United Arab Emirates: Middle Eastern Investment Treaties May Provide Unrealised Protections For Investors

The jurisdictional and final rulings in the case of Hesham al-Warraq v Indonesia under the Organisation of Islamic Cooperation's (OIC) investment agreement has highlighted the relatively untapped investor protection potential provided by multilateral investment treaties concluded between Muslim and Arab states. These may prove particularly valuable for investors in the Middle East.

In the case of Hesham al-Warraq v Indonesia, an UNCITRAL Tribunal decided that the agreement for the promotion, protection and guarantee of investments among member states of the OIC (OIC Agreement) did allow investors to take host states to arbitration. Investors have also previously made use of the Unified Agreement for the Investment of Arab Capital in the Arab States (Arab States Agreement), an investment treaty concluded between the members of the League of Arab States.

OIC AGREEMENT

The OIC is a union of 57 Muslim countries, founded in 1969 as the collective voice of the Muslim world. The OIC Agreement, in force since 1986, has been signed by 33 member states and ratified by 27. It sets out the minimum standards applicable to incoming capital and investment between member states.

Dispute resolution provisions

In the al-Warraq case, Indonesia argued that Article 17 of the OIC Agreement only provided for a state-to-state arbitration mechanism. The Tribunal rejected this interpretation, finding that it also permitted investor-state arbitration. Whilst the Tribunal recognised that the OIC Agreement provides for the establishment of an organ for settlement of any investment disputes arising under it, they observed that since no such organ had yet been established, ad hoc arbitration remained available in the interim. The Award enables al-Warraq to proceed with his claim, which stems from the nationalisation of his stake in an Indonesian Bank.

Under the OIC Agreement decisions of tribunals are final and binding. Each contracting party is under an obligation to implement an award in its territory as if it were a final and enforceable decision of its national courts, irrespective of whether that contracting party is party to the dispute. The agreement contains a so-called "fork in the road" provision, meaning that an investor is precluded from bringing simultaneous proceedings before an arbitral tribunal and national courts.

Scope

The OIC Agreement has a broad definition of the term 'investor', which includes any corporate person that is established in accordance with the laws in any contracting party and is recognised by the law under which its legal personality is established. Importantly, the OIC Agreement does not specify any requirements as to the nationality of the owner(s) of the company. This means, for example, that its protections will extend to contracting party incorporated subsidiaries of non-contracting party parent companies.

'Investment' is also broadly defined, encompassing any investment of capital in a state with a view to achieving a profitable return, where capital comprises everything that can be evaluated in monetary terms.

Substantive Protections

On its face the OIC Agreement contains a relatively limited range of investment protections. Whilst it does provide for protection against measures amounting to a direct or indirect expropriation, the OIC Agreement does not guarantee fair and equitable treatment, nor does it provide that foreign investors must be treated no less favourably than investors from the host state. However, the treaty contains a most-favoured nation (MFN) clause, guaranteeing that investors from a contracting party shall not be treated less favourably than investors from a non-contracting party. This raises the possibility that an investor claiming under the OIC Agreement may also be able to benefit from protections (and possibly the dispute resolution procedures) in other investment agreements concluded by the host state.

ARAB INVESTMENT AGREEMENT

Unlike the OIC Agreement, the Arab Investment Agreement has a body established for the purpose of hearing disputes brought under it. The Arab Investment Court (AIC) is seated at the permanent headquarters of the League of Arab States in Cairo and is composed of at least five serving judges each with a different Arab nationality (which must not be the same nationality as either of the parties to the dispute). It heard its first case in 2003 when Tanmiah – a Saudi Company – sued the Tunisian government.

Dispute resolution provisions

The AIC has compulsory jurisdiction over disputes involving investors, who may initiate proceedings before the AIC without prior consent. The jurisdiction of the AIC is, however, subsidiary; recourse to the AIC is only permissible in cases where the parties failed to agree to submit the dispute to arbitration, the arbitrator(s) failed to make a ruling or any arbitral award was not executed within three months of being rendered. Judgments rendered by the AIC are final and binding and are enforceable in each of the contracting parties in the same manner as a judgment delivered by their national courts.

Contracting parties may expressly agree to extend the AIC's jurisdiction to their investment agreements. Some inter-Arab bilateral investment treaties provide for recourse to the AIC, as do some national investment laws.

Scope

The criteria for benefitting from the substantive protections of the Arab Investment Agreement are far more stringent than those for the OIC Agreement. The Arab Investment Agreement protects "an Arab citizen who owns Arab capital which he invests in the territory of a State Party of which he is not a national." To qualify as an Arab citizen a corporate entity must not only be located in an Arab state but also be fully owned by Arab nationals. Furthermore, to fall within the scope of the Arab Investment Agreement the investment must contribute to the economic development of the host state or strengthen economic integration between the states.

Substantive Protections

The protections offered by the Arab Investment Agreement are broadly comparable to those under the OIC Agreement. The Arab Investment Agreement does not contain a fair and equitable treatment clause, however it does offer protection against expropriation and contains an MFN clause. In addition, unlike the OIC Agreement, it provides that the host state must not treat an investor less favourably than domestic investors.

Unusually, the Arab Investment Agreement also imposes a number of obligations on investors. Amongst other things, investors are required to observe the host state's domestic laws to the extent consistent with the agreement and comply with national development programmes when administering and developing investment projects. Failure by an investor to observe such requirements may give rise to responsibility before the AIC.

CONCLUSION

Multilateral investment treaties between Middle Eastern countries have received little attention from investors. Whilst the OIC Agreement and the Arab Investment Agreement have limitations, they nevertheless provide useful legal protections, particularly where an investor is unable to benefit from treaty protection under a bilateral investment treaty.

UPDATE: On 15 December 2014, the Tribunal in Hesham al-Warraq v Indonesia issued its Final Award, setting out its views on the merits of the case. Notably, the Tribunal found that, by virtue of the most-favoured nation clause in Article 8 of the OIC Agreement, Mr al-Warraq was entitled to rely on the fair and equitable treatment standard in Article 3 of the bilateral investment treaty between the United Kingdom and Indonesia.

The Tribunal considered that Indonesia's treatment of Mr al-Warraq's investment had breached the fair and equitable treatment standard, although it declined to award damages because it also found that Mr al-Warraq had himself breached the OIC Agreement. Notwithstanding Mr al-Warraq's failure to obtain damages, this result underscores the potential value of the OIC Agreement to investors, particularly now that there is established arbitral precedent to support the efficacy of the most-favoured nation clause.

First published 30 October 2012

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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