Egypt: Doing Business In Libya — Opportunities And Challenges Of The Transition

Last Updated: 4 April 2012
Article by Kilian Bälz

The Market

The fall of the Ghaddafi Regime in August 2011 marks the end of an era and it is difficult to predict what direction Libya will take in the future. The weeks and months ahead inevitably will provide both opportunities and challenges for companies active in Libya or targeting the Libyan market.

Presently1, political power is exercised by the National Transitional Council (NTC) comprising stakeholders from different backgrounds and with differing political agendas. The NTC has announced that rebuilding the country is a top priority. This will require oil production to start up again without delay. In view of the shortage of high-quality crude in the global markets, this is a shared interest of both Libya and the international oil industry. 

In September 2011, at the invitation of the NTC, the World Bank joined the United Nations and the European Union to coordinate international assistance for Libya as the country defines a path forward after months of violent conflict.

The political transition in Libya will take time and the outcome is still uncertain. With regard to the economy, however, analysts expect that it will not take long before confidence returns and the oil industry starts pumping once more. Nevertheless, it will take time for the economy to recover.

The civil war inflicted enormous damage to the economy. Oil production and exports, which had previously generated 90 % of the country's GDP, came to a halt. A global market research company has revised its forecast for real GDP growth in 2011 downwards to minus 23.2%. A full assessment of the damage to the country's infrastructure will not be possible until security has been fully restored.

The waiver of the asset freeze and the lifting of international financial sanctions will help the NTC in its efforts to kick-start the Libyan economy. It is expected that investments will focus on upstream oil and gas (and related services), refining, energy and construction. In the medium term, opportunities also are expected to arise in infrastructure, healthcare, tourism, manufacturing, financial and insurance services and consumer goods.

The Constitutional Framework

According to general principles of International Law, foreign investors are protected against a political regime change, and be it as radical as the end of the Qaddafi Regime. Protection includes, in principle, the changes in domestic legislation which are prejudicial to investors or inconsistent with the principle of the continuity of the State. First, the Libyan state and state entities will continue to be bound by international treaties and state contracts.2However, it is expected that the NTC will gradually introduce a number of legislative amendments. International law protects both the legitimate expectations and the vested rights of foreign investors and contracting parties, and to that extent, prejudicial regulatory changes could be excluded.

In August 2011 the NTC proclaimed a Constitutional Declaration consisting of 37 Articles. The Constitutional Declaration governs the exercise of political power in the transitional period until the election of the National General Council, which will take over power from the NTC. A constitutional assembly will be entrusted with drawing up a new Libyan constitution and submitting it to a referendum, probably in late 2012. Although the legal nature and effects of the Constitutional Declaration are difficult to determine, it does provide some pointers to the future. In addition to political liberalization and democratization, one of the main objectives is to diversify the economy which has traditionally been heavily dependent on oil. The promotion of private sector initiative is another priority. Until the new Constitution comes into force, the declaration replaces the Constitutional Proclamations and Declarations of the former Regime (which mainly served to cement Ghaddafi's rule3

The Legal System

Libya has a civil law system, influenced to a limited extent by the Islamic Shari'a. The key pieces of legislation are similar to Egypt and other Arab countries.

The Libyan Civil Code sets out the following hierarchy of legal sources: legislation, principles of Islamic Shari'a followed by custom and principles of natural law and equity. The main pieces of legislation are the 1954 Civil Code, the Code of Civil and Commercial Procedures of 1953, and the Commercial Code, which was thoroughly revised in 2010 and which covers matters such as company law and insolvency. In addition, there are numerous decrees from the Ghaddafi Era regulating various aspects of the economy. These decrees have made it challenging for foreign investors to navigate the Libyan legal system. A comprehensive revision of economic legislation will be a key task for the future Libyan legislator.

At present, the Libyan administration is in the slow process of getting back to normal. Significant delays in administrative proceedings, including registrations and applications, must be expected. The functioning of public administration came to a complete halt during several months of fighting. The result is a huge backlog of pending matters.

Setting up Business in Libya

Foreign companies operating in Libya must set up a local entity. Under Libyan law it is not permissible to do business in the country without a registered presence.

At present, the following forms of establishment exist:

  • Joint Venture: The joint venture ("Mushtarika") company is a joint stock company with a minimum of 35% Libyan ownership. The minimum share capital of a Mushtarika Company is one million Libyan Dinars, at least 30% of which must be paid in on incorporation, with the remainder to be paid within five years. This vehicle is commonly used for foreign-Libyan joint ventures.
  • Branch Office: The registration of a branch office of a foreign company does not require a Libyan partner (or sponsor). However, the foreign company must demonstrate that is has particular experience in its planned area of activity. In addition, the activities which may be performed through a branch are confined to those mentioned in a list published by the Ministry of the Economy. On registration, the parent company is obliged to deposit a minimum of 150 000 LYD with a local commercial bank. A branch office has the advantage that the foreign company is not dependent on a Libyan partner.
  • Investment Enterprise: Under Investment Law No. 9 of 2010, investors can establish investment enterprises for activities in all the main industry sectors, with the exception of oil and gas exploration and production. The investment project may be wholly owned by the foreign investor, provided that the amount of the funds invested exceeds five million LYD. The minimum investment is reduced to two million LYD if a Libyan partner holds at least 50% in the investment. An investment enterprise benefits from certain exemptions from taxes and customs duties. Net profits and dividends are freely transferable and the investor may own real property in Libya. An investment enterprise is particularly suited to a foreign investor wishing to undertake a capital intensive project in the country.
  • Free Zone Enterprise: The establishment of a free zone enterprise under Law 9 of 2000 is subject to a special legal regime. Under law 9 of 2000 and its executive regulations, a free zone enterprise can be established, for the manufacturing or processing of goods and the provision of services. A free zone enterprise must have a paid up capital of at least USD 100,000. Free Zone Enterprises qualify for exemptions and benefits similar to those available to investment enterprises. At present, there is only one free zone, located at Misurata, 200 km east of Tripoli. The Misurata Free Zone enjoys a certain popularity among investors. However, for the moment it cannot be compared to the free zones in Egypt or the Gulf States.

It should be noted that further restrictions, such as limits on foreign shareholdings, are contained in specific regulations, such as those covering oilfield services, banking and insurance.

Structuring business activities in Libya requires careful legal planning and, in view of restrictions of foreign ownership, corporate government arrangements are often complex.

At the present point in time it is unclear what changes the NTC intends to adopt in the medium term and what liberalizations, if any, will be implemented.

Concession and Production Sharing Agreements with the National Oil Company

The oil and gas industry is expected to play a key role in the rebuilding of the Libyan economy. Wood Mackenzie characterizes Libyan oil and gas resources as "highly unexplored" pointing out that only around 25% of Libya is covered by exploration agreements with oil companies.

The exploration and production of oil and gas in Libya is governed by the Petroleum Law (Law no. 25 of 1955, amended up to 1983) and Decree no. 10 of 1979, which reorganised the National Oil Company (NOC) and empowered it to enter into all kinds of petroleum exploitation agreements. In the recent past there were many attempts to enact a new petroleum law and several drafts were submitted legislative discussion, however none were approved. A bill submitted in 2010 was quickly withdrawn by the Government.

At present, international oil companies operate in Libya either on the basis of an exploration and production sharing agreements (EPSA) or a development and production sharing agreement (DEPSA). The EPSA is the most common way for a foreign company to engage in oil exploration activities in Libya. The agreements are based on standard forms and there have been four generation of EPSA since 1974.

Normally, the choice of law provisions in the agreements with NOC explicitly refer to the Petroleum Law and the regulations issued in relation thereto, incorporating them into the agreement. The agreements regularly provide for international arbitration (often under ICC rules).

Commercial Agency

Commercial agency and distribution are mainly governed by the Commercial Code which has abrogated the Commercial Agency Law No. 6 of 2004. The Executive Regulations of the Commercial Agency Law No. 136 of 2004 (which continue to be in force) provide an extensive list of goods and services for which a local commercial agent is required (notable exceptions are foodstuffs and construction materials). Only a Libyan national or a wholly Libyan owned company can act as commercial agent. However, the importation for private use or for the purpose of a specific project does not require a local commercial agent or distributor.

The laws governing agency and distribution have been subject to numerous amendments, reflecting policy changes of the Libyan government in this area.

Contracting with the Public Sector

Special rules apply to contracts with the public sector. It is expected that such contracts will continue to play a key role in Libyan business in the foreseeable future.

Contracting with the public sector is subject to the Administrative Contracts Regulation no. 563 of 2007 which applies to all contracts with Libyan government entities or relating to development projects which are funded from the public budget. In addition to tender rules, the Administrative Contracts Regulation contains special rules for state contracts. The provisions of the Administrative Contracts Regulation are mandatory. A choice of law is not permissible and the Regulation provides for the exclusive jurisdiction of the Libyan courts.

An agreement to submit disputes to arbitration is only permissible with the prior approval of the General People's Committee.

EPC Contracts

EPC Contracts are often based on international models and in addition are subject to the rules of the Civil Code or the Administrative Contracts Regulation, depending on whether the employer is a private company or a state entity. It should be noted that Libyan law imposes a ten year warranty on the architect and contractor in relation to "fixed installations" (so-called "decennial liability"). The rules on decennial liability are mandatory and form part of Libyian ordre public. A Libyan court will apply local law in relation to projects in Libya, even if a foreign law has been determined as the proper law of the contract.

In general, it is permissible to cap or exclude certain types of damages, with the exception of gross negligence and fraud.

The contractor may be obliged to employ a certain percentage of local workers.

Force Majeure

Both the Civil Code and the Administrative Contracts Regulation contain provisions on force majeure and impossibility. In many instances, international companies relied on these provisions during the last months (and continue to rely on them). These provisions normally are amended and detailed in the respective agreements. In general, however, force majeure can only be invoked as long as the exceptional circumstances persist. This means that international companies no longer can rely on them when life goes back to normal.

Dispute Resolution

Enforcing claims through the Libyan courts is generally challenging and lengthy.

Libyan courts are competent to hear claims against Libyan nationals or entities, or relating to real property located in Libya. It is permissible to choose the proper law of the contract, although it may be difficult to enforce the choice of law in practice.

The arbitrability of disputes is subject to certain restrictions. In contracts subject to the Administrative Contracts Regulation, the prior approval of the Peoples Committee (or the body replacing it in the future) is a prerequisite.

Libya is not a member State of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). However, the Riyadh Convention on Judicial Cooperation (1983)4 may apply, which also contains a basic mechanism for the recognition and enforcement of judgements and arbitral awards among the (Arab) member states.5

In addition, the Code of Civil Procedure permits, in principle, the recognition and enforcement of foreign judgements and arbitral awards. In the past, however, this was not a practical option, and it remains to be awaited if and when this situation would change.

Investment Protection

Libya has entered into bilateral investment treaties (BITs) with a number of countries, including Italy (2000), Austria (2002), Switzerland (2003), Portugal (2003), Germany (2004), France (2004), Belgium-Luxembourg (2004), Malta (1973 and 2004) and Spain (2007). In addition, Libya has singed BITs with other countries which did not enter into force yet, including South Korea (2006), India (2007), Russia (2008), Turkey (2009), and China (2010). There are no BITs in relation to the US or the United Kingdom.

Libya has not ratified the ICSID Convention. This means that the forum for disputes between investors and the Libyan government will depend on what has been agreed in the respective BITs, and it may be recommendable that international parties agree to submit disputes to the ICSID under the so-called Additional Facility Rules.

Footnotes

1. This report was completed on 28 September 2011.

2. An exception may be made for such laws which are in flagrant violation of the principles of justice and obligations which are "odious". Both doctrines, however, will only apply in very rare circumstances.

3. Prior to the regime change, Libya's legal and governmental structure was based on two constitutional documents: the Constitutional Proclamation of December 1969 and the Declaration of the Establishment of the People's Authority, enacted in March 1977. Both embedded a very peculiar form of government, termed the Jamahiriya ("rule of the masses"), which was a mixture of Islamic and socialist ideals.

4. In force since October 1985. The Convention regulates the enforcement of judgements rendered in civil and commercial matters among Arab States, and applies to Arbitral awards.

5. The Convention was signed by 20 Arab States (Algeria, Bahrain, Djibouti, Iraq, Jodan, Kuwait, Lebanon, Libya, Mauritania, Morocco, Sultanate of Oman, Palestine, Qatar, Saudi Arabia, Somalia, Sudan, Syria, Tunisia, United Arab Emirates, and Yemen. The Convention was ratified by Iraq, Yemen, Mauritania, Jordan, Syria, Somalia, Tunisia and Libya.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions