13.3 international arbitration and petroleum contracts · 2018. 4. 18. · qatar arbitrations,...

13.3.1 Introduction

Arbitration has played an important role in theelaboration of the legal system applicable to theagreements related to the exploitation of hydrocarbonresources. In this respect, the accumulated wealth ofthe reported arbitral awards covers a period of overhalf a century, starting in 1951-53 with the emergenceof the first two decisions adjudicating disputes. Theseconcerned the interpretation of two classicalconcessions granted during the colonial era by the AbuDhabi Ruler and by the Ruler of Qatar.

The constructive effects of the arbitral precedentsmultiplied throughout the following five decades,covering various aspects and extending to new types ofrelationships. These include the recent forms ofcooperation agreements between the authorities of thehost countries and the foreign entities – mainlybelonging to transnational corporations or jointmultinational ventures – established to undertaketechnologically sophisticated, huge oil and gas projectseither onshore or offshore.

A comprehensive chronological survey of thearbitral awards rendered in the field of petroleumresources leads to the regrouping of available data intofour categories: • The awards pertaining to the proper interpretation

of the first generation of concession agreements.These include the Abu Dhabi award (1951), theQatar award (1953) and the Aramco award (1958).

• The awards relating to the confrontation period, inwhich certain host states undertook a policy ofabstaining from participating in the arbitrationproceedings. This was triggered by the state’sunilateral act of bringing to an end theconcessionary relationship. This category coversthe Sapphire decision against Iran (1963), as wellas the three Libyan cases: BP (October 1973),

Texaco (January 1977) and Liamco (April 1977).• The awards rendered with regard to the impact of

concession agreements belonging to the secondgeneration which became subject to arbitralproceedings. These proceeding were marked byfull participation of the host state’s authorities infront of properly constituted arbitral panels andwith the assistance of able foreign counsels.Positive legal contributions were obtained undersuch balanced circumstances as a result ofadequately pleaded cases. This third category isillustrated by the rulings rendered during thefollowing years either by eminent InternationalChamber of Commerce (ICC) arbitrators or byequally qualified International Centre forSettlement of Investment Disputes (ICSID) panels(such as in AGIP v. Congo, Case No. ARB/77/1).The case law emerging in the field of petroleumarbitration matured in the detailed reasoningelaborated by the Aminoil Tribunal (1982), andcontinued to develop in the findings of theIran/USA claims Tribunal which dealt with thevarious petroleum claims submitted thereto(1983/1987). It was further developed in the Sunoilcase (1985/1987) as well as in the unanimousaward rendered in the ICC Grace Petroleum case(1995).

• The fourth and last category is marked by thegradual appearance of a new type of dispute of amore functional nature. These are the disputesopposing the economic interests of public entitiescontractually committed to provide the naturalresources needed within the context of jointoperating agreements. These agreements wereconcluded with the private foreign entities for theexploitation of publicly-owned natural resourcesand/or the production and supply of electricitypower under long-term Build, Operate, Transfer

879VOLUME IV / HYDROCARBONS: ECONOMICS, POLICIES AND LEGISLATION

13.3

International arbitrationand petroleum contracts

(BOT) or similar types of production sharing orprofit-sharing agreements. The basic particularcharacteristics of the awards adjudicating disputeswithin the context of such new types ofrelationships can be ascertained by focusing on theawards rendered during the last decade. Theseinclude instances such as the Wintershall caseagainst the Qatari authorities (1988), HimpurnaCalifornia Energy, and Patuha Power cases againstthe Indonesian authorities (1999), as well as in theKaraha Bodas case which equally concernedIndonesia (1999/2000).The salient features of the aforementioned four

categories of arbitral awards are explained belowfollowing the same order. For each category there is asufficient description of the main characteristicstogether with a summary of the related solutionsadopted.

13.3.2 The arbitration precedentspertaining to theinterpretation of theclassical colonial type ofconcession agreements

A concession agreement was concluded in 1939between the Sheik of Abu Dhabi – placed under theBritish Protectorate – and the Petroleum Development(Trucial Coast) Limited Company. The concessionarea was described in art. 2 to include “the whole ofthe lands which belong to the Ruler of Abu Dhabi andits dependencies and all the islands and the sea waterswhich belong to that area”. Art. 17 provided that: “theRuler and the company both declare that they intend toexecute this agreement in a spirit of good intentionsand integrity and to interpret it in a reasonablemanner”.

The agreement provided equally that in case ofcontroversy between the two parties, the saidcontroversy had to be settled through arbitration by anumpire appointed by the British Political Resident incharge of the external relations of the Protectorates inthe Gulf area.

When issues were raised in 1949 about whetherthe agreement transferred to the company the rightto extract mineral oil from the subsoil of theseabed subjacent to the territorial sea of Abu Dhabiand into the submarine area lying outside theterritorial waters (i.e. what became known from1945 as the “continental shelf ”), Lord Asquith ofBishopstone was appointed as umpire in charge ofrendering a binding award on the properinterpretation of the territorial scope of theagreement as provided for in art. 2.

In his decision of September 1951, the British Lordrejected the prima facie assumption of theapplicability of the law of Abu Dhabi on the groundsthat the prevailing Islamic legal traditions were notfeasibly applicable to modern transactions. Afteroperating such a negative ‘choice-of-law’, the umpirerelied on art. 17 of the agreement in order to base hisdecision on what he called “principles rooted in thegood sense and common practice of the generality ofcivilized nations” – a sort of ‘modern law of nature’,which in final analysis was embodied in the rules ofEnglish law.1

Lord Asquith’s dogmatic a priori elimination of theIslamic law as applicable in Abu Dhabi, under thepretext of a pseudo negative choice-of-law, was largelyconsidered an insult by the Arab jurists, who still –after five decades – invoke that “bad precedent” fromtime to time to demonstrate the existence of aninherent bias against Islamic law within the westernlegal community.2

However, it has to be emphasized that, in allfairness, the line of reasoning used in the Abu Dhabidecision of 1951 was not integrally followed two yearslater by Sir Alfred Bucknill acting as a referee in thesister Qatar case (1953).

The starting point for Sir Alfred Bucknill was toenvisage what was “the mental intention of the partiesas it exited at the time of contracting”. The referee’sattempt to detect the parties’ tacit intention in the lightof all relevant circumstance led him to conclude that:“there is nothing in the Principal or SupplementalAgreements which throws a clear light upon theintention of the parties on this point.” Therefore, hedecided in favour of determining the applicable law inreliance upon objective criteria based on the nature ofthe contract, its main characteristics objectivelypointing to, “Islamic law […] being the appropriatelaw”.3

However, after considering the legal opinionssubmitted to him by professor Milliot of Paris andprofessor Anderson of London, both experts in Islamiclaw, Sir Alfred Bucknill indicated that both experts“agreed that certain parts of the contract, if Islamic

880 ENCYCLOPAEDIA OF HYDROCARBONS

CONTRACTUAL REGULATION AND SETTLEMENT OF DISPUTES

1 International Law Reports referred to hereinafter asILR, vol. 18, pp. 145 ff.

2 What mostly hurt the sensitivity of the Arab Jurists wasthe strong language used by Lord Asquith in dismissing thepossibility of applying Abu Dhabi Law by saying “[…] nosuch law can reasonably be said to exist. The Sheikadministrates a purely discretionary justice with theassistance of the Koran; and it would be fanciful to suggestthat in this very primitive region there is any settled body oflegal principles applicable to the construction of moderncommercial instruments” (ILR, vol. 18, p. 61)

3 ILR, vol. 18, pp. 161ff.

law was applicable, would be open to the gravecriticism of being invalid”.4

Hence, in order to maintain the validity of theagreement, the referee in the Qatari case consideredthat “neither party intended Islamic law to apply”, andconsidered appropriate the reference to “generalprinciples of law” as applicable guidance.

The painful exclusion of the Islamic law as apossible source of solutions in both the Abu Dhabi andQatar arbitrations, related to the construction andinterpretation of Middle Eastern petroleum concessionagreements, was not repeated in any subsequent cases.

Starting with the Aramco/Saudi award of 1958, thesaid integral exclusion was avoided, since thearbitration agreement of 23 February 1955 providedexplicitly in art. IV that the Saudi Arabian law governs“matters within the jurisdiction of Saudi Arabia”,specifying that Saudi Arabian law “is the Muslim law(i) as taught by the school of Imam Ahmed IbnHanbal; (ii) as applied in Saudi Arabia”.

Accordingly, the Aramco arbitral Tribunal(composed of Swiss President G. Sauser-Hall, and twoEgyptian arbitrators, Mohamed Hassan and SabaHabachi) encountered no difficulty in arriving at thefollowing two basic conclusions: “The ConcessionAgreement of 29 May 1933 derives its judicial forcefrom the legal system of Saudi Arabia”; “TheConcession Agreement is […] the fundamental law ofthe parties […] it fills a gap in the legal system ofSaudi Arabia with regard to the oil industry […]. Theconcession has the nature of a constitution […]conferring acquired rights on the contracting parties”.

Nevertheless, as the dispute under considerationrelated to the interpretation of art. 1 of the concessionagreement which provided for granting an “exclusiveright, for a period of sixty years […] to transport, dealwith, carry away and export petroleum”, and asAramco claimed that the agreement concluded in 1954between Onassis and Saudi Arabia infringed the saidexclusive right granted under the concessionagreement of 1933, the arbitral Tribunal was bound toseek what system or rules of law governed thearbitration itself. That is, the nature of the concessionitself and the extent of the rights conferred thereunderas duly construed in conformity with the appropriatecanons of interpretation.

In order to accomplish all these tasks, the arbitralTribunal adopted inter alia the following three basicrules which became constantly taken as a source ofinspiration for a great number of subsequent arbitralawards. These rules were formulated in the followingterms:• “In so far as doubts remain on the content or on the

meaning of the agreements of the parties, it isnecessary to resort to the general principles of law

and to apply them in order to interpret, and even tosupplement, the respective rights and obligations ofthe parties”.

• “Law must, in case of need, be interpreted orsupplemented by the general principles of law, by the custom and practice in the oil business and bynotions of pure jurisprudence […]”.

• “Lastly, the Tribunal holds that public internationallaw should be applied to the effects of theConcession, when objective reasons lead it toconclude that certain matters cannot be governedby any rule of the municipal law of any state, as isthe case in all matters relating to transport by sea,to the sovereignty of the state over its territorialwaters and to the responsibility of the state for theviolation of its international obligations”.Faced with a situation in which there was no

claimant and respondent in the technical proceduralsense, dealing with a dispute pertinent to an abstractconstruction of legal issues, the Aramco Tribunal hadto render an award of a declaratory nature. In thisrespect, the main lessons emerging from the award canbe summarized as follows: a) within the context of thesaid dispute – Aramco v. Saudi Arabia – the lawgoverning the arbitration itself, i.e. the lex arbitri, wasinternational law, and not the law where the arbitralproceedings took place. In this way, the award was notsubject to the control of the Swiss Courts and neededno registration against payment of fiscal charges; b) inthe absence of a lex fori properly speaking in the fieldof transnational arbitration, and in order to adjudicatethe pending legal issues in dispute, the arbitralTribunal, in view of determining the applicablechoice-of-law rules, started by declaring that it was“influenced by the most progressive teachings in thatpart of private international law which deals with theautonomy of the will”. Accordingly, the Tribunaldecided “to follow the solutions prevailing in Britishand Swiss practice and to apply the law whichcorresponds best to the nature of the legal relationshipbetween the Parties”.

Thus, the Aramco Tribunal arrived at the decisionto apply cumulatively the English and the Swissconflict-of-law systems which both relied uponobjective considerations for the purpose of localizingthe contractual relationship. In addition, it declared theapplicable “proper law” to be “the law of the country


INTERNATIONAL ARBITRATION AND PETROLEUM CONTRACTS

4 Looking for a reasonable solution, and invoking lexvaliditatis as a basic argument, the referee proceeded byformulating the following proposition: “I cannot think thatthe Ruler intended Islamic law to apply to a contract uponwhich he intended to enter, under which he was to receiveconsiderable sums of money, although Islamic law woulddeclare that the transaction was wholly or partly void”.

with which the contract has the closest natural andeffective connection” - particularly taking intoconsideration “the economic milieu where theoperations are to be carried out”; c) after undertaking alengthy analysis according to the declared comparativelaw method of characterization adopted by theTribunal, the ‘public contract’ characterization of the1933 concession agreement was dismissed on thebasis that the Saudi law does not possess a body ofadministrative law comparable to the French system;and d ) finally, in all matters where the vestedcontractual rights of Aramco could not be affectedunilaterally by the Saudi public authorities, such as theimposition of restrictions on the freedom of maritimetransportation by sea going beyond the state’sterritorial waters, the case was to be construed by thearbitral Tribunal. For the Aramco award, theresponsibility resulting from that violation of rightssecured under the concession agreement wasaccordingly to be governed by international law, andnot by the Saudi domestic law.5

13.3.3 The different solutionsprovided for under the arbitral awards renderedin absentia against an expropriating host state

The Aramco award marked a decisive step in thehistory of petroleum arbitration as well as a definitiveimprovement from the point of view of legal analysisin comparison with its predecessors, the Abu Dhabiaward and the Qatar award rendered within thepost-colonial context. However, the Government ofSaudi Arabia reacted vigorously on that occasion byadopting a decree prohibiting the conclusion of anyfuture arbitration clause or agreement, except with theapproval of the Council of Ministers headed by theKing himself on a case to case basis.

The negative Saudi reaction towards the Aramcoaward could be considered the first sign of a generalhostile attitude adopted by certain future members ofthe Organization of Petroleum Exporting Countries(OPEC) that, during the following era, manifestedtheir distrust in the integrity of the arbitration processby refraining to comply with the arbitration clausesinserted in the agreements they previously concludedwith the foreign companies, and by boycotting thearbitral proceedings engaged against them. This wasparticularly the case of Iran in the Sapphire arbitrationcase (1963), and of Libya in the three arbitration cases(BP, Texaco, and Liamco) in the years 1973-77.

The National Iranian Oil Company (NIOC)/Sapphireoil development agreement was concluded on 16 June,

1958, following the standard second generationagreements according to which the two parties becomepartners in a joint undertaking for the prospecting andexploration of oil.

During the first period of exploratory operationsand prospecting, the Canadian company Sapphire wasto bear all the expenses, and only after the discovery ofcommercially-exploitable oil field, the two partieswere to share in the expenses. The previous expensesof Sapphire were to be reimbursed and the net profitwas to be divided, allotting 25% of the profit to theforeign company and 75% to NIOC and to theGovernment of Iran. Before the discovery of oil,NIOC objected to the plan of operations submitted bySapphire, and the dispute escalated in a manner thatled NIOC to terminate the 1958 agreement in 1961.

In implementing the arbitration clause provided forin the agreement, Sapphire requested the President ofthe Swiss Federal Tribunal to choose a sole arbitratorto adjudicate the dispute. Swiss Federal Judge Cavinwas appointed in spite of NIOC’s objection, and thesole arbitrator heard the dispute without theparticipation of NIOC.

The award rendered by Judge Cavin on 15 March,1963, had the following basic characteristics:• Contrary to the Aramco case, the sole arbitrator

subjected the procedures to the domesticprocedural laws applicable in the Swiss Canton ofVaud, as Lausanne was the place where the casehad been heard.

• Attracted by the old colonial negative choice-of-lawapproach of Lord Asquith in order to justifyexcluding the application of the host country’sdomestic legal system, the Swiss sole arbitratordecided to freely “determine which system of lawshould best be applied according to the evidence ofthe parties’ intention and in particular the evidenceto be found in the contract”. In this respect, heindicated that, in spite of the fact that “the lex locicontractus and the lex loci executionis both pointto the application of Iranian law”, the oppositepoint of view should be adopted because “thepresent agreement is fundamentally different fromthe usual commercial contract envisaged by thetraditional rules of private international law”.

• Thereafter, Judge Cavin tried to formulate ageneral proposition according to which a specialconflict-of-law rule had to be envisaged withregard to the category of ‘developmentagreements’ in view of protecting the foreignprivate party from the outright application of thehost country’s domestic legal system. More



5 ILR, vol. 27, pp. 117 ff.

specifically, he ascertained that the mere presenceof an arbitration clause implies “a negativeintention, namely to reject the exclusiveapplication of Iranian law”, and that the contractualprovision according to which the parties undertaketo carry out their obligations in good faith has to beconstrued as evidencing “the intention of theparties not to apply the strict rules of a particularsystem, but rather, to rely upon the rules of law,based upon reason, which are common to civilizednations”.

• By construing the 1958 agreement as having beenintended to be governed by “general principles oflaw”, the Swiss arbitration held on the merits thatNIOC refused to cooperate properly with Sapphire,thus violating the generally recognized rule ofpacta sunt servanda, and decided that such breachgave rise to the right to pecuniary compensationthrough allocation of damages covering both theloss suffered (damnum emergens) and the profitlost (lucrum cessans).According to the sole Swiss arbitrator, in spite of

the fact that Sapphire had ceased activities in theconcession area before oil had been found, there hadbeen a strong chance of finding oil, which justifiedawarding compensation for the “loss of chance”, inreliance on certain European and Americanprecedents.6

About a decade later, events that took place inLibya enriched the legal literature pertaining topetroleum arbitration awards as a result of thedifferences in approach among three eminent jurists.Each of them acted as a sole arbitrator appointed bythe President of the International Court of Justice(ICJ) in one of the three cases involving thenationalization by the Libyan Government of foreigninterests previously established in the country for theexploitation of the national petroleum resources. In thethree cases the state of Libya and its agencies declinedto participate in the arbitral proceedings which wereconducted in absentia.

The common features characterizing the threeinstances derive from the fact that the Legal Libyansystem was – since the beginning of the 1970s –already in possession of a sufficiently mature modernpetroleum legislation composed of standarddispositions which provided adequate rules governingall agreements concluded thereunder; i.e. exactly theopposite of what existed by the middle of the centuryunder the old legal environment that marked the three awards rendered in the Abu Dhabi, Qatariand Aramco cases.

According to the legal system in place, variousconcessions were granted following the model contractannexed to the text of the Libyan Law No. 25/1955 on

petroleum, which was later amended. Theseamendments were incorporated into the existingagreements in order to provide equal treatment amongthe petroleum companies operating in Libya.

More precisely, clause 16 of the model contract asamended in 1966 stipulated: “the Government ofLibya will take all steps necessary to ensure that thecompany enjoys all the rights conferred by thisconcession. The contractual rights expressly created bythis concession shall not be altered except by mutualconsent of the parties”.

The model clause continued by ascertaining that:“the concession shall throughout the period of itsvalidity be construed in accordance with the petroleumlaw and the regulations in force on the date ofexecution of the agreement of amendment by whichthis paragraph (2) was incorporated into thisconcession agreement. Any amendment to or repeal ofsuch regulations shall not affect the contractual rightsof the company without its consent”.

Over and above the said “stabilization clause”explicitly provided for in all Libyan concessionagreements, the amended model contract contained achoice-of-law provision which reads: “this concessionshall be governed by and interpreted in accordancewith the principles of the law of Libya common to theprinciples of international law and in the absence ofsuch common principle then [governed] by and[interpreted] in accordance with the general principlesof law, including such of those principles as may havebeen applied by international tribunals”.

All the concession agreements equally containedan arbitration clause according to which, in case thetwo parties’ appointed co-arbitrators fail to agree onthe third presiding arbitrator, the appointing authorityin charge of accomplishing this task is the President ofthe ICJ.

In the light of the above-stated legal andcontractual background, Judge Lagergren of Swedenwas named by the President of the ICJ as solearbitrator adjudicating the British Petroleum (BP) casein which the Government of Libya declined toparticipate. The cause of action was Libya’sexpropriation in 1971 of BP’s holdings in reaction tocertain political conduct of the United Kingdom (UK)in the Persian Gulf (dispute about the sovereignty overthree islands).

Since the sole arbitrator had chosen Copenhagen asthe seat of arbitration, he refused to follow the Aramcoprecedent of submitting the arbitral procedures tointernational law. Judge Lagergren decided that theprocedural law of the arbitration had to be Danish law



6 ILR, vol. 35, pp. 136 ff.

as it was the law of the Tribunal’s seat, pointing outthat such lex arbitri would enhance the effectivenessof the award rendered.

With regard to the substantive legal issues, JudgeLagergren confirmed the rule according to which: “ifthe parties to the agreement have not providedotherwise, such an arbitral Tribunal is at liberty tochoose the conflicts-of-law rules that it deemsapplicable, having regard to all the circumstances ofthe case”.

At the same time, the sole arbitrator reliedexclusively upon the domestic law characterization, asstated in the legal opinion submitted by BP’s Libyanlaw consultant, according to whom: “concessioncontracts under Libyan law are considered to belong tothe category of administrative contracts”.

Judge Lagergren construed the wording of thestandard clause 28/7 governing all Libyan concessionsas providing for a two-tier system of applicable bodiesof law. In the first place, reference has to be made to“the principle of law of Libya common to theprinciples of international law” and in the secondinstance, a subsidiary reference is made to the“general principle of law, including such of thoseprinciples as may have been applied by internationaltribunals”.

Hence, the BP arbitrator refused to accept both “thesubmission that public international law applies”, aswell as the argument according to which “BPconcession itself constitutes the sole source of lawcontrolling the relationship between the parties”.

Accordingly, Judge Lagergren proceeded by theanalysis of both Libyan law and international lawand arrived at the conclusion that Libya had actedin violation of both Libyan law and internationallaw by unilaterally terminating the existingagreement.

However, with regard to the appropriate remedy,the BP arbitrator considered that Libyan law was notcertain as to whether BP was entitled to specificperformance and restitutio in integrum. Facing suchuncertainty, the careful review of international law onthis point led him to the conclusion that Libya wasonly liable to pay damages.7

Totally opposite conclusions were adopted in thesecond Libyan arbitration case, usually referred to asTopco/Texaco, in which the sole arbitrator appointedby the President of the ICJ was the late Frenchprofessor René-Jean Dupuy who rendered his awardon 19 January, 1977, with the Government of Libyanot participating in the arbitral proceedings whichtook place in Geneva.

The measures undertaken by the LibyanGovernment against the Texaco Group initially derivedfrom a partial nationalization decree8 issued on 1

September, 1973 according to which 51% of all theproperties, rights and assets of companies wereexpropriated and transferred to a Libyan public sectorcompany. Few months later, another decree dated 11February, 1974, extended the taking of property tocover the remaining portion of the Texaco Group’srights and assets.

Contesting the legality of the said measures, themembers of the Texaco Group invoked the arbitrationclause contained in all the concession agreementsaffected by the Libyan measures.

In a preliminary award of 27 November, 1975,professor Dupuy dealt with the issue of hisjurisdiction. He ruled that according to thegenerally accepted rules, an arbitrator has thepower to decide on his own jurisdiction, and thatan arbitration clause is not invalidated by aunilateral repudiation of the agreement concernedby one of the contracting parties.

Professor Dupuy’s final award concerning thismatter, rendered more than twenty months later, onprecisely 19 January, 1977, differed radically from theBP award with regard to the following points:• Concerning the law governing the arbitration, the

Texaco arbitrator decided that international lawalone governed that issue, pointing out that theinvolvement of a state as a party made itinappropriate to choose the law of the seat of theTribunal and that possible problems arising out ofthe enforcement of the award were not within theconcern of the arbitrator.

• Professor Dupuy adopted the doctrinal distinctionbetween the law governing the contract and thelegal order from which the contract derives itsvalidity. He concluded in this respect that the lawfrom which the contract stemmed its bindingnature was international law and not any domesticlegal order.

• Based on a comparative analysis of major legalsystems, and not confined to one specific legalsystem such as the French system, the Texacoarbitrator refused to consider the concept ofcontrat administratif reflecting a “generalprinciple of law” which is “sufficiently widely andfirmly recognized in the leading legal systems ofthe world”. On the other hand, he invoked thepresence of the “stabilization clause” provided forin clause 16.e of the Libyan petroleumconcessions, depriving the state of its prerogativesto unilaterally amend the terms and conditions ofthe concession agreement to consider this as



7 ILR, 1979, vol. 53, pp. 297 ff.8 Decree No. 925/1973.

negation of the clauses exorbitants du droitcommun which constitute a necessary element toconfer upon the relationship the character ofcontrat administratif.

• Professor Dupuy’s analysis of the notion ofpermanent sovereignty over natural resources asexpressed in the various resolutions of the UnitedNations General Assembly had not affected thetraditional customary international law rulespertaining to expropriation. Therefore, thecontinuing validity of the concessions had to beassumed and the appropriate remedy was restitutioin integrum in the light of the contractual clausescontained in the concessions.9

The third case relates to the Libyannationalization of Liamco’s concessions resultingfrom the application of the 1973 decree (covering51% of the holdings) and the subsequent 1974decree (covering the remaining 49%) and raisedalmost identical legal issues in comparison to theaforementioned Topco/Texaco case.

Nevertheless, the award rendered in Geneva on 12April 1977 by Dr. Sobhi Mahmassani of Lebanon, thesole arbitrator appointed by the President of the ICJ,arrived at certain conclusions which are basicallydifferent from those provided for in the two precedingBP and Texaco awards.

The main particularities of dr. Mahmassani’sreasoning can be summarized as follows:• In determining the Tribunal’s rules of procedure,

the Liamco arbitrator took a completely differentapproach by choosing to apply the United NationsCommission on International Trade Law(UNCITRAL) arbitration rules. Thus, he avoidedengaging himself in the controversy of advocatingthe direct submission to international law (Aramcoand Texaco cases), or to the domestic law of thecountry where the seat of arbitration is located(Sapphire and BP cases).

• With regard to the characterization of thepetroleum concession agreements, dr. Mahmassaniopted for a midway solution which reconciled the“predominantly contractual nature” of the deedthat, in the same time, “partakes of mixed publicand private legal character”.

• The sole Liamco arbitrator relied, to a great extent,on Libyan law in general and Islamic law traditionsin particular, to demonstrate the existence of rulesand principles common with the principles ofinternational law – either in relation to the legalityof the recourse to arbitration, or to sustain thebalance between the sanctity of contracts and thesafeguard of the public interests. In adjudicatingthe dispute among the parties in this respect, dr.Mahmassani departed from the concept of total

‘internationalization’, considering that the relevantclause of the concession agreements should beinterpreted as merely “excluding any part of theLibyan law which is in conflict with the principlesof international law”; thus arriving at theconclusion that Libya’s nationalization was notdiscriminatory and, therefore, when accompaniedby adequate compensation had to be consideredlawful.

• Regarding the remedies available, the Liamcoarbitrator’s constant line of reasoning led him torule against the possibility of ordering restitutio inintegrum, as it would be “against the respect duefor the sovereignty of the nationalizing state”, andalso since it would be encountered by animpossibility of performance. Hence, the onlyremedy available had to be the allocation ofpecuniary compensation for the damagessustained.10

Taking into consideration all that has beenpreviously stated, the comparative evaluation of thetheoretical reasoning manifested by the sole arbitratorsin awards rendered in absentia of the respondent state,represents only part of the reality.

A comprehensive assessment of the effectiverole which the three BP, Texaco and Liamcoawards played in practice requires emphasizing thatnone of these awards were enforced as such.Invariably, the claimant companies concludedsettlement agreements with the Government ofLibya, accepting only a fraction of the resultsobtained in the arbitral proceedings.11

This final result demonstrates the realistic limitedimpact of the said awards, in spite of the great effortundertaken throughout those arbitrations by theforeign companies to protect their activities against therisk of having the authorities in the host countriesexercising unilateral regular powers affecting thestabilization clause. This clause was initially insertedin long-term agreements in order to preserve thecontractual balance between the rights and obligationsof both parties.



9 International Legal Materials, referred to hereinafteras ILM, vol. 21, pp. 976 ff.

10 Yearbook of Commercial Arbitration, referred tohereinafter as Yearbook, vol. VI, pp. 89 ff.

11 As reported in the Encyclopedia of publicinternational law published under the direction of prof.Bernhart, the BP case was ultimately settled out of Court byan agreement reached on November 20, 1974 (vol. I, p.506); with regard to the Texaco case “the parties settled theirclaims by an agreement entered into in September 1977”,(vol. III, p. 218); and concerning the third case “Liamcoentered into a compensation Agreement with Libya inMarch 1981” (vol. III, p. 211).

13.3.4 Case law concerningdisputes emerging underthe second generation of petroleum agreements

It has to be recalled that profound transformation inenergy economics produced a series of crises whichpermitted the OPEC countries to accelerate bringing toan end the era of relatively cheap and stable ‘postedprices’ that previously gave the upper hand to themajor oil companies.

The events marking the post-October 1973 warcreated a new economic and political realityadequately reflected in legal terms as a manifestationof what an eminent jurist called l’ivresse de lasouveraineté, permitting the OPEC members toradically change the structure of the petroleumindustry.12

Within this new context and the subsequentimplications that took place in other parts of the world– particularly with the Iranian Islamic Revolution andthe fall of the Soviet empire – both the nature and theterritorial scope of the petroleum arbitration casesgreatly changed. New types of disputes emergedoutside the Middle East in a variety of subjects goingfar beyond the traditional pattern of disputes betweenthe authorities of the host country and the foreigntransnational giants.

The reported arbitral awards of the last threedecades demonstrated the magnitude of the changethat materialized in both the Afro-Asian countries andthe successors of the former Soviet Union.

One of the early illustrations of this new reality isthe arbitration conducted under the auspices of theICC arbitration rules (Case Nos. 3099 and 3100).These were between an Algerian state enterprise andan African state enterprise. In an award rendered inLausanne and dated 30 May, 1979, the panelcomposed of three professors (Swiss President RobertPatry, and Naguya Ndila and Ahmed Mahiou as co-arbitrators) was called to adjudicate a dispute causedby the non-payment of amounts due as penalties,damages and interests under two contracts for the saleof refined oil products and crude oil. The respondentinvoked the force majeure clause contained in art. 18of the contracts – on the basis that the Central Bank ofthe buyer’s country did not authorize the payments.

The arbitral Tribunal arrived at the conclusion thatthe concept of force majeure requires the presence ofthe three characteristics, “externality, unavoidabilityand unforeseeability”. With regard to the last element,the Tribunal noted that “the foreign exchangeregulations were already in force at the moment thatthe two sales contracts were concluded”, and hence thebuyer could not invoke as force majeure his own

failure to obtain the required authorization “either atthe moment the contracts were concluded, or at thelatest before taking delivery of the refinery products orthe crude oil”.

Not only did the arbitral Tribunal allocatecompensation for damages and interest under the rulesof the applicable law, but it equally took into accountthe losses suffered as a result of “the depreciation ofthe American dollar” within the time limit requested.This was particularly taken into account since theseller had in the meantime to borrow US dollarsbearing interest to make up for the buyer’snon-payments.13

Within a different context, the first ICSIDarbitration case related to petroleum involved Agip(Italy) opposing the Government of Congo whichnationalized the oil products distribution sector inJanuary 1974, and transferred to a state corporationthe assets of a company established in 1962 underCongolese law and in which Agip held 90% of theshares.

In implementing an arbitration clause contained ina protocol of agreement according to which theGovernment undertook certain guarantees, Agip filedan arbitration request to ICSID on 30 November, 1979.A panel of three arbitrators (Jogen Trolle, acting asChairman, René-Jean Dupuy and Fuad Rouhani, asco-arbitrators) rendered an award which focused onthe legality of the measures undertaken by theCongolese Government both under the domestic lawand international law. This was as art. 15 of therelevant agreement provided that the applicable lawshould be the Congolese law supplemented by theprinciples of international law.

Particular emphasis was given by the arbitral panelto the legal effect of the “stabilization clause” freelyaccepted by the Government at the time when itconcluded the agreement with Agip. According to theunanimous award rendered by the arbitral panel, theinsertion of such a clause did not essentially affect thestate’s sovereign legislative and regulatory powers, butsimply entailed “that changes in the legislative andregulatory arrangements stipulated in the agreementcannot be invoked against the other contracting party”.

Hence, the arbitral panel arrived at the conclusionthat the act of nationalization – which occurred inviolation of the said clause – had to be consideredirregular under international law, and consequently:“the Government must compensate AGIP for the



12 The expression is due to professor Combacau, in theintroduction he devoted to the French Society InternationalLaw Colloquium of Caen 1975 addressing: La crise del’energie et le droit international.

13 Yearbook, vol. VII, pp. 87 ff.

damage it suffered from the nationalization,particularly in respect of the value of its share of thecompany’s capital and the amount paid by AGIP, orpotentially payable by it, in its capacity as guarantor,corresponding to the participation”.

With regard to the determination of the quantum ofthe compensation due, the Agip arbitral panel reliedexclusively on the rules of the Civil Code as applied inthe state of Congo. Essentially, attention was paid tothe basic rule of art. 1149 which included both the losssuffered (damnum emergens) and the loss of profits(lucrum cessans), as well as the allocation of interestcalculated on the basis of arts. 1153 and 2028 of theCivil Code.14

In implementing an arbitration agreement,concluded on the 23 July 1979 between theGovernment of Kuwait and the American IndependentOil Company, an ad hoc arbitration that took place inParis marked a decisive step in establishing a generalpattern within the context of host country/foreigncompany relationships emerging under the secondgeneration of petroleum concession agreements.

The award rendered – after extensive pleadingsfrom the lawyers of both parties – on 24 March, 1982by three eminent jurists (professor Paul Reuter of ParisUniversity as Chairman, Sir Gerarld Fitzmaurice, theformer President of the ICJ, as co-arbitrator, andprofessor Hamed Sultan of Cairo University, asco-arbitrator) in what is commonly known as Aminoilcase, provided valuable contributions on a variety ofsubjects.

The salient aspects ruled upon can be summarizedas follows:• The arbitration agreement provided that, unless

otherwise agreed by the parties, and subject to anymandatory provision of the procedural law of theplace in which the arbitration was to be held, theTribunal was empowered to prescribe theprocedure applicable to the arbitration “on thebasis of natural justice and of such principles oftransnational procedure as it may find applicable”.Accordingly, the Tribunal adopted its own rules ofprocedure, and these rules were not challenged byeither party. With regard to the law governing thesubstantive issues between the parties, thearbitration agreement merely indicated that it wasleft to be determined by the Tribunal “havingregard to the quality of the parties, thetransnational character of their relations and theprinciples of law and practice prevailing in themodern world”. The Tribunal asserted as a matterof principle that the law of Kuwait applied to manyof the matters involved, and at the same time itemphasized that established public internationallaw, including the general principles of law, formed

part of the law of Kuwait as provided for in theKuwaiti Constitution.

• With regard to the characterization of decree lawNo. 124/ 1977 which ordered the termination ofAminoil’s concession, the reversion of Aminoil’sassets to the state of Kuwait, and the payment of“fair compensation” to the company, the Tribunaldid not hesitate to consider such a legislative act asan exercise of the state’s right to nationalize.Indeed, after taking all relevant factors intoconsideration, the Tribunal concluded that Kuwait’s“take-over” did not possess any confiscatorycharacter.

• Furthermore, the Aminoil award introduced twobasic contributions in the field of the applicablerules pertaining to the conciliation between: firstly,the said legitimate exercise of the right tonationalize; and secondly, the fundamentalprinciple of pacta sunt servanda, particularly inpresence of a “stabilization clause”. The firstfundamental rule relates to the ‘mutability’ of theconcession agreement clearly expressed in thefollowing terms: “while attributing its full value tothe fundamental principle of pacta sunt servanda,the Tribunal has felt obliged to recognize that thecontract of concession has undergone greatchanges since 1948: changes conceded – oftenunwillingly, but conceded nevertheless – by thecompany. These changes have not been theconsequence of accidental or special factors, butrather of a profound and general transformation inthe terms of oil concessions that occurred in theMiddle-East, and later throughout the world. Thesechanges took place progressively, with anincreasing acceleration, as from 1973. They wereintroduced into the contractual relations betweenthe Government and Aminoil through the play ofart. 9, or else as the result of at least tacitacceptance by the company, which entered neitherobjections nor reservations in respect of them.These changes must not simply be viewedpiece-meal, but on the basis of their total effect –and they brought about a metamorphosis in thewhole character of the Concession” (para. 97 of theaward). Secondly, taking into account what theAminoil award characterized as “a change in thenature of the contract itself, brought about by time,and the acquiescence or conduct of the parties”, theTribunal favoured a restrictive interpretation of thestabilization clause provided for in the initialconcession of 1948 and in the supplementalagreement of 1961. It did this by stating in paras.



14 Yearbook, vol. VIII, pp. 133 ff.

94, 95 and 96: a) “the case of nationalization iscertainly not expressly provided against by thestabilization clauses of the concession”; b) “alimitation on the sovereign right of the state is allthe less to be presumed where the concessionaire isin any event in possession of important guaranteesregarding its essential interests in the shape of alegal right to eventual compensation”; c) “if theTribunal thus holds that it cannot interpret Articles17 and 7(g) – revised 11 – as absolutely forbiddingnationalization, it is nevertheless the fact that theseprovisions are far from having lost all their valueand efficacy on that account, since, by impliedlyrequiring that nationalization shall not have anyconfiscatory character, they re-inforce thenecessity for a proper indemnification as acondition of it”.

• With regard to the quantum of the compensationdue as a result of a lawful nationalization, theAminoil Tribunal primarily excluded the claim fora sum equivalent of restitutio in integrum andopted in favour of allocating what constitutes an“appropriate compensation” in the light of all therelevant circumstances of the case. In twoimportant paras. 148 and 154, the Tribunalformulated its ruling in the following terms: “bothparties to the present litigation have invoked thenotion of ‘legitimate expectations’ for deciding oncompensation. That formula is well-advised, andjustifiably brings to mind the fact that, withreference to every long-term contract, especiallyinvolving an important investment, there mustnecessarily be economic calculations, and theweighing-up of rights and obligations, of chancesand risks, constituting the contractual equilibrium.This equilibrium cannot be neglected – neitherwhen it is a question of proceeding to necessaryadaptations during the course of the contract, norwhen it is a question of awarding compensation. Itis in this fundamental equilibrium that the veryessence of the contract consists. For assessment ofthat equilibrium itself, and of the legitimateexpectations to which it gives rise, it is above allthe text of the contract that signifies, and it is ofmoment that this text should be precise andexhaustive. But it is not only a question of theoriginal text: there are also the amendments, theinterpretations, and the behavior manifested alongthe course of its existence, that indicate (oftenfortuitously) how the legitimate expectations of theparties are to be seen and [are] sometimes seen asbecoming modified according to thecircumstances”.

• It has to be particularly emphasized that in thefixing of the quantum for the value of

concessionary rights as lucrum cessans, theTribunal was keen to stress the influence of the factthat both the initial concession as well as thesubsequent agreements contained stabilizationclauses, by indicating that the said clauses:“created for the concessionaire a legitimateexpectation that must be taken into account. In thiscontext they dissipate all doubts as to the strengthof the respect due to the contractual equilibrium”.Hence, the Tribunal undertook a calculation that itthought reflected Aminoil’s “reasonableexpectations” in conducting its business accordingto circumstances that prevailed during the periodjust preceding the nationalization; that is, reflectingits legitimate expectation at that time.

• Finally, it has to be noted that the Aminoil Tribunalwas concerned with achieving a ‘realistic’evaluation, taking into account that the owners ofAminoil were entitled to get an amount ofcompensation capable of generating a purchasingpower – if reinvested elsewhere in 1982 when theaward was rendered – comparable to that whichthey would have obtained in 1977 at the time ofnationalization.In search of such equitable a solution, the Tribunal

allocated to Aminoil not only a rate of interestamounting to 7.5%, but equally an inflation factor of10%; i.e. an annual increase of 17.5% as of the datewhen the take-over took place in 1977.15

Without entering into the particularities of eachcase among those submitted to the jurisdiction of theIran/United States claims Tribunal in the field ofpetroleum related activities, a comprehensive surveyof the case law established by Chambers Two andThree of the Tribunal, clearly indicates the influenceexercised in this respect by the Aminoil award ofMarch 1982. It also indicates the extent to which thesolutions adopted by Aminoil’s three arbitrators pavedthe way for further elaborations – meeting therequirements of the special circumstances caused bythe Revolution in Iran. In fact, the latter led to radicaltransformations, marked by a series of gradual defacto nationalizations of the entire sector, bringing toan end all previous agreements as well as practicalarrangements that existed at that time.

The relevant major achievements of theIran/United States claims Tribunal can be summarizedas follows.

Within the process of adjudicating the AmocoInternational Finance case, Chamber Three(composed of the late professor Virally as Chairman,Brower and Ansari as members) started by stating that



15 ILM, vol. 21, pp. 976 ff.

the legality of an expropriation had to be determinedby international law – namely, the 1955 Treaty ofAmity between the United States and Iran – with therules of customary international law filling in lacunaein the Treaty, ascertaining the meaning of undefinedterms, or aiding the interpretation of certainprovisions.

After deciding that contract rights includedcompensation, the Tribunal emphasized the distinctionbetween lawful and unlawful taking – indicating thatin the first case, compensation had to be assessedaccording to the value of the rights on the date of thetaking. However, in the latter case, restitution could beclaimed and any increase in the value between the dateof the taking and the date of the award should be ofrelevance.

With regard to the issue of whether there was astabilization clause, following the Aminoil example, itwas decided that any limitation on the nation’s right tonationalize must be expressly stipulated, having beenapproved by the state itself in conformity with itsregulations, and covering a relatively limited period oftime. In the absence of a stabilization clause, acontract does not bar nationalization, and suchnationalization cannot be considered unlawful.

As to the method of evaluating the compensationdue, Chamber Three adopted the on-going concernapproach for valuing Amoco’s interests, and ruled thatthe Discounted Cash Flow (DCF) method did not fitwithin the context of that case, since the projection ofdamages over a long period opens “a large field ofspeculation due to the uncertainty inherent in any suchprojections”.

In conclusion, the Tribunal awarded Amoco 50%of the on-going concern value of Kharg Chemical Co.“without addition of future lost profits beyond suchvalue”.16

The other equally important case is that of PhilipsPetroleum, which concerned Chamber Two (composedof Robert Briner as Chairman, S. K. Khalilian andGeorge H. Aldrich as members). This case focused onthe issue of creeping expropriation in the energyindustry through the analysis of NIOC’s escalatingrequests in: a) repudiating the consortium agreement;b) unilateral setting of the production rates at lowerlevels; c) the termination of the Joint StructureAgreement (JSA); d ) and the subsequent effects of theSingle Article Act promulgated by the IranianGovernment in January 1980.

After refusing the changed circumstances as anexcuse, because “a revolutionary regime may notsimply excuse itself from legal obligations bychanging governmental policies”, the Tribunal heldthat force majeure is a general principle of law thatmay be applied even if the contract is silent on this

point. However, in order that force majeure would“have the effect of terminating a contract” it has to“make performance definitively impossible orimpossible for a long period of time”. Hence, since thenew Government was installed by March 1979, andthe oil exports were resumed thereafter, Chamber Tworejected Iran’s claim that the contract was frustrated orterminated by events of force majeure.

On the other hand, within the process ofcalculating the compensation due to Philips Petroleum,Chamber Two adopted a rather sympathetic attitudetowards the DCF method, considering it not as arequest for future best profits, but a relevant factor indetermining the fair market values. In order to remedythe shortcomings of the DCF method and the risk nottaken into account thereby, Chamber Two opted forconsidering the underlying asset valuation approach inassessing the quantum of Phillips Petroleum’snationalized interest. This included tangible andintangible assets, as well as the profitability of itsshare in the going concern after deducting its share ofliabilities. In other words, the method appliedcalculated the tangible assets at their depreciatedreplacement value. This was done by adjusting thebook value, and then quantifying the intangible assets– including the profitability of the on-going concern –by determining an appropriate income figure based onhistoric earnings in function of a multiplier that tookinto consideration the legitimate expectations in the oilventure.17

In addition to the aforementioned points, specialattention has to be given to the Mobil Oil case. In thisinstance, the Government of Iran and NIOC, raised asthe basic argument that the company, as well as theother consortium members, had agreed to thetermination of the Sales and Purchase Agreement(SPA), which replaced in 1973 the ConsortiumAgreement of 1954. In light of the extensivecorrespondence exchanged, Chamber Three (Virally,Brower and Ansari) refused to consider that the SPAwas frustrated or terminated, but found that manyimportant provisions of the SPA were replaced by theend of 1978 with ad hoc or de facto agreements.

Consequently, Chamber Three arrived at theconclusion that the parties mutually agreed toterminate the SPA and started to negotiate the issue ofcompensation when the Revolution took place andinterrupted the negotiations. Following the example ofthe Aminoil Tribunal, Chamber Three deemed itappropriate to determine what the parties could havelegitimately expected from good faith negotiations.



16 Reports of the Iran-US Claims Tribunal, hereinafterreferred to as Iran-US CTR, vol. 15, pp. 189 ff.

17 Iran-US CTR, vol. 21, pp. 79 ff.

It held that the claimed losses “cannot easily beascertained with the degree of certainty necessary toallow a finding that the profits claimed were withinthe legitimate expectations of the parties”.18

This finding was clearly instrumental in facilitatingthe resumption of negotiations, since the pendingcases of the American Consortium members were allsubject to awards by consent of the parties for thepurpose of enforcing the amicable settlementagreements via the funding mechanism established inimplementation of the Algiers Agreement of January1981.19

To complete the picture of the reported awardsrendered in relation to the Iranian measures affectingthe petroleum sector, it has to be noted that not allarbitrations were filed by American claimants. TheFrench company ELF Aquitaine resorted to arbitrationagainst NIOC in the exercising of an arbitration clausecontained in art. 41 of the Exploration and ProductionContracting Agreement signed on 27 August 1966.The latter was declared null and void by the specialcommittee created under the Single Article Act of1980.

As NIOC refused to appoint its arbitrator andraised objections against the recourse to arbitration,the President of the Danish Supreme Court, acting asappointing authority, appointed professor BernhardGomard as sole arbitrator. Since there was noagreement concerning the place of arbitration and theapplicable procedures, the sole arbitrator decided tohold the arbitration in Copenhagen and to applyDanish procedural law.

After ascertaining that the relevant provisions ofagreement 1966 led to the conclusion that the lexcontractus had been chosen as primary source of thegoverning rules, and that the arbitrator had the powerto rely on “considerations of equity and generallyrecognized principles of law and in particularinternational law”, the Danish arbitrator consideredthat the issue of competence had to be decided on thebasis of the principles of international law.

In the exercise of the said power to rule on his ownjurisdiction, the arbitrator so concluded:• “It is a generally recognized principle of the law of

international arbitration that arbitration clausescontinue to be operative even though an objectionis raised by one of the parties that the contractcontaining the arbitration clause is null and void”.

• “The autonomy of an arbitration clause is aprinciple of international law that has beenconsistently applied in decisions rendered ininternational arbitration, in the writings of the mostqualified publicists on international arbitration, inarbitration regulations adopted by internationalorganizations and in treaties”.

• “A contract with a foreign oil company for theexploitation of petroleum in Iran entered into byNIOC cannot be treated differently from a contractsigned by the state itself as a party with respect tothe obligation under international law to respectagreements on arbitration”.

• “It is a recognized principle of international lawthat a state is bound by an arbitration clausecontained in an agreement entered into by the stateitself or by a company owned by the state andcannot thereafter unilaterally set aside the access ofthe other party to the system envisaged by theparties in their agreement for the settlement ofdisputes”.20

13.3.5 The new rules conceived by the arbitral Tribunals

Kuwait’s nationalization of Aminoil in 1977 and the‘takeover’ of petroleum operations resulting from theIranian Islamic Revolution, which materialized in theyears 1978-1980, brought to an end the era of thetraditional concessionary system. During that era, thetransnational foreign companies had the total or partialownership of oil and gas resources existing in the hostcountries.

With the inauguration of a new phase – marked bythe joint exploitation of the nationally-ownedresources through various types of cooperationagreements – issues and disputes of a different naturestarted to emerge. These led to arbitration cases mainlyfocusing on the interpretation of the parties’ respectiverights and obligations within the management of thejoint operations, or the sale of the products to thirdparties under changing circumstances.

As an early example of the said new pattern,reference has to be made to the dispute betweenDeutsche Schachban und Tiefbohrgesellschaft and theGovernment of Ras Al Khaimah, together with itsnational company Rakoil. This concerned theoperating agreement under which a consortium was tocarry out certain seismic work and the drilling of twoexploratory wells.

In implementing an ICC arbitration clause, CaseNo. 3572 was filed. The panel, composed of three



18 Iran-US CTR, vol. 16, pp. 3 ff.19 Awards signed on 15 June 1990 in petroleum cases

Nos. 55 and 56 (Amoco), on 8 November 1990 in case 74(Mobil), on 17 December 1990 in case No. 81 (Arco), Iran-US CTR, vol. 25, pp. 301 ff., and the awards signed on 19October 1992 in cases Nos. 20 (Arco), 21 (Sun), and 396(Atlantic Richfield), Iran-US CTR, vol. 28, pp. 401 ff.

20 Yearbook, vol. XI, pp. 97 ff.

members (Pierre Folliet, Swiss citizen, acting asChairman, Bjorn Haug of Norway and Cedric Barclayof the United Kingdom, acting as co-arbitrators)rendered an award in 1982 by virtue of which thearbitral Tribunal held “internationally acceptedprinciples of law governing contractual relations to bethe proper law applicable to the case”. In addition, thepanel awarded the claimant a total amount of US$4,135,664, which included accrued interest as well asarbitration and legal costs.21

With regard to the sales of a certain quantity of oiland of oil products on Free On Board (FOB) and Costsand Freight (C&F) terms between the sellersSojuznefteexport (USSR) and the buyer Joc Oil(Bermuda), the dispute arose as a result of the buyer’snon payment for shipments – allegedly delivered withdelay – and the seller’s consequent suspension offurther shipments.

In implementing an arbitration clause providing forarbitration at the Foreign Trade ArbitrationCommission (FTAC) of the USSR Chamber ofCommerce and Industry in Moscow, the panelcomposed of three Soviet professors (V.S. Pozdnyakov,as Chairman, R.L. Naryshkina and S.N. Bratus, asco-arbitrators) rendered its award on 9 July 1984 (CaseNo. 109/1980).

As reported, the arbitral Tribunal held that theSoviet sellers “could not claim the contractual price ofthe goods because the sale contract was invalid as itdid not comply with the formalities of Soviet law.However, they were entitled to restitution, equal to thevalue of the amount of shipments delivered andunpaid”.22

The issue of force majeure within the context ofpetroleum operations became central in the NationalOil Corp (NOC) v. Libyan Sun Oil ICC arbitration(Case No. 4462).

Sun Oil entered into an Exploration and ProductionSharing Agreement (EPSA) with the state-ownedLibyan corporation NOC dated 20 November 1980.The EPSA provided that it had to be governed andinterpreted in accordance with the laws andregulations of Libya – including the Petroleum Law –and that it contained an ICC arbitration clause.

Sun Oil assumed the role of operator and wascharged with undertaking a minimum explorationprogramme estimated at US$ 100 million. Due to theUS Government’s sanctions – prohibiting personsusing US passports from travelling to Libya, and alsoprohibiting the export of certain technology without alicense – Sun Oil repatriated its US personnel andfailed to obtain the license needed. Under theseconditions, Sun Oil invoked force majeure to justify itsfailure to carry out its exploration obligations. NOCchallenged the applicability of the force majeure and

filed an arbitration request. The arbitral Tribunal(composed of the former First President of the FrenchCourt of Cassation, Schmelk, as Chairman, professorKatz of Germany and the US Senator Muskie, asco-arbitrators) rendered in 1985 a first award on thebasis of force majeure and a final award in 1987 dealingwith remedies consequently allocated to both parties.

In compliance with the rules provided for underart. 360 of the Libya Civil Code, the arbitral Tribunalarrived at the conclusion that the “impossibility”required under the Libya Civil Code “must not bedetermined subjectively, i.e., by reference to thecapabilities and personal means available to thedefaulting obligor but rather objectively”. It is becauseof such meaning that the impossibility is said to be“absolute”. Since other companies were able toperform – by reliance on citizens of other nationalitiesand using non-US technology – the ICC arbitralTribunal arrived at the conclusion in its first award,that the US prohibitions did not make it impossible forSun Oil to perform. Accordingly, it could not properlyinvoke the force majeure clause.

In its final award of 1987, the arbitral Tribunalruled that Sun Oil’s invocation of the force majeureclauses did not constitute a withdrawal per se. At thesame time, the Tribunal ruled that NOC did notrepudiate the EPSA by having taken recourse toarbitration. On the other hand, there was no mutualconduct giving evidence of an implicit agreement toterminate the EPSA.

Based on the language of art. 8.2 of the EPSA, theTribunal held that “NOC did suffer some loss bylosing its chance, within the exploration period, todiscover oil in the contract area and, within theexploration period, to obtain all the information anddata needed to assess the petroleum resources in thecontract area.” However, taking into consideration allthe relevant circumstances, including NOC’s failure tomitigate its loss, the arbitral Tribunal exercised thebroad discretionary power provided under art. 227.2 ofthe Libyan Civil Code to allocate a “fair andequitable” compensation of US$ 20 million.23

In the field of exploration, an important ad hocarbitration case took place between Wintershall, asclaimant, and the Government of Qatar, as defendant.The case involved a dispute that emerged under anEPSA concluded in 1976, concerning the right ofWintershall to produce non-associated natural gaspursuant to either: further contractual arrangements tobe mutually agreed; or the “go it alone” principlescontained in art. XV.3 of the EPSA.



21 Yearbook, vol. XIV, pp. 111 ff.22 Yearbook, vol. XVII, pp. 92 ff.23 ILM, vol. 29, pp. 565 ff.

The arbitral Tribunal (composed of US citizenJohn Stevenson, as Chairman, Bernardo Cremades ofSpain and Ian Brownlie of the UK, as co-arbitrators)rendered a partial award dated 5 February 1988 and afinal award dated 31 May 1988, which can besummarized as follows:• As the parties agreed that the arbitration had been

conducted according to the UNCITRAL rules, thearbitral Tribunal decided to hold the arbitration atthe Hague, in the Netherlands, ruling that theapplicable UNCITRAL rules were subject to anymandatory provisions of the NetherlandsArbitration Law, which would prevail in the eventof any conflict.

• It should be noted that the Government of Qatarrevised preliminary objections about the Tribunal’slack of jurisdiction because it was not party to theEPSA concluded, and signed only with QatarGeneral Petroleum Corporation (QGPC). As aresult of this, in its partial award, the arbitralTribunal noted that art. 21.1 of the 1976UNCITRAL arbitration rule gave it the power torule on its own jurisdiction. In this respect, theTribunal held that “a non-restrictive interpretationof the Tribunal’s jurisdiction is appropriate”.Accordingly, the objection to jurisdiction wasrejected, and the Government of Qatar wasdeclared as falling under the Tribunal’s jurisdiction,invoking inter alia the following reasons: a) QGPCwas acting as an agent of the Government; b)QGPC’s actions were attributed to the Government;c) the Emir appointed the QGPC’s Board ofDirectors, the majority of whom were officials ofQatar’s department of petroleum affairs – with theEmir being able to remove them at will; and d ) theChairman of the QGPC Board was the Minister ofFinance and Petroleum.

• In the absence of a choice-of-law provision in theEPSA, the arbitral Tribunal held that thesubstantive law to be applied had to be the law ofQatar, due to the close links to that country.Although the Tribunal indicated that publicinternational law – if determined to be relevant –would apply, it decided that, with regard to theissues under consideration, international law wasnot relevant, and applied only the substantive lawof Qatar.

• The basic issue submitted to the arbitral Tribunalrelated to the extent of Wintershall’s right to goahead in the process of exploiting thenon-associated natural gas discovered in, ortranscending, the contract area. The negotiationsconducted with regard to the use of natural gaswere not successful and no agreement was reachedwith QGPC. The arbitral Tribunal rejected

Wintershall’s claims that Qatar breached orexpropriated its rights under the EPSA by notallowing exploration transcending over an adjacentarea. This was particularly rejected since Qatar hadno legal duty to unitize the area or to accept theproposals for joint development. However, thearbitral Tribunal ruled that Wintershall was entitledto an extension of the relinquishment periodprovided by the EPSA. By a majority decision thisextension was considered as specific performanceof the contract. According to the Tribunal’s ruling,Wintershall’s relinquishment period was ordered tobe extended for eight years from the date of theaward for exercising the “go it alone” rights todevelop the natural gas in the contract area.Moreover, the relinquishment term for the structurearea would not begin to run until claimants werepermitted to develop that area.

• Furthermore, the arbitral Tribunal provided theproper interpretation of “petroleum costs” of thenon-restricted gas allowable under the EPSAprovisions, together with the extent of theobligation to off-take natural gas and whether itincluded residual dry as well as liquid elements.

• In application of art. 81 of the Qatari Civil Codeabout unjust enrichment, the arbitral Tribunalrejected Wintershall’s claims based on an allegeddeprivation of its economic interest in the naturalgas discovered and in the field informationresulting from the drilling undertaken. Accordingto the Tribunal, Qatar had a “lawful cause”, sincethe title to the gas in the ground belonged to Qatar,and Wintershall had an implicit duty under theEPSA to report the information obtained to theGovernment.

• Finally, the Tribunal ruled that in case Wintershallexercised the option provided in the award toextend the EPSA, it would not be required to makerental payments for the period before the date ofthe award. In other words, rental payments werenot required until Wintershall had the ability to usethe “go it alone” option as ordered in the finalaward.24

The impact of the USA’s sanctions against Libyaon the petroleum agreements involving Americancompanies returned to the arbitration scene with theICC Case No. 8035 brought by Grace PetroleumLibya, as claimant, against the Socialist People’sLibyan Arab al-Jamahiriya (Libyan state) and NationalOil Corporation of Libya (NOC), as defendants.

The dispute related to an operating agreementcovering concessions Nos. 16, 17 and 20, originally



24 ILM, vol. 28, pp. 795 ff.

confining the conduct of operations to Esso SirteInc., and which reverted after the nationalizationLaw No. 66/1973 to NOC through a wholly-ownedsubsidiary called Sirte Oil Company. NOC, as of 1December, 1981 owned an 87.995% undividedinterest in the three concessions with Grace owningthe remaining 12.005% undivided interest. Inimplementing the US Legislative Acts and ExecutiveOrders prohibiting trade and certain transactionsinvolving Libya, an agreement of suspension wasconcluded on 13 October, 1986 – with retroactiveeffect to June 30, 1986 – between NOC and Grace.Pursuant to the provisions of the suspensionagreement, neither party was entitled to take “anyaction inconsistent with the other’s interests underconcessions Nos. 16, 17 and 20 and the participationagreement, which shall continue in full force andeffect except as provided herein”. At the same time,Grace was “excused permanently from performanceof all contractual obligations otherwise arisingduring the term of this agreement under theconcession, participation agreement and relatedagreements”. In return, Grace waived “any rights orclaims to its crude oil entitlement which shall betaken over and freely disposed of by NOC and/or itssubsidiaries.”

After negotiations between the parties that tookplace in between April and June 1989, an indefiniteextension of the suspension agreement was mutuallyagreed upon. During the same year, Grace envisagedthe sale of its equity interest in the three concessions,and contacts were undertaken by Grace with Totalregarding the possibility of acquiring Grace’s Libyaninterests. However, the discussions terminated withoutany positive result.

In a note addressed more than two years later, on17 March, 1992, NOC announced to Grace itsintention to contract with a “foreign party” for thedevelopment of the Mabruk field in concession No.17. This would be without prejudice to Grace’s rightsand recalling that the suspension agreement remainedin “full force and effect”. Since no reply was given toGrace’s inquiry about the identity of the “foreignparty” and the terms of the contract under negotiation,it remained uninformed up until 27 December, 1992,when NOC informed Grace of the conclusion of anagreement with Total, and required Grace to sign aconfidentiality commitment in order to obtain a copyof the agreement.

Faced with such unexpected developments, Graceintroduced its request for arbitration to the ICC on 14September, 1993 – in application of the arbitrationclause provided for in section 5 of the suspensionagreement, not only against NOC, but equally againstLibya as first defendant.

Though the Libyan appointed arbitrator waschosen by both the state and NOC, Libya contested thejurisdiction of any arbitral Tribunal to hear any claimsagainst the state, emphasizing inter alia that the statewas not a party to the agreement under which thearbitration had been instituted. The arbitral Tribunalbecame constituted as the two co-arbitrators initiallyappointed by the parties (former ICJ President, JudgeStephen Schwebel and the late Judge Ruda ofArgentina) agreed on professor Pierre Pescatori ofLuxembourg to be the third arbitrator and chairman ofthe Tribunal. After the resignation of Judge Schwebeland the sudden death of Judge Ruda, the present USJudge at the ICJ, professor Burghental and the authorof this report became co-arbitrators.

In compliance with the terms of referenceelaborated by the arbitral Tribunal in its newcomposition and agreed upon by the parties, the briefswere exchanged according to the approved timeschedule, and the oral hearings took place. The arbitralTribunal rendered a unanimous final award on 18December, 1995 which dealt at the same time withboth the jurisdictional issue raised by the state ofLibya, as well as all the claims and counter-claimssubmitted by the parties.

The findings of the arbitral Tribunal can besummarized as follows:• With regard to the issue of whether or not the state

of Libya was bound in relation to Grace by thearbitral clause contained in section 5 of thesuspension agreement, the Tribunal’s finding wasthat “Grace has failed to establish the acceptance byLibya of the arbitral clause contained in section 5 ofthe suspension agreement.” The Tribunal’s findingwas based, inter alia, on the fact that NOC “wascreated as a separate legal entity vested withextensive capacities, rights and functions in themanagement of Libya’s oil resources”, and“according to the concept of dédoublementfonctionnel”, the dual signature of the suspensionagreement by the same person did not make thestate a party to the agreement. “The secondsignature, which appears under the legend Approvedand Endorsed, had the purpose of showing thatNOC was acting within the scope of its legal powersand accepts whatever NOC will do in relation toGrace in the framework of the SuspensionAgreement, including the liabilities NOC may incurin this respect and the legal authority of any solutionarrived at as a consequence of recourse to arbitrationunder section 5.”

• Taking into consideration that the US restrictivemeasures caused the inoperability of Grace’sconcession interests, the Tribunal held that Grace“cannot, therefore, contest in principle the



legitimacy of the agreement entered into with Totalby NOC. As long as Grace was prevented fromfully exercising its own rights and relieved of itsobligations due to suspension, the Libyanauthorities were at liberty to manage their oilresources to the best of their interests in the wholeof the concessions concerned, not excluding theshares of Grace. Problems arising out of thiscare-taking action (negotiorum gestio) imposed bycircumstances will have to be resolved in case ofrecommencement, under the conditions indicatedhereinafter”.

• The Tribunal’s scrutiny of whether NOC hadinfringed the guarantees conferred upon Grace – by the suspension agreement led in relation to thesubstance of the total agreement – concluded that ithad to be seen “as the exercise of the right ofoperation and management reserved to the partiesby the participation agreement, with the result thatthis action has not and cannot have any effect onGrace’s concession interest”. The Tribunal furtheradded that “as long as Grace’s operation rights areparalyzed by the US measures and by the effect ofsuspension, as noted above, NOC enjoyedunlimited freedom to organize the development ofMabrouk field to the best of its interest. Since theMabrouk field was in a state of almost completeneglect prior to suspension, Grace was not able toestablish that anything in the Total Agreementcaused any damage to its vested interests in theconcession”.

• In refusing to grant any reparation to Grace for thefact that it was excluded from the negotiationsconducted in secrecy with Total, and placedabruptly before an accomplished fact, the Tribunalheld that such behaviour was not permissible andthat it was inconsistent with Grace’s interest.Although, it stated that the latter “was however notable to establish the existence of any identifiabledamage caused to it by the behavior of NOC,considering the circumstances that, at the timewhen the action of NOC took place, the rights andinterests of Grace were dormant due to suspension,whereas NOC, considering the substance, wasacting within the bounds of its legitimate rights”.

• Interestingly, despite the fact that the Tribunalrejected all the claims of Grace, including thoserelated to its efforts to seek recommencement, aswell as for the sale of its assets in Libya, thearbitral Tribunal condemned NOC to bear the costsof the arbitration, since the latter’s behaviour inkeeping Grace uninformed, and its insistence onsigning a confidentiality agreement “compel theconclusion that NOC’s actions arose justifiedsuspicions on the part of Grace concerning the

extent to which its rights were being protected and,hence, a legitimate interest in obtaining fullclarification in this regard.”25

In recent years, new types of economictransactions arose aiming to utilize the natural gasresources owned by the state in generating electricalpower for local consumption through the conclusion ofwhat became known as BOT or Build, Own, Operate,Transfer (BOOT) with foreign companies able tosecure both the technology and the financial resourcesrequired. A vast programme within this concept wasparticularly implemented in Indonesia by the year1994 through a legal framework composed of threeelements:• The conclusion of an agreement referred to as

Energy Sales Contract (ESC) between the foreigninvesting entity and two Indonesian entities:Pertamina – the well known, wholly ownedgovernmental national company entrusted withIndonesian’s oil and gas resources; and PerusahaanListrik Negara (PLN), the entity equally whollyowned by the Government and which is in chargeof supplying electricity to the people of Indonesia.The ESC type of agreement is structured in a waythat encourages the foreign company to acceptlong-term commitments going up to 30 years. Thisaims at securing the financial resources andtechnology required for the exploitation of the gasreservoirs available in the geothermal fields ownedby the state, developing the wells, constructing theelectrical plants as well as undertaking theinfrastructure necessary for the project. Inexchange for assuming these long-termobligations, it was agreed that the electricity to besupplied to PLN throughout the period of 30 yearshad to be priced in terms of US dollars in order tomake sure that the foreign investor – who affectedthe financing in that currency – would not besubjected to exchange rate risks in the case of thelocal currency undergoing a substantialdevaluation.

• At the same time, Pertamina signed a JointOperation Contract (JOC) with the foreigncompany, establishing the rules to be applied forthe proper conduct and budgeting of the activitiesundertaken in the development and exploitation ofthe geothermal fields.

• Both the ESC and the JOC had a signature on thelast page by the Minister of Mines and Energy,stating “approved […] on behalf of theGovernment of the Republic of Indonesia.”



25 Reported in French translation at Journal de DroitInternational (Clunet), 197, pp. 1040 ff.

Due to the dramatic devaluation of the Indonesianrupiah which took place during the second half of1997, the future of such BOTs became uncertain. Inaddition, the Government caused presidential decreesto interfere in suspending certain projects. Thissituation led the foreign companies concerned toengage in arbitral proceedings under the arbitrationclauses existing in said agreements.

In two leading cases, the claimants filed parallelarbitration request, against the state ElectricityCorporation PLN in one instance, and against TheRepublic of Indonesia in another. These were thecases brought forward by Himpurna CaliforniaEnergy (Bermuda), and by Patuha Power (Bermuda),which were submitted to the same ad hoc arbitralTribunal composed of Jan Paulson, as Chairman,A.A. de Fina and H. Priyatnor Abduarasyid, asco-arbitrators.

The two cases against PLN led to two final awardsdated 4 May 1999, and in the two cases against theRepublic of Indonesia the two final awards wererendered on 6 October, 1999.

The findings of the arbitral Tribunal in both twinarbitrations can be summarized as follows:• With regard to the applicable law governing the

substantive issues, the arbitral Tribunal relied onart. 33 of the UNCITRAL rules in order toconsider that “the concept of party autonomy iscentral to international arbitration”. It concludedthat, since “the parties agreed to require that ‘all’the relevant terms of the ESC should be giveneffect when deciding a particular matter”.Therefore, the arbitrators need not apply theotherwise applicable law if it is inconsistent withthe “spirit” of the ESC or the “underlying intent”of the parties.

• Concerning the relationship between PLN and theGovernment of Indonesia, the arbitral Tribunalheld that PLN “cannot in fact avoid liability byinvoking state action since in the particularcircumstances of this case PLN entirelysubordinated its will to that of the GOI[Government of Indonesia]”. Over and above this,the Tribunal emphasized that PLN is simply “aninstrument of Government policy” as witnessed bythe fact that “its tariffs are set by GOI”. In light ofart. 9. 2 s.e of the ESC – providing that only theforeign party can claim an act of the Governmentof Indonesia to be an event of force majeure – thearbitral Tribunal arrived at the conclusion thatneither PLN nor Pertamina “may invokegovernmental action as an excuse fornon-performance, and that therefore it must beheld liable for the economic consequence of thefailure to perform”.

• After careful study of the factual and legalbackground pertaining to the change ofcircumstances resulting from the calamitouseconomic crises that caused the Indonesian rupiahto lose more than two thirds of its value, thearbitral Tribunal noted the significance in the ESCof pricing in US dollars rather than in Indonesianrupiah. It meant that “the parties unambiguouslyallocated the risk of a depreciation of the localcurrency to PLN.” Consequently, the Tribunalclearly stated that “when stipulations like theseappear in a long-term agreement like the ESC,with respect to which it is obvious that thesurrounding circumstances may changedramatically during the life of the contract, one canonly conclude that the allocations of risk isintentional, indeed emphatic”.

• In support of the said ruling, the arbitral Tribunalemphasized that it had no power “to question themotives or judgment of the parties, but to assesstheir rights and obligations in light of theirlegally-significant acts or missions,” adding that“to go beyond this role would be to betray thelegitimate expectations reflected in the Parties’agreement to arbitrate, and indeed to impair theinternational usefulness of the arbitralmechanism.”

• After ordering termination of the ESC for breachesof a fundamental nature by PLN, the arbitralTribunal addressed the quantification of thecompensation to be allocated to the claimants witha preliminary remark according to which “it isimpossible to establish damages as a matter ofscientific certainty”, which implies that“approximations are inevitable”, and“considerations of fairness” have to be taken intoconsideration. The arbitral Tribunal proceeded byascertaining that asking “for the full amount of thefuture revenue stream when also claimingrecoupment of all investments is wanting to haveyour cake and eat it too”, and hence “when thevictim of a breach of contract seeks recovery ofsunk costs, confident that it is entitled to itsdamnum, it may go to seek lost profits only withthe provision that its computations reduce futurenet cash flows by allowing a proper measure ofamortization”. The Tribunal further added that “itwould be intolerable in the present case to upholdclaims for lost profits from investments not yetincurred.”

• Turning to the claims against the Republic ofIndonesia, which became subject to two finalawards rendered six months later, it has to be notedthat a serious incident took place in between. Theco-arbitrator appointed by Indonesia was



intercepted at Schiphol airport and returned underescort to Jakarta in order not to attend theTribunal’s meeting – scheduled to convene twodays later at the Peace Palace in The Hague. Inreference to the UNCITRAL rules, the doctrinalcomments and precedents in this respect, the twomembers of the truncated Tribunal decided thatthey had the power to fulfill the Tribunal’s mandateand to render a final award, notwithstanding thenon-participation of the third member.

• After lengthy discussion of all the documents andlegal opinions pertaining to whether the so-calledMOF letter was intended to create legal obligationsor not, the arbitral Tribunal found that: firstly, thesaid letter “created a duty for the Republic ofIndonesia to ensure that PLN honored andperformed its obligations under the ESC and underany arbitral award rendered pursuant to it; andsecondly the Republic of Indonesia has breachedthat duty.”Accordingly, the arbitral Tribunal arrived in paras.

197-199 of the final award to conclude that:• It is “indisputable” that “The Republic of Indonesia

has failed to live up to its undertaking, to causePLN to respect its obligations under the ESC […];PLN’s breach of the ESC has been determined byan arbitral award which, as the ESC stipulated, isbinding and definitive.”

• “The MOF letter unequivocally required theGovernment of Indonesia to cause PLN to honorand perform its obligations. In the PLN award itwas held that the ESC is terminated for PLN’sbreach. The Republic of Indonesia has not shown –and indeed cannot show, given the PLN award as ares judicata – that it caused PLN to act in such amanner that it would not commit, or would cure,the breach.”

• “The record shows that the Republic of Indonesiaobstructed both: a) performance of the ESC, byregulatory measures fully described in the PLNaward; and b) satisfaction of the PLN award, byfailing to use its statutory power over PLN andPertamina to cause them to desist from courtactions seeking to set aside the PLN award and toparalyze this arbitration.”The arbitral Tribunal consequently ruled that “in

the absence of any claim for the damages, theoutstanding debt represented by the PLN awardconstitutes the measure of the claimant’s damagesflowing from the Republic of Indonesia’s breach of theMOF letter.”26

Within the same context of global relationshipcomprising: a tripartite ESC concluded between PLN,Pertamina with a foreign entity in change of exploitingnatural geothermal gas resources to guarantee and

supply electricity on long-term basis over 30 years;JOC with Pertamina covering the development andexploitation of the geothermal fields; and the formalwritten approval of both the ESC and the JOC by theMinister of Mines and Energy on behalf of theRepublic of Indonesia, a single arbitration request wasbrought by another foreign investor called KarahaBodas Company, referred to as “KBC”. This wasagainst all three Indonesian entities: Pertamina, PLNand the Government of the Republic of Indonesia(GOI), under UNCITRAL rules as provided for undersection 8 of the ESC, as well as under art. 13 of theJOC.

Since the three Indonesian Respondents refrainedfrom appointing the second arbitrator, and uponrecourse by the Claimant to the appointing authorityagreed upon what happened to be ICSID’s SecretaryGeneral, the author of this report was appointed assecond co-arbitrator. After consultation with theclaimant’s appointed arbitrator professor Bernardini,the two co-arbitrators chose Maître Yves Derains aschairman of the arbitral Tribunal.

The respondents raised certain challengesconcerning the jurisdiction of the arbitral Tribunal overthe GOI, the non-exhaustion of amicable settlementprocedure, about the regularity of consolidating KBC’sclaims into a single arbitration, as well as theconstitution of the arbitral Tribunal.

In a preliminary award addressing the said issuesand rendered on 30 September 1999, the arbitralTribunal came to the following ruling:• The arbitral Tribunal decided that it had no

jurisdiction over the Government of Indonesia,invoking inter alia that: “approval by theGovernment of contracts of national interest […] isa straightforward feature of contracts concluded bystate-owned enterprises throughout the world”.According to the text of both contracts “they couldnot become effective without the approval of theminister which was the starting point forcalculating the term of the contract. Thus, the verypurpose of the minister’s approval is clearlydefined: it is a condition precedent to the enteringinto force of the JOC and the ESC. This is a clearindication that the parties did not consider that theGOI was also a party to the contracts”. In otherwords, according to the Tribunal, it was “within theframework of its duty to control state-owned



26 The full texts of the awards were revealed and madeavailable with the consent of all parties concerned in theother case studied hereinafter, concerning the Karaha BodasProject, and were made public within the judicialproceedings engaged by the Indonesian parties against thesaid awards.

companies and agreements involving theenergetical resources of the country” that “theMinister of Mines and Energy of the Republic ofIndonesia was authorizing the implementation ofthe contracts agreed upon by the parties. It was notexpressing the will to become a party to them.”

• The arbitral Tribunal’s scrutiny of the relevant factsand legal provisions led to the rejection of therespondents’ objection to its jurisdiction for lack ofrespect of the amicable settlement procedurescontemplated by the arbitration clauses. It also ledto the acceptance of KBC’s position according towhich a party may act against several partiesbound by a different but similar arbitration clauses.This was considered fully justified in the caseunder consideration, not only on the basis of theconnexity between the JOC and the EFC, but dueto the fact that “in reality the two contracts areintegrated”, and the “parties did not contemplatethe performance of two independent contracts, butthe performance of a single project consisting oftwo closely related parts”. The arbitral Tribunalclearly indicated that: “due to the integration of thetwo contracts and the fact that the PresidentialDecrees, the consequences of which are at theorigin of the dispute, affected both of them, theinitiation of two separate arbitrations would beartificial and would generate the risk ofcontradictory decisions.”

• With regard to the respondents’ complaint about analleged “structural inequality created when theICSID Secretary General appointed one person onbehalf of them”, the arbitral Tribunal decided to beprimarily guided by the spirit of the contracts, andthe “underlying intent of the parties”, as a basicprinciple of interpretation reflected by art. 1343 ofthe Indonesian Civil Code, as well as incompliance with the UNCITRAL arbitration rules.Taking into account the relevant texts, the Tribunalexpressed its satisfaction that when the secretarygeneral of ICSID appointed an arbitrator, “failingan appointment by the Respondents, he wasrespecting the intention of the parties”.

• The adjudication of the merits between KBC, asclaimant, Pertamina and PLN, as the tworemaining respondents after excluding the GOI forlack of jurisdiction, permitted the parties to fullyplead their respective positions with the assistanceof the witnesses introduced on both sides, either onfacts, auditing and economic analysis, or on theapplicable legal rules – including the submission of“the Himpurna/Patuha awards given the same valueas any other supporting academic materials”.

• The first question addressed by the arbitralTribunal in its final award of 14 February 2001

relates to whether the two respondents were inbreach of their obligations under the ESC and/orthe JOC. In response to this basic question, thearbitral Tribunal focused on the effects of thePresidential Decrees which ordered thepostponement of the Karaha Geothermal project,constituting a “Government-related event” asdefined in both the JOC and the ESC; thus a forcemajeure event for KBC, but not for Pertamina andPLN. Therefore, in light of the allocation of riskprovisions of both the ESC and the JOC, theTribunal concluded, that: “since a governmentalevent is not a force majeure event for them, theirnon performance has no legitimate excuse and is abreach of contract”.

• Consequently, with regard to the remedy to beordered, the arbitral Tribunal stressed that 6 yearselapsed after the execution of the contracts and 3years after the Presidential suspension Decreeswithout any serious effort to render performancepossible in a foreseeable future. This was asituation which led the Tribunal to declare thatboth the JOC and the ESC were terminated. In thisrespect, the Tribunal stated: “it would beunreasonable and contrary to all the parties’interest, the spirit of the contracts and thelegitimate intent of the parties, which the arbitralTribunal must respect pursuant to Art. 13.2 of theJOC and s. 8.2(h) of the ESC, to maintain themindefinitely bound by contractual links”.

• The arbitral Tribunal proceeded thereafter with thetask of awarding compensation to KBC on thebasis of the rules established with regard to thatcategory of what it characterized as “Long TermInternational Development Agreements”.According to the Tribunal, in a case such as theone under consideration: “the foreign investor isentitled to seek recoupment of its entire investmentas an essential element of compensation, in thesense that due to the frustration of his legitimateexpectations in reliance on the contracts previouslyconcluded it has to be reimbursed for what heincurred as proved expenditures”.

• However, in order to comply with “the spirit andthe legitimate expectations of the parties asunderstood from the global textual structure ofthe contractual documents”, the arbitral Tribunalfound itself bound to go beyond the recovery ofthe capital invested in US dollars, the currency inwhich the said investments were originally paid.After deciding that the damnum emergens due tothe claimant to compensate its lost investmentsamounted initially to a total of US $ 93.1 millionat the relevant time when performance inreliance on the contracts came to an end, the



arbitral Tribunal considered it necessary “toestablish the present value of these lostinvestments”, and in order to achieve this task,the Tribunal ruled on the basis of the evidencesubmitted to it about a “risk-free rate”conservative measure of 5.8% per annum,“indicating what would be the least non-speculative yield that a prudent person couldhave earned by placing the amount in question ata secured type of investment”.

• After establishing – as stated above – theactualized present value of the lost investments tobe recovered under the heading of damnumemergens, the arbitral Tribunal turned to theassessment of whatever lucrum cessans may beallocated due to the loss of geothermaldevelopment opportunities.

In this respect, the arbitral Tribunal began byascertaining that the claimant “is entitled to obtainthe benefit of its bargain”, emphasizing that “theloss of a business opportunity (perte de chance) isa widely recognized basis for the lost profitsdamages component”.

However, in undertaking this assignment, theTribunal indicated the need: “to assess with areasonable degree of confidence the level of profitswhich the claimant might have legitimatelyexpected to earn out of a project which had not yetreached the stage of full development and whichwould have been subject to the vagaries of anumber of risks typical of this kind of projects in acountry such as Indonesia”.

The analysis of the relevant factors affectingthe determination of the magnitude of the risksinvolved, against which no protection was affordedby the JOC and the ESC, as well as thedetermination of an appropriate discount rateapplicable for the calculation of the future cashflow projections, led the arbitral Tribunal to fix anamount to be allocated to the claimant. This wentunder the heading of lost profits deemedreasonable which was considerably below whatwas claimed by KBC and its experts.27

It is left to future arbitral cases to demonstrate thedegree of adequacy of the solutions adopted in thiscase and in the previous ones, which inaugurated anew era in arbitrations related to modern oil and gascooperation agreements concluded between foreigninvestors and the host countries which are structuredas BOTs, BOOTs, or otherwise.

Ahmed El KosheriInternational University for African Development

Alexandria, EgyptICC International Court of Arbitration

Paris, France



27 The Karaha Bodas final award became equally in thepublic domain due to the various judicial recourses forannulment submitted in front of Courts in Switzerland werethe seat of arbitration was located as well as in front ofJakarta Courts. Equally, many judicial procedures wereengaged in front of Singapore and USA Courts resistingenforcement of the award. The latest in date was adjudicatedby the U.S. Court of Appeals, for the Fifth Circuit, decisionof 23 March 2004 in Karaha Bodas v. Pertamina.

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