Karbal & Co

Liability For Collisions Under UAE Maritime Law Explanation

Liability For Collisions Under UAE Maritime Law Explanation

Hosting one of the world’s largest ports, Dubai has rapidly expanded to become a leading maritime hub. As an expected consequence of the growth of Dubai’s maritime industry, the number of marine accidents has steadily increased over the past few years, as Dubai Port police have reported that there were 53 maritime accidents in 2013, 37 accidents in 2012, and 34 accidents in 2011. According to Marasi News, 9 of the 37 accidents that had taken place in 2013 were collisions.

Collisions cause a variety of  adverse consequences, ranging from  fires and explosions to loss of cargo and damage to the vessel, marine pollution, and death or injury sustained by individuals such as members of the crew. In the most extreme cases, the aforementioned effects may be coupled in the vessel sinking. Depending on the severity of the effects, damages for collisions may cost those who are liable millions in losses. The major area of concern during a collision is the allocation of liabilities amongst the parties implicated.

UAE Maritime law

The purpose of this article is to address the legal issues surrounding fault and liability that arises from a maritime collision that occurs within UAE territory by applying the applicable legislation, the UAE Maritime Code of 1981(Maritime Code).

Definition of a collision under Maritime Law

UAE Maritime law defines a collision an accidents that occur between vessels, regardless of whether physical contact has occurred; the UAE law allows victims to recover from tortfeasors even if no physical contact has occurred where  damage by an act or failure to act or violation of navigation rules is caused to another vessel, the goods or persons aboard the vessel (Article 318/2 of Maritime Code).  In case a collision occurs, persons or cargo aboard a ship or an innocent third party involved in the collision may recover for damages and losses suffered. However, the physical contact between ship and structures, such as a bridge or dock, is not a collision, and in fact constitutes tortious liability. 

Determining liability of a vessel

Like many other jurisdictions, a collision occurs due to either a fault of a vessel, force majeure, or unidentified cause. Determining the allocation of liability is determined by assessing which party is at fault.  If a Court determines one vessel is at fault for the collision, the owner of the vessel will be held liable for paying damages to successful claimant(s) (Art. 320 of Maritime Code). The UAE Maritime Law code provides for joint and several liability for collisions where more than one vessel is at fault. If a Court finds both vessels jointly at fault, then the Court will accord liability to ships in proportion to the amount of blame of each vessel.  (Art. 321 of the Maritime Code). Incidents may arise where Courts are faced with the difficulty of determining the percentage of  fault of the vessels, such as when evidence is vague and does not permit the court to determine who is at greater fault. In this case, the courts will find  all vessels involved in the collision equally at fault.     

Force majeure is the commonly used legal principal to describe an unknown cause or an irresistible force outside of the control of either party which causes a tort. Under maritime law, examples of force majeure include forces of nature, such as a hurricane or flood, which leads to a collision between vessels. In case of a force majeure, the UAE Maritime Code explicitly exempts each party from liability to the other. (Article 319 of Maritime Code) Instead,  a vessel shall only be responsible for its own losses.


As it is mentioned above, the ship-owner of a vessel that is found at fault for the collision shall be liable for paying damages to the victims of the collisions.

In dividing damages when more than one vessel has determined to be liable in a collision, , Article 321 of the UAE Maritime Code provides that damages will be determined and divided in proportion to the fault of more than one vessel. In effect, each vessel shall only remain liable for damages in in proportion to the percentage of the fault.  Furthermore, the UAE recognizes joint and several liability, which allows a victim to recover the totality of their damages from one of the defendants. (Article 321/3 of the Maritime Code).   Joint and several liability is limited, as vessels will only be jointly and severally liable for death or personal injury. if the damages relate to death or personal injury. Under UAE law, a charterer may also be required to indemnify the ship-owner for any claims for damages in a collision caused by the ship to third parties. (Art. 255of Maritime Code)

Check also: UAE Commercial Companies law and legal reforms

UAE Commercial Companies Law and legal reforms

UAE Commercial Companies Law and legal reforms

By Nabilah Karbal, Associate at Karbal & Co’s Dubai Office. 


Federal Law No. 2 of 2015 “The New Commercial Companies law” (CCL), which came into force on July 1, 2015, replacing the Federal Law No. 8 of 1984. The purpose of the new legislation was to bringing the UAE up to speed with corporate legislation currently enacted in many developed nations. The New CCL requires that corporations subject to the legislation amend their articles of association and memoranda to comply with the legislation’s new provisions. Failure to amend a corporation’s articles of association before June 30, 2016 will result in the dissolution of the company.

The purpose of this article is to highlight certain changes and new additions enacted by the new legislation, and what corporations and shareholders need to know.

UAE Companies Law and legal reforms

Applicability and scope of the New Commercial Companies Law

The scope of the new legislation covers a variety of areas of ownership and corporate governance rules for different company models and concerns the protection of shareholders and fiduciary duties of directors.  

Although the CCL suggests that it applies to all commercial companies, the CCL is not applicable to free zone companies (Article 5 of the CCL). Article 5 of the CCL will only apply to free zone companies if they operate outside of their designated areas.

Furthermore, Article 4 stipulates that certain companies are not subject to the new CCL. These companies include

(1)   Companies that the federal cabinet had specifically exempted from application due to resolution;

(2)   Companies that are wholly or partially owned by the federal or local government; and

(3)   Companies of which the federal or local government owns 25% or more and which operate in the oil, gas, and power sectors.

Check Also: Medical Malpractice in the U.A.E

General rules

Foreign ownership: Restrictions codified

The UAE provides a system of ownership where foreign ownership is restricted to 49% of the company’s shares and where the remaining 51% is required to be owned by an Emirati national. With the new CCL, Article 10(1) provides that the restrictions must be strictly observed, as any share transfers to foreign nationals greater than 51% will be invalidated. With the original CCL, this provision was nonexistant.

Fiduciary duties (the duties of Directors and Managers)

Fiduciary duty can be defined as a duty owed by an agent to a principal. For a corporation or business entity that is an independent person, directors and managers owe a fiduciary duty to the corporation. Corporate laws of jurisdictions of developed nations impose a duty of ordinary care and prudence on a director and manager. Article 22 of the New CCL imposes the duty for directors to act with the care of an “precise person.” Prior to the New CCL, fiduciary duties of directors and managers had not been codified.

In its attempts to protect corporations, Article 24 of the new CCL provides that all provisions exempting directors and managers from personal liability are void.

A form of a “duty not to compete” requirement has been enacted in Article 86 of the New CCL, which applies specifically to limited liability companies. Article 86 stipulates that a director of a company is not allowed to manage or govern another company unless the director obtains the consent of the company for which she is already a director.

Updated Accounting Requirements

The Enron crisis is considered the event which highlighted the importance of the role of accountants. As a reaction, legislation in developed nations, such as Sarbannes-Oxley, set into force accounting requirements to which many jurisdictions now adhere.

In the UAE, accounting requirements were already in force prior to the New CCL. However, the New CCL brings accounting requirements up to international standards. Article 26 of the New CCL stipulates that business entities subject to the new legislation are required to retain accounts of books at their relevant head offices for five years. The aim is to give shareholders and directors an accounting of profit and loss for a given period.

Introduction of Holding Companies into UAE legislation

Although “groups” exist in the Emirates, Article 266 of the new CCL legally recognizes the existence of holding companies in the UAE. 

Rules applicable to Joint Stock Companies

Responsibility of board of directors

For both private joint stock companies and public joint stock companies, the board of directors shall be held accountable for compliance with corporate governance framework. Article 6 and 7 of the New CCL provides that failure for a director may result in a statutory penalty of up to 10 million AED.

Rules applicable to Private Joint Stock Companies

Corporate governance

The New CCL provides that the Minister of Economy shall issue resolutions concerning a corporate governance framework for companies with more than 75 shareholders.

Rules applicable to Public Joint Stock Companies

Corporate governance

The Securities & Commodities Authority shall issue the resolution regarding the corporate governance framework. The framework will include rules relating to the corporate governance applicable to the a public joint stock company. 


Modern securities regulation, such as Sarbannes-Oxley, provides rules on independent auditors. The New CCL provides that all public joint stock companies must have at least one or more auditors that are nominated by the board of directors. The new CCL further provides that all auditors must be thereafter approved by the general assembly.

Article 243 of the New CCL provides that the mandate of the auditor shall not exceed 3 successive years. The reasoning behind this is most likely the same as other western jurisdictions. A restriction on the employment of an auditor aims to ensure independence from the corporation, and genuine auditing of the books.

Protection of Minority Shareholders

Protection of a class of shareholders

In order to protect a specific class of shareholders, Article 170 of the New CCL provides that the class may seek to void any resolutions passed for or against the class. 

Petitioning the court against actions that are detrimental to a shareholder

Western jurisdictions provide certain safeguards to protect minority shareholders. Article 164 of the New CCL provides the possibility for a shareholder who owns more than 5% of total outstanding shares the possibility of petitioning the competent court of the Securities & Commodities Authority for any actions of the company (board of directors) that are against the interests of any of the shareholders. This condition is common place in many jurisdictions, such as New York, where shareholders with a 20% ownership share of a closed corporation may petition a court for dissolution for a number of reasons, i.e., reasonable expectation of governance.

Rules applicable to Limited liability companies

New rules for sole shareholders

Prior to the New CCL, the concept of a sole shareholder was non-existent in the UAE legislation. Article 71 of the New CCL recognizes the right of one natural person or a corporate entity to be a sole shareholder of an LLC.

Number of directors

Many jurisdictions require that the the articles of association or by-laws to stipulate the number of directors and managers of a company.  Article 83 of the New CCL requires that the number of directors to be set in the articles of association and a company’s memorandum.  

Valuation of shares for shareholders for non-cash consideration

Valuation of shares for shareholders is essential to equity ownership. The valuation enables shareholders to obtain an accurate value of the ownership for the purpose of purchase or sale of equity. Due to the importance of the valuation of equity within financial centers and seeing as Dubai is growing into a regional financial hub, we understand the need for the addition to UAE legislation.  

Article 78 of the New CCL provides that shares will be valued in non-cash consideration or “in-kind.” The valuation of the shares can be done in one of two ways, either (1) the shareholders agree to determine the value of their shares, which shall be approved by the Department of Economic Development, or (2) a financial consultant approves the value of the shares, where the value is also subject to approval by the Department of Economic Development.

The Authority of an Expert Opinion in Medical Malpractice Litigation

The Authority of an Expert Opinion in Medical Malpractice Litigation

The Authority of an Expert Opinion in Medical Malpractice Litigation: Expert opinions in litigation aim to shed light on a matter presented in a case and assist the court in its understanding the matter presented by applying knowledge of a specific study to the facts of the case. Expert opinions are extremely important, as they are often taken into consideration by a court in its ruling. Expert opinions may therefore lead the court to rule in favor of one party over another.

The purpose of this article is to examine the authority of the expert opinions of the High Committee on Medical Liability in medical malpractice litigation in the U.A.E.

Federal Law no. 10 of 2008 on Medical Liability regulates the liability of medical practitioners in the United Arab Emirates.  Article 15 of the Federal Law no. 10 of 2008 established the High Committee on Medical Liability (the “Committee”), which is made up of consultant physicians selected by the Cabinet.  “The Committee members are from the Ministry of Health, the Ministry of Justice, the Health Authority Abu Dhabi, the Health Authority Dubai, a professor from the School of Medicine, the Armed Forces Medical Services Directorate, the Ministry of the Interior Medical Services Directorate, Emirates Medical Association, and the private medical sector.”

The Authority of an Expert Opinion in Medical Malpractice Litigation

The Committee serves as a body of medical experts and it provides opinions upon the request of the public prosecution office, a competent court or a medical body.  The Committee’s report should address whether a medical error and harm had occurred and whether there is causation between the culpable act and harm.  

Due to the composition of the Committee, as well as how it is established and appointed by the Cabinet, one may consider that the Committee shall provide a holistic and accurate medical opinion.  The composition also brands the Committee as the most legitimate source of medical opinion since it was established by a federal law, unlike other experts who are appointed by the courts.

This cloak of legitimacy given to the Committee, in my opinion, led various judges to consider the Committee’s reports as the authority on the subject matter which should override any other report. 

Appeal no. 48-63-70/2013 (The U.A.E. Supreme Court)

This case involves charges filed against a gynecologist for medical malpractice which was filed before the competent criminal court and a court of first instance in Abu Dhabi.

The Court of First Instance requested the Committee to provide a report on the facts of the case.  The Committee’s report concluded that the gynecologist had committed medical malpractice.  In the meantime, the gynecologist submitted three expert opinion reports prepared by the head of the medical liability department of the Ministry of Health, the Medical Committee of Dubai Health Authority and a medical consultant.  All three reports concluded that the report submitted by the Committee was inaccurate and that there was no medical malpractice committed by the Respondent. Furthermore, the three reports concluded that the harm caused to the claimant was due to medical complications recognized within the medical community. 

However, the Court of First Instance relied on the Committee’s report and ignored reports submitted by the gynecologist. In relying on the Committee’s report, the Court of First Instance ruled that the gynecologist had committed medical malpractice and decided to compensate the Claimant (the patient) for damages.  The Court of Appeals affirmed the Court of First Instance’s ruling and the gynecologist appealed the Court of Appeals’ ruling.   The case was heard by the Supreme Court of Abu Dhabi. 

The Supreme Court explained that the Committee is merely a body of experts in the medical profession and its opinion should be treated by the court as any other expert opinion report.

The Supreme Court also added that relying only on the Committee’s report and ignoring other reports submitted by the gynecologist is an error in examining evidence.  Furthermore, the Supreme Court pointed out that a report submitted by the Committee should not be considered as exclusive evidence.  This means that a court should not dismiss other expert reports submitted by one party to the litigation just because such reports contradict the conclusions in the Committee’s report.

In conclusion, the Supreme Court of the United Arab Emirates set an important precedent in that a committee established by law, such as the High Committee on Medical Liability, should not viewed as the supreme authority and should not override other reports in weighing the evidence in a court of law.

Check Also: Liability of a Freight-Forwarder Before the Dubai Courts

Liability of a Freight-Forwarder before the Dubai Courts

Liability of a Freight-Forwarder before the Dubai Courts

There has been a debate in many countries on the degree of liability of the carrier and a freight forwarder on the issue of cargo claims; is a freight forwarder a principal or an agent?  The debate indicates that a freight forwarder’s legal status in the shipping industry depends on the degree of involvement of a freight forwarder in the overall operation of shipping goods.  A freight forwarder could limit his liability by limiting his rule and act only as an agent on behalf of the carrier.

Contrary to the belief that the courts of the U.A.E. are still behind their western counterparts when it comes to maritime litigation, the courts of Dubai have proven to be very advanced.

Collisions under Libyan Maritime Law

Despite the important role played by a shipping agent in the chain of logistics, the Federal Maritime Commercial Law No. 26 of 1981 did not establish the responsibilities of a shipping agent.   Nevertheless, the courts of Dubai, in its efforts to determine the liability of a shipping agent, apply Article 8 of the aforementioned law, which allows a court to apply international maritime customs and rules of justice.  

The general rule followed by Dubai courts is to consider the freight forwarder not as an agent in litigation of cargo claims, unless proven otherwise.   There has been a clear application by the Dubai Court of Cassation which distinguishes between the carrier and the freight forwarder.  In one case filed against a ship-owner and a freight forwarder for damages to goods, the Court of Cassation of Dubai stated that in performing duties such as delivering cargo to the ship, delivering bills of lading to shippers, delivery of cargo to consignees, and supplying fuel to the ship, a freight forwarder is acting as an agent for the carrier or ship-owner. All such acts performed by a freight forwarder are considered to fall under Agency Law, and a freight forwarder is therefore considered an agent.  

The Court of Cassation of Dubai in the said case dismissed the claim against the freight forwarder for lack of evidence that the freight forwarder violated the rules of agency and acted as a principal. The Court also decided that unless the freight forwarder committed a tortuous act, the laws of the United Arab Emirates and the courts of Dubai place minimum liability on the shipping agent. This is due to the fact that a freight forwarder is not a party to the main shipping document, the Agreement of Affreightment.

One of the incidents that a freight forwarder may find itself responsible for is case of loss or damage to cargo is when the freight forwarder commits a tortious act.   

As long as the freight forwarder acts on behalf of the shipper and refrains from acting as a principal in shipping matters, a freight forwarder’s liability will be limited.

Therefore, it is advisable that a freight forwarder limit their role to receiving cargo from the shipper and issuing bills of lading on behalf of the carrier.

Check Also: Liability for Collisions under Libyan Maritime Law Click here

Liability for collisions under Libyan Maritime Law Libya

Liability for collisions under Libyan Maritime Law Libya

It is a known fact that the Libyan people are still struggling to establish a strong central government in order to fulfill the hopes and aspirations that inspired the revolution of February 17, 2011.

At present, there are two parliaments and two governments claiming to be the legitimate representative of the Libyan people. In order to resolve the dispute, both the United Nations and the European Union are bringing the two sides to the negotiation table, in hopes of establishing one internationally recognized government to bring peace and security to Libya through the support of the international community.

The strategic location of Libya and its tremendous wealth gives Libya an important status for the world, most notably to the EU.

Evidently, peace and economic development will soon come to Libya and that will lead to security and prosperity, not only in Libya, but in the world especially Europe. Trade will flourish and the part of the Mediterranean adjacent to Libyan ports shall be frequently visited by vessels. This leads to the topic of this article which discusses vessel collisions as regulated by Libyan Maritime Law.

Although the effects of certain collisions may not lead to sinking, collisions may still cause adverse consequences, including but not limited to, fires and explosions, loss of cargo and damage to the vessel, marine pollution, and death or injury sustained by individuals, such as members of the crew.

The repercussions of the collision may cost those who are held liable, such as shipowners or insurance companies (P & I clubs) thousands, even millions of dollars in losses depending on the severity of the damage. One of the biggest concerns is how each party implicated will assume liability and how loss will be allocated amongst the parties.

The purpose of this article is to address the legal issues surrounding fault and liability that may arise from a maritime collision that occurs within Libyan waters by using the applicable legislation, the Libyan Maritime Law of 1953.

The Libyan Maritime Law considers collisions as accidents that occur between vessels. Although a collision is commonly believed to require physical contact, the Libyan Maritime Law allows victims to recover from tortfeasors even if no physical contact has occurred, where damage by an act or failure to act or violation of navigation rules is caused to another vessel, the goods or persons aboard the vessel (Article 241 of Libyan Maritime Law).

In case of a “collision,” , as defined under the Libyan Maritime Law, persons or cargo aboard a ship involved in the collision or an innocent third party, may recover for damages and losses suffered. However, the physical contact between ship and structures, such as a bridge or dock, is not considered by the Libyan Maritime Law as a collision, and in fact constitutes tortious liability.

For a collision to have occurred, the accident must have caused by either a fault of a vessel or force majeure, or unidentified cause. The fault of a vessel is extremely important in determining the liability for damages. If a Court determines one vessel is at fault for the collision, the owner of the vessel will be held liable for paying damages to successful claimant(s) (Art. 238 of Libyan Maritime Law).

In case where a Court determines that both vessels are jointly at fault, then the Court will accord liability to ships in accordance to the amount of blame of each vessel (Art. 239 of the Libyan Maritime Law). Courts may be faced with the difficulty of determining the allocation of fault, such as when evidence is vague and does not permit the court to determine who is at greater fault. In case where the fault of the vessels is difficult to determine, courts will find both vessels equally at fault.

Force majeure is the common term used in various jurisdictions to describe an unavoidable or an irresistible force outside of the control of either party which causes a tort. Under maritime law, examples would be a hurricane or flood which causes a collision between vessels. The Libyan Maritime Law stipulates that both parties are exempt from liability to each other in case of force majeure (Article 237 of Libyan Maritime Law). Instead, each party will be responsible for its own losses.

In terms of division of damages, Article 239 of the Libyan Maritime Law stipulates that if more than one vessel is at fault, liability will be assessed in proportion to their fault, meaning that each vessel will only be held liable for the damages to the degree of their liability.

If it is impossible to calculate the degree of fault of each vessel, liability will be divided equally among the vessels involved. Each defaulting vessel will be severally proportionally liable for damages caused to other vessels, belongings of the crew and passengers.

However, defaulting vessels will be jointly and severally liable for death or personal injury, meaning that the plaintiff can recover the entirety of the damages (Article 239 of the Libyan Maritime Law) from one of the defaulting vessels.

If such vessel pays for damages exceeding its percentage of the fault, it is entitled to be reimbursed by other defaulting vessels for the amount it paid in excess of its percentage of fault. Military and government vessels serving public interest are not subject to the pervious rules of compensation (Article 244 of the Libyan Maritime Law).

Cruise Safely…

Check Also: Arrest of Ships in Accordance with Libyan Law clicks here.

The Arrest of Ships in Accordance with Libyan Law

The Arrest of Ships in Accordance with Libyan Law

Dr. Mohamed Karbal is a New York lawyer and founder of Karbal & Co, a full-service international law firm that serves the needs of businesses and governments in Libya and the United Arab Emirates.

Libyan Seaports
Despite the current security problems, the Libyan government due to its efforts to rebuild the New Libya has situated the nation at the apex of a widely-anticipated economic boom of development in all sectors. Prior to the revolution of 2011, Libya’s exports reached $30 billion USD and its imports exceeded $6 Billion USD. With new liberal economic views and the willingness to compensate for the 42 years of stagnation under the Gaddafi regime, Libya’s economic development is projected to be one of the fastest-growing economies in the world.

The Arrest of Ships in Accordance with Libyan Law Libya

Libya is largely dependent on imports, consisting mainly of industrial and food commodities. Libya’s biggest trading partner is the European Union and Italy leads with 30% of Libyan imports. This significance of the Libya/EU trade-link across the Mediterranean is undisputed as the seaports of Libya are invigorating their connections to the southern European seaports. This will continue to play an increasingly important role in the future. The Libyan foreign trade is carried out through seven major commercial seaports, seven petroleum seaports, and one seaport for the steel industry. This significant number will be the basis of the trade link across the Mediterranean once security and stability dominate the Libyan political scene.

The seaports are reasonably equipped, nevertheless, in the near future the Libyan government will be investing in improving the efficiency and productivity of its seaports. The government is presently contemplating involving foreign investors to develop and operate the Libyan seaports on the basis of public-private partnership (PPP).

As the efficiency of these seaports improves, the frequency of ships berthing at Libyan ports is expected to increase. It is a commercial fact that the majority of ships calling at the Libyan ports are neither registered in Libya nor owned by Libyan entities. With the expected increase of the tonnage and containers to be handled by the Libyan seaports, legal problems between the foreign ship-owners and shippers are expected to increase before the Libyan courts. These disputes shall be mainly related to the arrest of ships in the Libyan seaports. Parties involved in shipping disputes shall use the Libyan courts as a venue to force a settlement without resorting to litigation.

The Libyan Law and the Arrest of Ships
Libya is not a signatory to the International Convention relating to the Arrest of Seagoing Ships of 1952, however, a ship in Libyan territorial waters could be arrested as a property owned by a debtor.

In general, the Libyan law grants the Libyan courts original jurisdiction to hear a case brought against non-Libyan. Article 3 (2) of the Civil and Commercial Procedures Law gives the Libyan courts power to hear and decide a case involving property located in Libya. Since international law and Libyan law consider the water surrounding Libya as a part of that country’s territory, accordingly, a vessel located in the Libya’s territorial water will be subject to the original jurisdiction of the Libyan courts.

Another applicable rule to arrest a ship is to commence proceedings to secure claim. According to Article 516 (1) of the Civil and Commercial Procedures Law, a claim can be filed in a Libyan court against a property located in Libya even when the owner is a non-resident of Libya. Concerning a ship arrest, a ship located within the territorial waters of Libya will be subject to arrest despite the non-residency of the owner.

Here, we must draw a distinction between an arrest order obtained in the enforcement of priority rights conferred by a maritime lien and a prejudgment attachment or prejudgment writ of attachment as it is known in the United States of America. Prejudgment attachment under the Libyan law is a provisional remedy to preserve the status quo until the court issues a final judgment. It is mainly the seizure of the ship temporarily.

The plaintiff (creditor) has to commence the action in the court which has jurisdiction over the ship. The plaintiff must submit evidence of the debt owed by the debtor, in this case, the ship owner. The court orders the seizure or attachment of the ship specifically described in the writ by issuing a notice of attachment which will be served to the ship’s master in order to commence the attachment. The ship will be seized and maintained in the custody of a designated official (guardian). The guardian is usually appointed by the court or the ship’s master/crew member to ensure that the ship remains in custody until a final judgment is issued.

Usually, a good legal team will be able solve the issue of a ship’s seizure in Libya by arranging the offering of a guarantee, and/or letters of undertaking to the creditor in order to release the ship. As is unusually the final result, further details such as litigation or the sale of the ship by the court is unnecessary for this discussion and left best discussed with a debtor’s lawyer, if the need does arise.

This article was first published in Libya Business News August 2014 and republished in Marasi News in January 2015 issue.

Check Also: Libyan Investment Law

Libyan Investment Law: Political developments and Economic Policies

Libyan Investment Law: It has been proven that political development is a prerequisite for economic development. In other words, to stabilize a national economy, economic growth must be accompanied by political maturity. Political maturity in turn will attract external capital which will stimulate the country’s development. The Soviet Union in the later stages of its life provides an example. In the late 1980s, Mr. Gorbachev unveiled his reform program, known as “Perestroika” which literally means “restructuring”.

Libyan Investment Law image

Perestroika was declared without establishing a new political system that would go hand in hand with the economic restructuring to ensure social justice and equality of opportunities. Rather, the old the Soviet political structure was maintained with its overwhelming level of bureaucracy and lack of transparency.

Perestroika simply did not incorporate these basic tenets of good governance as it was concerned primarily with liberalizing the market. As a result, the Soviet political system failed to create a comfortable atmosphere for investments. Further, this is arguably, the very same reason which led to the failure of the entire Soviet experience. Simply stated, a country must be politically stable where its laws and decisions are clearly defined and integrated in order to succeed economically.

In addition, it should have an independent, mature judicial system that responds and deals competently with the foreign investors complaints while safeguarding people’s rights.

The mere availability of capital, infrastructure and investment opportunities does not guarantee stability. Actually, a country must provide tangible guarantees that ensure maintenance of investor’s rights. Further, the announcement of the formulation of investment laws and its implementation, as well as the designation of certain areas of free trade, does not indicate the establishment of an investment environment or ensure the rights of the investor identified by the laws.

Libya Topped the Third World Countries:
In 1975, a comparative economic study was issued by the Organization of Economic Cooperation and Development (OECD), an organization comprising the USA, Australia and developed European countries. The study addressed the gap of economic growth between rich and poor nations and raised the issue of whether it was possible for this gap to be closed? The study’s main concern was: how many years would it take for Third World countries to catch up with the developed countries? The study’s authors chose to list the most developed nations of the Third World as well as those that came in at the lowest levels, including several Arab countries such as Libya, Saudi Arabia, Tunisia, Iraq and Syria. In addition, other counties listed were Singapore, Malaysia and China.

The countries were rated on the basis of their economic growth between the years of 1965 and 1974. Libya topped the list of the Third World countries, with a growth rate of 11.8%, followed by Saudi Arabia, with a growth rate of 11.6% , Singapore 7.6%, Israel 5.0%, Iraq 4.4%,Turkey 4.0%, while the economic growth of Malaysia and China was at 3.8%.

The study concluded that if the Third World countries maintain their achieved economic growth during the previous period, they will be considered as a part of the 2 developed countries after a certain number of years. The study concluded that Libya needed only two years to catch up with developed nations. The Kingdom of Saudi Arabia needed 14 years, Singapore needed 22 years, Israel needed 37 years, Iraq needed 223 years, Turkey needed 675 years, Malaysia needed 2293 years, while China was in need of 2900 years to catch up with developing countries.

Interestingly, the study conducted by the OECD in 1975 predicted 22 years for the arrival of Singapore to the ranks of developed countries. This prediction proved credible when the world declared in 1997, the admission of Singapore to the advanced nations. Libya was not as fortunate.

Instead of maintaining the fiscal policies that would have continued the level of its economic growth, at that time, , the Libyan government decided to cancel the free economic system by abolishing all business licenses. Further measures by the Libyan government were to allow the government to control the commercial and industrial activities, while preventing the private sector from practicing it’s commercial and industrial professions. As a result of the state run economy, the atmosphere encouraged lackadaisical business practices and the institutionalization of bribery, as well as the constant looting of public funds. Instead of announcing the arrival of Libya to the level of the first world countries, Libya sank into a deep abyss of political, administrative and economic corruption.

After many years of self-imposed economic isolationism, the former Libyan regime decided to open up to the outside world by announcing a wide array of investment opportunities in various fields. The response was well received from both Arab and foreign investors alike. Free Zones were identified, and laws enacted that guaranteed the bulk of the investor benefits, including tax exemption and the transfer of profits abroad.

However, as with the Soviet experience, the former regime was intentionally not concerned with establishment of a free political and economic system that ensures equal opportunities, fair competition, and reduced corruption. Rather, the regime used the economic openness as an opportunity to give close cronies the right to receive all the capital and business opportunities coming from abroad, and using them for their own personal interests. Administrative corruption became rampant and public funds were used unlawfully. These circumstances are from where the resentment of political oppression and economic deprivation led to the explosion that turned into the popular revolution that brought down the former regime.

The Future of Investment in Libya:
After the victory of the Libyan people over the old regime, the new Libyan leaders have started to reinstate the country to the ranks of the stable, politically sophisticated, constitutional countries. Due to the fact that Libya is still one of the Third World countries which is rich in natural resources, utilization of foreign expertise is essential for its success. Foreign expertise along with their advanced technologies will be needed to help Libya exploit and market its natural resources as well as develop its infrastructure. Such capital and expertise shall be welcomed by the Libyans to operate within a well defined framework of cooperation and mutual benefits.

As there is a current debate in Libya about how to attract foreign capital and technical expertise, there must be better administrative effort than just legislation. Clear rules must be established for integration and how to regulate the economic relationship between the country and foreign capital. All rules must take inconsideration the legal rights of the foreign investors. Also needed are laws that demonstrate the procedures for open tendering, to ensure the highest degree of transparency. 

In conclusion, the relationship between a country that invites foreign capital and foreign investors should be based on transparency and the highest level of common interests for both parties. 

Dr. Mohamed Karbal
Attorney at Law/New York, Dubai, Libya
Managing Partner

Libya’s New Financial Regulatory Agency: Can it Boost Trading in Libyan

By Dr. Mohamed Karbal, Managing Partner at KARBAL & CO, and Nabilah Karbal, Associate at KARBAL & CO

 Libya’s New Financial Regulatory Agency: Libya’s aim to diversify its economic activity by strengthening its financial sector and encouraging investments may prove a success, as the creation of a new financial regulatory agency may restore investor confidence and increase liquidity on the Libyan Stock Market (LSM).

Libya’s New Financial Regulatory Agency History of the Libyan Stock Market

Created in 2006, the LSM has seen a relative amount of success.1 However, due to the revolution and other factors, the number of companies listed has declined over the years since its creation.2 Concerns have been raised about the illiquidity of the LSM, and investors’ interest in trading securities.3
In December 2013, Libya’s Economic Minister Mustafa Abufanas announced the creation of a financial regulatory agency which would regulate Libya’s entire financial sector, excluding the banking industry which is governed by the Bank of Libya.4

Libyan Construction Law image

A Financial Regulatory Agency may increase liquidity on the Libyan Stock Market
Importance of Market Liquidity Liquidity is crucial for a stock market.5 Liquidity can be defined as an asset’s ability to be traded on a market.6 An asset’s ability to be traded is determined in part by market demand, which is created by the existence of buyers and sellers on a market.7 If the demand is low, a market may be deemed illiquid, resulting in higher risks assumed by buyers and sellers of a security traded on the market.8 Market illiquidity therefore signifies the difficulty in selling a security.9
In contrast, higher liquidity will increase trading on the stock market and reduce volatile price fluctuations.10 To increase liquidity, risks must be “quantifiable” and investors must be confident about making transactions on the stock market.11 Lowered risks, such as political instability, may in fact increase liquidity, as investors will be more confident about investing.

The role of a Regulatory Agency in boosting Investor Confidence

The importance of a nation’s financial regulatory agency is unquestionable. At the wake of the Stock Market Crash of 1929, the Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC), the U.S’ main federal regulatory agency that oversees its securities industry. The SEC regulates the sale of securities to protect investors by promoting market transparency, while attempting to foster market integrity and financial stability.12
Just as the Financial Markets Authority of New Zealand was established after the 2008 Financial Crisis,13 the existence of a regulatory agency to enforce securities laws may increase investor confidence in the LSM. With more investors confident and willing to trade on the Libyan stock market, liquidity of the Libyan stock market will increase.

The Potential Powers and Influence of Libya’s Financial Regulatory Agency

Although the structure and powers of financial regulatory agencies differ per country, many of the characteristics of the agencies remain consistent throughout various jurisdictions. In practice, regulatory agencies are granted independence to act within their scope of power, which includes enforcement and often legislative powers.
Regulatory agencies are granted enforcement powers to enforce legislation enacted by the legislative or executive, rule-making power of a state. In the US, the SEC is instilled with the power to investigate potential violations and bring civil action against those who violate securities laws.14 An example is securities fraud, which is defined as illegal activities committed during the sale of securities, with the most notorious being insider trading.15 The SEC can further sanction violators with civil monetary penalties.16
The threat of civil suits brought by the SEC and criminal suits brought by the Department of Justice deter actors in the securities industry from committing securities fraud. Enforcement powers therefore permit the regulatory agency to protect investors.
For certain regulatory agencies, the scope of independence encompasses a rule-making power, which allows the agency to elaborate preexisting laws by enacting regulations needed to further their mission.17
The powers of the Libyan financial regulatory agency remains to be seen, however enforcement and investigatory powers of the financial regulatory agency can restore investor confidence, as its role would aim to ensure market integrity and transparency on the LSM.

The need for updated legislation to restore public confidence in the Stock Market

With Libya’s return to privatization and its growing private sector, legislation is needed to properly regulate the industry and restore investor confidence.
After the Enron and WorldCom scandals in the U.S, Sarbanes-Oxley was enacted to restore public confidence by imposing corporate governance rules and requirements for outside auditors.18 Similarly, Dodd Frank was enacted in 2010 after the 2008 financial crisis to restore institutional investor confidence through several of its provisions.
Libya’s investment laws regulate several industries, and have been in effect prior to the revolution.20 At present, the LSM is governed mainly by Law 11 enacted in 2010, which establishes the basic framework for regulating the stock market and its listed companies.21 The articles of the Law 11 mimic certain elements of U.S securities regulation, such as the thirty-day period for the approval by the SEC of an issuer’s registration statement, periodic reporting, liability of an for misstatements on the IPO registration statement, and requirements of outside auditors for issuers’ financial statements.22 The Exchange’s Regulation has been enforced in Libya, as several companies that were listed on the LSM prior to the revolution were not initially listed in the 2012 re-opening of the stock market due to not meeting regulatory standards.23 The basic regulatory structure exists. However, updated legislation may further investor confidence and consequently boost the LSM liquidity.

Potential Success of the Libyan Stock Market after certain factors are addressed

The creation of a regulatory agency is merely the beginning. Certain factors must be addressed in order to ensure the stability of the Libyan Stock Market.
Need for Economic and Political stability
In developing countries such a Libya, economic and political instability increases the likelihood of volatility, which signifies the possibility of extreme price fluctuation.24 Although market volatility may yield higher returns, fear of instability can reduce market demand.25 At present, security in Libya is the biggest factor influencing investor demand. Promoting security and economic stability could decrease the likelihood of extreme market volatility.

. . . And if the factors are addressed?
Ranked the second highest HDI in Africa, the standard of living in Libya for its small population is considered above the continents’ average.26 With the highest oil supply in Africa, and being major global supplier of sweet crude, Libya has potential to be an economic powerhouse.27 Libya’s potential economic strength has thus important implications on the success of its capital markets, as the increase of its exports and political stability may lead to a boom in its private sector. A strong, more developed economy would indirectly increase liquidity on the LSM.
Whether Libya’s regulatory agency will effectively increase investor confidence remains to be seen. However, its creation has entered the Libyan Stock Market into a new era, which may provide better investor protection and increased market liquidity.

See Also:

Libyan Construction Law Click here

Please see the footnotes for more details.

[1] A. Aljibri, Performance of the Libyan Stock Market, Acta univ. agric. et silvic. Mendel. Brun, 32-36 (2012), available at http://www.mendelu.cz/dok_server/slozka.pl?id=57208;download=104968, (accessed Aug. 4, 2014)

[1] See Id at 32; see also Libyan Stock Exchange says to re-open on March 15, Reuters (Mar. 4, 2012), available at http://www.reuters.com/article/2012/03/04/us-libya-stockmarket-idUSTRE8230T720120304 (accessed Aug. 4, 2014) (At its opening, the LSM listed seven companies, and according to the annual report LSM 2012, twenty-two companies were listed on the LSM in 2010 (including tradable and non-tradable securities). On March 15, 2012, five companies were listed as tradable, which was down from thirteen companies that traded before the revolution)

[1] Ulf Laessing, Seeking cheap stocks, chaos no problem? Try Libya, Reuters (Feb. 22, 2014), available at http://www.reuters.com/article/2014/02/23/us-libya-bourse-idUSBREA1M00820140223 (accessed Aug. 3, 2014)

[1] Libyan Financial Regulator Established, Libya Business News (Jan. 7, 2014), available at http://www.libya-businessnews.com/2014/01/07/libyan-financial-regulator-established/, accessed (Aug. 3, 2014)

[1] Nicholas Econodomies, How to Enhance Market Liquidity. In Capital Markets, ed. by R. Schwatz, Irwin Professional (New York: Irwin Professional, 1995), available at http://www.stern.nyu.edu/networks/how.pdf (accessed Aug. 4, 2014)

[1] See Kleopatra Nikolaou, European Central Bank, Liquidity (Risk) Concepts Definitions and Interactions (European Central Bank Working Paper Series No 1108 at 14, 2009) available athttp://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1008.pdf (accessed aug. 4, 2014)

[1] See Sanford J. Grossman and Merton H. Miller, Liquidity and Market Structure, 43 J. Fin.at 1(1988) (Market liquidity is based on the supply and demand of “immediacy,” which is created by the on-going existence of buyers and sellers who are willing to assume the market risk.) available at http://pages.stern.nyu.edu/~lpederse/courses/LAP/papers/InventoryRisk/GrossmanMiller.pdf (accessed Aug. 3, 2014)

[1] See Id; See also GROSSMAN supra. at 619 (When the demand is low, sellers assume higher risks, as the illiquidity signifies that the stock cannot be sold quickly. The risks assumed include higher increased cost and selling the security at a lower price.) 

[1] See Id.

[1] See Econodomies supra. at 2

[1] Governor Kevin Warsh, Speech before the Institute of International Bankers Annual Washington Conference, Washington D.C (Mar. 5, 2007) available at http://www.federalreserve.gov/newsevents/speech/warsh20070305a.htm (accessed Aug. 4, 2014)

[1] U.S Securities and Exchange Commission, 2004-2009 Strategic Plan at 4available athttp://www.sec.gov/about/secstratplan0409.pdf, (accessed Aug. 4, 2014)

[1] Adam Bennet, One financial regulator to rule them all, The New Zealand Herald (April 29, 2010), available at http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10641503 (accessed Aug. 3, 2014)

[1] U.S Securities and Exchange Commission, 2004-2009 Strategic Plan at 35available athttp://www.sec.gov/about/secstratplan0409.pdf, (accessed Aug. 4, 2014)

[1] Id at 6.

[1] Id at 35.

[1] Id.

[1] SEC Chariman William H. Donaldson, Testimony before the House Committee on Financial Services , U.S House of Representative (Apr. 21, 2005) available at http://www.sec.gov/news/testimony/ts042105whd.htm (accessed Aug. 3, 2014).

[1] See H.R Rep. No. 111-517 (Conf. Rep.)

[1] See Aljibri supra at 31.

[1] See Law No. 11 of the Year 2010 for The (Libyan) Stock Market, available athttp://www.saifannaser.com/ar/pdf/49.pdf (accessed Aug. 3, 2014).

[1] See Id.

[1] Libyan Stock Exchange says to re-open on March 15, Reuters (Mar. 4, 2012), available at http://www.reuters.com/article/2012/03/04/us-libya-stockmarket-idUSTRE8230T720120304 (accessed Aug. 4, 2014)

[1] Robert G. Ibotson, Why does market volatility matter?, Insights Yale School of Management, available at http://insights.som.yale.edu/insights/why-does-market-volatility-matter, (accessed Aug. 4, 2014); See Francis X. Diebold & Kamil Yilmaz, Macroeconomic Volatility and Stock Market Volatility Worldwide (National Bureau of Economic Research Working Paper Series 14269 at 7, 2008), http://www.nber.org/papers/w14269, (accessed Aug. 4, 2014) (Macroeconomic volatility in developing countries has a significant effect on the increase in market volatility)

[1] John Wasik, How to deal with emerging markets volatility, Reuters (Feb 10, 2014), available at http://www.reuters.com/article/2014/02/10/us-column-wasik-emr-idUSBREA1919S20140210 (accessed Aug. 4, 2014)

[1] Libya 2012, African Outlook Organization, available at http://www.africaneconomicoutlook.org/fileadmin/uploads/aeo/PDF/Libya%20Full%20PDF%20Country%20Note.pdf (accessed August 4, 2014)

[1] Energy Info. Admin., Country Analysis Briefs – Libya  (2012) available at http://www.eia.gov/countries/analysisbriefs/cabs/Libya/pdf.pdf (accessed Aug. 4, 2014)

Libyan Construction Law: Contractor Liabilities Libyan

Libyan Construction Law: Prior to the upheaval of the February 2011 revolution, Libya was already contending with various economic problems. Forty years of the Gaddafi regime’s irrational strategic planning and an apathetic mindset left Libya among the least developed countries. Hospitals taking 30 years for completion was common practice. Presently, the Libyan deteriorated infrastructure is in total disarray: housing shortages, dilapidated road networks, and airports stuck in a 40-year time warp, left without modernization since completion.

Other neglected sectors included small, unequipped seaports, substandard or nonexistent hospitals and schools. In other words, most of the infrastructure built in the ’60’s and ’70’s was left without any renovation. As a result most if not all, public service facilities needed to be demolished and rebuilt. The New Libya, in its road to modernization, will need massive reconstruction in all aspects of its economy. Fortunately for Libya it has zero debt and a lucrative oil industry to fund the reconstruction.

Libyan Construction Law liabilities

The international financial community believes that with wise, comprehensive planning, Libya will be able to climb out of the economic hole the regime dug for it. An International Monetary Fund (IMF) report stated that in 2012 the Libyan GDP was expected to increase by a record-breaking 122%. It is expected to continue growing at 17% in 2013, and at an average of 7% per year from 2014 to 2017. The Libyan Minister of Economy issued decree no. 207 for year 2012 amending decree no. 103 of 2012 which organizes the legal framework of foreign investment in Libya.

Foreign investment is allowed in all economic sectors except certain areas which are strictly limited to Libyan citizens such as the legal profession, accountancy firms, and commercial agencies. For foreign companies, the decree details the form of the legal entities; i.e. limited liability, joint venture, branch of a foreign company and representative offices.

Branch of Foreign Construction Company 

As recognition of the construction industries’ significance to the Libyan reconstruction, the Ministry of Economics’ decree no. 207 of 2012, granted the foreign construction sector the right to open a direct branch. A branch of a foreign construction company means that the shares of the company are totally owned by the mother company. The only restriction is that a manager of Libyan branch, or his deputy, must be a Libyan citizen. As a result the Libyan Government is hoping that it will experience a phenomenal growth in all areas of the construction sector. 

Libyan Law for Contractors and Supervising Architects (or Supervising Engineer): 

The Libyan Civil Transactions Code of 1953 imposes liabilities on both the contractor and the architect. Article 650 of the Civil Code holds the contractor and the architect (or supervising engineer) jointly liable for any minor or major collapse of the building even if the collapse was due to ground defects and/or the building had been approved and accepted by the owner.

The contractor and the architect are also jointly liable for major defects affecting the stability and safety of a structure. The guarantee period to be provided by the contractor and the architect lasts for 10 years from the date of completion and handling over to the owner. 

However, the architect’s liability could be limited to drawing and design errors under Article 651 of the Civil Transactions Code as long as the architect’s scope of work was only to provide the design and not to supervise the implementation of the design. Any clause exempting the contractor and the architect from their liabilities shall be void. 

In general, the only method of resolving commercial conflicts in Libya is to resort to litigation. It is unfortunate that the Libyan judicial system had suffered during the Gaddafi regime. Many of the judges’ appointments were based on political loyalty while the legal profession was stifled. Lawyers were not permitted to practice law through their own law firms as they were considered employees of the courts.

Moreover, the English language and other languages were not a part of the school curriculum which became an obstacle for lawyers to be involved in international disputes. In Libya there is no Arbitration Act as such. However, arbitration measures have been mentioned in general in the 1953 Code of Civil Procedures. Cabinet Resolution no. 333 for year 2012 has granted the Chamber of Commerce and Industry the power to arbitrate commercial disputes occurring between its members.

It also required the regional Chambers to establish arbitration and reconciliation councils just for this purpose. It should be noted that, contrary to many other countries in the MENA region, Libya permits a foreign party to a state contract (Public Contract) to choose arbitration as a method for dispute resolution. In other countries of the MENA region, public contracts fall under the jurisdiction of the national courts.

This precedent of compromising over the method of dispute resolution shall help in enacting an advanced, comprehensive, and modern system of arbitration in Libya. As for the near future, Libya may utilize mediation in the short run until it is able to establish a comprehensive system of arbitration.

Check Also: Health Insurance Law in Dubai

Dubai Health insurance: New Mandatory Law Dubai

New Mandatory Health Insurance Law in Dubai

A Brief summary 

Dubai Health insurance: Starting in January 1, 2014, Dubai’s new mandatory health insurance went into effect. Inspired by legislation in Saudi Arabia, Qatar, and Abu Dhabi, Dubai enacted Law No. 11 of 2013, which set to create a consolidated health care system for the entire Emirate and its population of 3 billion. To whom is the Law applicable? Under the law, all employers in Dubai are required to provide health insurance for their employees.

Similar to attempts that have been made in the U.S, the law requires mandatory health insurance for employees of all industries, public and private sectors, including the free zones. Family members and dependents of the employees will also be included in the coverage by 30th of June 2016.

What Health Coverage will the Insurance provide? The insurance is set to provide basic health coverage for nationals, residents, and visitors of the Emirate. However, the nationals will receive additional coverage for certain services. Procedures covered will include emergency treatments, visits to a general practitioner, and procedures such as maternity, investigative, and surgical referrals made to specialists. The insurance can be used by insured persons in both public and private hospitals.

Health coverage varies, from 500 to 700 for insurance premiums and has an aggregate limit of 150,000 AED per annum. 1,500 AED will be allocated for medication.

The insurance has begun to be provided by seven insurance companies, and has been made available for those making less than 4,000 AED a month. When will the Insurance Law be implemented?

Deadlines to comply vary depending on the size of the company. Companies will more than 1,000 employees must comply with the law by 31 Oct 2014. Companies with 100-999 employees must implement the law by 31 July 2015, and the law will be compulsory for companies with less than 100 employees by 30 June 2016.

KARBAL &CO is a full-service international law firm with offices in Libya and Dubai that serve the needs of businesses and governments in Libya and the United Arab Emirates. It was founded by Dr. Mohamed Karbal, who served as the first General Counsel for the Abu Dhabi Health Authority. Dr. Karbal drafted legislation and provided legal service for Abu Dhabi and its government hospitals.

Check Also:

Libyan Oil Contracts: Negotiating the Future Generation of EPSA

Force Majeure under Libyan Law: Foreign Contractors Resorting to Force

Foreign Contractors Resorting to Force Majeure under Libyan Law

By Dr. Mohamed Karbal

After decades of oppression and injustice, the Libyans, after many attempts, were finally successful in their eradication of the Gaddafi regime. Peaceful demonstrations initiated by the Libyan people morphed into armed conflict due to the irresponsible and brutal acts of the regime. As a result of the destruction that was launched by the Gaddafi regime against its own people, normal life during this period ended.

Business establishments closed and expatriate workers fled. After eight months of bloody battles and the loss of tens of thousands of lives, the Libyan Transnational Council declared the liberation of Libya from the Gaddafi regime on 23rd of October 2011.
At a time when Libyans are eagerly gearing up towards the task of rebuilding their country, previous international contractors are gathering their records to calculate their losses during the Libyan revolution. Although, these claims have a legitimate place in commerce, it is unfortunate at time of rebirth; Libyans are left to deal with the uneven commercial legacy of the old regime. Yet, this is the insistent nature of commerce.

Libyan Oil Contracts Negotiating the Future Generation of EPSA law

Further, as a Libyan, I would say that everything sacrificed by the Libyan people, whether in lives or money was worth the result of uprooting Gaddafi and his henchmen to create a more representative nature in the commercial sector. Therefore, we Libyans look forward to build a more responsible relationship with the previous or new contractors in our New Libya.
In this brief paper, we shall shed some light on the possibilities of settling claims between international contractors and Libya.

To claim an event of force majeure, in general, a party to a contract must find a degree of difficulty in discharging his obligations. There is no doubt that the Libyan revolution is an obvious example of a clear case of force majeure. Note, that it was impossible for an average individual to live a normal life.

Government offices, especially in the eastern part of the country, closed its doors and communication with these offices was impossible.
As a result of the revolution, the expatriate work force fled to neighboring countries and materials became scarce as a result of the state of war. Therefore, it became impossible for international contractors to continue performing their obligations under the contract.
Simply stated, all acts by the Gaddafi regime triggered an event of force majeure that justified the nonperformance of the international contractors’ obligations under their contractors.

Article no. 147 of the Libyan Civil Code states that a contract that is signed and is enforceable among the parties shall be the first source of law in any conflict resolution process. Therefore, the terms and conditions set out in the contract will govern the relationship between the parties.

An examination of the terms of the signed contract is the first step in deciding the obligations and rights of the international contractor. The assumption here is that all contracts which were valid during the Libyan revolution contained a force majeure clause. 

There is no need to dwell in detail on all points of the Libyan law related to force majeure, as the Libyan Civil Code recognizes the option of non performance of an obligation based on the event of force majeure.

Therefore in the case of the Libyan Conflict, an international contractor is fully justified not to perform its duties under the Libyan Civil Code. I reiterate that this is due to the fact that the upheaval caused by the revolution was a direct result of the Gaddafi regime’s decision to use excessive force on peaceful demonstrators. 

As of June 1st 2011, Libya has entered into 33 bilateral investment agreements with various countries such as Italy, Austria, Morocco, Croatia, Portugal, Switzerland, Belgo-Luxembourg and France. The aim of these treaties is to provide certain guarantees, as stated in each treaty, to investors of both parties to the treaty. It also allows investors from both parties to the treaty to bring claims against the other state before international arbitration.

Each investment treaty are tailored, however, all of them guarantee that in matters relating to the treatment of investments, the investors of each contracting party shall enjoy national treatment and most-favored-nation treatment in the territory of the other party.

At also requires that each contracting party undertakes not to adopt any measure of expropriation or nationalization or any other measure having the effect of directly or indirectly dispossessing the investors of the other contracting party of their investments in its territory.

Most importantly, an investment treaty restricts the acts of a contracting party to take any action to deprive and limit the ownership of investors from the other contracting party. For example, the treaty signed between Libya and Belgo-Luxembourg Economic Union states that: 

 Investors of one Contracting Party whose investments suffer losses owing to war or other armed conflict, revolution, a state of national emergency or revolt in the territory of the other Contracting Party shall be granted by the latter Contracting Party a treatment, as regards restitution, indemnification, compensation or other settlement, at least equal to that which the latter Contracting Party grants to the investors of the most favoured nation. 

In summary, it is clear that the Gaddafi regime triggered the violent acts that rendered normal life impossible in Libya. This forced international contractors to cease their performance under contracts signed with the Libyan government. Therefore, international contractors are entitled to claim force majeure as a defense of nonperformance.

International contractors may claim compensation due to the fact that the Gaddafi regime was responsible for the force majeure event. The claim may be granted based on (i) the contract signed between the Libyan government and the international contractor, (ii) the Libyan Civil Code, and if applicable (iii) a bilateral investment treaty signed between Libya and the country of the international contractor.

See Also: Libyan Oil Contracts: Negotiating the Future Generation of EPSA

Libyan Oil Contracts: Negotiating the Future Generation of EPSA

Libyan Oil Contracts: Negotiating the Future Generation of EPSA

By Dr. Mohamed Karbal, Managing Partner at Karbal & Co. Libyan Oil Contracts:

Libya Prior to the Discovery of Oil

Libyan Oil Contracts: During the twentieth century, Libya enjoyed only nineteen years of peace. Of only eight of the nineteen years, Libya enjoyed the peace and the fruits of its oil production. 

In 1951, Libya became the first country to gain independence through a United Nations resolution.  At the time of independence, Libya was one of the poorest countries in the world.  The Libyan economy during the 1950s, as taught in Libyan elementary schools in the 1960s, was dependent on three products (i) Esparto, a plant that was used to make paper currency, (ii) livestock exported to Egypt and Greece, and (iii) scrap metal from the machines used in World War II.

After its independence and prior to the production of oil, the main source of revenue for the Libyan budget was derived from rent payments paid by the American and British governments for the use of military bases on Libyan soil.  

After 42 years of rule, Gaddafi was removed from power through a revolution that occurred during the Arab Spring.  However, after his death, he left a legacy of mayhem fueled by a lack of political culture and structured political institutions.  

The Gaddafi regime’s apathetic attitude and incoherent economic development strategies left Libya as one of the least developed oil producing countries. Further, the Gaddafi regime’s obliteration response to the February 2011 Libyan uprising resulted in even more devastation to Libya’s already dilapidated infrastructure.

The Nature of Libyan Oil Production Contracts

Concession Agreement

The first type of oil and gas exploration/production contract used in Libya was a concession agreement.  Under a concession agreement, IOCs were granted the right to explore, produce and market the minerals located on one of the country’s various plots or concession areas. Normally, Libyan territory would be divided into concession areas for the purpose of oil production.

However, the whole country was occasionally considered one concession area for the purpose of oil production. A concession agreement granted an IOC full control, including technical and commercial control, over all aspects of the oil and gas production.

The Petroleum Law No. 25 of 1955 is considered the legal authoritative text for the Libyan oil industry. The Libyan Petroleum Law no. 25 of 1955 divided concession areas into small exploration sections not exceeding 75,000 square kilometers.  In contrast with other Arab countries, both large and small oil companies began exploring the Libyan Desert as a result of the planned strategy provided by the aforementioned law.

In effect, the Libyan government enabled many foreign and domestic investors to drill rather than allow a monopoly of one or two investors to control the concession areas.

Libya is not only notorious for being one of the most difficult Middle Eastern countries in which to enact legislation, but is also known for its rigorous negotiation tactics. In 1970, Libya was able to increase its profit share (royalties) in the IOCs agreements to 55% after pressuring the IOCs to reduce their share. 

With the aim to increase its share of royalties under the IOCs oil and with the threat of nationalization of oil companies, Libya was able to move from the traditional concession agreement to a new contractual relationship based on profit sharing. 

The EPSA Family

Under the new setup of participation in the oil production established in 1972, Libya became the holder of 51% of the shares in the concession agreements.  Companies who refused to adhere to the new rules, such as British Petroleum, were nationalized.

Between 1974 and 1979, the introduction of Exploration and Production Sharing Agreement (EPSA 1) was enacted.  Libya continued to issue new versions of EPSA hoping to attract more investors in the oil industry.  EPSA II was introduced in 1979, followed by EPSA III in 1988. 

EPSA IV was introduced in 2005 at a time when oil prices were high, making investing in the Libyan oil industry attractive.  Through EPSA IV, the NOC granted itself power by replacing the local Libyan partners to the IOCs. Hence, the NOC became a decision maker in all important aspects of production under the new agreement.

Negotiating EPSA V

The aim of this section is to shed light on issues of concern for the IOCs with EPSA IV.  By highlighting the issues of concern, this article will examine how the IOCs and the NOC may enter into a fair contract that will benefit both parties.

It has been reported that EPSA IV was the result of tough negotiations.  Libya was in a stronger position due to the nature of its oil, its strategic location and high oil prices at the time of negotiations. IOCs signed to EPSA IV agreed to accept low profit shares and paid large signature bonuses.

After the fall of Gaddafi’s regime, the NOC contemplated issuing a new bidding round for licensing.  The attempt to launch the new round of bidding was suspended due to the political unrest in Libya. In any future negations, one has to examine the concerns of the IOCs related to EPSA IV to predict the focus of future negotiations of EPSA V.  In brief, the IOCs reservations on the terms of EPSA V may be as follows:

The Management Committee

Article 4 of EPSA IV calls for establishing a management committee composed of four members.  Each party will appoint two members and one of the members appointed by the NOC shall chair the management committee.  The management committee will rule on all decisions concerning petroleum operations, including work programs and budgets.  The committee’s decision must be unanimous and in the case of a deadlock, the matter at hand shall be referred to the senior management of each of the parties. 

The main concern with Article 4 of EPSA IV is that the mechanism for decision making is inadequate.  For example, if there is no unanimous vote by either the four members of the committee or the senior management of both parties, the issue related to the work program or the budget which was raised for voting shall not be adopted by the management committee.  In effect, such mechanism for voting could pose many problems and delay the performance of the obligations under the contract. 

EPSA V should avoid this deadlock and propose a viable solution. Deadlocks may be solved by referring the disputed matter to an expert.  An expert opinion could be provided by an international consultancy firm appointed by the parties to resolve the issue at hand. Overall, it is advisable to have a detailed and rapid decision mechanism to resolve any issue that may arise. 

Force Majeure

In order to claim force majeure under Libyan law as per Article 360 of the Libyan Civil Code and the rulings of the Libyan Supreme court, three conditions must be met: (i) the event must be beyond the control of the parties, (ii) the event must be unforeseeable at the time the agreement is concluded, and (iii) the performance of the obligation must be absolutely impossible to execute.

Moreover, Article 22.1 (Excuse of Obligations) of the EPSA agreement excuses a party from its obligations if its nonperformance is attributed to “any unforeseen circumstances and acts beyond the control of such party which renders the performance of its obligations impossible.”  The doctrine of unforeseen events or circumstances requires that an event must (i) be exceptional and unpredictable, (ii) be of general nature, and (iii) occur during the performance of the obligation under the contract.

One has to seek a court ruling for termination of a contract as per Article 360 of the Libyan Civil Code which states “[a]n obligation is extinguished if the debtor establishes that his performance has become impossible by reason of causes beyond his control.” 

Training and Employment Strategy

In the mid of 1970s, the NOC introduced a program to increase recruitment of Libyan nationals in the oil and gas industry.  The program was labeled “Libyanization” and required the IOCs to train Libyans and identify jobs that could be held by Libyan citizens.  The Libyanization was not whole-heartedly welcomed by the IOCs for many reasons.

Even after more than 30 years since its introduction, the implementation of the Libyanization policy is still sluggish.  In 2009, the NOC announced its plan to launch 700 projects in 2009 alone, of which the budget of 550 projects was approved.  The Chairman of the National Oil Corporation (NOC) at that time, the late Dr. Shukri Ganem stated that “We are looking for long term gains not short term ones.

We are concerned that most of the engineering work is done outside the country.”  He also added that “Our graduates are becoming unemployed while we give jobs to people from outside … this is not to the benefit of Libya in the long term… We need to build engineering capacity in this country”. (The Tripoli Post 28 February 2009)

Article 5.7 of EPSA IV requires IOCs to hire Libyan nationals to carry out Petroleum Operations in the Contract Area. The IOC may hire non-Libyan nationals in specialized technical jobs or key management positions if no Libyan national is capable of performing the tasks.   Article 5.7.2 details the procedures and the timetable to train Libyan personnel.

Training and preparing Libyans to hold certain positions within each sector of operations could be considered burdensome by IOCs.  IOCs could argue that implementing a training program under Article 5.7.2 of EPSA IV, or any other contract, is beyond its aims of investment in Libya.

In the meantime, such a training program should not be considered a point of disagreement and complaints by the IOCs should be considered by the NOC.  As a suggestion to bring both sides together and to agree on the Libyanization program, the NOC should invest in providing a solid foundation for dedicated Libyan technicians and engineers prior to enforcing EPSA terms related to employing Libyan citizens.

Other areas of concern

Other areas of concern during the course of negotiations of EPSA V may include inserting a stabilization clause, the execution of work programs, types of operations and issues relating to taxes.

Check Also: Liability For Collisions Under UAE Maritime Law Explanation