Official citation Jan Paulsson, The Pyramids Case, in COLLECTED COURSES OF THE INTERNATIONAL ACADEMY FOR ARBITRATION LAW, Year 2012, Volume 1, at 1 (2014) -f JAN PAULSSON Although born to Swedish parents, Jan Paulsson was reared in Liberia and was sent to the United States for schooling, which turned out to be Monrovia High School in California, Harvard College, and Yale Law School, where he was an editor of the Yale Law Journal. He started practicing in 1975 with Coudert Freres in Paris, and received a graduate degree from l'Universit de Paris II. He joined Freshfields in 1989, and for 20 years headed the firm's worldwide international arbitration and public international law groups. He now holds the Michael Klein Distinguished Scholar Chair at the University of Miami, and is a Visiting Professor of Law at the London School of Economics. He has served as counsel or arbitrator in many hundreds of cases. He has been President of the London Court of International Arbitration; President of the World Bank, European Bank, and OECD Administrative Tribunals; a Vice-President of the ICC International Court of Arbitration; and a President of the International Council for Commercial Arbitration. He is currently a member of the AAA Board of Directors, and a member of the Permanent Court of Arbitration in The Hague. His two most recent books are Denial of Justice in International Law (Cambridge, 2005) and The Idea of Arbitration (Oxford, 2013). adies and gentlemen, thank you so much for honouring me with your presence. This large and friendly crowd is unmistakable evidence of the success of the Academy. It is hard to imagine a more elegant auditorium than this classic salon. Now where I come from in northern Sweden, it is not considered polite to say much about anything. If you have seen Bergman movies, you will know what I mean. And if you must talk, there is one thing you absolutely should not say anything about at all: yourself. Furthermore, in our profession, we all know that if you want to avoid being a bore you shouldn't tell too many war stories. Nevertheless I have been invited here to talk about myself, and to tell a very long war story from beginning to end. Yes: I have been given license to indulge myself limitlessly in the forbidden. How could I not be titillated? So here goes, and rememberI didn't ask for this! I will tell you a story about a single international dispute which was resolved in a way which changed the world of arbitration. Good stories tend to involve some colourful people, and this one certainly does. Let me start with Peter Munk. Today, he is the founder and Chairman of Barrick Gold, the world's largest gold company, which has 20,000 employees. He is a prosperous and prominent Canadian, and a well-known philanthropist. In 1944, he was a II-year old Jewish Hungarian who escaped the Nazis on what I am tempted to call the last train from Budapest. Eight years later, he had a degree in electrical engineering from the University of Toronto. When my story starts, Mr Munk was in his mid-fifties and had already become a business tycoon. He had retained a definite trace of a Middle European accent. He was impeccably and expensively dressed, but what anyone would first notice was his pale and piercing blue eyes. He never seemed to blink. The adjectives that would come to mind to describe him would have been: intense and focused. You knew that he was a busy man, INTERNATIONAL ACADEMY FOR ARBITRATION LAW I YEAR 2012 and sensed that he viewed any professional discussion as an investment in a valuable resource his time and he was not going to waste it. So if a problem was important enough that he had to spend time getting legal advice about it, his concentration was absolute. Never before and never since have I had the feeling of someone who so absorbed absolutely every word, intent on understanding every point, processing it, testing whether it made sense, and deciding what action to take in response to it. That was Mr Munk, a formidable figure, totally oblivious at least in a business Official citation Jan Paulsson, The Pyramids Case, in COLLECTED COURSES OF THE INTERNATIONAL ACADEMY FOR ARBITRATION LAW, Year 2012, Volume 1, at 1 (2014) -f JAN PAULSSON Although born to Swedish parents, Jan Paulsson was reared in Liberia and was sent to the United States for schooling, which turned out to be Monrovia High School in California, Harvard College, and Yale Law School, where he was an editor of the Yale Law Journal. He started practicing in 1975 with Coudert Freres in Paris, and received a graduate degree from l'Universit de Paris II. He joined Freshfields in 1989, and for 20 years headed the firm's worldwide international arbitration and public international law groups. He now holds the Michael Klein Distinguished Scholar Chair at the University of Miami, and is a Visiting Professor of Law at the London School of Economics. He has served as counsel or arbitrator in many hundreds of cases. He has been President of the London Court of International Arbitration; President of the World Bank, European Bank, and OECD Administrative Tribunals; a Vice-President of the ICC International Court of Arbitration; and a President of the International Council for Commercial Arbitration. He is currently a member of the AAA Board of Directors, and a member of the Permanent Court of Arbitration in The Hague. His two most recent books are Denial of Justice in International Law (Cambridge, 2005) and The Idea of Arbitration (Oxford, 2013). adies and gentlemen, thank you so much for honouring me with your presence. This large and friendly crowd is unmistakable evidence of the success of the Academy. It is hard to imagine a more elegant auditorium than this classic salon. Now where I come from in northern Sweden, it is not considered polite to say much about anything. If you have seen Bergman movies, you will know what I mean. And if you must talk, there is one thing you absolutely should not say anything about at all: yourself. Furthermore, in our profession, we all know that if you want to avoid being a bore you shouldn't tell too many war stories. Nevertheless I have been invited here to talk about myself, and to tell a very long war story from beginning to end. Yes: I have been given license to indulge myself limitlessly in the forbidden. How could I not be titillated? So here goes, and rememberI didn't ask for this! I will tell you a story about a single international dispute which was resolved in a way which changed the world of arbitration. Good stories tend to involve some colourful people, and this one certainly does. Let me start with Peter Munk. Today, he is the founder and Chairman of Barrick Gold, the world's largest gold company, which has 20,000 employees. He is a prosperous and prominent Canadian, and a well-known philanthropist. In 1944, he was a II-year old Jewish Hungarian who escaped the Nazis on what I am tempted to call the last train from Budapest. Eight years later, he had a degree in electrical engineering from the University of Toronto. When my story starts, Mr Munk was in his mid-fifties and had already become a business tycoon. He had retained a definite trace of a Middle European accent. He was impeccably and expensively dressed, but what anyone would first notice was his pale and piercing blue eyes. He never seemed to blink. The adjectives that would come to mind to describe him would have been: intense and focused. You knew that he was a busy man, INTERNATIONAL ACADEMY FOR ARBITRATION LAW I YEAR 2012 and sensed that he viewed any professional discussion as an investment in a valuable resource his time and he was not going to waste it. So if a problem was important enough that he had to spend time getting legal advice about it, his concentration was absolute. Never before and never since have I had the feeling of someone who so absorbed absolutely every word, intent on understanding every point, processing it, testing whether it made sense, and deciding what action to take in response to it. That was Mr Munk, a formidable figure, totally oblivious at least in a business it made sense, and deciding what action to take in response to it. That was Mr Munk, a formidable figure, totally oblivious at least in a business to anything that did not relate to the achievement of his context purpose. Thirty seconds of irrelevancies, one felt, and he would end the conversation. But before scaling the heights of the business world, as a young electrical engineer, Peter Munk had worked on the innovation of sound systems, going from mono to stereo, exploiting the new solid state technology to produce what was then called high fidelity stereo sets for homes. He was a techie. Then he met someone who would become a long-time business partner. This is the second person in this story. His name is David Gilmour, a native-born Canadian who hardly resembled Peter Munk at all. Mr Gilmour was an urbane socialite, charming, tall, with a sort of languid aristocratic elegance that might make you think he had all the time in the world. He too was exquisitely well dressed, but whereas Munk's clothes seemed to have a business purpose, namely to establish confidence, achievement, and authority, the unhurried Gilmour seemed to exude elegance for its own sake. Someone said that he never carried a wallet in his suit jacket because he was offended by the bulge it would create. His circles were glamorous and he was at home there, from Hollywood to London, a man of great aesthetic awareness, not particularly interested in technology, but in the pursuit of dreams. He could sell snow to the Eskimos, as the saying goes, and probably charge a premium because his trademark made them feel that this snow was different from all other snow.... This odd couple, having met somehow in their twenties, developed an idea and in 1958 started a company called Clairtone. This was the idea: the engineer would make the sound system, and the persuasive aesthete WOUld promote the radical concept that you could house it in gorgeous furniture perfect sound married to great design. This was the future, and 2 JAN PAULSSON ITHE BERTHOLD GOLDMAN LECTURE ON HISTORIC ARBITRATION STORIES the future was cool. Clairtone was an immediate success; in a world used to gramophones, no one had seen anything like it or paid such prices for the sound of recorded music. The two young men struck it rich. The sales of Clairtone units soared to heights that exceeded anything they could have imagined. Suddenly consumer electronics could be fashionable. Sinatra endorsed Clairtone; in magazines you could see Sean Connery, then in his heyday as James Bond, with a Clairtone in the background. In the famous movie The Graduate, young Ben (Dustin Hoffman) was seduced by Mrs Robinson (Anne Bancroft) as sultry music wafted from a Project G stereo, the signature Clairtone product, which actually still looks pretty good. With a thousand employees, the company was quoted on the Toronto Stock Exchange. But this kind of success can be costly, as you need to invest to expand to meet the market, and the income lags behind. Munk and Gilmore turned to government for support, but the public-private partnership was not a SUCCess. For example, now decisions were made on the basis of where factories should be located to create employment, and the company launched into colour television years before it and the market were ready. Munk and Gilmour were ousted, and Clairtone ultimately went bust. A dozen books have been written about the Clairtone story a story of failure, a business-school example of how NOT to turn a flashy venture into an enduring enterprise. Our two protagonists were now in their 30s. They should have learned a lesson but what was that lesson? Was it to play it safe, to get a decent job with a decent salary and forget about risk-taking? Not at all, this had been a valuable failure, which showed them how you could turn an idea into a fortune, but also that you then needed to be very careful about how you manage your success. Having lost none of their confidence, they launched themselves into a series of very different industries, beginning with hotels. They founded the Southern Pacific Hotel Corporation, which acquired the largest chain of hotels in Australia and throughout the South Pacific from New Zealand to Tahiti. Soon they began to think of expanding into other regions. They set up a legal entity under the laws of Hong Kong called Southern Pacific Properties (Middle East), which you all have heard of as the first name of the famous SPP v. Egypt case, often referred to as in the title of this lecture as the Pyramids Case. 3 INTERNATIONAL ACADEMY FOR ARBITRATION LAW I YEAR 2012 The third personality of our story is Anwar Sadat, the President of Egypt. In the early seventies, the previously friendly relations between Egypt and the USSR became very frosty. Sadat set a new course, turning his back on the close cooperation which had been maintained under the Nasser regime between Egypt and the USSR. He proclaimed a new policy of open door to foreign private investment. It took the shape of something called Law Number 43 of 1974 for the Promotion and Protection of Foreign Investment. This law will play a pivotal role in this story and indeed in the genesis of the modern phenomenon called "investment arbitration" which you have been studying in this Academy. At the same time, President Sadat began a program of negotiating and signing bilateral investment treaties with a number of countries, including the United Kingdom. Peter Munk and David Gilmour were intrigued by Egypt's abandonment of pro-Soviet policies, and its invitation to foreign investors. These days Mr Munk is often asked to give lectures, in Canada and elsewhere, about his successful career. He likes to say that his talents are small, but that his dreams have always been big. And the Monk-Gilmour team unquestionably had big dreams, as they started thinking about Egypt. Others might have said "let's wait and see." They said "let's go," we'll be the first foreign investors to come in under this new Law and we are going to do something very big. Since I am going to be talking about myself, I will now introduce myself as the fourth character, and I can do so in a single sentence. At this time, I was what most of you in this beautiful but crowded salon are today, a law student wondering what my future might be. Back to Munk's and Gilmour's big dream. What did Egypt have? The most obvious answer, one of the Seven Wonders of the world, the Pyramids. They had seen them, of course, and were appalled at the environment around them. They conceived the idea of a prestigious residential and tourism complex in the area of the Pyramids which would protect the environment, generate employment, and enhance revenue inflows. They discussed it directly with the President and with a number of Ministers. They all agreed to the project, and to its location in the vicinity of the Pyramids. This is a sensitive environment, needless to say. Let me immediately tell you what the dispute was not about. In the international press, this was described as a project which was controversial because it 4 JAN PAULSSON ITHE BERTHOLD GOLDMAN LECTURE ON HISTORIC ARBITRATION STORIES perhaps endangered the Pyramids. But at the time, the Pyramids were already endangered by the SUbUrbS of Cairo which had reached the very steps of the Sphinx, and were encroaching on the Pyramids. A very short walk from the Pyramids, a number of illegal constructions had sprouted, visual eyesores which were referred to in Egypt as chalets. It was a long way from the Alps, but that is what they were called. Gambling and other dubiOUS night time activities were going on near the Pyramids, as these buildings mushroomed, making lots of money for their operators. The people who owned them were openly acting outside the law, and seemed somehow to have the influence to entrench themselves. They resisted any idea of zoning. The SPP project contemplated immense investments, on the order of half a billion dollars (which was serious money at the time), which would remove all of these illegal constructions, in 50/50 partnership with the government, and replace them with a complex of buildings, hotels and residences, the closest of which would be a full three kilometres from the Pyramids. The tallest building could be no taller than a palm tree, so that no edifice could be seen from the Pyramids. Contrary to the image portrayed in the press, this was not a crazy capitalist idea of invading the Pyramids and having people teeing off their golf stokes from the tops of these ancient monuments. It was nothing like that. Many years have passed, and I believe that I can be objective in saying that the project, had it gone forward, is likely to have been better than the perpetuation of the unregulated mess around the monuments. One of my reasons has to do with the personality of Mr Gilmour and his love of beauty. Some time after my story ended, Gilmour bought a private island in the Fiji archipelago. The island is called Wakaya. Its size is 8 square kilometres, which is four times larger than Monaco. He bought it for himself and his wife. I guess to break the monotony of the tropical paradise he built ten bungalows for visitors. The Gilmours could have built a palace for themselves and a dozen huge hotels for profit anything they wanted. Instead they created what must be one of the smallest and most exclusive resorts in the world. If you are an avid reader of Hello magazine, you might read the fine print under the photographs and note that celebrities are said to be dashing off to Wakaya to spend their honeymoons, or to be creeping away to Wakaya to restore their souls after divorces. Once they land on the tiny 5 INTERNATIONAL ACADEMY FOR ARBITRATION LAW I YEAR 2012 strip, they understand the words which the Gilmours have used to define this particular enterprise: "The more the world changes, the more we gravitate to places that don't." This leads me to believe that David Gilmour would never have been a party to the desecration of the Pyramids. It is of course only a personal conviction. But someone has already brought pyramids to Las Vegas, and I am quite sure that Munk and Gilmour would not have brought Las Vegas to the Pyramids. I have not been digressing as much as you might think. I want you to see that this case was not about whether this was or was not a defensible project. That was for the Egyptian Government to decide, not SPP. The investors came in, mobilised substantial resources, and commenced operations on the ground. Then the project ran into political controversy, in the media and in the Parliament. It was said I do not know if it was true that at the time it was thought unwise to criticize the Government directly and even more delicate to criticize the President directly. So instead, opposition figures would criticize projects that had been initiated by the Government. This was a high profile project. Perhaps the status quo had strong defenders. The project ran into hot water, and was ultimately cancelled. quo had strong defenders. The project ran into hot water, and was ultimately cancelled. The investors' complaint was not, and never became, that they should be allowed to pursue the project no matter what. The case was about an investor who said, "We had an agreement. We agreed that we WOUld do this; we have invested money, now you have cancelled it. We are not asking for specific performance, we are not going to ask an international tribunal to declare that we are entitled to proceed no matter what. We just want our money back and contractual damages." Subsequent talk about saving the Pyramids and respecting a UNESCO world heritage site (a classification that the Pyramids did not have at the time the contracts were signed) was absurd and inflammatory. Egypt was sovereign, and this was never questioned by the investor. Let's then see where we are: Munk and Gilmour had come to Egypt and had signed contracts. A few details are important. They signed an initial agreement called Heads of Agreement, which was tripartite. The parties were SPP (the investor), on the one hand, and, on the other, the State of Egypt and EGOTH (the Egyptian General Organization for Tourism and Hotels), a State agency. The Government signed through its Minister of Tourism. The Heads of Agreement contemplated the creation of a joint 6 JAN PAULSSON ITHE BERTHOLD GOLDMAN LECTURE ON HISTORIC ARBITRATION STORIES venture company, fifty-fifty. That was in September 1974. A detailed agreement was then negotiated over the months that followed, and in December 1974 the final Joint Venture Agreement was concluded. It was indeed the first private foreign investment approved under the famous Law No. 43, and the Agreement specifically so stated. Gilmour, not Munk, was the head of the negotiating team at this time. He observed that the draft presented by the Egyptian party no longer included three parties, but only two, SPP and EGO TH. Gilmour was no lawyer, but his instinct was that this presented a problem. He had shaken the hand of the President, he was dealing with Ministers. He did not exactly know what EGOTH was, and whether a promise of EGOTH would be bankable. He was counting on the Government's involvement. He objected, "This is not what we thought we were going to sign." The answer was, "We are a joint venture, we are creating a joint venture company, fifty-fifty. YOU are a shareholder. On the Egyptian side there is also a shareholder, and it is not going to be the State; the State does not do that. We have separate State-owned organs that take shareholdings in commercial ventures. We are not going to have three shareholding parties." Gilmour remained dubious, and unwilling to sign on this basis. But there was a desire on both sides to conclude, so the matter was discussed at some length. Finally, as so often happens, at the end someone found a solution which seemed to be a good idea at the time. (One hopes that it will never be tested.) The idea was that the Minister would sign the Agreement on some kind of ad hoc basis, without formally making the State a named party. So this is what eventuated: an agreement between SPP and EGOTH alone, with the Minister signing it nonetheless, on the last page, under the words "agreed, approved and ratified." What do you think? Was this good enough? Well, it was good enough for Mr Gilmour; he signed, and so the Pyramids Oasis project commenced. Over the next couple of years, as I said, the project ran into political hot water. The Government was criticized for having agreed to these contracts. Ultimately the President concluded that the project had become too much of a controversy, and unfortunately must be cancelled. The Prime Minister went on the radio and announced, "We regret that this is both the first project under Law No. 43, and the first project we are cancelling. I am very sorry, but the Government has decided as a matter 7