Egypt's ban on public interest litigation in government contracts: a case study of 'judicial chill'.

• Author: Hazzaa, Heba

Since 2010, a series of Egyptian court decisions, which effectively expropriated foreign investments on a variety of public interest grounds, has made foreign investors wary of investing in Egypt. Those directly affected by the court-led expropriations have lodged multiple bilateral investment treaty claims against Egypt, exposing it to potentially large damages awards. Consequently, the Egyptian government came under considerable pressure to restrict such public interest litigation. In 2014, it proposed a sweeping ban on third party litigation. Law 32/2014 spells the end of public interest litigation in Egypt by limiting the right to challenge the validity of government contracts to the parties and creditors only.

In this Paper, we argue that (1) public interest litigation proliferated in Egypt because of the lack of good governance, particularly the absence of an independent anticorruption body during the privatization program; (2) the promulgation of Law 32/2014 is an example of "judicial chill, " where the government forecloses the courts ' review power in the name of foreign investment; (3) Law 32/2014 curtails the fundamental "right to petition the courts " as laid down in the Egyptian Constitution; (4) instead of limiting public interest litigation, Egypt should address the widespread and institutionalized corruption in government contracting as the root cause of the disputes, by establishing an independent anti-corruption body and streamlining government contracting; and (5) Egypt should consider explicitly allowing for citizen suits in the area of human, labor, and environmental rights to overcome government inertia and corruption.

1. EXECUTIVE SUMMARY II. INTRODUCTION III. THE ROLE OF PUBLIC INTEREST ADJUDICATION IN INVESTMENT-RELATED MATTERS. A. Public Interest Litigation Is a Motor of Social Change 1. Public Interest Litigation in the USA 2. Public Interest Litigation in India B. PIL in Egypt. 1. Economic and Social Effects of the Privatization Program Helped Trigger the Egyptian Uprising in 2011. 2. PIL Cases and the Resulting Investor-State Arbitrations Against Egypt 3. Recent Trends Set by the Administrative Courts in Reviewing the Validity of Government Contracts in PIL. i. Locus standi ii. Standard of review iii. Arbitrability and Separability: Does the Inclusion of an Arbitration Clause in the Challenged Contract Preclude the Court from Hearing the PIL case? iv. Standard of Proof Applicable to Corruption and Illegality IV. PIL BAN IN EGYPT: AN ATTEMPT TO AVOID DAMAGES IN INVESTOR-STATE ARBITRATIONS A. Law 32/2014: PIL in Egypt Triggered a Regulatory Backlash B. Judicial Decisions May Amount to Judicial Expropriation C. Egypt May Have a Corruption and/or Illegality Defense D. Traditional Quantum Valuation Methods May Appear Unfair Where Investments Were Acquired at Undervalue V. EGYPT IS A CASE OF "JUDICIAL CHILL" A. Law 32/2014 Is an Example of Judicial Chill B. The Egyptian Supreme Constitutional Court Hears a Challenge Against Law 32/2014 on the Basis of Judicial Chill VI. CONCLUSION I. EXECUTIVE SUMMARY

   Since 2010, a series of Egyptian court decisions, which effectively expropriated or re-nationalized foreign investments on a variety of public interest grounds (including illegality, squandering public funds, and corruption), has made many foreign investors wary of investing in Egypt. Those foreign investors directly affected by the court-led expropriations and re-nationalizations have lodged multiple international treaty arbitration claims against Egypt under some of its bilateral investment treaties, potentially making Egypt liable to pay large damages awards it can hardly afford. As a result, the Egyptian government has been under considerable pressure to restrict those public interest lawsuits, given their potentially negative impact on foreign investment.

   Accordingly, in 2014 the Egyptian government proposed Law 32/2014, a sweeping ban on third-party litigation, to stop the influx of cases exacerbating an already difficult economic situation. In support of Law 32/2014, the government cited the negative impact on investments and the high probability of losing investor-state arbitration claims, as well as exposure to large damage awards resulting from the domestic court decisions.

   In this Paper, we argue that the promulgation of Law 32/2014 is an example of "judicial chill," in which the government forecloses the courts' review power in the name of foreign investment. We argue that public interest litigation, in itself, is not antagonistic to foreign investment. Public interest litigation proliferated in Egypt because of the lack of good governance, particularly the absence of independent anti-corruption agencies during the privatization program. Egyptian courts were left with the duty to review and reverse impropriety in government contracting. From the government's perspective, Law 32/2014 cuts the head off the snake in an effective and clean manner. From a civic perspective, however, the law forecloses peaceful means of change in government policies by blocking one of the venues the public used to respond to widespread institutionalized corruption and rights violations.

2. INTRODUCTION

   Three years after the Egyptian Uprising that led to the toppling of Hosni Mubarak and ushered in one of the most politically volatile and economically precarious periods in Egypt's modern history, Egypt is trying to win back foreign investors, particularly those from the Gulf Cooperation Council. However, a series of Egyptian court decisions since 2011, (1) which effectively expropriated or renationalized investors' investments on a variety of public interest grounds, has made many foreign investors wary of investing in Egypt.

   Furthermore, these domestic court decisions have caused Egypt to become the respondent in a series of international arbitration proceedings under some of its many bilateral investment treaties. (2) As of June 1, 2013, Egypt was party to more bilateral investment treaties than any other State in the Middle East and North Africa region. (3) These international arbitration proceedings expose Egypt to billions of dollars in potential damages and legal costs. Between the January 2011 uprising and August 10, 2014, twelve arbitration proceedings against Egypt were registered with the International Centre for the Settlement of Investment Disputes alone. (4) Five of these arose out of an Egyptian court's decision negatively affecting the relevant foreign investment. One investor, A1 Jazeera Broadcasting, announced its intention to file an investor-state arbitration following a court decision in a public interest litigation banning A1 Jazeera from carrying out its Egyptian operations. (5) There are fourteen more cases pending in Egyptian courts that could potentially increase the number of investor-state arbitration cases based on judicial breach of the relevant bilateral investment treaty.

   One could argue that there is nothing unusual about the occurrence of expropriations and nationalization programs following major political upheavals and change, particularly as the 2011 uprising was fueled by popular demand for bread, freedom, and social justice. What is unusual is the fact that in the case of Egypt, the expropriations are court-led. By annulling and voiding the affected investment contracts, the Egyptian courts effectively reversed the transaction--i.e., the previously privatized asset fell back to the state. But neither the Egyptian government under Mohamed Morsy nor the military-backed interim administrations supported or initiated the proceedings, nor did they have any interest in taking over the administration of large companies. (6) Public interest suits were brought by concerned citizens and/or Egyptian civic and labor organizations, (7) who sought--and in some instances succeeded--to annul the relevant investment contracts.

   While the annulments left the investment companies in limbo, the investors sued the Egyptian government through the International Centre for Settlement of Investment Disputes under the applicable bilateral investment treaties. These court actions sent shockwaves through investor circles and prompted lobbying efforts by investors to amend the Egyptian Investment Guarantees and Incentives Law. (8) It has been widely reported in the Egyptian press that Saudi Arabian investors were actively lobbying for amendments to the Investment Guarantees and Incentives Law to ensure that rights and privileges enjoyed by investors under previous contracts could not be changed. The amendments proposed by the Saudis placed restrictions on the right to sue investors in criminal courts and barred public interest litigation challenges against investment contract. (9) The suggested amendments were met with outrage by Egyptian labor and human rights organizations and were thereafter scrapped. (10) On April 22, 2014, the Egyptian government passed Law 32/2014, a procedural law titled "Regulating Some Procedural Aspects of Challenging Government Contracts" ("Law 32"). (11) This well-drafted law is succinct: It consists of two main articles that deny third parties the right to file claims relating to contracts between investors and the government. (12) The law extends to all government contracts and administrative decisions leading up to the award of such contracts. (13)

   This Paper discusses the effect of Law 32 on public interest litigation in Egypt and its interplay with investor-state arbitration claims against Egypt. First, we provide a comparative overview of public interest litigation in two jurisdictions: public interest litigation in the United States and its success in bringing about social change (subsection IILa.i) and public interest litigation in India regarding the fight against corruption in government (subsection IILa.ii). In Section III.b, we then discuss the emergence of public interest litigation in Egypt as developed by the administrative courts. In...