Cambridge International Law Journal | 16 November 2018
The case of Ampal v Egypt : What are the parameters of the due diligence standard ?
by Amin R. Yacoub
In international investment arbitration, host states can be held liable to foreign investors under bilateral or multilateral investment treaties. An important but vague ground of liability is found in the Full Protection and Security obligation (“FPS”), where a host state has to grant protection and security to investors and their investments. Most international investment tribunals agree that the standard of FPS for host state responsibility is the due diligence standard. A logical question follows : what are the parameters of the due diligence standard ? Put even simpler : what should tribunals look at in applying the due diligence standard of FPS ?
Although Pantechniki and LESI provided some answers to these questions, the subsequent tribunal of Ampal v. Egypt seems to backtrack on the conclusions reached by the Pantechniki and LESI tribunals. The Pantechniki Tribunal took into account two factors to measure the due diligence standard : the limited resources of the state and the remoteness of the place where the civil disturbance took place. Taking into account Albania’s level of development, overall political stability, and the remoteness of the location where the investment was attacked, the Pantechniki Tribunal did not find Albania liable under the FPS obligation. In LESI, the Tribunal assessed the due diligence standard by simply measuring the level of protection granted by the host State to its nationals and nationals of third-states. The LESI Tribunal did not find Algeria liable under FPS since it was not less favourable in protecting the foreign investor than protecting its own nationals. A reasonable ICSID Tribunal would have followed the paths of LESI and Pantechniki in determining the liability of a host state under FPS, the Ampal Tribunal did not.
The facts of the Ampal case are centred on a pipeline operated by the Egyptian company Eastern Mediterranean Gas (EMG), which is majority owned by the Ampal-American Israel Corp. This pipeline delivers natural gas provided by the Egyptian Natural Gas Holding Company (EGAS) to Israel. From February 2011 to April 2012, the pipeline was attacked thirteen times by terrorists. Accordingly, EMG sued EGAS for the contractual breach of the Gas Sale Purchase Agreement (GSPA) before the International Chamber of Commerce (ICC). The ICC rejected Egypt’s force majeure defence and held it liable for the contractual breach. In the aftermath of the ICC’s decision, Ampal (the majority shareholder of EMG) decided to file an ICSID case against Egypt (since EGAS’s acts are attributable to Egypt) grounded in, among other things, a violation of the FPS obligation under the US-Egypt BIT.
The factual background behind Ampal is a complex one, but it can be summarised in four main points. First, the pipeline was installed in El-Arish, in the Northern Sinai Peninsula. The Sinai in general and El-Arish in particular were prone to attacks by the Islamic State – Sinai Province, one of the strongest terrorist groups affiliated with ISIS. Second, the attacks took place in the aftermath of the January 25th revolution, a time when the country was undergoing radical political change. The Supreme Council of the Armed Forces had substituted the executive and legislative authorities and it had become the sole governing body in the country. Third, the Supreme Council of the Armed Forces had taken over the role of maintaining the internal security of Egypt from the police forces, at a time when the situation was still unstable on the borders, especially those near the Sinai Peninsula. Thus, the role of the armed forces in protecting the borders at full capacity -as under ordinary circumstances- was hindered, since the Egyptian military was burdened by a huge political responsibility and a dramatic internal security absence. Finally, it is worth noting that Egypt did apprehend and punish those responsible for the pipeline attacks.
Despite all these facts, the Ampal tribunal found Egypt liable for its failure to take reasonable steps, as set out in the due diligence standard, to protect the pipeline of the investor against terrorist attacks. The Ampal tribunal did not take into account the exceptional circumstances the country was facing, its limited resources, and the extreme strength of terrorism in the remote Sinai region. In other words, in its conclusion, the tribunal only considered the security of the investor’s pipeline, neglecting the overall state of the country. This raises an alert to any developing country fighting terrorism, as it could be held liable under FPS if the investment was harmed, even if it had adopted adequate measures relevant to its capacity. In other words, the Ampal tribunal unconsciously transformed the due diligence standard from a duty of care to a duty to achieve a result ; or in international investment language, the duty of due diligence to strict liability.
For an ICSID tribunal that holds a developing nation with very limited resources to the same due diligence standard it holds a developed nation, any harm to foreign investment in a developing nation could constitute a breach of FPS. And if future tribunals decided to follow the Ampal rationale, then the high due diligence standard of a developed nation would, by the same token, constitute a strict liability standard for a developing one. As the Pantechniki Tribunal wisely opined : “[a]n investor investing in an area with endemic civil strife and poor governance cannot have the same expectation of physical security as one investing in London, New York or Tokyo.” Holding Egypt accountable under FPS despite its limited resources, its political instability, its precarious safety situation, the remoteness of the area where terrorist attacks took place, and the extreme terrorism that Egypt had to face at the time could only be characterised as a strict liability standard, not a due diligence one.
There are not many reasons that one could think of to justify the tribunal’s position. One reason might be that the Ampal tribunal relied on the earlier ICC decision on EMG v EGAS as a res judicata. Since the EMG tribunal rejected EGAS’s force majeure defence to the contractual breach under the same facts, the Ampal Tribunal felt comfortable enough to find Egypt liable under the FPS obligation. It is true that the Ampal tribunal distinguished between a contractual breach and a treaty breach, but it seems that the tribunal was still under a confirmation bias effect after reading the EMG v EGAS decision to find Egypt liable under the same circumstances. Otherwise, how could a tribunal distinguish between a contractual breach and a treaty breach on the one hand and hold the ICC’s factual findings of contractual breach as res judicata on the other. This leaves us with the belief that the Ampal Tribunal was blinded by the factual findings of the EMG Tribunal.
Another reason might be that the Ampal tribunal had, unconsciously, placed a lot of weight on the discrimination element. However, this element should be the basis for Fair and Equitable Treatment (“FET”), not FPS. Again, it seems that the tribunal, after finding a lot of evidence referring to a negative bias towards Israel, had adopted a confirmation bias itself towards Egypt’s lack of due diligence to protect the pipeline delivering gas to Israel. This contention is furthered by the fact that a recent study found that arbitrators of investment disputes tend to be influenced by their general political preferences and beliefs when adjudicating arbitration disputes. Even if the Ampal tribunal had adopted LESI‘s approach by comparing the full protection and security of investors to that of the nationals, the tribunal would not also be able to find Egypt liable under the FPS. This is because Egyptian nationals, and even high rank officials, were prone to the same terrorist attacks, if not more so. For instance, Egypt’s Interior Minister “narrowly escaped assassination” by the same terrorist group amid his most prudent and skilful guards.
Thus, the Ampal decision seems disastrous on many levels. What is done cannot be undone. If the next tribunal blindly followed Ampal, it would lay down some adverse future burdens on developing nations that are both illogical and unjustified. This mistake on behalf of the tribunal finds its basis in an ossified reading of customary international law, which provides that the FPS obligation of the host state survives public disorders, revolts, violence, civil wars, or international armed conflict.
In conclusion, the Ampal Tribunal just applied the pre-existing due diligence standard on a host state that was experiencing public disorder, revolts, violence, and international armed conflict (i.e. terrorism). In other words, the decision in Ampal is not an expansion or a development, but rather an accurate application of the survival of the FPS due diligence standard under customary international law. This is because neither customary international law nor ICSID precedents set out clear parameters or thresholds for the FPS obligation. Accordingly, the job for the next tribunal is to define the parameters of the due diligence standard both in ordinary and exceptional circumstances, taking into account the insightful initiatives of Pantechniki and LESI.
Author’s Note : This blog post was mainly influenced by the Author’s research with Professor Robert Howse. For a detailed critique of the Ampal v. Egypt ICSID award see the forthcoming article “Should States Be Liable Under Investment Agreements For Failure to Prevent Terrorism ? A Sceptical View : The Case of Ampal V. Egypt” co-authored with Professor Robert Howse.
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