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New Restriction On The Termination Of Contracts Between The State And Foreign Investors – Will The Number Of Arbitrations Decline? – Arbitration & Dispute Resolution



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On 13 September 2022, the Egyptian Prime Minister issued
Decree 3218/2022 requiring all state entities and companies fully
or partially owned by the state to seek the approval of the Supreme
Authority for Arbitration and International Disputes before
terminating a contract referring disputes to international
arbitration. This is an effort to reduce the surge of negative
arbitral awards rendered against the Egyptian state in recent
years.

Background

In the aftermath of the Egyptian revolution in 2011, the
Republic of Egypt has faced a considerable increase in
investor-state disputes. The government managed to settle many of
these cases, and is generally endeavoring to amicably settle
pending investor-state disputes.

However, this comes after awards against Egypt threaten to cause
significant financial losses to the Egyptian state. These losses
were in addition to money and alternative investment opportunities
that were offered to investors to settle some of the cases.

The reasons for the surge of investment and commercial arbitral
proceedings initiated against Egypt or Egyptian owned companies
vary. Two significant reasons are: (i) the mismanagement –
mainly by mid-level officials – of contracts concluded with
foreign investors, and (ii) poor initial contract drafting. In an
attempt to address this issue, the Egyptian government established
an inter-ministerial committee, the Supreme Authority for
Arbitration and International Disputes (the
Arbitration Authority”), and entrusted
it with: approving referring disputes to international arbitration
in contracts to be concluded with foreign investors, and drafting
arbitration clauses and “governing clauses” in these
agreements. Decree 3218/2022 now expands these competences further
to include the termination of contracts with foreign investors.

Approval Requirement for Terminating Arbitration Agreements in
Contracts with the Public Sector

The Arbitration Authority was effectively established in
December 2020 (via Prime Minister Decree 1062/2019 as amended by
Decree 2592/2020) and is an inter-ministerial committee chaired by
the Prime Minister.

The Authority’s predecessor entities were focused on the
resolution of ongoing disputes, reviewing settlement proposals, and
management of arbitration cases; significantly, the new Arbitration
Authority was given tools to strengthen the Egyptian position in
the event that a dispute arises.

The Arbitration Authority is entrusted with reviewing and
drafting arbitration clauses in all contracts between a foreign
investor and the public sector as well as other “governing
clauses such as force majeure and change of law
” (Article
2 (2) of Decree 1062/2019 as amended).

Moreover, any arbitration clause in a contract between foreign
investors and a public sector entity is subjected to the
Arbitration Authority’s approval (Article 6 of Decree 1062/2019
as amended). Public sector entities in this sense comprise both
administrative entities as well as fully and partially state-owned
companies.

Implications for the Future

Many of the previous disputes the Egyptian government became
ensnared in arose from the unilateral termination of contracts by
the public authority. The Egyptian contracting entity often
terminated these agreements without proper assessment and relied on
a weak legal basis to do so.

In theory, poorly reasoned terminations should now occur with
less frequency as the Decree requires the Arbitration Authority to
approve the termination of contracts. That is, the Authority will
be able to first proactively demand the insertion of pro-government
arbitration clauses, and then supervise the relevant entity when a
desire to terminate the agreement arises. The Decree envisions a
“belt and suspenders” approach to supervising the
termination of contracts that could lead to onerous
arbitration.

In doing so, the Arbitration Authority wants to make sure that
only justified terminations will occur, and that the chances of
success for the public contracting party in arbitral proceedings
are high.

As a consequence to the surge of investor-state disputes, some
Egyptian policymakers suggested the withdrawal of Egypt from the
ICSID Convention and from various bilateral investment treaties
(BITs). On the other hand, many Egyptian legal scholars and
arbitration practitioners advocated for structural changes in
drafting and managing contracts with foreign investors to prevent
investor-state disputes from arising in the first place.

The latter, in our view, is the more realistic and appropriate
approach. Restricting the unilateral termination of contracts on
the part of the public contracting party in contracts with foreign
investors is a step in the right direction.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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