Jurisdiction in respect of contract terminated following allegations of fraud (ICSID)

Between August 1999 and February 2000 the claimant, Malicorp Ltd, took part in a tender process run by the Egyptian government (Government) for a concession to build and operate the Rus Sudr International Airport in Egypt.

In September 1999, Malicorp amended its Memorandum and Articles of Association, increasing its authorised share capital from £1,000 to £100 million However, it appears that no further capital was issued with Malicorp's issued capital remaining £1,000.

As part of the tender process, on 3 January 2000, Malicorp's representatives were called to a meeting with representatives of the Government in order to clarify certain aspects of its bid, in particular the company's structure and capital. What was said and what documents were provided at this meeting is disputed. The Government alleges that Malicorp held itself out as a company with capital of £100 million and submitted forged documents to this effect. Malicorp disputes what documents were provided and when, and asserts that there is a major difference between issued or subscribed capital, constituting the actual capital, and authorised capital, which is the amount up to which the board of directors may increase the capital without having to call an EGM.

In February 2000, Malicorp was selected as the preferred bidder, and on 4 November 2000 Malicorp and the Government entered into the concession contract.

In March 2000, Malicorp cancelled the resolution to increase its authorised share capital to £100 million, and replaced it with the original value of £1,000.

On 12 August 2001, the Government wrote to Malicorp, rescinding the contract on four bases, that Malicorp had:

On 20 April 2004, pursuant to the dispute resolution provisions in the contract, Malicorp filed a request for arbitration with the Cairo Regional Centre for International Commercial Arbitration (CRCICA) claiming damages for losses sustained due to the alleged wrongful termination of the contract. In parallel with the CRCICA arbitration proceedings, the Government brought criminal proceedings against a number of individuals directly or indirectly connected with Malicorp, including Egyptian civil servants involved in examining the bid, alleging various unlawful and fraudulent acts. The Government applied to the CRCICA tribunal for a stay of the arbitration proceedings in view of the criminal proceedings. The CRCICA tribunal refused the stay and the CRCICA arbitration proceedings continued.

On 19 February 2006, the Council of State Administrative Court of Cairo held that the arbitration clause contained in the contract was void and ordered the CRCICA tribunal to suspend the arbitration proceedings. As a result, one member of the tribunal suspended his participation in the proceedings. The remainder of the CRCICA tribunal however went ahead with the proceedings, relying on Egyptian Arbitration Law, and on 7 March 2006 issued an arbitral award (CRCICA award).

The CRCICA award found the arbitration clause binding but found that the Government had been the victim of a fundamental error in signing the contract in that it had wrongly believed that the capital registered and paid by Malicorp was £100 million and for that reason the contract was void. The CRCICA tribunal nevertheless ordered the Government to reimburse Malicorp for costs, invoices and salaries of its employees in the sum of US$14,773,497, with interest. The Government has alleged that in doing so the CRCICA tribunal relied on a provision of Egyptian Civil Code to which the parties had made no reference during the proceedings, and has applied to have the CRCICA Award set aside, an application which is pending.

Malicorp sought to enforce the CRCICA award in France. However, on 19 June 2008 the Paris Court of Appeal dismissed Malicorp's application to enforce the CRCICA award, finding that the tribunal's issuing of the award on the basis of a provision that had not been previously submitted to the parties amounted to a denial of justice. This decision was upheld by the French Cour de Cassation, which considered that the tribunal had violated the adversarial principle by basing its decision on provisions of the Egyptian Civil Code that had not been pleaded by the parties.

On 21 October 2008, Malicorp filed its Request for Arbitration with ICSID pursuant to the BIT. In the ICSID proceedings, Malicorp alleged that:

The Government challenged the tribunal's jurisdiction on the basis that the contract had been entered into as a result of fraud and the ICSID tribunal therefore had no jurisdiction, as the Government's consent to arbitration under the BIT did not extend to fraud.

Although the Government had focused its jurisdiction challenge on the alleged fraud, without discussing the other conditions on which the tribunal's jurisdiction depended, the tribunal concluded it must satisfy itself that all the conditions were in fact fulfilled. It therefore looked at all the requirements under the BIT and Article 25 of the ICSID Convention, before focusing in particular on the requirement that the dispute relate to an "investment", and the impact of the allegations of bad faith.

The tribunal confirmed that the safeguarding of good faith is one of the fundamental principles of international law and the law of investments. It considered that good faith issues can arise in two contexts:

The tribunal noted that while some previous tribunals had approached this as a jurisdictional issue, in other words that the state's consent to arbitration of investment disputes presupposed that those investments were validly made, others have approached it as an issue on the merits.

The tribunal did not think it appropriate to provide a general answer to this question, but decided on the present case there were strong arguments that favoured treating the issue of the validity of the investment at the merits stage. Among the factors that the tribunal relied on were:

For these reasons, the tribunal concluded that the issue of whether the concession contract had been entered into in good faith and the validity of the investment should be considered as part of the merits stage, not as part of the examination of jurisdiction and, having already concluded that the contract constituted an investment, concluded it had jurisdiction to consider the dispute.

As to the merits, Malicorp argued that the Government had breached BIT obligations relating to fair and equitable treatment (Article 2) and expropriation (Article 5). The tribunal noted that expropriation necessarily implies treatment that is neither fair nor equitable. The tribunal considered that where an investor bases its action primarily on expropriation, in order to rely on both provisions the investor must be able to establish that it has also been the victim of other measures, different from the expropriation.

Malicorp's sole complaint concerned the rescission of the concession contract. Nowhere in its pleadings did it explain in what way it was also the victim of unfair or inequitable treatment that gave rise to additional consequences. The tribunal therefore concentrated on the allegation of expropriation.

The tribunal examined the reasons set out in the Government's letter rescinding the contract, as listed above. Malicorp argued that these were merely pretexts, and that the real reason for the termination was a change of government policy. The tribunal, however, concluded that if the Government had a legitimate right to terminate the contract, it could do so, even if that indirectly suited its change of policy. The first question was therefore whether the reasons given in the respondent's letter justified the termination.

The first reason relied on in the letter was the Government's allegation that it had been misled by the submission of inaccurate documents concerning Malicorp's financial capabilities, at the heart of which was the distinction between authorised and issued share capital. On the facts, the tribunal, without making any finding on whether Malicorp was guilty of fraud or bad faith, found that "the nature and content of the information supplied to the Respondent by Malicorp's representatives was such as to give rise to an essential mistake" as to whether the company awarded the project was an empty shell or a company of substantial resources. The tribunal concluded that the mistake was sufficiently fundamental that it entitled the Government to terminate the contract, and therefore that the termination, justified in fact and law, could not be interpreted as an expropriation.

Malicorp's claim therefore failed at the merits phase.