Egypt: New Restriction On The Termination Of Contracts Between The State And Foreign Investors – Will The Number Of Arbitrations Decline?

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.

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