The Imperial Jet saga: How courts and arbitrators ruled against Lebanon, but the state still came out ahead financially

The Imperial Jet saga: How courts and arbitrators ruled against Lebanon, but the state still came out ahead financially

An aerial picture taken on March 7, 2020, shows a view of Rafik Hariri International Airport in Beirut. (Credit: Patrick Baz/AFP)

BEIRUT — Amid a snowballing economic crisis, an ongoing political stalemate and an out-of-control surge in COVID-19 numbers, Lebanon got a spot of good news last month with the results of a six-year-long international court battle over a government decision to boot a small airline from the Beirut airport more than a decade ago.

The government alleged the company, Imperial Jet, had been operating unsafely; the company alleged that its license had been pulled arbitrarily for political reasons.

Lebanon’s highest administrative court had sided with the airline, leaving the state in what appeared to be a tenuous position in 2015 when the case went before an international arbitration panel, where Lebanon faced a potential payout of more than $1 billion.

The final verdict was mixed. The international arbitration panel at the World Bank’s International Center for Settlement of Investment Disputes found that Lebanese officials had acted improperly when they withdrew the Imperial Jet company’s license to operate in Lebanon and had breached agreements on the treatment of international investors.

But on the more pressing question of compensation, Lebanon came out ahead.

Instead of the $1.3 billion in damages that Imperial Holding — the parent company of Imperial Jet — and its co-owner, Abed El Jaouni, had sought, Jaouni ended up on the hook to pay Lebanon $266,202 to reimburse its costs in the case.

While the victory is largely symbolic — had Lebanon been ordered to pay, it’s unlikely that the cash-strapped government would have been able to do so, and it remains unclear if Jaouni will pay up — it came at a time when the country was desperately in need of good news.

Caretaker Justice Minister Marie-Claude Najm declared the outcome of the case a much-needed success story for Lebanon.

“The lesson I take from this case is really that when you have hard work and cooperation between the administrations and the litigation department at the Ministry of Justice and the law firm which represented the Lebanese state … you can make good work and actually defend the interests of the state and avoid any dilapidation of public funds, and therefore safeguard the money of the people,” she told L'Orient Today.

At the same time, Najm said the case should also serve as a cautionary tale.

“Administrations should implement good governance rules [to] avoid any undue costs to the Lebanese state and the Lebanese people,” she said.

The question of governance

Like many things in Lebanon, governance of the aviation sector is one thing on paper and another thing in practice. A law passed in 2002 outlined the creation of an independent civil aviation regulatory body, a measure that was intended to strengthen oversight of safety measures and bring Lebanon in compliance with international standards.

But the law has not been implemented to date, despite international pressure, including from the European Union, which in 2014 threatened to stop accepting flights from Lebanon if the independent civil aviation authority was not formed.

Instead, aviation safety falls under the Directorate-General of Civil Aviation, which is part of the Ministry of Public Works and Transportation.

The DGCA in June 2010 revoked the licenses of the small private airline Imperial Jet, a Lebanese subsidiary of Imperial Holding, owned by Jaouni, a German citizen, and Saudi businessman Kamal Bahamdan, and barred its employees from the Beirut airport.

The timing of the action was unusual, since in any case the company’s authorization to operate in Lebanon was set to expire a few months later. The aviation administration cited a range of safety issues, as well as “disrupted service and malpractice” by the airline.

The airline, for its part, asserted that it had been taking steps to remedy the issues and contested the withdrawal of the licenses in court, first in Lebanon and then abroad.

It wasn’t the first time Imperial Jet had been at loggerheads with the DCGA. In 2009, the civil aviation directorate ruled that the company could no longer fly its Boeing 737-200 to Europe because of the plane’s age. The company complained to the State Shura Council, which ruled that Lebanon did not have authority to make the decision on behalf of European countries. Then the DGCA ordered that the Boeing 737 be replaced, which the company also disputed.

With the revocation of its licenses, the company again appealed the decision to the Shura Council, saying that the state had not followed the required procedures. The Shura Council agreed and ordered the Public Works Ministry to reverse the decision, but Ghazi Aridi, the minister at the time, refused.

Mohamed Alem, an attorney representing Imperial Holding and Jaouni, told L'Orient Today that the Boeing 737 had passed a routine safety inspection by the European Aviation Safety Agency in June 2009, and noted that EASA “had twice confirmed that the European Commission had not issued any ban on this particular aircraft or on Imperial Jet.”

As for the reasons behind the license revocation, which Alem described as “disregard of the Lebanese judicial system and Lebanese law,” he pointed to media statements by Aridi at the time, in which he said that his priority was to protect national airline Middle East Airlines.

Alem claimed vindication from the arbitration panel’s findings.

“The fact that minimal damages were awarded by the ICSID tribunal to Mr. Jaouni does not negate the fact that this tribunal found that Lebanon had in fact breached its international obligations towards a foreign investor,” he said.

Judge Shukri Sader, who was head of the Shura Council at the time, told L'Orient Today that the case was straightforward from his point of view.

“It was an easy file,” he said. “It didn’t take a lot. There were not a lot of legal points that needed a lot of study — it was so obvious what decision we had to take.”

Sader said Aridi had pushed back.

“He called me at the time when we stopped implementation of the decision and he was telling me that these people were not very straight or by-the-book,” Sader said. “I told him, ‘I don’t know them, but what I know is that there are rules if you want to withdraw a license, Your Excellency.’ … You should notify them, you should give them the right to answer. … To withdraw the license, you can't tell them from one day to the next, ‘I withdrew the license and you’re forbidden to go to the airport.’”

Aridi, for his part, maintained that Imperial Jet — and other companies that had their licenses withdrawn under his watch — had been given ample warning and defended the decision to withdraw the licenses.

The former minister told L'Orient Today that Imperial Jet’s owners had launched a “slander campaign” against the ministry and claimed vindication from the international arbitration decision.

“My conscience is clear and I know my decision was as it should be,” Aridi said. “I’m not the minister today and those in the ministry, I’m not with them politically, but the right of Lebanon is the right of Lebanon in the end. Aviation safety is aviation safety.”

Allegations of corruption

In the meantime, the waters have been further muddied by a criminal investigation launched against the airport’s head of aviation safety, Omar Kaddouha, who had also been a witness in the Imperial Jet case.

In November, a judge ordered that Kaddouha be suspended from his position and banned from traveling, alleging that he exploited his position, wasted public funds and blackmailed airlines, resulting in Lebanon being fined $50 million, according to the state-run National News Agency — although it was not clear where that figure had come from.

At the time, retired DGCA director Mohammed Chehabeddine told L'Orient Today that the case against Kaddouha was related to his 2013 recommendation to withdraw the licenses of another small airline run by prominent local businessman Mazen Bissat, but as for the corruption allegations, he said, “I didn’t see anything like that.”

Contacted by L'Orient Today, Bissat declined to comment on details of the matter, saying he had an ongoing case before the Shura Council. Bissat said his complaint had been against the Lebanese government, not against Kaddouha personally, but added, “Everyone knows he’s a corrupt person.”

Kaddouha, meanwhile, has maintained that he had simply been doing his job in enforcing safety standards and was the victim of a political hit campaign.

In a statement issued via an attorney after the arbitration panel’s decision in the Imperial Jet case, Kaddouha maintained that DGCA’s decisions “were based on elaborate technical standards based on the application of the law and the applicable principles” and said that the allegations against him had been aimed at undermining Lebanon’s position in the international arbitration case.

He said he would “continue his journey to prove his innocence and lift the injustice he suffered.”

The international arbitration court

When the case went to international arbitration in 2015, the Lebanese state’s defense team, headed by Lebanese attorney Raëd Fathallah at the French law firm Bredin Prat, appeared to have an uphill battle ahead of it.

Not only had the Shura Council already ruled against the government, but also before the arbitration case, government officials had negotiated and nearly gone forward with a proposed settlement of $148 million with Imperial Holding, although in the end it did not get the cabinet’s approval.

And, in fact, the arbitration panel found that Lebanon had breached the “fair and equitable treatment” clause of its trade deal with Germany when it revoked the airline licenses and barred its staff from the airport. It described the revocation as “arbitrary,” noting that the reasons the DGCA had cited were not backed up by the documents presented and that there had been ongoing discussions between the administration and Imperial Jet at the time to remedy the issues.

But Imperial Holding and Jaouni were over-ambitious when they cited nearly $1.3 billion from the lost investment. Asked why the claim was so much higher than the $148 million settlement that had been proposed, Alem said the settlement was negotiated on the basis that Imperial would be able to resume operations, while the amount claimed in arbitration was on the basis that the business had been “totally destroyed.”

But in the first place, the arbitration panel found that Imperial Holding, which is registered in Lebanon, did not qualify as a foreign investor, leaving only Jaouni, who is a German citizen and owns a 49 percent stake in the company, as a claimant.

Jaouni then revised his claim to $88 million, but in the end, that, too, was substantially knocked down, in particular because the company’s authorization to operate in Lebanon had, in any case, been set to lapse soon after the licenses were revoked.

In the end, the panel ordered Lebanon to pay only $218,205 in damages to the airline owner — with interest, for a total of $338,599 — while ordering Jaouni to reimburse $604,801 in costs to the Lebanese state: meaning, in effect that despite having been found in breach, Lebanon is ultimately owed $266,202.

Alem said Jaouni is exploring possible responses to the decision, including potentially attempting to seek an annulment of the award. Meanwhile, Jaouni’s business partner has a similar case in arbitration before the Organization of Islamic Cooperation.

BEIRUT — Amid a snowballing economic crisis, an ongoing political stalemate and an out-of-control surge in COVID-19 numbers, Lebanon got a spot of good news last month with the results of a six-year-long international court battle over a government decision to boot a small airline from the Beirut airport more than a decade ago.The government alleged the company, Imperial Jet, had been operating...