the Egyptian and the international legal systems) only apparently conflicts with the State's legitimate prerogative to issue expropriatory measures affecting business concerns operating on its territory. It is indeed through recognition of both said principles that one can safeguard the interest of the foreign investor without impairing the sovereign prerogatives of the State.
A considerable number of allegations have been made. The principal allegations may be summarised as follows:
(i) Mismanagement of ETDC
(ii) Disregard of national patrimony
(iv) Financial irregularities
(v) Variation in financing concepts
(vi) Violation of Egyptian law.
As a consequence of these alleged breaches EGOTH claims from SPP a substantial amount of damages including, but not limited to restitutio in integrum concerning the Ras-El-Hekma Project whereby:
"The usufruct right on Ras-El-Hekma reverts entirely to EGOTH alone within the existing frame of ETDC or in case of its liquidation (Rejoinder and Statement of Argument, at p.77 et seq.; Final Submission, at p.44)’.
These are contained in Claimant's Exhibits No. 173 and 21, respectively. In neither of these statements did the Government criticise the way in which the foreign investors were carrying out their obligations under the joint venture. In substance, both the Project and its execution were defended by the Ministers most directly concerned. We find it difficult to understand why, if the Government considered that it had any justifiable basis for alleging breaches by the Claimants, especially if those breaches were thought to justify the cancellation of the whole project, no mention was made of such matters in either address. At first, the Government resisted pressure for such a cancellation. However, even when it submitted to such pressure and ordered the cancellation in the manner described above, there was no suggestion at all that this was brought about or justified by the conduct of the Claimants. The sole grounds of cancellation were the public and environmental factors which made it inappropriate that the Project should continue.
"The irony of the present case is that the party which caused a de facto frustration since 1977 seized the opportunity of a Governmental action undertaken more than one year later in order to reverse the roles. Instead of trying to cooperate with EGOTH in finding an amicable solution through negotiations that would preserve the jointventure efforts by restructuring it on a new balanced foundation and at a convenient new site not far from the Pyramids, SPP(ME)’s immediate reaction was to run away with the money it succeeded in accruing out of Egypt previously, trying to liquidate ETDC and to get whatever other possible extra gains under irrealistic claims against EGOTH, the true victim in the whole story of that sadly frustrated venture".
We cannot accept this opinion in which EGOTH fails to recognise that the Claimant's refusal to depart from the terms and conditions of the original Agreements does in no way amount to a contractual breach. All the more so as the unwillingness to accept new negotiations attributed to the Claimant relates (inter alia) to an element of the utmost importance i.e., the change of location of the site. Understanding and cooperation in the implementation of the Agreements can be deemed an obligation cast upon all parties concerned by the proviso of Article 148, Egyptian Civil Code whereby:
"a contract must be performed in accordance with its contents and in compliance with the requirements of good faith".
It is unthinkable, however, that a party can unilaterally compel the other to modify substantially contractual terms and conditions already agreed. In view of the above we cannot accept the argument that SPP(ME) caused "a de facto frustration" since 1977. We have perused Articles 157 and 158 of the Egyptian Civil Code dealing with dissolution of Contracts. They embody a number of principles which are fairly common under civil law systems, i.e.
(i) in case of non performance by one party, the other may, after serving a formal summons ("mise en demeure"), seek either performance or rescission of the contract with damages, if due, in either case (Article 157 para 1):
(ii) Rescission cannot be sought if failure to perform is of little importance in comparison with the obligation in its entirety (Article 157, para. 2);
(iii) "Ipso facto" rescission (i.e. without a Court Order) may take place only if the parties have so agreed, provided however that such an agreement does not release the parties from the obligation of serving a formal summons unless said parties agree that such a summons will be dispensed with (Article 158).
From the evidence submitted to us no formal summons appears to have been served by Defendants upon Claimants, nor did we detect, in the Agreement executed by the parties, any clause dispensing with service of the formal summons. In addition to it, one should note that before cancellation of the Project no demand was ever put forward by Defendants alleging breaches on the part of the Claimants and requesting performance or rescission of the Agreements.
As pointed out in paragraph 56, breaches by Claimants were first raised at the inception of this arbitration, apparently as a defence to the claim and as a ground for the counterclaim.
"the shameful record of the Claimant's operations in Egypt from the very first day demonstrates clearly that they came to Egypt not as investors, not as promoters, but with the sole purpose of obtaining by fraudulent means exorbitant and illegal benefits".
It is the duty of the arbitrators to examine with great care this grave statement. No reference is made by Defendants to the provisions of the Egyptian Civil Code. The subject matter of the contention, however, is expressly dealt with in Article 125, providing as follows:
"A contract may be declared void on the grounds of fraudulent misrepresentation, when the artifices practised by one of the parties, or by his representative, are of such gravity that, but for them, the other party would not have concluded the contract.
Intentional silence on the part of one of the parties as to a fact or as to the accompanying circumstances constitutes fraudulent misrepresentation if it can be shown that the contract would not have been concluded by the other party had he had knowledge thereof (E. 136, M.196, F1116)".
Again one is faced with principles, generally prevailing within the civil law systems, which deserve but a brief comment.
(i) In case of fraudulent misrepresentation (i.e., dolus) the contract may be avoided upon demand of the party concerned. The contract is not absolutely void, or void in itself (Cf. Article 139 as opposed to Article 141, Egyptian Civil Code). As pointed out in paragraph 56, no such demand was brought by Defendants before the inception of this arbitration.
(ii) The party claiming to be the victim of fraudulent misrepresentation must comply with the onus of proving the existence of the conditions set forth under Article 125 cited above. However, no artifice was proven to our satisfaction whereby Claimants induced Defendants to enter into the Agreements with the sole purpose of obtaining exorbitant and illegal benefits.
The review of the evidence shows that the contentions of illegality raised by Defendants in the course of this arbitration were in fact voiced by third parties (members of People's Assembly and State bodies and/or Agencies other than those directly connected with the execution of the Agreements) at the time when opposition to the Pyramids Oasis started to develop. As pointed out in paragraph 56, Defendants never joined the criticism to the Project; on the contrary, they challenged the soundness of said criticism and defended the Project as well as the implementation thereof. We cite again, as being of great importance, the Written Answers of the Minister of Tourism to the People's Assembly, dated September 10, 1977 (Claimant's Exhibit 173).
Nowhere in this document can one find claims on alleged misconduct, violation of law and/or contractual breaches committed by Claimants. On the contrary, certain practices (now challenged by the Government) are clearly upheld, such as, for example, the possibility of financing the Project (inter alia) through the sale "of usufruct of some lands" (at p.6).
Only when Claimants brought forward their claim, Defendants assumed the paternity of the criticism claiming misconduct and violations of law by the Claimants. Claimants in turn claimed breaches by Defendants concerning the implementation of the Agreements.. The relevant issues are expounded in detail by the parties (Defendants' Supplementary Statement of Argument, p.14 et seq.; Defendants' Final Submission pages 4-5 and 20-33, reaffirming their Counterclaim; Claimants' Final Submission, pages 50-56; Claimants' Statement of Argument, pages 32-54).
The arbitrators have pondered on the relevance of the Minister's Written Answer in the light of Article 139 of the Egyptian Civil Code whereby
"The right to procure avoidance of the contract is extinguished by an express or implied ratification of the contract".
In our case the issue of avoidance of the contract is moot because the Project was cancelled "ex imperio". However, one could be strongly inclined to believe that after the Minister's Written Answer, clearly amounting to a ratification, Defendants were barred from claiming fraudulent misrepresentation and/or prior breaches to the charge of Claimants. This is not the course of action that the arbitrators chose to follow and indeed they examined the merits of the argument put forward by Defendants irrespective of the principle laid down under Article 139 cited above.
Defendants rely on two documents which in their opinion conclusively establish Claimant's breaches, i.e., The Central Auditing Office report (the Egyptian "Cour de comptes") and the report of the "Ad Hoc Experts Committee of the People's Assembly (Second Defendant's Final Submission, at pages 5 and 6). It is EGOTH's contention that:
"By accepting 'en connaissance de cause’ a predominant figure among the member of the said 'Experts Committee' to become an arbitrator in the present case, SPP(ME) should be deemed concurring to - or at least not objecting to - the findings he contributed in establishing" (ibid.).
We fail to accept this argument and accept the view expressed by Claimants whereby they deny having acquiesced in the findings contained in the two documents by refraining from challenging Defendant's nominee. In this connection, Claimants declaredly assumed that
"Defendant's nominee must have accepted his appointment after having searched his conscience and determined that his participation in the work if the ad hoc committee, and the position he may have taken in that context, would not condition his ability to approach the present proceedings with an open and independent mind, as required by ICC arbitrators" (claimants Final Submission, at pages 54 and 55).
Whilst duly appreciating the institutional role of the Central Auditing Office within the framework of the Egyptian legal system, we cannot fail to remark that the enquiry leading to the conclusions embodied in its report was conducted "inaudita altera parte", i.e. without the fundamental guarantees of the adversary system. Furthermore, as pointed out by Claimants the report was
"never made public, and was not communicated to Claimant until February 1981, many months after the constitution of the arbitral tribunal (ibid)"
In our opinion there exists no reason for accepting the reports in question as conclusive evidence of Claimant’s breaches. It is up to the arbitrator's prudent discretion to freely weigh their probative value after careful review of all the arguments as well as evidence submitted by the parties. As a result of this review we find that Claimants did not mismanage ETDC; that they did not show any disregard of the national patrimony; that they were not responsible for causing any significant delay; that the alleged financial irregularities were not established specificially having regard (inter alia) to the fact that these were scrutinised by two firms of internationally recognised accountants; that there was no significant variation or departure from the original financial concept and that it is not satisfied that there were any violations of Egyptian law which would have amounted to any justification for cancelling the Project. One should also recall, in this connection, the limited impact of Egyptian municipal laws upon the adjudiction of Claimants claims. As pointed out in paragraphs 49 and 54, such laws can be relied upon only to the extent that they are consistent with the principles of international law. Defendants now claim inter alia that the legal iter leading to the approval of the Project was severely vitiated. Even if such irregularities were found to exist under Egyptian municipal laws and regulations, they could not be raised now to challenge the validity of the contractual engagements under-taken by the Defendants. Otherwise the whole purpose of the arbitration clause would be frustrated and Claimant's investment would be devoid of protection.
This defence rests upon the assertion that any breach which was committed by EGOTH was the result of circumstances outside its control, namely, the action of the Government. On the facts there can be little doubt that the events of May/June, 1978 were beyond EGOTH’s reasonable powers to control. It was a decision taken at the highest levels of State on a matter of general public importance. However, if we were to treat the matter simply as one of force majeure, we would be faced with a difficult question of whether the extremely close connection between EGOTH and the Government, exemplified by the fact that EGOTH was at all times under the control of the relevant Minister, permits the doctrine of force majeure to be applicable.
In the opinion submitted by Defendants on January 21, 1981, Professor Riad after a review of the issue at the level of comparative law concludes (at p.21):
"Ainsi serait-il superflu de chercher la loi applicable au litige pour savoir dans quelle mesure la force majeure est susceptible de liberer la partie contractante de ses obligations. Les parties contractantes nous ont en effet epargne cette recherche en precisant dans le contrat meme qu’aucune des parties au contrat ne sera tenue pour responsable si l’inexecution de son obligation est due a la force majeure. Per consequent la Societe E.G.O.T.-H. se trouve, en vertu du contrat meme, liberee des obligations qui lui incombaient et qui sont devenues impossible a executer par suite de l'acte de l'Etat Egyptien".
For the reasons stated hereinbelow it does not appear necessary to comment in detail on said conclusion. May we only point out that the view expressed by Professor Riad is by no means uncontroverted. As an example, we would refer to an Arbitral Award of May 30 1979, Case Nos. 3099 and 3100, rendered under the rules of the ICC (Yearbook - Commercial Arbitration, Volume 7 -1982, p.87). In that award, a defence of force majeure was not accepted. The Award cites (inter alia) a decision of April 15, 1970 of the French Supreme Court, holding as follows:
"the ulterior, irregular intervention of the guardian authority (l'autorité tutelle -Gen. Ed.), i.e., the State, to try, in that capacity, to impede Air France from carrying out its obligations, cannot be objected to by the debtor who is submitted to the guardianship as an unforseeable and unsurmountable intervention of a third person extraneous to the debtor (at p. 90)".
However, we do not consider it necessary to decide that point in this case since here there are additional circumstances which, in our opinion, preclude liability by EGOTH. If one looks back at the Agreement of December 1974, one finds that the obligations of EGOTH are expressed in a qualified form. Generally speaking, its obligation, where acts of the Government were required, was to use its best endeavours to obtain the necessary action from the Government. Bearing in mind the context of this limited liability and bearing in mind EGOTH’s separate legal identity, we find it impossible to say that the breach committed by the Government was also ipso facto a breach of a joint obligation by EGOTH or that the act of the Government in cancelling the Project was an act that may be attributed also the EGOTH. It was this very fact that the wishes and intentions of EGOTH might be defeated by some action taken by the Government which made it particularly important that the Government should be a party to the Agreement of December, 1974. We accordingly hold that EGOTH was not liable for the cancellation. Different considerations might well apply if the Government had not been a party to the December, 1974 Agreement.
"The judge will fix the amount of damages, if it has not been fixed in the contract or by law. The amount of damages includes losses suffered by the creditor and profits of which he has been deprived, provided that they are normal results of the failure to perform the obligation or of delay in such performance. These losses shall be considered to be a normal result, if the creditor is not able to avoid them by making a reasonable effort. When, however, the obligation arises from contract, a debtor who has not been guilty of fraud or gross negligence will not be held liable for damages greater than those which could normally have been foreseen at the time of entering into the contract".
Evidence submitted by both parties clearly demonstrated that the issuance of the Decrees was not capricious. Nor was said issuance motivated by reprehensible or malicious intent aimed at securing advantages to the Government or else at bringing wilful damage to SPP(ME). Egypt is a sovereign State, i.e., a public body whose function is, inter alia, that of giving recognition to the cultural, social and political instances emerging within the community of its citizens. The Project was originally well received and all competent bodies and agencies willingly acted to perfect the contractual schemes aimed at securing its completion. Then new events occurred whereby public opinion strongly demanded cancellation of the Project.
The Government initially defended the Project in as much as politically feasible and finally gave up and issued the Decrees in question.
Whereas this background does not exclude a contractual breach by the Government, it convinces us that the breach was neither fraudulent nor grossly negligent in the sense pointed out above.
The evidence submitted to us indicates further that when entering into the Project the Government intended to back it up to completion. Only supervening events which the Government could hardly resist at the political level led to the issuance of the Decrees and prevented such completion.
We are not required to express any judgement upon the merits of the motives which led the People’s Assembly to oppose so decidedly the Project. Our analysis being strictly limited to the legal ground, we find the Government responsible for a contractual breach calling for compensation of damages under Article 221 Egyptian Civil Code. Such compensation, however, shall be limited to damages (including "damnum emergens" as well as "lucrum Cessans") no greater than those which could have normally been foreseen at the time of entering into the contract.
(1) Money invested;
(2) Value of the investment in May 1978;
(3) Loss of opportunity.
We consider items (1) and (2) as overlapping to some extent since monies had to be invested to produce the investment. Item (3) must be represented by a proper allowance for interest on the damages assessed as at the date of the breach.
1. We believe the risk factor is much higher than has been assumed in the projections. We consider that if the projected figures of income and expenditure were to be adopted they would carry a much higher discount rate. The uncertainties were very considerable. The project was a unique one in a very sensitive area from an environmental and political point of view.. This involved risks against which even the Egyptian Government could not give full guarantees. They were bound to lead and did lead to differences between the parties to the Joint Venture.
2. By the date of the cancellation, the political and economic climate had a number of new elements unfavourable to the venture's prospects. This is one of the reasons why we feel only very limited weight should be given to the transactions in the shares of SPP(ME) which took place between eighteen months and two years previously.
3. There was a considerable risk in a change in the tax status of the venture after the initial five year period.
4. By the date of cancellation the great majority of the work had still to be done.
5. The calculation put forward by the Claimants produces a disparity between the amount of the investment made by the Claimants and its supposed value at the material date.
6. There is the possibility, although we suspect it is a remote one, that there will be some recovery from the proceedings now involving ETDC.
For these and other reasons we are of the opinion that an approach to the quantification of damages by means of a discounted cash flow calculation should in this particular case be rejected. We consider it more appropriate to take the amount of the Claimant's actual investment and add to that an incremental factor representing the increase in the value of the investment over its actual cost. Taking into account all the various factors placed before us, we have come to the conclusion that a fair sum to award would be $12.5 million. We hereby, by a majority award this sum as damages to the First Claimant, SPP(ME) against the First Defendant, the Arab Republic of Egypt. To this sum must be added interest at the statutory rate of 5% from the date of the commencement of the arbitration proceedings, namely 1st December 1978 until the date of payment (Article 226 Egyptian Civil Code.)
In view of the above, the right course to follow is that the Government should bear 80% (eighty percent) of the costs of the arbitration (to be determined by the Court of Arbitration of the ICC) as well as 80% (eighty percent) of the normal legal costs of the Claimants. Claimants and Defendants have submitted legal costs of substantially the same amount and therefore we accept the figure of US$913,380 to be reimbursed by the Government to SPP(ME). The claim against EGOTH and the counterclaim by EGOTH are both being dismissed, and under all the circumstances, we consider there should be no order for costs in respect to EGOTH one way or the other.
We accordingly, by a majority, AWARD
1. That the first Defendant, the Arab Republic of Egypt, pay to the First Claimant, Southern Pacific Properties (Middle East), Limited the sum of US$12,500,000 (twelve million five hundred thousand) together with interest thereof at the rate of 5% per annum from the date in which the request for arbitration was received by the Secretary of the ICC Court of Arbitration (i.e. 1st December 1978) until payment.
2. That the claim by both Claimants against the second Defendant, the Egyptian General Company for Tourism and Hotels, be dismissed.
3. That the counterclaim by the said second Defendant against the Claimants be dismissed.
4. That the First Defendant pay to the ICC or the Claimants 80% of the costs of this arbitration as assessed by the ICC Court of Arbitration, the remaining 20% being to the charge of Claimants.
The total costs were fixed at US $ 493,965.
5. That the First Defendant pay to the First Claimant the sum of US$730,704 for legal costs.
This Award is given by a majority, Mr. Elghatit dissenting. Mr. Elghatit refused to sign the Award.