Foreign Litigation: Another Libyan Front is Ablaze
The news of open battlefronts throughout Libya could not overshadow one that came from out of the country. A British judicial ruling rejected a US$1.2 lawsuit filed by the Libyan Investment Authority (LIA) against Goldman Sachs Bank (GS). Many people had been closely observing the lawsuit’s proceedings for over two years, especially after the proceedings revealed some interesting cases of corruption. One of these cases involved a GS bank staff member accused of implicating some LIA officials in a guaranteed-to-fail transactions using prostitutes. But this wasn't the only reason [why this case gained attention]. It was also the substantial financial value of the lawsuit, at a time when the country is in need of financial resources as a result of the decline in oil exports prompted by the decline in oil prices. This case might also be of interest due to its significance to the fate of similar lawsuits. Therefore, many were disappointed by the court’s ruling.
The ruling in the Goldman Sachs case was not the first sign of an open litigation front. It was preceded by a court ruling in the al-Kharafi case in a dispute over a contract for a Tripoli beach resort. Libya was ordered to pay the claimant [the Kuwaiti al-Kharafi company] US$936 million, in compensation for US$900 million dollars of loss of profit, and 4% of interest to be paid as of the date of the decision until its implementation. It is expected that the amount Libya will pay will exceed US$1 billion. As part of implementing the decision, the presidential plane of Gaddafi was seized in France where it had been sent for maintenance. The freeze order was later lifted for considerations relating to Libyan sovereignty associated with the plane. The aircraft survived, although the strong threat to Libya’s funds still stands. News on this front, as on many others, is not promising.
Al-Kharafi’s contract with Libya was part of a developmental program that the former regime had launched in its final years. According to an audit report prepared by a committee formed by the council of ministers in 2012, the program encompasses 9,513 contracts at a total value of LD96.7 billion. The majority of contracts (71%) are at a value of less than one million Libyan dinars, mostly awarded to national companies (98%). In contrast, the majority of contracts exceeding LD200 million are awarded to foreign companies at a value of LD36.9 billion, while the remaining contracts worth LD10.3 billion go to joint ventures, and those worth LD9 billion go to national companies. Accordingly, al-Kharafi’s case is likely one of many others, and if the current situation continues as is, the fate of these cases may very well be similar to al-Kharafi’s.
As the report shows, contracts concluded with national companies are not the problem. On top of their low value, they are considered administrative contracts; i.e., they fall under the jurisdiction of Libyan law. The Libyan state enjoys a distinguished contractual status and exceptional powers over this type of contracts. By contrast, contracts concluded with foreign companies are of high value, and usually contain clauses to ensure a balance in contractual statuses between companies and the Libyan state. These types of contracts are not administrative in nature. Moreover, some of these contracts adopt a legal system that excludes many provisions of the Libyan legislation, such as the FIDIC contracts system. Many of them provide for arbitration, rather than resorting to the judiciary as a way to resolve the disputes arising from them.
These differences are important in addressing whatever conflicts arise therefrom. For example, Libya’s February revolution is considered legally as a force majeure. That incident was unexpected. Its aftermath, which rendered the execution of the contract impossible, could not have been avoided. This adaptation entails interruption of the contract until execution is doable. This is carried out by the force of law without the need to take any action on the part of contractors. This means that neither the Libyan state, nor its contractors are accountable for the damages that might arise from non-implementation of the contract. Provisions of the contracts concluded with national companies are less likely to be violated, as they are subject to the regulations of administrative contracts.
Moreover, the fact that disputes arising from these contracts are adjudicated by the administrative judiciary ensures protection of the state’s position. On the other hand, contracts concluded with foreign companies are subject to civil law which does not deem the rules on the force majeure peremptory; thus, it allows the contractors to agree on violating them. This means, for instance, that they can stipulate that a notice be given within a specific period of the date the force majeure has occurred to invoke responsibility. Failing to give such a notice results in the loss of the right [to invoke responsibility]. Such a stipulation was indeed invoked against the Libyan state.
Libya's problems are not limited to the contracts concluded under the developmental program. Its other contracts are also prone to judicial disputes. The most prominent example of this is the lawsuits filed against the National Oil Corporation (NOC) and its subsidiaries. The lawsuits are not only filed on the part of foreign companies. In many cases, Libya initiated legal action against the foreign party, but unlike the Goldman Sachs case, luck was not on its side. These recent lawsuits raise an issue regarding the root of the problem: many of the contracts concluded in the former regime’s recent years were associated with corrupt practices.
There was an allegation that Goldman Sachs had exploited the little knowledge on the part of the Libyan party and used immoral means to nail contracts from the LIA. This raises questions not only about the extent to which compensation can be demanded, as in the case of Goldman Sachs, but also about the possibility of reviewing the contracts assuming they remain in force. This was precisely what the Libyan General National Maritime Transport Company did when it terminated a contract, signed under the former regime, with the cruise ship-building company STX France. Taking this route is not legally easy, especially for contracts concluded with foreign companies. The Court of Arbitration of the International Chamber of Commerce issued a decision (which was upheld later) ordering the Libyan company to pay US$14 million in compensation for the termination of the contract.
The lawsuits filed by or against the Libyan state raises another issue regarding the management of these cases. In its aforementioned report, foreseeing this problem, the committee formed in 2012 to review the developmental program contracts recommended that the “official state’s position be unified in order to avoid inconsistencies over the subordination of developmental program contracts”, emphasizing that they continue to belong to the existing apparatuses. The committee also recommended that statements on the projects of the program, as well as stances and actions taken by ministries and other owners be unified, especially when dealing with international contractors and their governments. The committee underlined the need for a unified and quick response to companies demanding compensation. However, what happened next was quite the opposite. As a result of the political divide, bilateral and later tripartite [structures of] management developed in the state ministries and institutions. Instead of having one Libyan corporation for investment and another for oil, for example, multiple institutions emerged.
This has caused considerable damage to the status of the Libyan state in various litigation and arbitration arenas. Its lawyers are not just obliged to substantiate the state’s allegations, but the veracity of their representation too. An example of this damage is when the Amsterdam Court rejected a suit relating to an exemption of a company with criminal suspicions from managing US$700 million worth of investment assets for the LIA. The court explained its decision by arguing that it is unclear whether the exemption was made on the part of authorized persons. By this, the court refers to the bilateralism with regard to the LIA board of directors; an issue that was raised during the hearing.
In this regard, the announced unification of the LIA is promising. In the same context, a more serious announcement was the unification of NOC, with practical actions that followed which resulted in the resumption of oil exports. However, these steps, although important, are not enough, and how serious they are is still questionable. This time, the two parallel investment institutions (in the west and the east, respectively) have jointly denied news of unification and questioned the representative status of those behind it. As for the NOC, the statements are still contradictory regarding the outcome of export revenues. This is an indication that the road is still long towards the unification of all Libyan state institutions at all levels. Such a unification would be an initial step for seriously addressing present and future lawsuits inside and outside the country. Following this, a comprehensive review of these suits should be undertaken to correct and address their causes. Lawsuits filed by foreign partners concerning developmental program contracts may be addressed outside the courts. Addressing such cases should be made in a way that would ensure that these investors return to complete the execution of the contracts, under new conditions that would contribute to the reconstruction of Libya.