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Libyan business law and practice: a contractual opportunity for italian enterprises

This paper brings to light the business legal climate in Libya after the civil revolution of 2011, and connects it to the broader system of international trade law, therewith outlining formal points of contact and differences. This research also reviews both the legal opportunities and requirements that foreign enterprises should meet to invest in the country. 

However, not all foreign firms have been taken into account in the current study that, conversely, rotates around Italian companies already registered in the country and those that may set up a business there in the near future. Italian enterprises have been chosen against the wide body of foreign companies that are already present in Libya because a high potentiality and many chances to succeed are attributed to them, due to the long economic cooperation between the two countries and the many political and historical ties.  

Elements of international contracts

The role of international contracts – those whose parties have their place of business in different countries -  is leading in cross-border business transactions, in which contractors must deal with languages, laws and legal traditions of more than one nation. However, mistakes in translations or even the distance and unfamiliarity with the counterpart’s law could endanger the reading and execution of contractual obligations, and in worst cases also give birth to disputes between parties and great financial losses.

Parties concluding a contract are generally recognized the principle of contractual autonomy, that makes them free to choose many traits of their agreement. This self-government touches not only the official language to be used in writing the deal, thus disqualifying any other version to mere translations, but also the form that the agreement shall take, either written or oral, even though the use of written contracts is heartily recommended as they are legally enforceable.

Also the choice of the law governing the contractual relationship is free. Nevertheless, in Europe, the Rome Convention on the law applicable to contractual obligations (1980) first and the Regulation Rome I (2008) later, set forth the criteria to select the applicable law in case contractors neglected to make this decision. The guiding principle of such provisions is the “characteristic performance”, meaning that the law to be applied to the contract is that governing the country where the principal contractor has his residence, whereby the “principal contractor is that carrying out the performance not implying any monetary act”.

The last legal pitfall to be agreed upon in any international contract is the method used to solve prospective disputes. The options provided by international trade law are either litigation or arbitration.

In litigation parties submit their dispute to the courts of one party’s country. Although the costs of litigation are rather profitable, obtaining a court judgement may take a long time, as it requires the use of depositions, written discovery and documents, whose production is a rather time consuming process. Therefore, parties usually opt for arbitration, where contractors can benefit from significant control over the way the arbitral award is issued, the names of arbitrators, the language of proceedings and the place of hearings, while avoiding complicated rules of procedure.

Another reason favouring the use of arbitration is the international recognition of foreign awards, that is granted by the New York Convention (1958), of which art. 3 reads that “each contracting state shall recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon”.

Major cooperation agreements

The backbone of business cooperation in all countries is the international sale of goods contract, that is governed by the United Nations Convention on Contracts for the International Sale of Goods from 1980 (CISG). It develops key provisions on the formation of the contract (art. 14-24), the obligations of both the seller and buyer (art. 30/53 and following), and also common rules regarding remedies for breach of the contract (art.45-52/61-65). Although CISG covers many aspects of the international sale of goods, it is neither exhaustive nor self-sufficient in ruling the whole matter. Neither the validity nor the effect of the contract on the property of goods fall outside the Convention’s scope (art. 4), but also its sphere of application is quite narrow, as it only covers sales of products from business to business.

Also the use of distribution agreements is rising in the business global environment. Such a broad collection includes agency, concession and franchising. Although they share some of the typical properties of distribution, as for example the task of advertising, promoting and distributing goods in a given territory, a number of divergences make each type different from the other.

The agent, for example, is obliged to connect the principal to the public. Conversely, instead, the distributor in a concession buys the goods to be resold to the public but does not work as a mediator. Even more different is the figure of the franchisee, that is allowed to market goods and services that require the use of a specific trademark, business or technical structure.

Joint Ventures, instead, can be classified either in contractual joint ventures or corporate joint ventures. In the former, partners are not required to set up a separate new legal entity, like in the latter. Instead, the relationship between partners is founded on a contractual choice, where the agreement sets all terms and conditions of members’ partnership. What these two forms of international cooperation have in common, on the other hand, is the exchange and combination of resources  between partners, with a view to profit sharing and mutual benefit.

Another form of cooperation is licensing, under which one party is allowed to use any intellectual property against the payment of royalties and guarantees to its owner. By any licensing agreement, licensors have the opportunity to advertise their brand into new markets with minor upfront investments than by setting-up their own transactions. Moreover, they can retain control over the brand and the way it is used.

On the other hand, licensees benefit from the credibility and popularity of the intellectual property, already developed by the licensor, and face lower costs than those of building a brand or developing a technology on their own.

To conclude on cooperation agreements, international tendering is based on a bid to select a business that is able to respond the needs and provides the best prices. Tender may be either a private or public process but shall always be based on the principles of competitive bidding and transparency, without any trace of favouritism or corruption. To the contract that follows, parties do not have an equal contracting power, as the awarded supplier must adhere to the conditions previously determined by the independent contractor and fixed in the tender request by the relevant agency and he retains only little power to change them by negotiation[15][15].

Libya country profile

At the present moment, Libya is a risky market to invest in. First, foreign investors shall face a political risk. The civil revolution of 2011 led to overthrow Gaddafi, in power for more that four decades. The uprisings demanded political liberalization, economic reform and respect of the rule of law. However, the path towards a democracy wherein the people are the source of authority is everything but easy. A number of transitional challenges need still to be addressed and the current leadership has still to prove its ability to create a new model of governance.

Another risk is the unstable legal framework, and the fast rate at which pieces of legislation follow one another in the country. Although the relevant legal sources have been inherited from the previous regimes, specifically the Commercial Code of 1953, the Civil Code and the Code of Civil Procedure of 1954, the new institutions are going to draft a new Constitution. However, the mechanism to be used is still under review, due to continuing delays to the initial schedule and controversies inside the Congress. Additionally, whatever Constitution Libya will adopt, Muslim religion will be at the basis of law, as the GNC has recently voted.

In addition to the institutional problems, also an economic risk weights on the business environment. Particularly, the poor economic diversification. As a matter of fact, the overwhelming economic structure is heavily dependent on oil and gas revenues, that suffered from a sudden halt during the civil war and that the country has had difficulty to recover to the prewar levels. Thus, high oil prices volatility represents a source of uncertainty and unpredictability that may discourage foreign investors to do business in Libya.

Financially, the regulatory uncertainty and administrative inefficiency still feature the country system since 1970, when the banking sector and financial institutions were nationalized.

A considerable reformation of Libyan banking laws, although already started under the late regime, has been continued by the NTC and in recent months also by the GNC. Further, significant progress has also been made to introduce Islamic principles in the banking and financial sectors, under Law No. 46 of 2012. Some months later, in 2013, the GNC put forward the Decree No. 1, which prohibits interests on bank loans given to individuals[18][18]. However, it is still too early for the results of such reforming process to be assessed. 

Despite these potential risks, that are likely to dissuade foreign companies from developing new forms of business in Libya, a number of strategic advantages may raise investors’ confidence in the country, and boost awareness and reliability of the whole system.

To start with, the new institutions are reviewing the existing regulations, particularly those on economy and investment, and creating new ones. The main purpose of this revision and legislative production is making trade activities more favorable to foreign investors and simplifying existing procedures, that are quite complex and long to be fulfilled.

Additionally, Libya has one of the lowest public debts in the world, that amounts at 4.1%, it is independent from external financial assistance, and has huge foreign exchange reserves, that would be able to cover currency gaps in case of external shocks. Further, the African country needs to face the complex and costly challenges of rebuilding the economy and renewing infrastructures, also focusing on capacity building, the development of the private sector and job creation. In such a framework, foreign investments only have the potential for boosting a more diverse and inclusive growth in the coming years.

Doing business in Libya

Libyan market currently offers a number of contractual opportunities to foreign companies. Selling goods or services in the African country is the easiest commercial transaction but requires the use a commercial agent, that in Libya shall be either a national citizen or even a wholly Libyan owned company. Behind this rule there are two main rationales.

First and foremost, it fosters the recruitment of Libyans, thus lowering the high unemployment rate and transferring knowledge and capability to nationals. Second, in Libyan business personal relationships and face to face contacts are very important and require not only the physical presence of the distributor in the country and the direct interactions with the client, but also regular visits to the market and the full knowledge of Libyan cultural background and context.

Local legislation also recognizes forms of incorporated cooperation, thus setting up a new local entity, through either joint ventures or branch offices, representative offices or investment enterprises. However, foreign ownership in companies set in Libya is capped at 49%, while at least 51% of the company capital must be Libyan-owned, although the foreign investor often provides most capital of the enterprise.

Additionally, the minimum capital required to form a joint stock company, whereby Limited Liability Companies are prohibited to foreigners, must not been less than LYD 1 million, to be deposited in a Libyan bank. Further barriers to foreign companies provide that determined requirements need to be satisfied to establish a company in Libya. Specifically, the foreign company shall be established in accordance with the law of the country of origin and have at least ten years experience.

Licensing agreements are also admitted. However, careful attention shall be paid to the rules and provisions on the protection of any form of intellectual property, of which the abuses across the country are growing. In this field Libya is in the very forefront as the country ratified most of the international conventions on intellectual property rights: from the Paris Convention for the Protection of Industrial property to the Stockholm Convention establishing the World Intellectual Property Organization and the Berne Convention on the Protection of Literary and Artistic Works.

Libyan tendering is mostly a public process in Libya, especially in the sectors of oil and gas. However, it lacks a reliable database or source where tenders are announced. Instead, some of these sources are Libya Herald, Tripoli Post, MEED, the official web-sites of some public bodies, Ministry of Transportation and Ministry of Economy, and some other sources, which are expected to increase in number and efficiency as the economy continues to grow. The legal basis of tenders are the Civil Code and the Administrative Regulation no. 563, that also contains special rules to be applied to contracts with the government and public authorities.

Other legal requirements

Apart for investment opportunities, a number of further legal requirements need to be fulfilled before embarking on any new investment in the country. First, it is necessary to register a company, that is both expensive and time consuming for the heavy bureaucracy. The World Bank has conducted a useful study on Libya, within the “Doing Business” initiative, that provides objective measures of business regulations on the steps, cost, time and minimum capital to be deposited for registration.

Secondly, methods and criteria to settle disputes in Libya must be known by contractors. Provisions shall be extracted from national legislation, specifically from the Code of Civil Procedure of 1954, that covers a number of aspects of appealing to either a national or foreign court or even arbitrators, that is generally a free choice by parties. However, disputes arising from Libyan state contracts are usually subject to national courts. Moreover, arbitration is never possible in labor disputes, while it is compulsory in the petroleum industry contracts.

Libya is not a member of the New York Convention (1958), thus in order to be enforced in Libya, all foreign arbitration awards have to be approved  by  national courts.       

In third place, also a general assessment on the level of taxes imposed by the government is crucial before starting any form of business in Libya. The main taxes and mandatory contributions to be paid are:

  • the corporate income tax and Jehad tax (an income tax), as all profits and earnings that originate in the country are levied
  • social security contributions and salaries tax, that are produced by labour in the African country
  • stamp duty tax, to be imposed on any paper, document, publication, invoice, as well as any act, transaction, and fact concluded in the country.

However, in order to create a favourable business to invest in, a number of five years exemptions and privileges are available for firms willing to operate in the country.        

Employment contracts in Libya are subject to specific regulations that discourage companies to recruit foreign workers. All administration and representation positions must be held by Libyan nationals. In addition, foreign investors are forced by law to recruit Libyan nationals for at least 75% of the total workforce of the company, and to contribute to the reduction of national unemployment through mentoring and coaching programmes, thus tending also toward the nationalization  in  foreign-owned  organizations.      

Finally, all the opportunities that small and medium enterprises benefit from must be crystal-clear to investors, also in the larger framework of international subsidies and incentives. It is for example available the mentoring initiative Forsa, a programme launched within the Deauville Partnership to provide Libyan and MENA region entrepreneurs with business mentoring as well as to demonstrate to policy makers how to produce mentoring policies. If this programme will succeed, and will result in economic growth and job creation as expected, also Italian firms investing in Libya may profit from it. As a matter of fact, collaboration with local partners trained to do business is more likely to win and gives returns to both the foreign and local partner.     

Concluding remarks

Doing business in Libya is complex and demanding as the country is still facing the challenges posed by the messy transition. In spite of this, the African country is a favorable market to invest in, as data record an increase in the country real GDP after the civil war, and this strong positive trend is likely to continue in the coming years.

Moreover, the huge infrastructure shortfall – especially houses, schools, hospitals and roads - created by the revolution has given rise to the need to construct new ones. In this context, the new government in the aftermath of the revolution is trying to re-establish the rule of law, and introduce reforms able to attract local and foreign firms in the country.

Writing a contract is the very first step in every business transaction. However, contracting with Libya implies that it is the local law to set up most of the legal framework on terms and conditions of doing business in the country, as Libya did not ratify any of the major conventions on international trade law: neither the New York Convention (1958) nor the Vienna Convention (1980), and not even the Regulation Rome I, that is a European act.

Therefore, being the national legal system rather complex and confused, in order to avoid prospective disputes with Libyan partners it is necessary that Italian investors follow specific pieces of advice, as follows:

Study Libyan market, what the competition is like and which the needs of the place are. The Ministry of Economy and Trade of Libya may be a good source to start with. The more an Italian company is familiar with this information, the easier it will be to determine its involvement in the country. 

Choose the most appropriate partner to contract with. This selection shall be made on the basis of its level of expertise in the field which the Italian firm wants to invest in, as well as its liability in performing contractual obligations under the agreement. Moreover, it is heartily suggested to negotiate with the person that has the authority to bind the business, that generally is one of the owners in a small firm, while in a larger organization it might be a chief executive officer.

Analyze local laws. Libyan regulations are complex and unfamiliar to Italian beginners. In such a framework, the risk of incurring in financial and legal damages is rather high. Accordingly, it is recommended to hire not only a good translator, but also a local legal expert or lawyer, better if they already have any connections with the industry in question.

Write the agreement down and use a simple form. Written contracts are easier to be enforced in courts, thus less risky as an official document contains each party’s rights and obligations. Additionally, the form must be simple, with clear and short sentences so that any kind of confusion is avoided.

Choose the language to write the agreement. Remember that you should choose Italian or English, and avoid the use of Arabic as far as possible to prevent any misunderstanding. However, Arabic language is compulsory in the case of company registration, as the whole body of documents and certificates necessary to implement the procedure are only available in such a language. Court judgments and arbitral awards that are issued in Libya are another case in which Arabic cannot be eluded.

State explicitly all rights and obligations upon each party. Do it in detail and do not leave anything out, otherwise it will be impossible to enforce. It is also admitted to add amendment to the original text or even to change it by mutual consent.

Detail also the payment obligations. This is often an extremely disputed issue. Thus, it is better to spell out in advance which amount is due, who has to pay and to whom, together with time and method conditions to make the payment, for example either by cash or by cheque.

Clarify in which circumstances the agreement shall terminate. For instance, in case of non performance of the obligations under the contract by one of the parties, or even, in case of considerable delay in performing it. Keep into account, however, that at least until all local firms will be completely restored, delays in payment and difficulties in performing the activities are likely to occur.

Set a method to solve controversies. You can choose between litigation or arbitration, with the restrictions seen above on contracts with the government and disputes on hydrocarbon sector. In case arbitration is opted for, it must be specified the names of the arbitrators, the proceedings as well as the place of the arbitration.  

Choose the applicable law to the contract. Under Libyan law contractors are left free to negotiate the legislation they prefer to govern the agreement, unless this choice contradicts Libyan law. However, this selection is not allowed for administrative contracts, that are those in which one party is a public body, where instead the application of Libyan law is compulsory and automatic. Libyan law is also mandatory in the case of petroleum industry contracts.

Letizia Marini e Giuseppe De Marinis

Bibliography and Sitography

 

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