Iraq’s accession to the ICSID Convention, as well as recent UK and US court decisions concerning the Kurdistan Regional Government’s entitlement to sovereign immunity represent potentially significant changes to the Iraqi disputes landscape for investors.

The end of 2015 saw a number of interesting developments for dispute resolution and enforcement in Iraq.  In particular: 

• In December 2015, the ICSID Convention came into force for Iraq, which had ratified it the previous month.  Although this represents a promising step for foreign investment, as explained below, its immediate impact may be limited in practice.
• Two recent court decisions in the UK and US refused to find that the Kurdistan Regional Government (KRG) was entitled to sovereign immunity.  Although these decisions are specific to their facts and the governing laws at issue, they are indicative of the approach that may be taken to sovereign immunity involving the KRG.

With Iraq’s economy struggling due to low oil prices and the security situation, these developments are potentially significant.  The current economic and political climate has led many foreign investors to review their investments and contracts in Iraq.  These recent developments are likely to be relevant to investors’ consideration of their strategic options in respect of both current and future Iraqi investments.  

Iraq ratifies the ICSID Convention

On 17 December 2015, the ICSID Convention came into force for Iraq, which became the 160th country to sign the Convention.  This follows Iraqi Law No. (64) of 2012, which authorised Iraq to join the ICSID Convention. 

The ICSID Convention protects and promotes foreign investment by providing foreign investors with a forum for the settlement of disputes with a host State.  At a time when Iraq’s economy is struggling due to the drop in oil prices and the security situation, this was a significant move by the Iraqi government, which may be seeking to increase the foreign direct investment needed to continue developing Iraq’s resources and infrastructure. 

In practice, however, Iraq’s ratification of the ICSID Convention may not have any immediate impact on foreign investors.  Iraq has only a limited number of bilateral investment treaties (BITs) currently in force.  Whilst Iraq is reportedly a signatory to over 30 BITs, only two have entered into force (Kuwait, and more recently Japan, which expressly provides for ICSID arbitration proceedings as one of the methods for resolving investor-state disputes).  Iraq is also a signatory to a number of multilateral agreements regarding investment promotion, and it is reported that additional bilateral investment treaties with Iraq are pending. 

An interesting question is whether the protection offered by BITs would extend to the various contracts the KRG has entered into with foreign companies for the development of natural resources in the Kurdistan region.  The FGI has declared a number of those contracts to be in breach of Iraqi law.  As discussed further below, recent caselaw from the UK and the United States suggests that conduct by the KRG, which is disputed by the FGI, may not be attributed to the “State” and therefore foreign investors dealing with the KRG in those circumstances might not be entitled to the protections of any applicable BIT. 

A significant advantage of an ICSID arbitral award is the ability to enforce that award in the host State.  By ratifying the ICSID Convention, Iraq agreed to abide by and comply with the terms of any ICSID award, and to enforce any such award within its territory as that award if were a final judgment of an Iraqi court. 

This could be particularly beneficial for foreign investors, because Iraq has yet to sign the New York Convention, which now has over 150 contracting states.  Iraq is, however, a signatory to the Riyadh Convention on Judicial Cooperation of 1983 (the Riyadh Convention). 

For foreign parties entering into commercial dealings with parties based in Iraq, or with assets in Iraq, in addition to considering whether protection may be available from a BIT, it would be wise to choose a seat of arbitration located in a Riyadh Convention-member state, as doing so would increase a party’s ability to directly enforce any resulting award in Iraq. 

Recent caselaw involving the KRG

English commercial court holds the KRG is not entitled to state immunity

In Pearl Petroleum Company Ltd and others v The Kurdistan Regional Government of Iraq [2015] EWHC 3361 (Comm.), the English Commercial Court rejected an argument that the KRG was entitled to assert state immunity under the English State Immunity Act (the SIA).

The English court was asked to enforce an LCIA tribunal’s peremptory order that the KRG pay the claimants USD 100 million in connection with a contract for the development of two gas fields in Kurdistan.  In its defence, the KRG argued that it was entitled to state immunity under SIA.  

Whilst the Court recognised that entering into a long-term contract for the exploitation of natural resources would involve an exercise of sovereign authority, the Court found that the KRG was not entitled to state immunity on the facts, because it was “quite clear this was an exercise of the sovereign authority of the KRG itself, not of Iraq”. 

The Court noted the dispute between the KRG and the FGI in respect of the KRG’s power to award petroleum contracts.  The Court further noted that the FGI had sent a letter to one of the claimants stating that the contracts signed by the KRG, without the approval of the FGI, were “in violation of the prevailing Iraqi law”. 

The KRG is unsuccessful before US courts

On 21 September 2015, the U.S. Court of Appeals for the Fifth Circuit dismissed as moot the KRG’s appeal from the district court in the Southern District of Texas denying the KRG’s motion to dismiss a complaint that had been brought by the Ministry of Oil of the Republic of Iraq (Ministry of Oil of the Republic of Iraq v. Kurdistan Region of Iraq, No. 15-40062, 2015 WL 5530272 (5 Cir. Sept. 21, 2015)). 

The dispute concerned over one million barrels of crude oil that had been exported from the Kurdistan region of Iraq and transported to the Gulf of Mexico by tanker, which dropped anchor approximately 60 miles off the coast of Galveston, Texas.

The Ministry of Oil had alleged that the oil on the tanker had been exported in violation of the Iraqi Constitution, and sought an order declaring that the Ministry of Oil was the rightful owner of the cargo.

The KRG sought to have the complaint dismissed under the “political question doctrine”, which excludes from judicial review controversies that are constitutionally committed for resolution to Congress or the Executive Branch.  The KRG also sought to have the complaint dismissed on the basis that the KRG enjoyed immunity under the Foreign Sovereign Immunity Act (the FSIA).

In its decision dated 7 January 2015, the district court found that the question at issue was the interpretation of the Iraqi Constitution, which was consistent with classic judiciary functions.  The district court further found that whilst the KRG qualified as a “foreign state” under the FSIA, it was not entitled to immunity in the present case because its conduct in exporting the crude oil for sale was clearly commercial activity  (Ministry of Oil of the Republic of Iraq v. 1,032,212 Barrels of Crude Oil Aboard the United Kalavrvta & the Ministry of Natural Resources of the Kurdistan Regional Governate of Iraq, Civil Action G-14-249, 2014 WL 4215357  (S.D. Tex. Jan. 7, 2015)). 

The KRG’s subsequent appeal was dismissed as moot by the Fifth Circuit, because the KRG had discharged the cargo in Israel.  The Court of Appeals refused the KRG’s request to vacate the district court’s earlier order that it give 10 days’ notice to the Ministry of Oil before further attempting to sell oil in the Southern District of Texas.  The Court of Appeals found that by discharging the cargo and failing to give the court notice of the intended discharge, the KRG severely weakened its entitlement to the equitable relief of vacatur.