1
Kavanagh, S The Legality of Reconstruction Contracts in
Post-War Iraq
Law, Social Justice & Global Development
(An Electronic Law Journal)
The Legality of Reconstruction Contracts in Post-War Iraq
Sophie Kavanagh
LLM Student,
School of Law,
KingsCollege, London.
This is a refereedarticle published on: 28 February 2005
Citation: Kavanagh, S, ‘The Legality of Reconstruction Contracts in Post-War Iraq, 2004 (2) Law, Social Justice & Global Development Journal (LGD). <
Abstract
This paper is an analysis of the legal issues that surround the contracts awarded to reconstruct Iraq after the war in 2003. Initial consideration is given to the unilateral invasion of Iraq by the United States of America and the United Kingdom, the support given by the United Nations Security Council Resolutions, and the international conventions that govern the occupation of a country. Following this, an in depth analysis explores the major role of the United States in managing the reconstruction programmes, their justifications for not allowing certain countries to compete for these contracts, and the compatibility of such behaviour under international obligations. Research into American law shows that a number of contracts, awarded by the United States Government to American firms, have not complied with the accountability and transparency requirements that are essential when spending taxpayers’ money. It follows that such discrepancies are susceptible to the risk of corruption. A look at international and domestic anti-corruption measures provides further arguments into the uncertain legality of these contracts to reconstruct Iraq.
Keywords: Coalition Provisional Authority; US Government Agencies; Reconstruction Contractors; Public Procurement; International Standards; WTO-GPA; UNCITRAL Model Law; US FAR; Anti-Corruption Instruments
1.Introduction
The crisis in Iraq following the invasion by the US and UK in spring 2003, has not only been subject to controversial debate over the legality and justifications for the war. Concerns have also been voiced about the methods adopted to reconstruct Iraq, now that the war has been declared ‘over’. Funding has been acquired from countries across the globe to provide for the humanitarian, reconstruction and economic reparation needs of Iraq[1]. However, the US decision to ban countries which opposed the war in Iraq from bidding for the contracts has resulted in condemnation by prospective donors.
The UN Security Resolution 1483 of 22 May 2003 empowers the Authority[2] to disburse funds directly into the Development Fund for Iraq, so that such funds:
‘…shall be used in a transparent manner to meet the humanitarian needs of the Iraqi people, for the economic reconstruction and repair of Iraq’s infrastructure, for the continued disarmament of Iraq and for the costs of Iraqi civilian administration, and for other purposes benefiting the people of Iraq…’ (para.14)
This paper examines whether such transparent methods have been adopted by the US led Authority. Where taxpayers’ money is being spent, taxpayers are privy to these contracts. Public interest must be safeguarded. If the US government is not fully accountable to their own citizens, then there are possibilities of revolt which could undermine the US administration, and leave the situation in Iraq considerably worse off.
2.Iraq, the International Situation
2.1.The Invasion
The United States (US) and the United Kingdom (UK), in March 2003, took unprecedented unilateral military action against Iraq. The correctness or legitimacy of the action taken against Iraq is extremely important in terms of the future role of the UN and international law. However, the main purpose of this analysis is the legality of the contracts to reconstruct Iraq. Now that the Saddam regime has been overthrown, control over Iraq is shared between the US, UK and the new Iraqi interim government. The US and UK do have rights under the 1907 Hague Conventions[3] and the UN Security Council Resolution 1483. However, without UN authority, they cannot impose a government, cannot make major structural economic changes, nor exploit the occupied State’s natural resources[4].
The issues of legality of the initial invasion of Iraq must not obstruct the best way to reaffirm ‘the sovereignty and territorial integrity’ of Iraq and ‘the vital role’ for the UN in Iraq. These two major themes are central to the post-war UN Security Council Resolutions 1483 and 1511. They must be upheld and respected by all Member States of the UN.
2.2.The Role of the CPA-PMO
The US-run Iraq Coalition Provisional Authority (CPA) was comprised of 63 countries, encompassing every major religion and ethnic group, each undertaking to assist in the financial, material, and military needs in Iraq < >. The procurement component of the CPA was the Iraq Program Management Office (PMO), run by the US Pentagon, responsible for all activities associated with the program, project, asset, construction and financial management of the reconstruction in Iraq.
In July 2003, the CPA appointed an Iraq Governing Council. Both organisations were formally recognised by the UN Security Council under Resolution 1500 (August 2003). Resolution 1511 (October 2003) reaffirmed this recognition emphasising the ‘temporary nature of the exercise by the CPA of the specific responsibilities, authorities, and obligations under applicable international law … which will cease when an internationally recognized, representative government established by the people of Iraq is sworn in’ (para.1).
The CPA dissolved on 28 June 2004, at which point control was transferred to an interim Iraqi government comprised largely of Iraq exiles led by the US-appointed Prime Minister Iyad Allawi (Dinmore, G, 2004a) ‘White House getting used to idea of Shia Government’, Financial Times, 2 December 2004). The CPA awarded contracts funded by the Development Fund for Iraq (DFI), money accumulated from oil and gas sales, the UN oil-for-food programme, frozen Iraqi assets and contributions from the CPA countries and World Bank (Nichols, R, 2004, NA103-112). The US continues to supervise the administration of contracts funded by the DFI and the contracts awarded before the CPA’s dissolution. The DFI was originally worth USD 20.6 billion, but by the end of June 2004, its value had decreased to USD 2.9 billion[5].
2.3.The Legal Status of Foreign Contracts in Iraq
The legal position of Iraq and the issues surrounding any contracts made between foreign firms and Iraq whether before, during or after the war, raises extremely important international law questions. The main applicable law governing such questions is international humanitarian law (including the 1907 Hague Conventions), the 1949 Geneva Conventions, investment treaties, customary international law concerning occupied territory, and UN law (particularly Resolution 1483). Precedent such as the post-World War II occupations of Germany and Japan may also be relevant to the Iraq situation.
2.3.1.Legal Status of Contracts made Before the War
The overthrow of Saddam Hussein’s regime and any subsequent change of Iraqi government should not affect the legal position of any contracts made between the Republic of Iraq and foreign parties before the war. A State’s international obligations do not change merely because that State’s government has changed. In the Tinoco Case (UKvCosta Rica) despite the lack of recognition by a number of states of the regime under the former dictator of Costa Rica, Tinoco, the international arbitrator held that the new government of Costa Rica was bound by the concessions and bank notes given by Tinoco to British companies. It was irrelevant that Tinoco’s regime was a dictatorship. Unlike the Tinoco Case, Iraq was a recognised State by many states.
It is uncertain whether the Security Council has the authority to declare any existing contracts made with a former government of a UN member state, such as Iraq, null or void (Bekker, P, 2003a, p8). Resolution 1483 has not declared any contract null or void. Resolution 687 (1991) did provide that the force majeure defence was available to persons who complied with the economic sanctions against Iraq, and that no claim could be made by the Iraqi government, person or body in Iraq in connection with any contract affected by sanctions (para 29). Resolution 687 also provided that statements by the Iraq government disclaiming its foreign debt were null and void.
Under Article 46 of the Hague Regulations made under the Hague Conventions of 1907, any contracts made regarding ‘private property’, which include proprietary rights granted in a state contract, ‘must be respected’. This provides that the old and the new Iraq governments will be bound by any contacts made between Iraq and foreign private parties before the Iraq invasion, including any property rights.
Article 43 of the Regulations made under the Hague Conventions of 1907, provides that the Occupying Power must respect the laws of the occupied territory[6]. This will include Iraq’s law on contracts, provided that any such contract did not violate any UN sanctions. Therefore, the CPA, as the Occupying Power, is prohibited from nullifying (possibly suspending) any Iraq state contract concluded with foreign parties by amending the law of Iraq or by issuing legislation that could declare any such contract void.
With regard to the post-World War II occupations of Germany and Japan, the US did respect pre-war contacts, despite the major alteration in governmental authority and their ten-year occupation in the defeated states. The US was not subject to The Hague Regulations’ restrictions for a number of reasons, and the Geneva Conventions had not yet been established. Pre-war legal relationships made between the defeated state and any foreign government or national of the allied states were kept valid after the war had finished through various peace and reparation treaties, such as the Agreement on Reparation from Germany, 14 Jan 1946 and the Treaty of Peace with Japan, 8 September 1951.
2.3.2.Legal Status of Contracts made During the War
Article 52 of the Hague Regulations stipulates that enemy private property within occupied territory can not be taken or interfered with unless it is of use for local military purposes, for example, for the occupational army but not for its general needs at home or abroad. However, private property of non-belligerent bodies is protected from confiscation, but may be seized temporarily.
Article 43 of the Hague Regulations, provides that the Occupying Power must respect the laws of the occupied territory, subject to an exception (Bekker, 2003b, p8), and Article 46 of the Hague Regulations, provides that the ‘private property’ within the occupied territory ‘must be protected’ and ‘cannot be confiscated’ by the Occupying Power.
A foreign party’s right to compensation, under Iraqi law, may be initiated if the US or Iraq appropriate the foreign party’s lawful property rights in the occupied territory, or the US or Iraq declare any such rights worthless or void. This right to compensation is provided for under Article 3 of the Hague Convention IV, which states that a ‘belligerent party which violates the provisions of the said Regulations shall, if the case demands, be liable to pay compensation’. In Iran - US Claims Tribunal v AS, it was established that the cancellation of contractual rights, e.g. long-term oil concession rights, may constitute expropriation under international law. The status of contractual rights as property is confirmed in the UN General Assembly Resolution (V) of 2 December 1950, which states:
‘No one shall be deprived of property, including contractual rights, without due process of law and without payment of just and effective compensation’ (UN GAR, 1950)
The oil-for-food programme was ended within 9 months from the initial invasion of Iraq. The UN Secretary General, the CPA and the Iraqi interim administration examined the contracts concluded by the Hussein regime under the programme. However, the provisions that authorised the Secretary-General to interfere with these contracts did not clarify the position of whether or not this could be done without the consent of the contractor (Griffiths, J, 2003, p68). Until 31 December 2007, oil and gas exported from Iraq will be immune from legal proceedings (UN Security Council Resolution 1483, para 22). All proceeds from oil and gas exports are expected to be paid into the Iraq development fund until a suitable Iraqi government takes office. It follows from this, that if Iraq now breaches an export contract, in the interests of promoting stability, it can avoid any liability.
If the US, UK or Iraq breach a rule of international law (for example under the Hague Conventions), then either state may be internationally responsible for that particular breach to the injured party. However, it is not clear who can be sued and where. Under the US Foreign Sovereign Immunities Act (FSIA), jurisdiction over a foreign state is within the power of the US courts. This is likely in the case of Iraq. Section 1605(a) of the FSIA states that:
‘A foreign state shall not be immune from the jurisdiction of courts of the US or of the States in any case in which rights in property taken in violation of international law are in issue …’
Only in the situation of breach of international law will the US assert this exception to immunity. It is not clear how these matters will be dealt with in the UK or by European Union Legislation.
There is no binding international dispute instrument established by the Hague Regulations available for private parties. If a foreign company is incorporated into a State and has a registered office in that State’s territory, then a dispute may be settled by the laws of that State, for example Iraqi law.
2.3.3.Legal Status of Contracts Made After the War
Provided that no future UN Security Council Resolution is created that will affect the legal status of contracts made between foreign parties and the authority of Iraq (old and new), either before or after the war, then these contracts will remain valid.
There is legal uncertainty, however, with regard to contracts made between the Occupying Power (eg by the CPA or the US Department of Defense) and non-Iraqi firms during the occupation. The CPA had the authority to administer new Iraqi contracts, however, under The Hague Conventions and UN law, only for the period of the occupation. The uncertainty lies in legal status of these contracts now that the occupation is over, especially in relation to contracts for Iraq’s natural resources. The Preamble of Resolution 1483 emphasises ‘the right of the Iraqi people freely to determine their own political future and control their own natural resources’ (UN Resolution 1483).
International law is unlikely to bind the new Iraqi government to the contracts awarded by the CPA (or other US state agencies) to foreign parties during its occupation. The new Iraqi government has the sole discretion to uphold or reject these contracts, whether partially or in whole. It may also change or repeal any legislation or measures made by the CPA during their occupation of Iraq (ASIL Sept/Oct 2003, p9).
3.Public Procurement and International Standards
3.1.Public Procurement
The damage caused in Iraq by the US and UK’s bombing has inevitably opened substantial building opportunities to reconstruct its demolished infrastructure. The main area of work to be addressed is public procurement, which involves obtaining goods or services for the use of the public sector. Procurement in this sector is often formalised, and contracts for public works, supplies, or services, which will be large in Iraq’s case, are normally advertised for formal tender. Public procurement has been described as ‘big business’ (Arrowsmith and Hartley, 2002, p ix), involving government at different levels purchasing goods and services from private firms.
Figures show that spending by governments on procurement is significant (Table 1), highlighting an area of great economic, political and legal importance in most countries.
Government Procurement Country/Organisation / % GDP spent in 2000WTO / 10 - 15
European Union / 14
United Kingdom / 10.84
United States / 28.45
Iraq / 0.04
Table 1: UN Procurement by Country
As an important policy tool, procurement spending must be seen to be efficient, legitimate and effective. Through ‘fair’ and transparent competition procedures, better procurement services can be obtained for less. Also, implementing procurement procedures to reduce bribery and corruption practices is fundamental (Strombom, 1998a)
3.2.The Nature of the Post-War Iraq Contracts
United States firms have been recorded to have obtained USD 900 million reconstruction contracts from the United States Agency for International Development (USAID) before the war in Iraq had started (Arnold and Booth, 2003, p1). These were the ‘major’ contracts involving work on infrastructure, roads and seaport administration. A total of 8 contracts from this sum were awarded solely to American firms (Nikkhah, 2003a) on the basis that strict US government procurement guidelines maintain that only American firms can win prime contracts funded by the US government..
The US Defense Department, on 5 December 2003, issued a document listing 63 countries eligible to compete for the second round of 26 Iraq contracts, funded by the USD 18.4 billion that US Congress has allocated to rebuild Iraq. This decision excluded non-coalition countries, such as France, Germany and the UN Security Council, to bid for any of the prime contracts (Pleming, 2003). A memorandum, titled ‘Determination and Findings’ and signed by the Deputy Secretary of Defense Paul Wolfowitz, states the reason for their decision to award the reconstruction contracts only to contractors from the 63 different countries:
‘..it is necessary for the protection of the essential security interests of the US to limit competition…’ (Palmeter and Meagher, 2003a)
This second round of contracts, described as the ‘prime’ contracts, are open to tender for all coalition countries and cover areas such as oil, power, communications, water, housing and public work buildings (King, 2003a, p2). However, only one out of seven of these contracts (worth USD 13 billion) worth USD 8,416,985 was awarded to a UK-based company to provide support to the Oil Sector Programme, and only part of a contract worth USD 43,361,340 to provide support to the Electrical Services Sector Programme was given to a UK-based company to share with an American firm. The rest of the contracts were awarded to solely American firms (CPA-PMO Construction Contracts Awarded as of 14 March, 2004 and CPA-PMO Programme Management Contracts Awarded as of 12 March, 2004).