A sardine cannot swallow a whale: ICSID tribunal declines jurisdiction under the Egypt-UAE BIT

In an Award on Jurisdiction rendered earlier this year in National Gas S.A.E. v. Arab Republic of Egypt (ICSID Case No. ARB/11/7), an ICSID tribunal declined jurisdiction to hear a claim brought against Egypt under the Egypt-UAE BIT by an Egyptian corporate claimant whose immediate shareholders were two UAE shell companies but who was ultimately controlled by an Egyptian-Canadian dual national. The claimant had sought to argue that despite being an Egyptian company that it was entitled to take advantage of a limited exception in Article 25(2)(b) of the ICSID Convention which provides that in certain circumstances a national of an ICSID Contracting State can include a national of the State party to the dispute if there is an element of "foreign control". However, these arguments were rejected by the tribunal, not least because the "control" of the claimant rested ultimately with an Egyptian national and not the two UAE shell companies.  

Background

The claimant was National Gas S.A.E. ("National Gas"), a private Egyptian company. Since 2006, 90% of the shares in National Gas were owned by a company registered in the Jebel Ali free zone in the United Arab Emirates ("UAE") called CTIP, which in turn was wholly owned by another Jebel Ali company, REGI. The only shareholder in REGI was an individual named Mr Ginenea, who had dual Egyptian and Canadian nationality.

The dispute related to a concession agreement signed in January 1999 between National Gas and the Egyptian Petroleum Corporation ("EGPC"). The subject matter of the underlying dispute is not relevant in the context of this decision on jurisdiction, but in summary National Gas alleged that its investment had been expropriated and that it had been denied justice before the Egyptian courts which constituted a breach of the Egypt-UAE BIT (which was signed in May 1997 and has been in force since January 1999). The BIT provides that any disputes between one of the States and a qualifying investor from the other State is to be resolved by ICSID arbitration (Egypt and the UAE both are (and at all material times were) signatory states to the ICSID Convention).

Given that National Gas was an Egyptian company and Mr Ginenea was a dual national of Egypt and Canada, neither of them prima facie had standing to bring a claim against Egypt under the UAE-Egypt BIT as a qualifying investor from the UAE. This is also reflected in Article 25(1) of the ICSID Convention which provides that ICSID's jurisdiction "shall extend to any legal dispute arising directly out of an investment, between a Contracting State … and a national of another Contracting State" (emphasis added). Moreover, Article 25(2)(a) of the ICSID Convention expressly provides that "national of another Contracting State" does not include any person who also has the nationality of the Contracting State party to the dispute.

However, the ICSID Convention contains a limited exception to the rule that a claim must be between a Contracting State and a national from another Contracting State. In particular, Article 25(2)(b) of the ICSID Convention provides that "national of another Contracting State" can include a person with the nationality of the Contracting State party to the dispute if "because of foreign control, the parties have agreed [that person] should be treated as a national of another Contracting State for the purposes of this Convention". National Gas argued that such agreement could be found in Article 10(4) of the Egypt-UAE BIT, which provides that:

"In case of the existence of a juridical person that has been registered or established in accordance with the law in force in a region following a Contracting State, and an investor from the other Contracting State owns the majority of the shares of that juridical person before the dispute arises, then such a juridical person shall, for the purposes of the Convention, be treated as an investor of the other Contracting State, in accordance with Article 25(2)(B) of the [ICSID] Convention."

National Gas therefore argued that because the two UAE company investors owned the majority of National Gas' shares this meant that National Gas was "foreign controlled". It followed, National Gas argued, that it then fell within the scope of Article 10(4) of the UAE-Egypt BIT such that it could then take advantage of the provisions of Article 25(2)(B) of the ICSID Convention in order to bring its claim under the UAE-Egypt BIT.

Decision

The tribunal (V.V. Veeder QC as President, Yves Fortier QC and Professor Brigitte Stern) disagreed with National Gas' position and declined jurisdiction to hear the claim. In particular, the tribunal highlighted that there is a significant difference under Article 25(2)(b) of the ICSID Convention between: (i) control exercised by a national of the Contracting State; and (ii) control by a national of another Contracting State. The latter situation violates no principle of international law and is consistent with the text of the ICSID Convention (and the underlying rationale of bilateral investment treaties generally). However, the former situation violates the general limitation in Article 25(1). While the tribunal acknowledged that there was a qualified exception to this rule in Article 25(2)(b), the exception must be read in conjunction with the general limitation to ICSID jurisdiction in Article 25. To illustrate the point the tribunal noted that "a sardine cannot swallow a whale".

Further, the tribunal noted that the parties’ agreement to treat a claimant as a foreign national "because of foreign control" does not ipso jure confer jurisdiction. The reference in Article 25(2)(b) to "foreign control" necessarily sets an objective limit beyond which ICSID jurisdiction cannot exist and parties therefore lack power to invoke the same no matter how devoutly they may have desired to do so. In the context of this particular case, the tribunal concluded that the factual evidence demonstrated that CTIP is a shell company of UAE nationality wholly owned by REGI, which is also a shell company of UAE nationality wholly owned by Mr Ginena, an Egyptian (and Canadian) national. It followed, therefore, that this was not a claim by a qualifying UAE investor against Egypt, but actually a claim by an Egyptian national against Egypt. Accordingly, the tribunal did not have jurisdiction to hear the claim given it had been brought under the arbitration clause in the Egypt-UAE BIT.

The tribunal did acknowledge that share ownership is not conclusive proof of control, but in this case concluded that it was clear that in fact the controller of both CTIP and REGI was Mr Ginenea. Indeed, while each of the two UAE companies existed independently from Mr Ginenea in juridical theory, the "commercial reality" was that Mr Ginena controlled National Gas. The tribunal further noted that a bilateral treaty between two States, even if that treaty is incorporated into their national laws, cannot modify the text of a multilateral treaty such as the ICSID Convention.

Comment

It is common for international investors to structure investments through corporate vehicles in a particular state so as to benefit from the most advantageous bilateral (and potentially multilateral) investment treaty protections that are available. Indeed, in addition to tax considerations, this can be one of the major factors for certain investors structuring an investment in a particular way and through an investment vehicle in a particular state.

Most international investment tribunals should (and more often than not do) respect the principle of corporate personality and will conclude that a company registered in a particular State can take advantage of bilateral investment treaty protections, even if the shareholders are ultimately from another State (although there are exceptions). However, the facts in this case were different in that the tribunal concluded that, in reality, the actions that were being complained about had (if proved) caused harm to National Gas (an Egyptian company) and Mr Ginenea (an Egyptian national). There was simply no nexus to the UAE and thus it was not possible to "shoe-horn" the case into the Egypt-UAE BIT even with the limited exception in Article 25(2)(b) of the ICSID Convention.

The decision therefore serves as a reminder to potential investors to ensure that wherever possible they structure their investments in such a way as to ensure they can maximise the bilateral and multilateral investment treaty protections that are available to them.

For further information, please contact Craig Shepherd, Partner, Mike McClure, Senior Associate, or your usual Herbert Smith Freehills contact.