Worldwide: Legal Impact Of A Possible Referendum On Independence For Iraq's Kurdistan Region

Last Updated: 22 June 2017
Article by Christopher Thomson

On 7 June, officials in Iraq's Kurdistan Regional Government (the KRG) announced plans to hold a referendum on independence for the northern Iraqi territory that is already semi-autonomous in practice. While holding such a referendum, let alone declaring independence, would have a range of local and international implications, this article focusses on how the process of declaring statehood might look, what impact it may have on the existing treaty-based, statutory and contractual framework for oil and gas developments in the Kurdistan Region and what purpose a referendum may serve in practice if statehood is not the KRG's immediate goal.

Before considering these questions, it is worth noting that this is not the first time that the prospect of independence has been raised by the KRG. The President of the Kurdistan Region, Massoud Barzani, instructed members of the Kurdistan National Assembly (the KRG's legislative arm) to begin preparations for such a vote in 2014. However, these plans were postponed following the capture of Mosul by Islamic State with the explanation that the defeat of Islamic State was the priority.

What are the main challenges to recognition as an independent state?

To be accepted as an independent state, the Kurdistan Region would have to exhibit the necessary characteristics of statehood. Article 1 of the Montevideo Convention sets out the most widely accepted formulation of the criteria of statehood in international law. It provides that the state should possess the following characteristics: a permanent population; a defined territory; a government; and the capacity to enter into relations with other states. Of these, the second and fourth may be the most challenging for the KRG.

Although fully delineated borders are not required, the greater the extent to which the approximate size and shape of the new state is uncertain, the greater the challenge a fledgling state may face in achieving recognition. This issue is particularly relevant to the Kurdistan Region. Since 2014, the Peshmerga have substantially expanded the territory controlled by KRG beyond the boundaries of the three Iraqi governorates formally constituting the Kurdistan Region under Iraq's constitution. The KRG's announcement contemplates the inclusion of many of these territories (Sinjar, Khaniqin, Makhmour and Kirkuk) within the scope of the referendum. Control over these territories is a sensitive topic, which was supposed to have been resolved by a referendum under Article 141 of Iraq's constitution that has never been held, particularly in relation to Kirkuk (where both the KRG and Iraq's federal government in Baghdad have asserted their authority to grant oil development rights).

These domestic tensions are reflected in regional ones between the Middle East's big powers that surround the Kurdistan Region and are directly relevant to the KRG's ability to demonstrate that it has the capacity to enter into relations with other states. While independence for the Kurdistan Region has some supporters, many other states (including all of its direct neighbours, all of whom are home to substantial Kurdish minorities) are fiercely opposed.

The Montevideo Convention's criteria are not determinative and in reality a number of other legal and factual conditions would dictate the nature and circumstance of any Kurdish secession from Iraq. The extent to which a newly-declared independent Kurdish state would be recognised by major global powers would, of course, be of particular influence.

What would the impact be on international treaties signed by Iraq?

When a state breaks up, a "continuing state" remains a legally identical state despite changes in its territory, and continues automatically to exercise the same rights, obligations and powers under international law. A "successor state" will not continue automatically to be bound in the same way.

It seems likely that the rest of Iraq would be the continuing state on Kurdish independence (so that its international law position remains unchanged), while a newly independent Kurdistan would be the successor state. The position of an independent Kurdistan in relation to international treaties would therefore likely to be as follows:

  • Treaties creating rights and obligations connected with territory would generally be considered to be automatically binding on an independent Kurdistan.
  • In respect of general treaties of a "law-making" nature to which any state can become a party as of right (including certain international human rights agreements, multilateral environmental agreements), an independent Kurdistan could (should it so wish) simply confirm unilaterally its intention to be bound by way of declaration to the depository of the treaty.
  • For treaties establishing international or inter-governmental organisations, or for other multilateral treaties with particular entry criteria, an independent Kurdistan would have to negotiate the terms of its membership.
  • Succession to bilateral "political" treaties (such as double taxation treaties and bilateral investment agreements) would require the agreement of the other state. This is usually done by way of an exchange of notes, but it can also be an opportunity for the other state to request re-negotiation. Given the level of foreign investment in the Kurdistan region of Iraq, the application or non-application of bilateral investment treaties should be of particular relevance.

There is also an argument to say that treaties which reflect generally accepted rules of international law bind a successor state by virtue of the concept of the acquired rights of the inhabitants of the state, although this position is less clear.

What would the impact be on applicable laws?

The bulk of law enacted by Iraq's federal government is directly applicable in the Kurdistan Region. Where Iraqi law applies in the Kurdistan Region and there is a conflict between that legislation and a KRG law, the KRG law takes precedence, unless the law relates to an area within federal control under the Iraqi constitution. In practice, the law is the same or very similar in many areas, although there are some variations introduced through local implementing regulations. For example, the same Companies Law applies in the Kurdistan Region as the rest of Iraq but there are few restrictions in the Kurdistan Region on the transfer of shares and uses of Representative Offices.

On independence, the KRG would be required to introduce new legislation replacing the Iraqi laws that would no longer automatically apply. While we would expect this to be a fairly mechanical process in most areas, there is a risk that investors could find their position adversely affected by new legislation. That said, there are two factors mitigating this risk that international oil companies which are party to Production Sharing Contracts with the KRG benefit from.

The first of these is that the Kurdistan Oil Law already purports to repeal the application of all other existing Iraqi law, providing that:

"no Federal legislation or other law, and no agreement, contract, memorandum of understanding or other Federal instrument shall have application to Petroleum Operations except with the express agreement of the Regional Government and pursuant to the provisions of this Law"

In the context of petroleum laws, then, there may not be a large difference to the laws applicable in Kurdistan following independence, given that Iraqi Federal law is already expressly disapplied by Kurdish law.

The other positive is that the terms of the PSCs concluded with the KRG (which the Kurdish state should become a party to upon independence, on which see below) should also provide additional protection to investors against any adverse changes in law consequent upon succession, in the form of a stabilisation clause.

The KRG Model PSC provides at Article 43 that:

"If, at any time after the Effective Date, there is any change in the legal, fiscal and/or economic framework under the Kurdistan Region Law or other Law applicable in the Kurdistan Region which detrimentally affects the Contractor, the terms and conditions of the Contract shall be altered so as to restore the Contractor to the same overall economic position as that which Contractor would have been in, had no such change in the legal, fiscal and/or economic framework occurred."

While the definitions of "Kurdistan Region Law" and "Kurdistan Region" are ultimately linked to the Kurdistan region of Iraq as recognised by the Constitution of Iraq, there would be a credible argument that the stabilisation clause would operate to prevent an adverse change in the law following independence, particularly in a situation where the laws currently in force in the KRG would continue to apply upon independence. It is important to note that stablisation provisions in some PSCs entered into more recently are more narrowly drawn so this analysis may not apply in all cases.

What would happen to existing PSCs with the KRG?

The international law doctrine of acquired rights is relevant to this question. At its simplest, the doctrine provides that private rights acquired under existing law do not cease on a change of sovereignty. In relation to property and investments in Kurdistan, this would mean that a new Kurdish state should become a party to agreements entered into with the KRG.

The principle has been consistently recognised by international tribunals and was discussed in particular in a number of cases before the Permanent Court of International Justice in the inter-war years.

There is, however, a considerable amount of uncertainty as to the extent to which the doctrine of acquired rights protects foreign nationals upon succession and some older cases do suggest that a new state may have a degree of discretion over which contractual rights and duties of the old state that it wished to respect.

It should also be noted here that there is no absolute rule to the doctrine and it does not mean that a new sovereign cannot alter or interfere with these rights. For example, expropriation of the property and investments of foreign nationals is permitted under international law, subject to certain conditions particularly with regard to compensation.

Under the doctrine of acquired rights, a party with rights under a contact with the KRG would continue to hold rights under the contract as against a new independent Kurdish state. There is a risk that the KRG could use a declaration of independence to reopen contractual provisions that it particularly objected to, which may be more relevant to some of the older and more generous PSCs, although we expect that the KRG would generally be anxious to assure investors that their contractual rights would continue to be respected.

What is really going on?

The KRG's aspirations for independence should not be underestimated. However, the legal and, perhaps more importantly, the political hurdles it faces are significant. With this in mind, it is possible that the KRG's short term purpose in calling a referendum on independence in the coming months is to strengthen the KRG's hand in the negotiation of a new political settlement with Baghdad that may follow the recapture of Mosul. The two layers of government have, over the years, agreed several short-term compromises on the management of Iraq's oil resources. The trend has generally been a movement towards increasing autonomy for the KRG. It is not unreasonable to expect that trend to continue. A solid deal could potentially unlock the Kurdistan Region's production potential for existing and future investors, at least in the medium term. Whether that deal can be reached probably depends as much on the outcome of discussions about the position of Kirkuk (and who controls the local hydrocarbon reserves) as it does on the possibility of future independence for the Kurdistan Region.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

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