Courting Foreign Business

December 09, 2010

By Daniel W. Smith and Ben Lando of Iraq Oil Report

Published December 9, 2010

BAGHDAD - Investors are learning detail’s of Iraq’s newly established a foreign commerce court intended to provide legal recourse for investors and, consequently, attract more foreign funds to the country.

“After opening Iraq’s economy (to foreign investors), it was necessary to establish courts specialized in commercial issues as encouraging investment,” said Judge Amir Kadhim al-Shammari, the chief justice of Iraq’s supreme court, who will also head the investment court.

The court’s effectiveness in attracting foreign investment will depend largely on its ability to prove its impartiality. Some foreign investors have already voiced fears that any such court in Iraq – in contrast to international courts of arbitration – will reflexively side with an Iraqi defendant or plaintiff as opposed to the law.

“What investors are looking for is a neutral place of arbitration with neutral arbiters,” said Jay Park, partner at international law firm Macleod Dixon and chair of its International Energy Law practice group. “There’s always a home-field bias.”

The foreign investment court was announced late last month, and will be run from Baghdad by two justices from the supreme court and a host of legal staff, all of whom have had training in business law, according to the court. If it’s a success – and if business continues to pick up in the country – branches in Mosul and Basra will open as well.

In a statement, the newly formed court touted its role to expedite business disputes. Its purview will include not only the oil sector but also industries like tourism services, publishing, advertising, real estate, and transportation.

Many investors were reluctant to talk on the record, positive or negative, for fear that public comments could affect their plans in Iraq. Most were cautiously optimistic, a characteristic trait of people thinking of putting down money in such an unsettled country.

“One question that investors have had is about the difficulty of enforcing foreign legal judgments in Iraq, so now that there is a specific court to address this, that makes me more confident,” said Zaab Sethna, the head of the Baghdad office of Northern Gulf Partners, an asset management and financial services provider in Iraq.

“We have faith in (the way the Iraqi judicial system functions), and the fact that this court is part of the official Iraqi judicial system is good news,” he said. “This court is another example of how Iraq is reforming to an investor-friendly framework.”

Foreign investment is a keystone of Iraq’s strategy for reconstruction and economic development. Iraq relies on oil exports for more than 90 percent of state income, and has signed 15 oil and gas deals with foreign oil companies since the end of 2008 – contracts which, in aggregate, could make Iraq the largest oil producer ever.

Iraqi plans to diversify the economy also depend on foreign investors. In this regard, the ability of foreign oil companies to operate in Iraq will be one bellwether of the country’s larger economic fortunes.

Oil companies have already encountered considerable legal pitfalls and ambiguities. The Kurdistan region of Iraq has signed 37 exploration and development oil deals, though a dispute between the central and regional governments has stymied production from those fields.

The Kurd-Baghdad conflict has also prevented modern oil legislation from being approved. Iraq’s 2005 constitution calls for a suite of laws to answer a host of unresolved questions about the oil sector, including the extent of central versus local authority in negotiating contracts and managing production. In the absence of such legislation, which failed to make its way through Parliament in 2007, foreign oil companies have signed multi-billion dollar deals based on vague and disputed definitions of the constitution and pre-2003 laws that remain on the books.

Late last year a member of Parliament sued the prime minister and oil minister over the constitutionality of the contract Iraq signed with BP and the Chinese National Petroleum Corp for the Rumaila field. That lawsuit was thrown out on a technicality when the plaintiff was unable to pay a quarter-million dollar court fee. Had it survived, that case would have been handled by Iraq’s Supreme Judicial Council and not the new investment court, since it presented a constitutional matter. Still, the dispute and its ambiguous resolution highlight just how much legal confusion remains in Iraq.

Park, the international attorney with clients invested in Iraq, said that even if the new court lives up to its hype, it will provide investors with substantially less assurance than international arbitration.

“When investors are considering the suitability of a country’s petroleum legal regime, one of the things they are looking for is that disputes be resolved using enforceable international arbitration,” he said. “The reason for this is that history has shown that disputes between foreign investors and local government, when dealt with by a local court with a judge or arbiter appointed by a local government, it doesn’t result in fair treatment of investors.”

Yet Iraq’s legal system is hoping their new court will not only serve justice, but in doing so assuage investors’ reasonable doubts.

Investors “need to know that, if a dispute occurs in the future, that they will be properly protected and represented,” said Judge Abdul-Sattar Bayraqdar, the spokesman of the Iraqi Supreme Judicial Council. “By creating this court, it will show investors that there is someone looking out for them, even if they are not Iraqi.”

Ben Lando reported from London and Basra. Daniel W. Smith reported from Baghdad.