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The Concept of “Pre-contractual Period” in Libyan Government Contracts  

The Concept of “Pre-contractual Period” in Libyan Government Contracts  

On various occasions during proceedings to solve a claim, Libyan government foreign contractors relied on pre-contractual period in the form of representations and statements.  When doing business in Libya by signing a Libyan government contract, foreign parties should expect that the Libyan government will insist that the law governing the contract will be Libyan law, not the English law or any other law.  

A foreign investor should know that the Libyan law does not regulate the pre-contractual period (negotiation period).  The written contract, the end-result of the negotiations, “makes the law of the parties,” and it can only be amended by the mutual consent of the parties (Article 147 (1) of the Libyan Civil Code).

In addition to the law articles related to the interpretation of contracts, the Libyan judge plays an essential role during court proceedings.  One of the roles of the judge is to interpret the vague terms of a contract based on the intention of the parties to the contract and customs practiced in affairs related to the nature of the contract.  In the meantime, if the contract terms are clear, they should not be interpreted in any other meaning.

In case the parties to the contract agreed on essential points but decided that other details would be agreed to later, Article 95 of the Libyan civil code grants the judge the right to determine the details.  The judge can also enforce the missing details of the contract and decide the method of payment of damages.  Article 174 (1) relates to the payment method of damages and grants the judge the decision on the payment method of damages in accordance with the circumstances.  The damages may be paid by installments, or in the form of a regular periodical payment, in either of which cases the debtor maybe order to provide security.

Renewable Energy in Libya: the Need for a Legal Framework

A comprehensive renewable energy legal framework for Libya will assist with utilizing renewable energy sources to produce power in an efficient and environmentally sustainable manner.  Libya has abundant renewable energy sources such as solar and wind.   There are other available renewable sources in Libya, such as geothermal, biomass, and tidal waves.  However, all these sources have less potential in Libya. Libya needs a legal framework to support the use of renewable energy sources and create an environment to attract investment in renewable energy sources.

The state of Libya and its people are aware of the abundant sources of renewable energy they have on their land. The state owns power-producing companies in Libya, and thepower generation market is still closed for private investors. Solar energy production is limited to the supply of households and small agriculture projects. There are small-scale scattered PV projects, but there are no RE auto-producers in practice.  

Currently, the renewable energy sect is under the Ministry of Electricity and Renewable Energy. In addition, the Solar Energy Research Center (SERC), established in 1978 to provide research on the possibility of exploring renewable energy sources. In 2007, the Renewable Energy Authority of Libya (LEAOL) was established to promote and assist with utilizing renewable energy. 

The Libyan institutions should be responsible forpromoting the production of renewable energy. The Ministry of Energy should provide policy direction for accomplishing this goal. Other institutions such as SERC and LEAOL should also be responsible.  They should provide the ministry with knowledge and information on developingrenewable energy.  The institutions, collectively, should create a platform for collaboration between the government and private sector for the promotion of renewable energy

The new legal framework should incentivize the private sector to play a role in the renewable energy industry by incorporating Investment Law no. 9 and tailoring it tocover the renewable energy sector. It should include financial incentives such as tax exemption andother duties levied on importing equipment and machinery necessary for developing, producing, and utilizing renewable energy sources. The new legal frameworkshould also promote local manufacturing of components to facilitate the rapid growth of renewable energyand encourage implementing training plans for local individuals and supporting local experts in the field of renewable energy.

Investing in Renewable Energy in Libya

Investing in Renewable Energy in Libya

Libya is an oil-producing country relying mainly on oil and gas as the principal energy source and income.  It is in dire need of searching for alternatives to fossil fuels for sustainable development.  Renewable energy in Libya is as abundant as fossil fuel energy. As an option, Libya can easily tap into its natural energy sources, such as solar and wind, by inviting international investors to invest in renewable energy.

In 1978, the Solar Energy Research Center was established to research renewable energy applications in Libya. There has been a great interest in Libya to explore the possibility of investing in renewable energy, but in reality, no major renewable energy project materialized. The Renewable Energy Authority of Libya (REAOL) was established in 2007 to support and spreadthe call for exploring renewable energy.

Libya’s Renewable Energy Plan

The REAOL released a Strategic Plan in 201, setting a target of 10% renewable energy contribution to Libya’s electricity energy mix by 2025.  Renewable energy will come from wind, concentrated solar power, photovoltaic, and solar water heating.

Legal Framework

Libya needs to find a legal framework to regulate the renewable energy sector. According to REAOL, in 2013, a draft law regulating renewable energy was submitted to the proper authority in Libya to be approved.  As of today, there is no law in place regulating renewable energy in Libya.  The draft law of 2013 encouraged the private sector to participate in electricity production.

However, Law no. 9 for 2010 encourages investors to invest in Libya under conditions.  Investing in renewable energy by bringing technology and know-how to Libya could entitle investors to many exemptions.  For instance, an investor is entitled to exemption from all taxes, customs duties, import fees, service charges, and other fees and taxes of a similar nature for machinery, equipment, spare parts, transport means, furniture, and raw materials, among other exemptions. In addition to other exemptions related to the distribution of dividend and equity returns.

The Need for Private Public Participation

The Libyan energy sector remains closed to private investors. The General Electricity Company of Libya (GECOL) is the only entity engaged in electricity production.  Prior to 2011, GECOL produced around 6,000 megawatts of electricity, but since then, it faced a deficit of approximately 2,000 megawatts.

For Libya as a rich developing country, the participation of the international private sector is essential inbringing in the technology, expertise, and capital required to tap into the unrealized potential of renewable energy. This is true, especially in emerging economies, whose governments lack the budgetary resources and technical expertise necessary to invest heavily in renewables.

There is no policy to provide financial support to investors from the private sector to engage in renewable energy projects.  Consequently, Libya should express its interest in welcoming international investors who are willing to take advantage of the abundant sources of renewable energy and the benefits of the investment law.

Politics of the Libyan Oil Industry: The Latest Brawl

Politics of the Libyan Oil Industry: The Latest Brawl

Since the revolution of 2011, the Libyan oil industry has been politicized and has faced various challenges. It has witnessed a chain of setbacks that started with armed militias controlling the oil ports and halting oil exports.  In addition to the armed struggle over the oil ports, the political interest of groups and individuals impacted the operation of the oil industry. 

Oil Management is a Joint Responsibilities

The Libyan legislature has been keen to establish two entities responsible for managing the oil and gas industry.  The Libyan Petroleum Law of the year 1955 laidthe joint responsibility on the Ministry of Oil and another entity that runs the day-to-day business of the sector.   The Ministry of Oil & Gas duties have always been limited to overseeing the oil & gas industry production.  In 2012, the Council of Ministers (the Cabinet) issued Decree number 32 for 2012. Article 2 of Decree no.32 named twenty-three duties of the Ministry of Oil & Gas. Most important is the approval of production plans and concession licenses.

Responsibilities of the NOC

As early as 1968, Libya sought to create a corporation that would manage oil production and marketing and operate as a commercial corporation free from government intervention and bureaucratic hurdles.  The Libyan Petroleum Corporation was founded in 1968 by a royal decree which granted it the right to negotiate and supervise the execution of oil concession agreements.   With the arrival of  Lieutenant Gaddafi to power, the General Libyan Petroleum Corporation was replaced with the National Oil Company (the NOC) in November 1970 by Law number 24 for the year1970 to replace the Libyan Petroleum Corporation.

It was not until 1979 when the NOC was restructured and granted broader responsibilities under Decree number 10 of 1979, which authorized the NOC to enter into joint ventures with multinational companies.  Today, the NOC is the sole entity responsible for oil & gas exploration and production. It conducts such operations through its affiliated or wholly-owned companies as well as joint ventures with international companies.

The First Brawl:   Presidential Council and the NOC

On March 25, 2017, the Presidential Council (named the “Council of Ministers” by the Libyan Political Agreement) issued Decree no. 270/2017.  The Decree dissolved the Ministry of Oil & Gas, an organ of the executive branch, and designated the former’s responsibilities and functions to both the Presidential Council and the National Oil Corporation (NOC).

The Second Brawl: Oil Ministry and the NOC

With the arrival of the newly selected government headed by Prime minister Abdel Hamid Dubaiba in February 2021, Mohamed Aoun was appointed as oil & gas minister.  Another struggle surfaced among Libyan government entities, and in this instance, the struggle was of a legal nature.

On August 14, Aoun sent a letter to the Prime Minister suggesting establishing a new board of directors of the NOC.  The reason for this proposal was Mr. Aoun’s assertion that MustafaSannallh, Chairman of the NOC, assumed the position of the Chairman of the Board of the NOC illegally.  Consequently, Aoun decided to remove the Chairman of the NOC, Mustafa Sannallah, and appoint a new chairman. 

The Oil Minister accused the head of the NOC of holding meetings with foreign ambassadors, which he considered to be beyond the NOC Chairman’s authority.  On August 29, Aoun took Decision no. 35 for the year 2021, subjecting Sannallah to administrative investigation for (1) not obtaining prior permission for traveling on business trips and (2) not allowing the new head of the NOC, replacement of Sannallh, to assume his duties. 

The Reaction by the NOC

The Chairman of the NOC, MustafaSannallah, had denounced the Presidential Council Decree no. 270/2017 dissolving the Ministry of Oil & Gas, describing it as illegal because the Presidential Council is a mere “executive” organ.  He also rejected an attempt by the Minister of Oil, Mohamed Aoun, to suspend him and dissolve the board.

As for the latest brawl round between the Oil Minister and the Chairman of the NOC, Mustafa Sannallah dismissed the Oil Minister’s decision to replace him as illegal since the Cabinet is the only entity empowered to take such a decision. 

The NOC on September 20 welcomed the decision by Prime Minister Abd AlhamidAldabaiba (No. 292/2021) to withdraw the decision of the Minister of Oil (No. 35/2021) to suspend the head of the NOC Chairman Mustafa Sanalla from his post. The NOC stated that it now considers all decisions, correspondence, and measures taken in this regard to have no legal effect.International newspapers described the nature of the latest brawl as “old personal enmity. “In conclusion, the current political vacuum in Libya and the absence of effective state institutions have created a sense of independence among Libyan governmental entities and agencies since 2014.  Until recently, Libya witnessed two governments simultaneously; at one time, there were three governments.  A sense of ignoring the role of law and regulations led some entities to assume the responsibilities of other entities. 

A possessory lien under Libyan law is created by contractual agreement.  It permits a creditor the right to remain in possession of an encumbered item, movable or immovable until the debtor has satisfied the debt. Therefore, a lien is a legal claim that one person, the creditor or the pledgee, has over the property of another, the debtor or pledgor, as security for paying a debt.

Under Libyan law, possessory lien grants the pledgee the right to (i) possess the pledge until the terms of the possessory lien are met, and (ii) the right to seek a court’s decision to sell the pledge if its value deteriorates to a point where the value of the pledgee becomes, or fear to become, less than the debt. On the other hand, the pledgor (i) is under obligation to guarantee the safety of the pledge, and (ii) shall be responsible for the deterioration of value or loss of pledge due to his/her negligence or force majeure (Articles 1105 and 1106 of the Libyan Civil Code).

Article (1101) of the Libyan Civil Code

As stipulated by Article (1101) of the Libyan Civil Code, the thing subject of a possessory lien must either be movable or immovable, which can be sold independently in a public auction. It should also be well defined and subject to possession. Therefore, the subject of a possessory lien could be real estate or a car that falls under the definition of the thing subject to be pledged.

The property, the pledge, could be kept, in possession of, the pledgee, until the debt has been paid, or it could remain in possession of the pledgor. In some cases, the pledgor remains in possession of the pledge but will not own it. In case the pledged item was in the position of the pledgor, and after the debt was satisfied and the pledged item was returned to the pledgee, the pledgee has the right to claim any such entitlement against the pledgor for damages for the pledged item.

The pledgor is responsible for the safety of the thing pledged. Consequently, the pledgor is accountable for any damage to the pledged item. Article 1106 (1) of the Libyan Civil Code holds the pledgor responsible for damages to the pledged item if the damage is due to his negligence or due to force majeure even if the pledged item is in possession of the pledgee.

Article 1107 of the Libyan Civil Code rest the duty to maintain the pledged thing on the pledgee. The pledgee becomes responsible for the safety of the pledge if he has possession of the pledge. He will use the care of a reasonable person and shall be liable for deterioration or loss of the pledged item unless he proves the cause of damage is not attributed to him.

The management of the thing pledged shall be the responsibility of the pledgee, who shall manage the thing pledged item as a reasonable person would under the circumstances. The pledgee shall not change how the pledged item is used unless approved by the pledgor.

If the pledgee miss manages the pledged thing or misuses it, the pledgor shall have the right to ask for the pledged item to be placed under judicial deposit. The pledgor will also have the right to ask the court for the restitution of the pledged thing, provided he will be the debt.

Unless the pledge contract states otherwise, the thing pledged must be invested as stipulated in Article 1108. The pledgor is not allowed to benefit from the investment, in the form of revenue or production, of the pledged thing. On the other hand, the investment of the pledge is considered an obligation on the pledgee if he is in possession of the thing pledged.

Net Profits Details

The net profits received by the pledgor from managing the pledged item shall cover (i) the pledgee’s expenses on the preservation and maintenance, expenses of the pledged item, (ii) the interest and, (iii) the rest of the amount of the net profit, if there is any, shall be deducted from the capital amount of the debt.

Dr Mohamed Karbal is licensed to practice law in Libya, New York and Washington D.C. He served as an expert witness on Libyan law. Karbal & Co is a full-service international law firm that serves the needs of businesses and governments in Libya and Washington D.C.

Tort under Libyan Civil Law: Understanding the “Fault” Factor

Tort under Libyan Civil Law: Understanding the “Fault” Factor

In civil law jurisdictions such as Libya, a tort is an act or omission that causes harm to others for which courts impose liability. The compensation is based on injury to other’s physical safety, property, economic interests, or reputation. Here we discuss Tort under Libyan Civil Law and understand its factors.

Article 166 of the Libyan Civil Code is contained within Section III (“Unlawful Acts”), Part 1 (“Liability Arising from Personal Acts”) of the Libyan Civil Code. Creates a general provision of liability for civil wrongs as defined in that section. Article 166, which is entitled “General Rules,” provides as follows:

“Every fault which causes injury to another imposes an obligation to make reparation upon the person by whom it is committed.”

A negligence claim will succeed if the claimant can prove: a fault was committed by the defendant, damage or harm, and causation between the act of the defendant and the harm suffered.

In this article, we shall deal with the concept of “fault.”

Tort under Libyan Civil Law: “Fault” According to Article 166

Article 166 of the Civil Code requires that the defendant must commit a “fault.” The Libyan Civil Code does not define the word “fault.” However, it is understood that a person is at fault. When he commits an act or omission that is a deviation from the behavior of a reasonable or “ordinary” person in the same circumstances.

Dr El-Sanhouri defines the “ordinary person” as the one who represents the “majority of people” in his intelligence and care. Similarities may be drawn between the concept of the “ordinary person” test and the English common law principle of the “standard of care” and the “reasonable person. ” Under the “ordinary person” test, the burden of proof falls on the claimant to prove that the defendant failed to act as an “ordinary person” would under the circumstances surrounding the facts.

A “fault” could thus result from an act in contravention of Libyan law, given that a reasonable person is expected to act under the law. Or an act that is not unlawful but nevertheless falls short of the standard expected of an ordinary individual. In accordance with the common person standard as set out by Dr El-Sanhouri, intent to commit the harmful act or the harm itself is not required to hold someone liable under Article 166 of the Civil Code.

Ordinary Person

The judge will examine the facts at hand and determine whether the person acted as an “ordinary person.”

In determining an ordinary person’s appropriate standard of behaviour, a Libyan court will consider whether the damage was a natural result of the defendant’s act. It is noted that although the concept of foreseeable harm is not applied explicitly, this consideration may come into the above analysis. If the defendant’s fault and causation are established, the defendant shall be responsible for the damage.

A fault, namely a deviation in a normal person’s behaviour, may also occur when someone is exercising a right or a license in an abusive manner. There is a general agreement among scholars and judges that someone is also at fault when s/he deprives a person of a right or a privilege protected by the law.

The majority of cases concerning Article 166 relate to acts rather than omissions. However, the facts of every case should be examined carefully by the court. Failure to perform accordingly may constitute a fault if there is a duty to act in a certain way while facing a specific situation. A judge may then find that by failing to act, a person failed to meet the standard of an ordinary person under the given circumstances.

Article 166 of the Libyan Civil Code

Article 166 of the Libyan Civil Code focuses (Tort under Libyan Civil Law) on the nature of the harmful act. The Libyan Civil Code is not concerned with the degree of likelihood of the harmful event occurring. In analysing the nature of the act, two principles apply under Libyan law, both in the Libyan Civil Code and the legal commentaries of El-Sanhouri; the principle of (1) the deviation from the behaviour of an “ordinary person” and (2) the age of legal discretion.

Dr Mohamed Karbal is licensed to practice law in Libya, New York, and Washington D.C. He served as an expert witness on Libyan law. Karbal & Co is a full-service international law firm that serves the needs of businesses and governments in Libya and Washington D.C.

Disclaimer: Every effort has been made to ensure the accuracy of this publication at the time it was written. It is not intended to provide legal advice or suggest a guaranteed outcome as individual situations will differ, and the law may have changed since publication. Readers considering legal action should consult with an experienced lawyer to understand current laws and how they may affect a case. For specific technical or legal advice on the information provided and related topics, don’t hesitate to contact the author.

Contribution to the World Bank’s “Doing Business 2021” Publication

Dr. Mohamed Karbal contributed for the second time to the World Bank Group’s flagship annual publication “Doing Business 2021.” Doing Business publication is a comparative law study that measures regulations that enhanced business activity using quantitative indicators for 190 economies.

More on the “Doing Business” publication can be found here.

Doing Business world bank 2021 certificate

Check Also: Awarding Lost Profits in International Investment click here

Awarding Lost Profits in International Investment Disputes

Awarding Lost Profits in International Investment Disputes

Dr. Mohamed Karbal is licensed to practice law in Libya, New York, and Washington D.C. and served as an expert witness on Libyan law for Tekfen-TML Joint Venture v. Man-made River. Karbal & Co is a full-service international law firm that serves the needs of businesses and governments in Libya,  Washington D.C. and Turkey.

For more information on our legal services relating to Libyan law, please visit our page.

Introduction

Tribunals, whether national or international, exercise discretion when awarding lost-profits claims since such claims involve complex economic and financial data.  In lost-profits claims, the common practice is to award claimants damages to place the claimant in the same pecuniary position they would have been in had the contract been performed.  However, in general, tribunals use various methods to calculate lost-profits such as the “Benchmark” and the “Before and After” methods. 

Calculating lost-profits is complex and has resulted in courts awarding damages for lost-profits inconsistently or arbitrarily. This article will examine and compare how two tribunals analyzed the facts and explain the methodology and reasoning it relied on to issue its damages in lost-profits claims. 

In this article, we will review the case of PSEG Global Inc. and Konya Ilgin Elektrik Uretim ve Ticaret Limited Sirketi v Republic of Turkey[1] (“PSEG v Turkey”) as decided by the International Centre for Settlement of Investment Disputes (“ICSID”) in applying Turkish law.  As a comparison, we will discuss the case of Mohamed Abdulmohsen Al‐Kharafi & Sons Co. v. the State of Libya, et al.[2], which was decided under the Unified Agreement for the Investment of Arab Capital in the Arab States (Unified Agreement) and applied Libyan law. 

The ICSID

PSEG v Turkey

​​​​​​ As the ICSID is considered “the international body” designated to arbitrate and settle international investment disputes arising between investors and states, the ICSID has tried hundreds of cases on various procedural and substantive topics ranging from decisions on provisional measures to decisions on annulment of agreements, and matters relating to lost-profits. 

Background

In PSEG v Turkey,PSEG Global applied to the Turkish Ministry of Energy and Natural Resources in 1994 to build a lignite-fired thermal power plant in Turkey. Authorization was granted in 1994 to prepare a feasibility study which was submitted in early 1995, and the project was approved late that year. The Implementation Contract required PSEG to conclude several agreements and protocols, most notably the Energy Sales Agreement, the Fund Agreement, and the Treasury guarantee ICSID arbitration.[3] After the Concession Contract was signed, a performance bond for USD 8.04 million was posted by PSEG on February 23, 1999,[4] which was terminated at a later time.

In its claim, registered with the ICSID on May 2, 2002, the PSEG estimated the pre-construction costs to be in excess of USD 10.5 million, which included engineering and consultant studies, development costs, and legal fees.[5]  The Project envisaged thirty-eight (38) years of commercial operation and a total investment cost of USD 804.8 million.

Assessing Lost-Profits

Based on the experts’ reports submitted, PSEG proposed to the ICSID tribunal  (“ICSID Tribunal”) three approaches to assess the damages: the fair market value, the lost-profit valuation, and the actual investments made and out of pocket expenses incurred by the Project sponsors.[6] A claim by PSEG against Turkey was based on the lost-profit valuation approach and was calculated as the equivalent to the amount of profits that PSEG would have obtained under the Concession Contract. Using the lost-profit valuation approach, PSEG estimated its lost-profits to be USD 223.742 million, where the interest incurred on the lost-profits would amount to USD 334.756 million at the end of 2006.[7]

In return, Turkey argued that the PSEG should show a record of profits in addition to performance records. Turkey convincingly invoked the awards granted in AAPL159 and Metalclad,160, which required the plaintiff to show that it had a record of profits and a performance record. Turkey explained that the for awards under Wena161 Tecmed162 and Phelps Dodge163, the ICSID refused to consider profits that were too speculative or uncertain. Furthermore, Turkey noted that in cases where lost profits were awarded to plaintiffs, such as Aminoil, the claim was based on the fact that the plaintiff had a long history of operations.[8]

The ICSID Tribunal examined other ICSID decisions whose awards were granted based on the precedent in Aucoven.  The PSEG Tribunal concluded that previous ICSID tribunals were “reluctant to award lost profits for a beginning industry and unperformed work.” As decided in Aucoven, the PSEG Tribunal added that compensation based on the lost-profits, is “normally reserved for the compensation of investments that have been substantially made and have a record of profits.”  Otherwise, compensation for lost-profits is “refused when such profits offer no certainty.”[9]

PSEG argued that its claims are based on contractual arrangements “that establishes the expectation of profit at a certain level and over a given number of years.” An identified period of investment specified in a contract renders calculating future profits an easy task.  On the contrary, the PSEG Tribunal considered that long term contracts subject to adjustment mechanisms and other possible variations with time were the “most difficult if not impossible to calculate such future profits with certainty.”[10]

In explaining the basis for its decision not to award PSEG lost-profits, the PSEG Tribunal stated:

Even assuming that none of those difficulties existed, in this case the exercise becomes moot because the parties never finalized the essential commercial terms of the contract, and as a result neither could the additional agreements concerning the sale of electricity, the Fund payments and the Treasury guarantee be finalized.

Relying on cash flow tables that were a part of proposals that did not materialize does not offer a solid basis for calculating future profits either.[11] The future profits would then be wholly speculative and uncertain. By definition, the concept of lucrum cesans requires in the first place that there is a lucrum that comes to an end as a consequence of certain breaches of contract or other forms of liability. Here such an element is not only entirely absent but impossible to estimate for the future.[12]

As a result, the PSEG Tribunal awarded PSEG compensation in the amount of USD 9,061,479.34 out of the claimed estimated lost profits of USD 223,742,000 with interest at the six months average LIBOR rate plus two (2) percent per year for each year during which amounts are owing to be compounded semi-annually.  In addition, Turkey was ordered to pay sixty-five (65) percent of the costs of the arbitration and legal costs and fees of USD 20,851,636.62.

Unified Agreement for the Investment of Arab Capital

Mohamed Abdulmohsen Al‐Kharafi & Sons Co. v. State of Libya, et al

Signed on November 26, 1980, and entering into force on September 7, 1981, the Unified Agreement for the Investment of Arab Capital in the Arab States (“Unified Agreement”) is a regional agreement limited to the Arab States which are willing to solve investment claims raised by an Arab national in its territory.  The Unified Agreement called for the establishment of an Arab Investment Court (“Al‐KharafiTribunal”), and the draft statutes of the said court came into force on February 22, 1988.

Even though it was decided in 2013, the case of Mohamed Abdulmohsen Al‐Kharafi & Sons Co. v. the State of Libya, et al. (“Al‐Kharafi v Libya”) is considered the first arbitral award issued under the Unified Agreement and was the first to apply Libyan law.

Background

In 2006, the Libyan Ministry of Tourism approved an investment project proposed by Al-Kharafi & Sons Co. for the construction and operation of a tourism complex (the “Project”). Shortly thereafter, the Kuwaiti company signed a Built-Operate-Transfer contract with the Libyan Tourism Development Authority for a ninety (90) year land-leasing contract comprised of twenty-four (24) hectares of state-owned land in Tajura, a city in the Tripoli District. The Project was to build a small town consisting of a four-star hotel, hotel apartments, residential apartments, townhouses, villas, a shopping mall, offices, public areas, and a beach totaling 69,500 sqm.    The Project was to start in 2007, but construction work never commenced. The Ministry of Economy annulled the project’s approval in 2010 and as a result, the land-leasing contract was also invalidated.

Expert Witness

At the beginning of the dispute with the Libyan government, Al‐Kharafi was satisfied to receive USD 5 million as compensation for the loss. However, the amount of compensation was revised until it reached the amount stated in the expert’s reports submitted by Al-Kharafi.  The submitted financial reports prepared by international financial experts showed that the value of the lost-profits during the investment period of the Project covered by the contract ranged between USD 1.74 million and USD 2.55 million.

All financial experts used the data and documents provided by Al-Kharafi to prepare their scientific and unbiased reports on the estimation of the company’s lost profits for eighty-three (83) years according to commercial practice and the international accounting and financial standards.

Al‐Kharafi Tribunal’s Reasoning  

The Al‐KharafiTribunal described the experts’ reports submitted by Al-Kharafi as being:

prepared by highly renowned, specialized and expert accounting firms with vastly reliable and credible research, studies, and results… All financial experts have built on the data and documents provided by the Plaintiff to write their scientific and unbiased reports on the estimation of the company’s 83-year-long lost profits, pursuant to the commercial practice and the international accounting and financial systems.[13]

In its decision, the Al‐KharafiTribunal failed to analyze the reasoning and analysis contained in the experts’ reports. The Al‐KharafiTribunal instead reached its decision for the plaintiff based on the following reasons:

  • The experts’ “reports are considered among expertise works that the defendants could have objected to and refuted by means of response expert reports prepared by specialized firms having an excellent professional reputation.”
  • “The defendants did not submit any response expert report to refute the content of the reports submitted by the [Al-Kharafi].”

The Al‐KharafiTribunal added, “the [d]efendants’ discussion of these four reports was limited to the form and did not tackle the details and calculations through the submission of reports characterized by the same level of expertise as the submitted four reports.”[14]

Concerns with the Experts’ Reports

Instead of questioning the experts’ method of forecasting the lost profit of the Project which had never commenced, the Al‐KharafiTribunal asked the same question twice framed differently to the two experts.   The Al‐KharafiTribunal first asked if the damages mentioned in the reports were real and certain lost opportunities and constitute a lost profit.”[15]  The experts replied that the lost profit was certain and represents the minimum.” 

After the Al‐KharafiTribunal repeated the same question (for an unknown reason), and the experts’ answer was, “[t]hese are certain profits that the Plaintiff has lost and which it would have otherwise certainly realized in the normal conditions currently prevailing in Libya.”[16] In cases where a court rewards the claimant compensation for lost-profits based on the breach of a contract  if for goods and/or services, the contract would refer to the amount of items/service to be provided and the corresponding price.

For the case at hand, the Al‐KharafiTribunal appears to have failed to review the facts. The case did not involve the purchase and sale of products or the provision of services: The case involved a land lease on which the Project will be built and there was no guarantee on the number of clients would seek the service provided by Al-Kharafi. Furthermore, the Project never commenced.    

In Al-Kharafi v. Libya, the experts relied on the fair market value based on the “conditions currently prevailing in Libya.”  The experts calculated how much profit the Project would generate during the first year and later multiplied such a figure by the number of years remaining of the land lease agreement (i.e., eighty-three).

The experts, in theory, should have obtained a performance record to establish that the Project is generating a profit in order for Al-Kharafi to be awarded damages of lost-profits. Logically, Al-Kharafi should not have been awarded loss-profits as the Project did not have a performance record.

The Status of Al-Kharafi v Libya

Since Al-Kharafi v Libya’s award was published in 2013, both parties became involved in legal proceedings.  Al-Kharafi filed for proceedings to seize Libyan properties around the world, as an attempt to enforce the award. In 2015 and 2016, Al-Kharafi Construction Group failed to take ownership of the luxurious Libyan plane, previously used by Kaddafi.  The aircraft was on a maintenance program in France.

On the other hand, the Libyan authorities filled legal proceedings with the Egyptian courts.  At first, the Cairo Court of Appeal rejected the Libyan request to annul the award in Al-Kharafi v. Libya.  The Court of Appeal’s decision was appealed before the Supreme Court, who in December 2019 overturned Cairo’s Court of Appeal decision and ordered rehearing.   

In June 2020, the Cairo Court of Appeal found that the arbitral award should be set aside. The court based its decision to annul the award on two significant issues.  The first issue was that the judicial system, from a public policy view, is always entitled to examine and ensure that the core procedural standards, such as standards of fairness, have been adhered to by the arbitral trial.

The second issue was the judges are entitled to evaluate whether the award was based on reasons and conclusions that represent a clear and real violation of public policy.  The court concluded that the award was unproportioned to the actual damage, especially when Al-Kharafi, at the beginning of the dispute, was only demanding five (5) million dollars as compensation. 

This article was first written in 2018.


[1] PSEG Global Inc. and Konya Ilgin Elektrik Uretim ve Ticaret Limited Sirketi v Republic of Turkey, ICSID Case No. ARB/02/5

[2] Mohamed Abdulmohsen Al‐Kharafi & Sons Co. v. State of Libya, et al. Final Award Document downloaded from http://www.italaw.com

[3] Id. para.24.

[4] Id. para.21.

[5] PSEG Global Inc. and Konya Ilgin Elektrik Uretim ve Ticaret Limited Sirketi v Republic of Turkey, ICSID Case No. ARB/02/5, para.19.

[6] Id. para.283.

[7] Id. para.285.

[8] Id. para.311.

[9] Id. para.310.

[10] Id. para.312.

[11] Id. para.313

[12] Ibid.

[13] Mohamed Abdulmohsen Al‐Kharafi & Sons Co. v. State of Libya, et al. Final Award Document downloaded from www.italaw.com p.378.

[14] Ibid.

[15] Ibid.

[16] Ibid.

Identifying Government Entities Under Libyan Administrative Law

After the fall of Gaddafi’s regime, foreign companies which had performed works in Libya rushed to the international tribunals seeking compensation.  Since the counterparty in agreements for public procurements in Libya is a public entity established by the Libyan government, foreign companies file their claims against both the government entity and the state of Libya. It is understood that the aim of such a litigation strategy is to have the state of Libya and the government entity jointly liable.

International Administrative law firms in Tripoli Libya
International law firm in Tripoli Libya

Since I served asexpert witness on Libyan administrative and civil law on behalf of the Respondent  in Tekfen-TML Joint Venture v. Man-made River Authority and the State of Libya and my law firm was retained to advise the Respondent, it is worth mentioning that the said case dealt with the issue of defining a “government entity”. The case was first brought before the International Chamber of Commerce in Geneva, Switzerland. 

The Arbitral Tribunal decided not to hear the allegations against the State of Libya based on its conclusion that the Man-Made River Authority was not a “government entity.” As a result, the Arbitral Tribunal determinated that the State of Libya is not responsible for violations committed by the Man-Made River Authority and by a majority decision, dismissed the claim against the State of Libya.

The Arbitral Tribunal upheld the claim against the Man-made River Authority in part. It awarded the Tekfen-TML Joint Venture sum of USD 40,134,129 payable immediately by the Man-made River Authority, after setting-off a counter-claim of USD 354,520.

The Arbitral Tribunal (by majority decision) found that the Man-made River Authority is an independent legal entity under Libyan law.  Therefore, the Arbitral Tribunal rejected Tekfen-TML Joint Venture’s notion that the Man-made River Authority was an organ of the Libyan state or an auxiliary of the state, and thus identical to the state.

Under Libyan law, the Libyan Supreme Court (the “Supreme Court”) considers  various factors to determine whether an entity is a “state entity” or a “state organ.” The Supreme Court examines, inter alia, whether the entity/organ:

  1. has an independent legal personality;
  2. is chaired by a minister or under the direct influence and supervision of a minister;
  3. exercises a legislative function such as enacting policies for public sectors;
  4. serves public needs, i.e., providing health service, education, food products, etc.;
  5. recruits employees to be governed by the Civil Service Code or other laws or special policies and procedures.
  6. was intended by the legislature to be a part of the government and exercise public functions or whether the legislature intended the entity to operate as a commercial company.

The Test

In practice, the Supreme Court did not rely merely on the “independent legal personality” factor alone  to determine whether an entity is a “state entity.” An example of a precedent where the Supreme Court considers the Test is its decision in Cassation No. 296/24 dated 25 April 1978 where the Supreme Court concluded that the Agriculture Development Board (“ADB”), which had an independent legal personality, is a government entity. The Supreme Court reviewed and analyzed in detail the power and practices granted to ADB by Law 146/1972 which established the ADB.

As mentioned by the Supreme Court, and based on the Law 146/1972, the ADB:

  1. has a separate legal personality;
  2. is chaired by the Minister of State for Agricultural Development;
  3. has a mission to participate in the development of the national economy in the agriculture sector by increasing agricultural production to ensure self-sufficiency in grain, meat and other protection of natural resources, etc.;
  4. establishes general policy for agricultural development in areas listed in Law 146/1972; and
  5. oversees the integrated agrarian development plan.

In its conclusion, the Supreme Court ruled that

the Agricultural Development Board, which enjoys legal personality, administrative authority, which is a part of public authority, and participates in the development of the national economy in the agriculture sector, should be considered as one of state public facilities…

Dr. Mohamed Karbal is licensed to practice law in Libya, New York, and Washington D.C. and served as an expert witness on Libyan law for Tekfen-TML Joint Venture v. Man-made River. Karbal & Co is a full-service international Administrative law firm that serves the needs of businesses and governments in Libya,  Washington D.C., and Turkey. For more information on the legal services we offer on Libyan law, please visit our page dedicated to Libyan law.

Rebalancing Administrative Contracts under Libyan Law

by Dr. Mohamed Karbal

Dr. Mohamed Karbal is licensed to practice law in Libya, New York and Washington D.C. and served as an expert witness on Libyan law for Tekfen-TML Joint Venture v. Man-made River. Rebalancing Administrative Libyan Law is explained in details here.

We are offering our services as a Legal Consultation and if you’re establishing business in Libya you can hire us as a lawyer.

Under the Libyan Civil Code, a Libyan tribunal is empowered to adjust or rebalance a civil contract to “restore its equilibrium” as a result of extraordinary or unforeseen events if one party may still continue the performance of the contract.  A Libyan judge may rebalance the contract due to unforeseen events or circumstances (La théorie de l’imprevision).

The doctrine of unforeseen events or circumstances is also applicable to administrative contracts.  Article 105 of the Administrative Contract Regulations (“ACR”) requires an administrative unit to rebalance the contract in the case of unforeseen circumstances that render performing an obligation under the contract difficult, but not impossible.

Rebalancing Administrative Libyan Lawyer

The Libyan law empowers a tribunal to rebalance a contract, whether civil or administrative, only when the contract is “excessively onerous.” However, if the contract is impossible to perform, it is illogical to adjust the terms of the contract. The contract will be terminated in this case.  

The doctrine of unforeseen events or circumstances (La théorie de l’imprevision) is provided under Article 104 and 105 of the ACR and is detailed in Art. 147(2), and Art. 657(4) of the Libyan Civil Code.

Art. 147(2) of the Libyan Civil Code states:

When … as a result of exceptional and unpredictable events of a general character, the performance of the contractual obligation, without becoming impossible, becomes excessively onerous in such way as to threaten the debtor with exorbitant loss, the Judge may, according to the circumstances, and after taking into consideration, the interests of both parties, reduce to reasonable limits the obligations that have become excessive. Any

agreement to the contrary is void.

The rebalancing of a contract under the Libyan Civil Code is also applicable to lump-sum contracts.  Article 657(4) of the Libyan Civil Code, which deals with lump-sum contracts states: 

As a result of exceptional events of a general character which could not be foreseen at the time of the contract was concluded, the economic equilibrium between the respective obligations of the master and of the contractor breaks down, and the basis on which the financial estimates for the contractor were computed has subsequently disappeared, the judge may grant an increase of the price or order resiliation of the contract.

For administrative contracts, article 105 of the ACR provides:

If general exceptional conditions occur, being unforeseeable, as would make execution of the obligation burdensome threatening the contractor with serious loss, without [being] impossible, the contractor shall have right to compensation for recovering the contract financial balance to the reasonable limit.”

In summary, the doctrine of unforeseen events or circumstances requires that an event must (i) be exceptional and unpredictable, (ii) of general nature and (iii) occurs during the performance of the obligation under the contract.

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GCC UAVAT: The UAE to implement VAT in 2018 What we know so far

GCC UAVAT: The UAE to implement VAT in 2018 What we know so far

By Karbal & Co, Legal Consultants

Last updated: 27 April 2017

With the Gulf nations aiming to diversify their economies through the implementation of a VAT in 2018, what can we expect?

In recent years, the Gulf States have sought measures to diversify their economies to reduce their oil dependency and seek alternative means of state revenue.

In a unified effort, six GCC UAVAT countries have announced plans to simultaneously enact a VAT law by January 1, 2018 under the Unified Agreement for Value-added Tax (“UAVAT”). The VAT shall levy funds at a rate of 5% for both goods and services that are sold or provided to consumers within the Gulf States.

GCC UAVAT By M. Karbal

When shall the law come into force?

Although the legal framework shall be agreed upon between the countries by January 1, 2018, the VAT law shall be implemented in the GCC countries between January 1, 2018 and January 1, 2019. The UAE has stated in particular that it shall implement the law by January 1, 2018.  

To whom is the law applicable?

Businesses

Not all businesses operating in the UAE will be required to pay a value-added tax. According to a statement issued by the UAE Ministry of Finance, companies whose annual revenue exceeds AED 375,000 shall be required to register with the relevant authorities and pay the tax. However, companies whose annual turnover is between AED 187,000 and AED 375,000 have the option to register. Although the 5% VAT may be applied to all industries operating within the UAE, specialists believe that certain industries may be exempt, including water and energy (oil & gas and renewable energy). Additionally, international trade between GCC member states is likely to call for special statutory exceptions to facilitate trade between the countries. It is also unclear whether the VAT will be applied to imports. The details of the legislation for each GCC member state remain to be seen.

Consumers

Concerns have been raised about the applicability of the VAT to consumer goods. Reports indicate that in its essence, the VAT aims to tax tobacco, energy drinks and soft drinks. A list of 100 items shall be issued stating items that shall be exempt from the VAT tax, including healthcare, basic food items and education fees.

Measures taken to enact law

Member states in the GCC shall have from January 1, 2018 to January 1, 2019 to implement the legislation internally by enacting their own laws. It is therefore presumed that each member state shall impose its own specific details on VAT compliance requirements for companies.

Although the UAE has yet to release the general framework for the VAT law, reports indicate that the UAE has drafted a law internally. In anticipation of the implementation of the new GCC VAT law, the UAE established a Federal Tax Authority which shall enforce federal tax laws and levy taxes. The Federal Tax Authority shall also perform tax audits on firms and issue penalties in the case of non-compliance.

Significance of new tax law on businesses operating in the Emirates

Many questions raised by businesses operating in the Emirates concern compliance for the highly anticipated tax law. Compliance with the legislation will most likely include periodic reporting requirements, such as quarterly or monthly filings for VAT returns. A predicted effect of the tax law shall be an increase in detailed record keeping for businesses. Furthermore, if companies shall be expected to periodically remit funds to the Federal Tax Authority, companies may be faced with issues concerning cash flow management.  

Looking for tax law services in the UAE or Libya? Please visit our Contact us page to connect with us. 

Karbal & Co is an international law firm with offices in Dubai, United Arab Emirates and Tripoli, Libya. Our corporate law practice advises clients on all ownership, corporate governance and regulatory matters. Our experience includes setting up companies, ownership agreements and drafting articles of association for various different companies in the information techonology, medical and oil & gas industry.

Structuring Islamic finance transactions in the Shipping Industry of the UAE

Structuring Islamic finance transactions in the Shipping Industry of the UAE

By Nabilah Karbal, specialist in Islamic Finance and Associate at Maritime law firm Karbal & Co in Dubai, United Arab Emirates.

Islamic finance is a branch of finance that raises capital and provides financial services in compliance with Islamic rules and principles. Islamic finance not only establishes rules for providing financial services, but also legal rules for commercial transactions, such as sales.

Seeing as Nasdaq Dubai is the largest exchange for sukuk globally, and since the Dubai Maritime Vision 2030 aims to “establish Dubai as a leading Global Islamic Maritime Economy,” Dubai is rapidly growing as a world Islamic financial hub.

Structuring Islamic finance transactions

This article briefly examines (I) the specific contractual rules required for a valid Islamic finance transaction and (II) the commonly used Islamic finance products in the maritime industry.

(I)                Contractual rules specific to Islamic Finance

Islamic finance contractual rules

The purpose of Islamic finance contractual rules is (1) to encourage development and (2) to ensure that transactions between parties are sound and fair. Islamic finance requires that the parties to a contract be of sound mind, and that the contract be formed on the basis of offer and acceptance. Furthermore, the terms of the acceptance by one party must mirror the terms of the offer proposed. The basic contractual rules of Islamic finance transactions therefore reflect the same contract law rules of common-law jurisdictions, thus making the Islamic finance contracts enforceable in many western jurisdictions.

Like many of the rules throughout various jurisdictions that aim to protect consumers, Islamic finance requires the seller to fully disclose all known flaws of goods that may not be evident to a buyer. Parties must also avoid any misrepresentations, and a seller may not take advantage of a buyer’s ignorance.

Furthermore, the seller must disclose the profit made from the transaction by disclosing the actual cost incurred (i.e., the cost of acquiring, producing or manufacturing the good). A permissible exception to this requirement is a musawama transaction, whereby a buyer agrees not to know the profit earned by the seller.

Check also: Liability for Collisions under UAE Maritime Law

Prohibitions in Islamic finance transactions

Islamic Finance transactions must be based on honesty and fair trade. Profiteering and cheating are therefore impermissible or haram. Furthermore, certain practices of the financial services industry of western jurisdictions are prohibited in Islamic finance. In addition to the prohibition on transactions concerning impermissible goods (i.e., investing in the production or sale of pork and alcohol), one of the absolute prohibitions in Islamic finance is the prohibition of riba.

There are two categories of Riba; The first is the act of charging interest on a loan (Riba al Nassiyah), and the second is the compensation received by one party which is in excess of the value of the underlying transaction (Riba al Fadl). The act of charging interest in addition to the principal on a loan is therefore impermissible in Islam. Islamic finance therefore provides alternatives to conventional financial products that use riba through various Islamic finance products.

Transactions must also avoid gharrar, or uncertainty. All terms of the contract, such as date of delivery in a sales contract, must be defined in order to avoid uncertainty. However, price need not be agreed upon in order for the contract to be valid if the price can be readily determined on the market. A seller must also own the property that is the object of the contract prior to the conclusion of the sale or transaction in order to avoid gharrar. Ownership can be either constructive or actual.

Finally, maysir, or speculation, is a major prohibition in Islamic finance. The interdiction therefore prohibits the use of derivatives in Islamic Finance transactions.  

(II)             Common Islamic finance products used in Ship Finance

Amongst the various Islamic finance products available, certain products are well-suited to the needs of the shipping industry. The following are the most popular Islamic finance products used in ship finance:  

Ijara- Operating and Finance leases

Ijara is the Arabic word for “rent.” It is defined as a bilateral usufruct contract, or contract which grants one party the right to use the property of another party for a specific duration. In order to avoid gharrar, a lessor must therefore own the asset before entering into a lease contract with a leasee.

The ijara contract can be structured as either an operating lease or a finance lease known as ijara wa iqtina.

Ijara wa iqtina allows a leasee to pay periodic rental payments to the owner of the property with the promise to purchase the property at the end of the lease term. In the shipping industry, ijara wa iqtina is therefore used to finance the purchase of ships and other marine assets. Islamic finance also allows transactions to be structured with a security or mortgage in order to protect the lessor from the leasee’s default.

Istisna’a – Project finance

Istisna’a is a commonly used Islamic finance product which enables a bank to act as an intermediary between a customer and a manufacturer hired to produce or construct an asset. It is mainly used for project finance or working capital as an alternative to a loan.

In practice, a customer approaches a bank in order to construct property or manufacture goods. The bank pays for the construction of the project, and ownership of the finished product is transferred to the bank upon completion. In the maritime industry, istisna’a is predominately used in ship building. It enables a bank to exercise pre-delivery financing of ships under construction.

Upon completion of construction, ownership may be transferred from the bank to the customer. The customer has the right to pay for the property either (1) in installments, or (2) in whole at the end of the construction.

Murabaha – Cost-plus financing

Another commonly used Islamic finance product is murabaha, which is the Islamic finance equivalent of cost-plus financing in conventional banking.

Murabaha is often used for acquiring assets and working capital. In the maritime industry, murabaha would therefore be used to acquire ships and other marine assets.

In a murabaha transaction, the bank enters into a contract to acquire an asset on behalf of a customer. The bank acquires ownership of the asset in order to avoid gharrar. The rules of Islamic finance allow a bank to acquire the property in its name, or to appoint an agent to act on the bank’s behalf to acquire the asset. The bank may even appoint the customer as an agent.

After the bank acquires the asset, the asset is immediately transferred to the customer. The customer then pays for the asset by a deferred payment on a date that is pre-agreed upon between the two parties.

Like other Islamic finance transactions, banks may protect themselves from loss through mortgages, collateral (rahm), and/or guarantees (kafala).

Sukuk – Bond

Sukuk is considered the fastest growing and most popular Islamic finance product on the market. The growing popularity can be accredited to the fact that, like bonds and shares, sukuk certificates are securities that can be publically-traded on a secondary market (exchanges). The popularity is also due to a sukuk’s capability of raising large amounts of capital.

Sukuk can be defined as a beneficial interest or proof of ownership in an underlying asset whereby a sukuk holder receives periodic payments based on the performance of the underlying asset. Sukuk is often equated to bonds in conventional banking. However, many characteristics clearly distinguish sukuk from conventional bonds. For example, periodic payments based on performance of the underlying asset differ from coupons attached to a conventional bond, as coupons allow a bond holder to receive interest payments. Furthermore, due to the ownership interest a sukuk grants a holder of its certificates, a sukuk can be classified as a hybrid security that combines the characteristics of both bonds and shares (debt and equity).  

There are various forms and structures of a sukuk, however ijara sukuk appears to be a popular form of sukuk in the maritime industry. In a typical sukuk transaction, the obligor, or the party who wishes to raise funds, approaches an Islamic bank for funding. The Islamic bank then establishes a special purpose vehicle (“SPV”). The SPV issues the sukuk certificates, which are title deeds of equal shares for leasing project, to shareholders in exchange for capital. The obligor transfers the property to the SPV in exchange for the capital provided by the sukuk holders. The obligor enters into a rental agreement with the SPV, and agrees to pay periodic rentals on the property, with a promise to purchase the property at a maturity date. The certificate shares are only issued once the obligor transfers the property to the SPV. Seeing as the certificates represent ownership, the certificates grant the holders the right to receive rental fees paid by the obligor and dispose of their property affecting the lessee’s rights.