Iraqi Supreme Court judgment
Jawad KhalafPartner, Head of Litigation - Iraq
Zainab SaadTrainee Lawyer,Litigation
The Kurdistan Regional Government ("KRG") has for several years extracted and exported oil and gas based on the provisions of the KRG Oil and Gas Law No. 22 of 2007. This process was conducted without the consultation or approval of the Federal Government in Iraq, which caused a dispute between the Federal Government and KRG and raised the legal issue of whether the law is legitimate and constitutional. The decision on this issue is of the competence of the Federal Supreme Court ("the Court"). The Court responded to this issue in its Judgment No. 59 /Federal/2012 unified with Judgment No. 110/federal/2019. In this article, we review the importance of the said judgment and its impact on oil contracts concluded with the KRG prior to its issuance.
In 2012, the Federal Minister of Oil filed Case No. 59/Federal/2012 before the Federal Supreme Court against the Minister of Natural Resources of KRG, claiming that the latter refused to hand over the oil produced in the Kurdistan region to the Federal Government in Iraq. The allegation that oil was exported without the approval of the Federal Government also included a violation of the Constitution. Therefore, the judgment required the KRG to deliver all oil production from the oil fields in the Kurdistan region and other areas where oil was extracted by the KRG Ministry of Oil and Natural Resources.
While reviewing the above case, the Court noted that Case No. 110/Federal/2019 was filed by a member of the Basra Provincial Council against the Speaker of the KRG Parliament, claiming that the KRG Oil and Gas Law No. 22 of 2007 is unconstitutional, requesting a ruling that the law is unconstitutional. In addition, the said member requested to consider the KRG's contracting with foreign companies invalid as the jurisdiction for such contracts falls within the exclusive authority of the Federal Government. For the legal permissibility, the court decided to consider the two cases and unify them under one case as they have the same subject matter.
As a result of the Court's scrutiny of the two unified cases ( 52/Federal/2012 and 110/Federal /2019); the requests made under these cases during the proceedings and the written documents submitted by the attorneys of the two parties in defense of their position, these defenses and statements summarized that the plaintiffs insisted that the actions of KRG violate Articles 111 and 112 of the Iraqi Constitution of 2005, which stipulate that all oil inside Iraqi territory is owned by all Iraqi citizens in all regions and governorates. The Federal Government undertakes managing the oil and gas extracted from the fields provided that the revenues are distributed equally in accordance with Article First of Federal Budget Law of 2012 and Article Fifth of Ministry of Oil Regulation Law No. 101 of 1976. In response to these defenses, the Defendants' attorney stated that KRG did not violate any constitutional provisions and that the actions taken by the same are justified according to Articles 112, 113, 114, and 115. Moreover, the Ministry of Oil Regulation Law No. 101 of 1976 does not apply to KRG as it was issued for a central non-federal government and concluded with a request to dismiss the case.
The Federal Court reached conclusions contained in its decision. These conclusions were adopted and relied upon to reach the decision which resolved the case. The decision stipulated that the extraction and export of oil by the KRG; its contracting with foreign countries and companies; and the issuance of the Oil and Gas Law No. 22 of 2007 violates the provisions of the Constitution, specifically articles 110, 111, 112, 115 and 121/First. Accordingly, the Court decided the following:
Ruling that the KRG Oil and Gas Law No. 22 of 2007 is unconstitutional and that it is repealed for violating articles 110, 111, 112, 115, 121 and 130 of the Constitution of the Republic of Iraq of 2005.
Obliging KRG to hand over all oil production from the oil fields in the Kurdistan region and other areas from which the Ministry of Natural Resources of KRG extracted oil; deliver the production to the Federal Government represented by the Ministry of Oil; and permit the said Ministry to explore, extract and export oil.
The plaintiff has the authority to follow up on the invalidity of the oil contracts that the KRG, represented by the Minister of Natural Resources, has concluded with external parties (countries and companies) in relation to the exploration, extraction, export and sale of oil.
Obliging KRG to permit the Iraqi Ministry of Oil and the Federal Board of Supreme Audit "FBSA" to review all contracts concluded with KRG in relation to exporting oil and gas. Such review is made for auditing and determining the financial rights that KRG owes to the Federal Government based on such contracts; determining the KRG share from the Iraqi budget in a manner that ensures fulfillment of all KRG citizens' rights immediately after the judgment becomes effective; and informing the Federal Government and FBSA of the compliance of KRG.
In general, the effect of any judgment applies to the actions taken after the date of its issuance. This does not include any actions taken before that date under Article 19 of the Constitution, which stipulates that laws are entered into force as of the date of their issuance unless otherwise provided. Since the judgments of the Federal Supreme Court have legal authority, the decisions and procedures carried out before the judgment are considered valid. Nevertheless, it can be noted, from the paragraphs of the Court's decision above, that the legal effects apply on three aspects or affect three types of contracts depending on the date of their conclusion and whether they are still effective or not .The first aspect is related to contracts of the exploration and extraction of crude oil concluded before the issuance of the judgment, which are still effective. The second aspect is related to contracts concluded, implemented and completed before the judgment was issued, whether they relate to the extraction and exploration of oil or its export and sale. The third aspect is related to contracts that will be concluded after the date of the judgment issuance.
The first type of contracts is resolved in paragraph 3 of the decision, where the decision gave the authority to suspend (invalidate) the contracts or continue its effectiveness exclusively with the Ministry of Oil of the Federal Government. Accordingly, the said paragraph stipulated, "the plaintiff has the authority to follow up on the invalidity of the oil contracts that the KRG, represented by the Minister of Natural Resources, has concluded with the external parties (countries and companies) regarding the exploration, extraction, export and sale of oil."
In this case, the Federal Ministry of Oil may approve certain contracts based on the relevant circumstances and their benefit to the financial situation and public interest of Iraq. On the other hand, and as the holder of authority and jurisdiction and not the KRG, the Federal Ministry of Oil may terminate contracts which appear to violate the public interest or are of no use to it, and which are concluded with other foreign countries and entities. The Minister of Oil has exclusive authority to review such contracts concluded with countries and companies and decide on their approval or termination. In addition, even if the KRG or other contracting parties used the right to appeal the judgment, the contracts would still be considered unconstitutional. In this regard, the Federal Ministry of Oil used its right and requested to invalidate these contracts as permitted by the decision. Seven cases were filed before the ordinary courts of law (The Commercial Court in Karkh), in accordance with its jurisdiction to consider this type of cases, against seven foreign companies contracted with the KRG to explore and extract oil within the borders of the region, four of these cases were resolved by the issuance of decisions in absentia against the defendants. All of which were in favor of the plaintiff, the Federal Ministry of Oil, considering these contracts as null and void as they were not approved by the authority. The remaining cases are still pending.
As for the second type of contracts, which are concluded, implemented and completed before the judgment was issued, the legal effect of the judgment is contained in paragraph 4 thereof, which stipulated "4. Obliging KRG to permit the Iraqi Ministry of Oil and the Federal Board of Supreme Audit ("FBSA") to review all contracts concluded with KRG in relation to exporting oil and gas. Such review is made for auditing and determining the financial rights that KRG owes to the Federal Government based on such contracts; determining the KRG share from the Iraqi budget in a manner that ensures fulfillment of all KRG citizens' rights immediately after the judgment becomes effective; and informing the federal government and FBSA of the compliance of KRG." As these contracts were implemented, expired and no longer exist, and because the invalidation applies only to the ongoing contracts, the federal authority cannot use this option. Instead, it has the right to review and audit these contracts, determine the financial rights resulting from the same, and demand the Kurdistan Government to hand over the debts owed after deducting the Kurdistan region's share of the Iraqi budget. As such, the most important effect of the judgment is all contracts concluded with KRG based on Oil and Gas Law No 22 of 2007 will be subject to review by FBSA in coordination with the Ministry of Oil to determine the debts of KRG to the Federal Government of Iraq.
The effect of the judgment on the contracts that will be concluded after its issuance is explained in paragraphs 1 and 2 thereof, which stipulated: "1. Ruling that the KRG Oil and Gas Law No. 22 of 2007 is unconstitutional and that it is repealed for violating articles 110, 111, 112, 115, 121 and 130 of the Constitution of the Republic of Iraq of 2005. And 2. Obliging KRG to hand over all oil production from the oil fields in the Kurdistan region and other areas from which the Ministry of Natural Resources of KRG extracted oil; deliver the production to the Federal Government represented by the Ministry of Oil; and permit the said Ministry to explore, extract and export oil." The fact that the law under which the contracts for the exploration, extraction, export and sale of oil produced in the territories within the region is deemed unconstitutional, and therefore repealed, renders it non-existent. Therefore, any operations involving the disposition of these resources (oil and gas) after the law is repealed make them illegal; constitute illegal acts; and may fall under the provisions of the Iraqi Penal Code No. 111 of 1969 or the Law Against the Smuggling of Oil and its Derivatives No. 41 of 2008, which includes provisions that lead to imprisonment in addition to other ancillary penalties. The Iraqi law has considered the original perpetrator and co-perpetrator as equals with respect to the penalty, and may consider the individuals who assist in any way in preparing, facilitating, or supporting the commitment of the act as affiliates of the co-perpetrator.
The other effects of the judgment can be summarized as follows: first, the judgment confirms the sovereignty of the Federal Government and its authority over its natural resources such as oil and gas. We believe that this judgment will prohibit the disposal of oil and gas as well as other natural recourses cases by authorities other than the Federal Government. Second, the judgment confirms the supremacy of the Constitution and cancels any laws contradicting its provisions. Lastly, the judgment invalidates any action, procedure or decision taken by KRG based on the Oil and Gas Law issued by the same as of date of judgment issuance.
This judgment highlights the position of the Iraqi Federal Government on KRG’s actions and decision to export oil outside the county based on the region’s laws and regulations. The judgment clarifies that the Federal Government, as a matter of public interest to all Iraqi citizens, must approve any actions related to the oil and gas industry; otherwise, such actions are unconstitutional and shall be suspended by the federal Ministry of Oil. Finally, the judgment does not lead to any criminal charges in respect of contracts and actions carried out while the repealed law was still in force, as it was issued in a civil lawsuit. However, if the judgment is not applied or if a party refuses to implement it, this may lead to legal procedures including criminal charges according to Article 329 of Iraqi Penal Code No. 111 of 1969.
For further information, please contact Jawad Khalaf or Zainab Saad.
Published in November 2022
