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CHAPTER 4
CONTRIBUTION OF INTERNATIONAL COURTS AND TRIBUNALS
- JURISPRUDENCE
In the light of previous discussion, it is time to
consider how the contemporary tribunals have articulated the ~
present state of the law regarding the state's obligation to
compensate an alien for a fundamental interference with his
contractual rights. In this chapter some ICSID1 awards will
be considered.
It is more than 2 6 years since the World Bank
Convention on the Settlement of Investment Disputes entered
into force. More than 120 states are now parties to it.
This unique convention providing for the international
arbitration of disputes arising between states and nationals
or companies of other states, has given rise to an·important
body of case law. These decisions are relevant in the
application or study of the law relating to international
investments.
AGIP2 involved an arbitration against the Congolese
government for violation of an investment agre8ment and
expropriation of assets and contract rights associated with
1. Convention on the SettlAment of Investment Disputes
between States and Nationals of Other States, opened
for signature March 18, 575 U.N.T.S. 159.
2. AGIP Co. v. Popular Republic of Congo, Yearbook
Commercial Arbitration, vol.8 (1983), pp.133-144.
116
a hydrocarbon distribution business. The facts of this case
are as follows: AGIP, an Italian company, established in the
Congo, in 1962, a company under Congolese law of which it
held 90% of the shares, the other 10% being held by the
swiss Hydrocarbons International Holding company. The
company was intended for oil distribution, which it
commenced in 1965.
In 1974, the oil products distribution sector in
the Congo was nationalised, all assets thereunder being
transferred to the Hydro-Congo state Corporation. AGIP,
however, was not affected by these measures. It had earlier
signed a Protocol of Agreement by which it had sold to the
Congolese government shares representing 50% of the
company's capital. The government agreed that the compq.ny
should retain the status of a limited liability company
despite government participation. The Congolese government
also undertook to guarantee upto a limit of 50~; all
financing granted to the company and to take thn necessary
steps to ensure that all supplies of oil products and
lubricants to state and parastatal organiz~tions be provided
by the company. As to the settlement of disputes, the
Agreement contained the following clause:
"Any differences that may arise concerning the
application ~r interpretation of this Protocol of
Agreement shall be definitely settled in accordance
with the Convention on the Settlement of Investment
Disputes between States and Nationals of other states,
ratified by the Popular Republic of the "Congo, through
an arbitration tribunal consisting of three arbitrators
appointed in accordance with the above mentioned
117
convention. Congolese law, supplemented if necessary by
any principles of international law, shall be
applicable".
The Congo nationalized the company by Ordinance
no.6j75. The Presidential order read, in part, as follows:
"Under the Constitution and pursuant to Ordinance
establishing Hydro-Congo; considering that the company
AGIP Brazz~ville S.A. had ceased all commercial
activities and is therefore unable to meet its
obligations; and considering that this situation is
seriously damaging the Congolese state as a share
holder in this company: The shares and liquid and fixed
assets of the company AGIP Brazaville S.A. are
transferred to the Hydro-Congo company. This decision
creates no right to any compensation."
Moreover, occupation by the army of its headquarters
and offices totally impeded the company from any further
management of its affairs. Furthermore, in view of the
government's and Hydro-Congo's refusal to recognize their
engagement to guarantee, the company's financial
obligations, the company was faced with formal demands for
payment by its banks, with which it could only partly
comply. AGIP informed the Ministry of Energy that it
intended to have recourse to arbitration. This notification
was made so as to allow the governmentto review the problem
once again. Not receiving any reaction, AGIP presented its
request for arbitration to the ICSID.
In 1978,. through another ordinance, the Congolese
government revoked that part of a nationalization ordinance
which eliminated the right to compensation. A fresh round of
negotiations to settle amicably the dispute, proved
118
unsuccessful. The dispute was referred to the tribunal in
terms of the agreement. Under its terms the applicable law
was Congolese law, supplemented, if necessary, by principles
of international law. Article 42 (i) of the Convention
stipulates that the tribunal shall decide• the dispute in
accordance with such rules of law as may be agreed to by the
parties.
The government had proposed that the tribunal should,..
play the role of a friendly arbitrator. Since AGIP did not
share this attitude, the tribunal makes its decision in
accordance with the provisions of the applicable law
referred to in the agreement. The said article binds the
parties and has the force of law for the tribunal in view of
article 42 of the convention. In the matters of civil and
commercial nature, the Congolese law o'applies the French
legislation in force at the time that country gained its
independence in 1960. At a higher juridical level there is
the constitution of the Popular Republic of the Congo.
Article 33 of the constitution provides:
"Private property and the right to inherit property are
guaranteed. Nobody sLall use his right to private
property to the detriment of the community.
Limitations on private ownership may when the general
interest so requires be pronounced by an act of
government. Expropriations shall take place only
pursuant to a law.
Within the domain of the law are:
- Nationalisation of companies and transfers of company
119
property."
The grievances of AGIP were based on non-performance by the
government of the following contractual obligations:
(a) Its substitution for AGIP as guarantor of 50% of the
loans granted to the company;
(b) The award to the company of all the purchases by state
corporations;
(c) Settlement by the state corporations of their debts to
the company.
(d) Stabilization of the company's legal status.
The tribunal had no difficulty in finding that the
first three obligations had not been fulfilled by the
Congolese government. It then turned to ground D which deals
with the nationalization ordinance and the agreement which
had been concluded between the company and the government
and considered the issues deriving therefrom in the light of
Congolese law as well as international law, in particular
with respect to stabilization clauses. The precise question
was whether order no. 6/75 is a violation of the Protocol of
Agreement to the extent that it guaranteed the stability of
the company's legal status. The government had undertaken
not to apply certain laws and decrees as well as any other
subsequent law or decree that aimed at al tl ring the
company's status as a limited liability corporation in
private law. Furthermore, if changes were to be made in the
law concerning companies, appropriate· measures will be
taken to ensure that such changes do not affect the
120
structure and composition of the organs of the company as
provided in the agreement and in the company's statutes,
which fixed its duration at 99 years. The tribunal said:
"The nationalization decree by Order No.6f75 requiring
the transfer of all company assets and shares to the
Hydro-Congo state Corporation must be considered first
in relation to Congolese law. The tribunal must then - .. consider whether the matter mu.3t also be examined from
the standpoint of international law.
Congolese law consists on the one hand of
constitutional rules and on the other of rules of civil and
commercial law. From the point of view of constitutional
law, the fact that private property is guaranteed by the
constitution cannot be regarded as depriving the Congolese
state of the right to nationalize which it possesses as a
sovereign state, since the same aiticle stipulates that
liquidation of ownership may when the general interest so
requires be pronounced by ah act of government. While
article 55 of the constitution adds: "Within the domain of
the law are nationalizations of companies and transfers of
company property."
Since the measures taken against the company were put
into effect through an ordinance ratified by law... there
can be no doubt that they were in accordance with the forms
required by Congolese constitutional law.
On the other hand, AGIP maintains that the
nationalization was irregular since it did not satisfy the
basic condition laid down by the constitution, namely, that
it was required by the national interest. In its preamble
121
the ordinance states:
"Whereas the company AGIP (Brazzaville) S.A. has ceased
all commercial activities and is in fact unable to meet its obligations, whereas this situation causes serious damage the Congolese state as a shareholder in this
company ... " The tribunal does not feel that it can accept the
distinction made by ~GIP between the general interest and
the private interest of the state acting as a shareholder.
While a state, in participating in the contribution of the
capital of a company, performs an act in the private sphere
analogous to t~e action of an individual,it is nonetheless
acting in the general interest of the national commun.it:y for
which it is responsible. Thus, the fact that the state which
nationalizes a company is a shareholder cannot by itself
warrant the conclusion that this step is not taken in the
general interest.
However, even though the government could consider that
its interest as a shareholder might basically coincide with
the general interest, it does not necessarily follow that in
the present case the latter could only be satisfied by
resource to nationalization. This point is all the more
relevant since the Congo had a contractual relationship with
AGIP which under Congolese law obliged it not to alter th~
company's status unilaterally."3 The tribunal then proceeded
to consider the position under Congolese civil and
commercial law. It observed:
3. Ibid., p. 138.
122
"As regards civil law, Article 1134 of the French Civil
Code, which establishes the principle that agreements
lawfully arrived at have the force of law for those
making them, provides a juridical basis for the
agreement signed between the parties to the present
dispute. It cannot be denied that the measures taken
under the Ordinance cited above ignored the obligations
of the contracting state to perform the contract".
Furthermore, the government, which was not, be it noted,
without responsibility for the economic difficulties
experienced by the company, has no legal right from the
point of view of commercial law to act in such radical
fashion against the company. If it wished to protect its
interests as a shareholder, the government should have
respected the legal procedures available to it, which in
this case consist either of having the board of directors
call an extra-ordinary general meeting of the company, or
applying to the judiciary to pronounce its dissolution.
As noted, the agreement provides that the applicable
law should be Congolese law supplemented by the principles
of international law. In the tribunal's view contradiction
between Congolese law and the act of nationalization
pursuant- to Order No.6/75 has been demonstrated. It should
in fact be stressed that in this case any unilateral
modification of the company's status was prohibited under
the Agreement. If the government had the power to reduce
this contractual obligations to nothing by nationalizing the
company whenever it thought fit, this would constitute a
purely protestative condition, considered null under article
123
1174 of the French Civil Code.4
Though the tribunal was satisfied that Congolese law
demonstrated the illegality of nationalizations, it still
proceeded to examine them from the point of view of
international law. It reasoned that since the contested
ordinance is itself part of Congolese law it is necessary to
determine why it cannot, as such, be considered as providing
a juridical basis for the measures taken pursuant to it. It
observed, "the tribunal believes that it ought to observe
that although there can be no doubt as to the right: of a
state to nationalize on the basis of a consistent and
constant international practice, positive international law
also recognizes
agreement with a
that in concluding an international
private individual the state exercises
sovereign powers whenever, its consent is freely given.
In the present case, it is worth recalling that under
the agreement Congolese law can be supplemented if necessary
by any principle of international law. AGIP has maintained
that the term supplemented should be interpreted as implying
the subordination of Congolese law to international law.
Whatever the merits of this argument it is enough for the
tribunal to note that the use of the term supplemented means
as a minimum that there can be recourse to the principles of
international law either to fill a gap in Congolese law or
to supplement it if necessary.
4. Ibid. I p. 139.
124
The tribunal notes that under the agreement the
government undertook not to apply to the company certain
ordinances or decrees whose purpose is to alter the
company's status as a limtied liability corporation under
private law. In particular, the government had promised
under the terms of the agreement not to change unilaterally
the company's articles of incorporation, which were declared
an integral part of the agreement even if changes are made
in company law.
The unilaterally decided dissolution under ordinance ~~
No.6/75 was clearly ~nconstant with these stabilization
clauses, whose applicability results not from the automatic
play of the sovereignty of the contracting state but from
the common will of the parties expressed at the level of
international juridical order.
These stabilization clauses, freely accepted by the
government do not essentially affect its sovereign
legislative and regulatory powers, sineeit retains both in
relation to those, whether nationals or foreigners, with
whom it has not entered into such obligations, and since, in
the present case these clauses have the limited effect
that changes in the legislative and regulatory arrangements
stipulated in the agreement cannot be invoked against t:he
other contracting party. The application of international
law in the present case therefore does not require an
examination of the other possible violations of the law
alleged by AGIP, particularly those concerning the
discriminatory nature of the contested measures. It is
125
sufficient to focuG the examination on the compatibility of
the nationalization with international law regarding
stabilization clauses.
It is in fact in regard to such clauses that the
principles of international law supplement the rules of
Congolese law. The reference to international law is enough
to demonstrate the irregular nature, under this law, of the
act of nationalization which occurred in this case.
Consequently the government must compensate AGIP for the
damage it suffered from the nationalization, particularly in
respect of the value of its shares of the company's capital
and the amount paid by AGIP or potentially payable by it, in
the capacity as guarantor, corresponding to that
participation. Having nationalized that part of the
company's shares that did not belong to it until then, the
government became responsible for the liabilities relating
thereto.
The tribunal notes that the principles of this
compensation was indeed accepted by the government, which in
1978 published ordinance No. 5/78 abolishing the refusal t.o
pay compensation expressed in Article 2 of Law 617 5 and
which repeatedly and specifically in its counter-memorial of
March 15, 1979, recogn~sed that principle.5
Then the tribunal proceeded to consider the
constituent elements of damages, it said:
"The tribunai notes that AGIP claims not only
compensation for nationalization of the company but
5. Ibid. , p. 14 0
126
also for damages for losses resulting from the alleged
breaches by the governmentof all its contractual
obligations. The tribunal first observes that the fact
that the Ordinance No. 5/78 revoked Article 2 of
Ordinance 6/75 which denied any compensation for the
nationalization decreed thereby, cannot remove the
basis of AGIP's claim for compensation since it has
received nothing upto this time. The tribunal considers
that the present case involves not just an act of
nationalization but also a series of failures by the
government to perform its contractual undertakings,
distinct from the nationalization. It therefore
considers that AGIP is justified in its request for
damages. As regards compensation for losses, according
to the basic rule of Article 1149 of the French Civil
Code both the losses suffered (damnum emergens) and the
loss of profits (lucrum cessans) must be taken into
account. This principle of full compensation for losses
is limited in certain circumstances, which in the
tribunal's opinion are not present in this case. There
is no basis for invoking and the government has in fact
not invoked either any fault committed by AGP that
would constitute contributory negligence nor the
unforseeable nature of the damages suffered by the company. it 6
Benvenuti et Bonfant v. Congo 7: In this case the
claimant alleged that the Congolese government had
effectively expropriated B & B' s interest in a bottle
manufacturing factory through a series of confiscatory
6. Ibid., p.142.
7. Benvenuti et Bonfant v. People's Republic of Congo,
Yearbook Commercial Arbitration. vol.8, (1983), pp.144-
152.
127
measures and had failed to remunerate B & B for advances it
had made to the joint venture. Facts of this case are as
follows: Towards the end of 1972 claimant was commissioned
by the government to study the possibility of setting up and
operating in the Congo an establishment for the manufacture
of plastic bottles. To this end the parties signed in 1973
an agreement which provided for:
a. The establishment of a mixed economy with a capital stock
of which 60 percent would be provided by the government and
40 per cent by the plaintiff.
b. The right of the government to purchase Plaintiff's share
after a period of five years from the constitution of the
new company, the purchase price being determined by mutual
agreement between the parties or in default thereof by
arbitration.
c. The commitment of the government to fully guarantee any
financing the above mentioned company would need for
conducting its program and to grant it a fiscal regime
through an establishment agreement.
d. The commitment of plaintiff to guarantee the marketing of
the products of the company to be established.
On the same day the parties signed the Bylaw of the
PLASCO company which was established for a duration of 99
years and was to be managed by a Board of Directors
composed of seven members of which at least four would be
appointed by the government. Arbitration clauses referring
128
to ICSID-arbi tration were contained in both the agreement
between the governmentand the company and the Bylaws of the
company. Article 25 of the Bylaws reads:
Any dispute that may arise during the life of the
company or its liquidation, either between the
shareholders themselves concerning corporate mattE~rs,
or between the shareholders and the company, which have
not been settled either by ~he competent coLrts of the
corporate jurisdiction or by negotiation, shall be
arbitrated under the Convention of 18 March 1965 for
the settlement of investment disputes between states
and nationals of other states established by the
International Bank for Reconstruction and Development.
Again, Article 12 of the agreement stipulated that,
Any disputes that may arise between the parties in the
execution of this protocol of agreement and are not
. settled by negotiation shall be arbitrated under the
Convention of 18 March 1965 for the settlement of
investment disputes between states and nationals of
other states established· by the IBRD. The parties
undertake herewith to submit themselves to the
decisions of the arbitrator, undertaJ.: e to ensure its
execution, and renounced any appeal against the
decisions rendered.
on 21, April 1973, a contract was signed between the
Palsco company and SODISCA, an Italian engineering company,
for a turn-key plant for the manufacture of plastic bottles.
During ·and after the completion of the Plant many
differences arose between the parties both under the
agreement as well as between them in their joint venture
(PLASCO) . When settlement negotiations failed, claimant
introduced this arbitration on December 15, 1977.
129
The Congolese government objected against the
jurisdiction of the tribunal. It based its plea of lis
pendens on the existence of a suit pending before the
Revolutionary Court of Brazzaville. It involved a suit
instituted by the government against Bonfant in his capacity
as agent of the PLASCO company. To this argument, B & B
replies that a suit between the government and Mr.Bonfant is
quite different from a suit between B & B and the
government. The government, basing itself on Article 25 of
the Bylaws of the PLASCO company also argued that B & B
should have first instituted proceedings before the
Commercial Court, instead of directly applying to the
Centre. B & B does not agree with this interpretation of
Article 25. According to it, the text does not include ~
obligation to first exhaust domestic remedies.The tribunal
dealt with the arguments of the government in following
manner:
With respect, first to the request of the government to the tribunal that it relin~uish the case to the Revolutionary Court of Justice, the tribunal declared that the pendency of a case was in order only in the event of the identity of the parties, of the subject matter, and of the cause of the suits pending before the two tribunals. The tribunal found that these conditions were not fulfilled. Specifically, the dispute submitted to this tribunal actually involves B & B and the government and not Mr. Bonfant in his capacity as agent of the PLASCO company and the Government.8
8. Ibid. I p. 14 5.
130
With respect to the question whether the arbitration
clause governs the present procedure, the tribunal observed
that the government referred solely to article 25 of the
Bylaws to ground its objection to jurisdiction. For its part
B & B pleaded in favour of rejecting the objection to
jurisdiction on the basis of Article 12 of the agreement.
The tribunal continued:
"The disagreement between the parties about the
interpretation to be given to Article 25 of the Bylaws
has already been noted. The tribunal was of the opinion
that there was nothing to be gained in ruling on this
question since it believed that the claims of B & B
were essentially based on alleged violations of the
Agreement and not on the acts of government as a
shareholder of the PLASCO company and did not directly
arise from a dispute about the application of the
Bylaws. The tribunal especially took into account in
this regard the fact that B & B's claims concerned an
alleged failure of the .government to furnish the
necessary guarantees for the financing which the PLASCO
company needed, to an alleged failure by the
government to define a fiscal regime for t:he
PLASCO company as well as to the imposition by decree
of a political price for the sale qf the products of
the company. Taking into account the foregoing
elements, the tribunal, judging that the objection to
jurisdiction should be treated as preliminary question~
declared its competency to settle the present dispute.9
The dispute was submitted to the tribunal under Article
12 of the agreement and article 25 of the Bylaws. These
9. Ibid., p.146.
131
articles do not contain any stipulation with respect to the
applicable law. In this case, pursuant to Article 42(i) of
the Convention the tribunal applies the law of the
contracting state party to the dispute as well as such rules
of international law as may be applicable. In the instant
case, the tribunal also has the power to decide the dispute
ex aequo et bono if the parties so agree, r: Jrsuant to
article 4 2 ( 3) of the Convention. Such agreement was
expressed to the tribunal during the hearings. The main
grounds of complaint set forth by the claimant were as
follows:
i) The government has never fully paid its shares of the
capital stock.
ii) The government interfered with the regular operations of
the organs of the PLASCO company.
iii) The government did not fulfill its economic contractual
obligations with respect to the PLASCO company, in
particular as regards the guarantees for the financing of
the activities of this company, the granting of a
preferential fiscal regime and protection against
competition nor did it take steps to require SIACONGO, a
state enterprise, to execute its contract with the PLASCO
company.
iv) The unilateral fixing of political prices is also a
violation of the agreement.
v) The seizure by the governmentof the PLASCO company and
of all its activities.
The tribunal dealt with these complaints in following
132
terms:
"The tribunal is of the opinion that the fixing of the
parti9S by the decree undoubtedly inflicted a loss on
the PLASCO company and that the governmentmust assume
responsibility for it.
Claimant asserts that the government, by means of the
serviee note and the use of the military occupation of the
property and of the premises of the PLASCO company,
dispossessed it of its shares in the PLASCO company and
expropriated it. The government disputes, that it undertook
any confiscation or nationalization and argues that the
Italian party can return and take back its share at any
time.
The tribunal is of the opinion that it is difficult to
follow this argument. First of all there are a large number
of facts and elements that go against the argument of the
government. In its service no'te the government treated the
PLASCO company as a state company. Next by instituting
criminal proceedings against him Mr.Bonfant was led to
follow the advice of the Italian diplomatic representative
and to leave the Congo, although the tribunal has not
received any document that would enable it to determine the
merits of this criminal proceeding. The fact that the
governmentdid not respond to the subsequent request of the
claimant for the resumption of negotiation must be noted.
The tribunal also notes that the ~overnment has done
nothing about convening the Italian party to the meetings of
the Board of Directors or the General Meeting of
133
shareholders. Nor has any convocation been sent out by the
provisional manager. It should also be noted that, upto the
hearings in November 1979, the government had refused to
give an explanation of the allegations of Claimant according
to which it has de facto expropriated its corporate shares
in the PLASCO company. That is why the tribunal is of the
opinion that the government has indeed apprcpriated the
share of claimant in the PLASCO company and owes it damages.
Furthermore, the government acknowledged: "the
obligation not to proceed to an open or keeping confiscation
and, of course, not to nationalize the share of the Italian
investor without fair compensation. The principle of
compensation in the event of nationalization is in
accordance with the congolese Constitution and is one of the
generally recognized principles of international law as well
as of equity. Accordingly, the government must therefore be
condemned to pay Claimant damages, the amounts of which are
going to be determined by the tribunal ex aequo et bono in
the following paragraphs.10
Then the tribunal proceeded to consider compensation
for loss of profits. It observed:
"Claimant has limited this claim to the profits no1:
received during the five yeas at the end of which the ' government could have repurchased its shares. In this
regard, Claimant bases itself on Article 22 of thE!
Bylaw~, which provides that the shareholders were
~ntitled to an initial annual dividend representing 5%
10. Ibid., p.149.
134
of the amounts in which their shares are paid up and
not redeemed without, when the profits of a year do not
permit this payment, the shareholders being entitled to
claim them against the profits of subsequent years. On
this point, the tribunal first notes that this
statutory clause clearly stipulates that the right to
dividends is canceled when, during a certain ye:ar,
there are no sufficient profits to pay dividends. v
During the first of the five years for which Claimant
claims compensation there were no profits, during the
second year, which is that of the start-up of
production, profits were, in the opinion of the
tribunal, not to be expected. With respect to these two
years, the tribunal is therefore of the opinion that
Claimant is not justified in demanding compensation.
With respect to the last three years, the tribunal
considers that, if the contract had been executed as
expected the PLASCO company would have had sufficient
profits to pay the 5% of dividends. The partners
themselves have admitted that by referring to probable
profits in the projected_ operating account for 1976.
The tribunal therefore beiieves that, on this count, it
should award claimant the amount of CFA 3,300,000."11
As far as compensation for the value of 40 per cent of
the shares in PLASCO is concerned, it was stated earlier
that the government had appropriated the PLASCO company
which became the property of the state. The tribunal
declared that the state must therefore pay compensation. The
claimant also made the following assertions:
A. It has lost opportunities for work and investment in
Italy.
11. Ibid.
135
B. It is no longer able to resume its own activity in
Italy because of lack of capital, since it invested all its
financial resources in the Congo.
c. It has lost its credits with suppliers and banks, since
it put the latter in touch with the Congolese government for
transactions in which the government has shown itself to be
a de~faulter.
D. It has seen its own organisation at the managerial level
and its own technical personnel dispersed, following their
forced and precipitous departure from Congolese territory.
The tribunal made the following observations on above
allegations:
"The tribunal does not have available any element
capable of establishing the materiality of the
allegations of Claimant, which limits itself to mere
assertions unaccompanied by concrete evidence, or even
the beginning of evidence. Likewise, it is not
established that, even after having received t.he
compensation, that is due it with interest, claimant
would not have an opportunity to wo1k or invest or to
resume its activities in Italy or elsewhere. The
tribunal has reasons for doubting the mere assertions
by Claimant that it has lost its credits with its
suppliers or bankers or that it would not be able to
obtain the necessary personnel. However, in view of
the measures to which Claimant has been subject and the
suit that was the consequence thereof, which have
certainly disturbed the activities of Claimant, the
Tribunal deems it equitable .to award it the amount of
CFA 5,000,000 for moral damages.n12
12. Ibid., p.151.
136
About the interest, it said,
"On account of the provisional agreement reached by and
between the parties - not confirmed by the Government -
Claimant has claimed interest at the rate of 15%
annually on the total amount that would be awarded it.
The tribunal does not believe that it can accept this
petition since the applicable law, that is to say, that
of the Congo, provides for a legal rate of interest .. that is clearly lower. But the tribunal notes that the
Government, in its Defense Memorial, has proposed an
interest rate of 10% for its counter claim. In view of
its power to decide
deems it equitable
ex
to
aequo et bono,
accept this
compensation awarded to Claimant.n13
the tribunal
rate for the
Liberian Eastern Timber Corporation v. The Government
of the Republic of Liberia14: By a Concession Agreement
signed on 12 May 1970, Liberia granted LETCO the exclusive
right to harvest, process, transport and market timber and
other forest products and to conduct timbering operations
within a certain exploitation area in Liberia. In
consideration of such rights, LETCO agreed , among other
undertakings, to make annual payments and to pay rent and
other fees. The agreement was to last for a minimum period
of 20 years. In addition, LETCO was given a right to renew
the agreement for an additional period of 15 years. The
agreement contained an ICSID arbitration clause.
After a period of normal relations between the
13. Ibid.
14. Letco v. Liberia, Yearbook Commercial Arbitration,
vol. 13, ( 1988) , pp. 35-52.
137
contracting parties, certain problems began to appear in
1979. At first, the Forestry Development Authority of
Liberia (hereinafter FDA) began to request a renogiation of
the concession granted to LETCO. Later, in July 1980, the
FDA accused LETCO of abandoning quanti ties of logs in the
concession area. Finally, in a letter dated 18 November
1980, the FDA fndicated to LETCO that its concession area
would be reduced by 279,000 acres with immediate effect. In
support of this decision, the FDA al.leged a number of
breaches of the Concession Agreement by LETCO. Based on.
these allegations, the FDA determined that LETCO was
incapable of properly exploiting the concession area granted
to it.
On 19 November 1980, a day after receiving the letter
indic~ting the reduction of its concession area, LETCO l>
replied to the F~A indicating. its disagreement with those
allegations made by the government and protesting the
reduction of its concession area. It also indicated that
such reduction essentially nullified the Concession
Agreement since the areas withdrawn had not yet been
exploited. Despite this letter and subsequent contacts with
Librarian authorities, the FDA confirmed its decision in a
letter of 2 December 1980.
Given this situation, ·LETCO continued to petition the
highest governmental bodies of the Republic of Liberia so
that they might intervene on its behalf to correct the
situation. These petitions proved fruitless; on 28 March 4Jo
1983 LETCO communicated to the FDA the suspension of all its
138
operations concerning the concession "because of the fact
that we have no forest to operate". On 16 November 1984,
more than a year after this arbitration had commenced, the ::D
FfA sent LETCO a letter in which it indicated that it had
decided to annual the Concession Agreement as a result of
LETCO's breach of Articles (5) and (6). Three months later, ..
on 2b February 1985, the FDA indicated to LETCO that, given
the fact that LETCO had not replied to its last-mentioned
letter and failed to rectify the mentioned breaches, it had
no other recourse but to institute the appropriate legal
proceedings to annual the said Forest Products Utilization c
,t(Contra1t executed by and between the Government and the
company.
Despite repeated reminders and extensions of time
Liberia refused to participate in the arbitral proceedings
after it had appointed an arbitrator. On 24 October 1984,
the arbitral tribunal rendered the final award in which it
decided that the Concession Agreement was improperly revoked
by Liberia before the date fixed for its expiration,
constituting a breach of the agreement which entitled LETCO
to U.S.$ 8,095,904 as damages for lost profits as a result
of the expropriation and US $654,302 as costs incurred as a
result of the same expropriation, together with interest at
the amount of LIBOR at three months. By a rectification of
award dated 14 May 1987, pursuant to Article 49 of the
Washingtron Convention of 1965., the arbitral ·tribunal
corrected some amounts in the award. LETCO' s attempt to
execute the award in New York failed for reasons of immunity
139
of execution. The tribunal considered the applicable law in
the light of ICSID arbitration clause contained in the
Agreement. It said:
"Under the doctrine of party autonomy, parties to a
contract are free to choose for themselves the law
which is to govern their relationship.This doctrine has
gained almost universal acceptance, particularly in
international commercial transactions, and it is
adopted by the ICSID Convention which provides in
Article 42 (({The tribunal shall decide any dispute in
accordance with such rules of law as may be agreed by
the parties/· In the view of the tribunal, there is no
doubt as to the applicability of Liberian law. No other
system of rules of law were chosen by the parties; and
even if there was no express choice of Liberain law by
the parties, it is plain that the tribunal must apply
Liberian law to the present dispute.The only question
is whether Liberain law is applied on : ts own as the
law chosen by the parties or in conjunction with
applicable principles at public international law.
According to Article 42 of the ICSID Convention, in the
absence of any agreement between the parties as to the
rulec; of law by which a dispute is to be decided: "the
tribunal shall apply the law of the contracting state
party to the dispute including its rules of the
conflict of laws and such rules of international law as
may be applicable. This provision of the ICSID
Convention envisages that in the absence of any express
choice of law by the parties, the tribunal must apply a
system of concurrent law. The law of the Contracting
state is recognized as paramount within its own
territory, but is nevertheless subjected to the control
by international law. The role of international law as
a regulator of national systems of law has been much
discussed,with particular emphasis being focused on the
140
problems likely to arise if there is a divergence on a
particular point between national law and international
law. No such problem arises in th~ present case; the
tribunal is satisfied that the rules and principles of
Liberian law which it has taken into account are in
conformity with generally accepted principles of public
international law governing the validity of contracts
and the remedies for their breach.n15
After having investigated Liberal's allegations
regarding LETCO' s failures to comply with the Concession
Agreement, the arbitral tribunal concluded that none of them
were well founded. The tribunal observed.
"Again the tribunal stresses the fact that, according
to the Concession Agreement, LETCO should not be
obligated to demonstrate its compliance with the
concession agreement in order to prove its right to
recovery. Nonetheless, this tribunal has sought such
proof. both ~or reasons of prudence and to assist it in
determining the award of ~ossible damages. The evidence
which was produced to the tribunal demonstrates LETCO's
compliance with the Concession Agreement.n16
As part of its consideration of this case, the tribunal
considered whether the action taken by the Liberian
government in depriving LETCO of its concession might be
considered as an act of nationalization, which might be
justifiable both under the law of Liberia and under
international law, if accompanied by payment of appropriat:e
compensation. It said:
"It should be emphasized that the Government of Liberia
15. Ibid., p.44
16. Ibid. I p.47.
141
has not sought to justify its action on this basis;
rather, it has consistently claimed that its action was
taken because of failure on the part of LETCO to
properly carry out its obligations under the Concession
Agreement - an argument which the tribunal has rejected
on the facts. However, even if the Government had
sought to justify its action as an act of
nationalization, it would have had to first point to
some legislative enactment, embodying the act of
nationalization. It would then have had to show that
its, action was taken for a bona fide public purpose;
that it was non-discriminatory; and that it was
accompanied by payment of appropriate compensation.n17
The tribunal continued:
"none of thes~o;: conditions is satisfied in the present
case. There was no legislative enactment by the
Government of Liberia. There was no evidence of any
stated policy on the part of the Liberian Government
to take concessions of this kind into public ownership
for the public good. On the contrary, evidence w~given
to the tribunal that areas of concession taken away
from LETCO were granted to other foreign owned
companies .... Finally, no offer of compensation was made
to LETCO for the loss of its concession; to the exte t
that the Liberian GGvernment has attempted any
justification of its actions it has been on the basis
of alleg.ed breaches of the Concession Agreement by
LETCO. Accordingly, it is the opinion of this tribunal
that even if the argument as to nationalization had
been raised, it would have failed. Leaving aside the
lack of any legislative enactment, the taking of
LETCO's property was not for a bonafide public purpose,
was discriminatory and was not accompanied by an offer of appropriate compensation.n18
17. Ibid.
18. Ibid. I p.48
142
About the breach of contract and right to damages, the
tribunal, after reviewing Liberian law, observed:
It is clear that under the law of Liberia (as under
most, if not all, developed system of law) the binding
force of contracts is recognized, so long as t:he
contracts in question are validly made and do not
offend public policy. No doubt has been raised as to
validity of the original grant of the concession to
. LETCO, nor was this grant contrary to Liberian public
policy. On the contrary, the State appears to encourage
the grant of concessions to foreign persons and
corporations.n19
The arbitral tribunal concluded:
"By its f1ilure to follow the procedure . laid down in
the Concession Agreement, as well as by its subsequent
actions, the Government of Liberia has acted in plain
breach of the terms of the Concession Agreement. Its
breach of the Agreement entitles LETCO to the recovery
of damages.n20
The tribunal then turned to the scope of damages:
"Having determined LETCO'~ right to damages, it is now
necessary to determine the nature of these damages and
the extent to which they must be compensated. It is
necessary to deteriTiine whether LETCO is entitled to
receive compensation for both the amounts invested in
the forestry concession and subsequently lost due to
the confiscation and those profits lost that LETCO
would have obtained had the Concession Agreement not
been revoked. It is clear that LETCO has requested both
compensation , for its lost investments as well as
compensation for future profits that it has foregone as
a result of the Government expropriation.n21
19. Ibid.
20. Ibid.
21. Ibid. I p. 4 9.
143
"' The tribunal consulted the Concession Agreement itself
as a first step in the determination of compensable damages.
The said agreement reads:
"Unless otherwise specifically provided and
notwithstanding the Government's right for revocation,
the penalty for any breach of this Agreement shall be
damages which shall be fixed by agreement or, if
agreement can.~ot be reached, then damages or specific
performance as fixed by the arbitral tribunal.
The tribunal observed:
"As the parties have clearly been unable to reach an
agreement concerning a determination of damages, it is
necessary pursuant to powers granted to this tribunal
by the parties that this tribunal determine compensable
damages. As a first step in this analysis. this
tribunal must necessarily exclude the possibility of
granting specific performance. In this request for
arbitration LETCO stated: LETCO does not request.
injunctive relief because such relief would be wholly
inadequate. For example, an order of specific
performance requiring the defendant to return the land
would be meaningless since the land has been
significantly exploited by three other timber
companies. Likewise, the grant of another concession
would also be unsatisfactory since there is no
comparable forest land in Liberia and LETCO would in
any event be required to spend vast additional sums for
mapping and constructing new road, airstrips, housing,
sawmills etc .... LETCO is, thus, constrained to seek
reparation solely in the form of money damages.n22
The tribunal agreed:
The tribunal is entirely in agreement with this
22. Ibid., p.50.
144
statement. LETCO's activities in Liberia were
terminated over two years ago. Start up expenses would
pe prohibitive and would repeat those already carried
out in the initial investment. It is also questionable,
given the circumstances, whether LETCO and the Liberian
Government would be able to cooperate to successfully
recommence the concession. Furthermore, given
Liberia's failure to participate in this arbitration,
one must doubt whether an injunction by this tribunal
would be respected by the Government authorities.
Therefore, the tribunal concludes that only reparation
in the form of money damages will be adequate in this
case. The decisions of previous arbitral tribunals
determining cases similar to the present one have
overwhelmingly favoured the award of lost investment
costs.n23
Then the tribunal referred to LIAMco24 arbitration
which awarded damages for lost future profits. It also
referred to other cases referred in the LIAMCO which granted
similarly broadly defined damages. The LETCO tribunal found
these decisions quite useful in determination and definition
of damages. But it thought that in and of themselves these
decisions are inadequate. It, therefore, turned to the law
of the Republic of Liberia as the law applicable in this
case and therefore determinative of the nature of damages to
be awarded. It found under Liberian law the following rule
for measure of damages:
"The object of a civil action indemnify the injured person,
23. Ibid.
for injuries is t.o not to punish the
24. LIAMCO arbitration, International Legal Materials, vol.20 (1981), pp.1-87.
145
injurier: Therefore, it follows that the measure of damages is the actual amount of the loss or inconvenience sustained by the injured person without any reference to the degree of misconduct of which the injurers may have been guilty."
It said: "The first conclusion that the tribunal reaches after reading the above quoted section is that punitive damages, as a general rule, are not allowable in civil actions. Punitive damages will only be permitted in civil actions when the actions of the liable party are of a 'peculiar nature and partake of a criminal nature'. Th~ same paragraph goes on to state that only in such cases may a judge take into account the misconduct of the defendant and in its discretion increase the damages beyond the amount needed to recompense the injured person in order to penalize the injuries. Not finding these required elements in this case, the tribunal denies LETCO the award of punitive damages. Having determined that Liberian law precludes the award of punitive damages in this particular case, it is necessary to determine whether such law would permit compensation for damages in the event of lost investments as well as profits foregone. Generally the common law systems do permit the recovery of lost profits. In the restatement of contracts ... it is stated that damages shall include losses caused and gains prevented by the defendant's breach, in excess of savings made possible .. The Liberian courts themselves have confirmed the award of both actual losses and foregone profits. This tribunal therefore determines that both according to international law and, more importantly Liberian law, LETCO is entitled to compensation for damages for both its lost investments and its foregone future profits.n25
2 5. Ibid. I p. 52.
146
Maritime International Nominees Establishment (MINE) v. The
Republic of Guinea.26 In 1971, Guinea and MINE entered into
a Convention for ocean transportation of bauxite (CBG)> The
Convention was intended for the establishment, for thirty
years, of a ttlixed economy company called SOTRAMAR. The
Company's purpose was to carry out the transportation of 50% v
of the Guinea bauxite (CBG) that had been sold to several
western companies (the Bauxite Receivers) and which,
according to Art.9 of a contract of 1961 with the first
buyer (Harvey Contract) could be carried by ships flying the
Guinean flag. The convention contained an arbitration
clause providing that if conciliation failed, the disput:e
was to be settled through arbitration for which the tribunal
was to be appointed by the President of ICSID. SOTRAMAR
was 49% owned by Guinea and 51% by MINE.
Guinea was to contribute half of the freight rights, adopt
stable tax and customs rules and provide two vessels. MINE
made several calculations and recommendations to start long-
term contracts, but Guinea did not react t:.o any of the
proposals. In 1972, Guinea asked MINE to negotiate short-
term contracts. The parties established the SOTRAMAR
Shipping Committee to continue negotiations with the
Bauxite Receivers. In the meantime costs and freight rates
had increased and the proposed contracts were rejected by
the Bauxite Receivers.
J-6· MINE v. Guinea, Yearbook Commercial Arbitration,
vol. 14, ( 1989) , P.P. 82-92.
147
In July 1972, the parties held an arbitration meeting
with the Bauxite Receivers which resulted in the acceptance
by latter of freight rates which according to MINE, would be
profitable to SOTRAMAR. However, SOTRAMAR, according to
MINE, had still not received authority from Guinea to
conclude contracts of affreighment. In September 1973, v
MINE made clear that because SOTRAMAR did not have
authority to contract, it could not proceed on the basis of
the arbitrated rates of July. MINE again mentioned
SOTRAMA~s need for authority and said that the failure to
give this was in contradiction with the Convention.
In February, 1974, MINE became aware that Guinea was
negotiating the Art.9 freight rights with a third party. In
a meeting between the parties MINE asked about this. Guinea
did not give a clear answer. However, in March 1974, Guinea
had entered into an agreement with a consortium of shipping-
companies AFROBULK under which AFROBULK was to pay Guinea
50% per ton for the Art.9 freight rights.
Later, this fact was acknowledged to MINE by Guinea but
it was said that this was a temporary matter, until
SOT~ would be in operation. In August 1974, Guinea
presented the agreement with AFROBULK to MINE, which did not
regard it as a temporary agreement, but as a unilateral
substitution of the r ~ ghts of SOTRAMAR. MINE maintained
that it was willing to continue the convention if Guinea
would terminate the agreement with AFROBULK, but Guinea did
not affirm this. In 1974, AFROBULK started to use the
Art.9 freight rights, SOTRAMAR being past resuscitation. In
148
January 1978, MINE filed a petition to th~ u.s. District
court to compel arbitration before the American Arbitration
Association. Guinea did not appear. MINE contended t:hat
Guinea refused to participate in the ICSID arbitration. The
petition was granted and arbitration before the AAA was
ordered by the District Court. v
In June 1980, the AAA rendered an award against Guinea
which had not attended the hearings, in excess of $27
million. MINE then returned to the US District Court, filing
a motion to confirm and enter judgement on the arbit:ral
award under Sect.9 of the Federal Arbitration Act. At t:his
point, Guinea entered the proceedings for the first time,
filing a motion to dismiss for lack of jurisdiction.
Guinea's motion was denied by the court and the AAA award
was confirmed in MINE's favour. Guinea filed an appeal to
the US Court of Appeals. This Court reversed the decision,
ruling that the District Court lacked jurisdiction of the
subje~ct matter under the Foreign Sovereign Immunities Act.
In May 1984, MINE filed its claim with ICSID. MINE
had, meantime, also initiated attachment proceedings in
Europe. In June 1985, Guinea requested an order from the
tribunal to dissolve all pending attachments of its bank
account and assets in Europe. MINE replie,d that the
European sections were meant to seek enforcement of the AAA
award and that they were not prejudgement attachments with
the ICSID arbitration. The tribunal denied Guinea's request
as premature, because it had not yet defended itself in the
attachment proceedings.
149
In December 1985, the tribunal ~uled, in a provisional
measure, that MINE's actions in Europe constituted another
remedy under Article 26 of the ICSID Convention and that
this breached its submission of disputes with Guinea to
ICSID. It further recommended, in accordance with Art.47 of
the ICSID Convention, that MINE immediately withdraw and
discontinue all pending litigation, and that it dissolve all
attachments and not seek any new remedy in national courts.
MINE complied. In the arbitration awa~d the ICSID tribunal
decided as follows on the liability of the parties as to the
failure to make SOTRAMAR function. It also decided the
damages to be paid: It observed:
"The arbitrators considered that the parties entered
into the Convention on a basis of equality and that the
convention failed because of inflated expectations of
the parties as to Guinea's freight rights. The
Convention was a contract between Guinea and MINE to
make SOTRAMAR function. Guinea understood the objective
well enough to form the contract now in dispute. Having
gone into force the convention bound both parties c.
until it was breathed. The terms of the convention were
negotiated actively, not dictated by MINE with adhesive
force or misrepresented by MINE as to their effect.n27
The tribunal acknowledged that MINE possessed economic
power to ship financing but it did not consider that this
fact coerced Guinea into signing the convention. On· the
contrary, it found coercive power in the Guinea's
demonstrated ability to destroy MINE's investments in
SOTRAMAR planning. It further observed:
27. Ibid., p.85.
150
"In hindsight, the convention failed because both
parties had inflated expectations of what could be
accomplished with GY,inea' s Art. 9 freight rights. The
initial concept was the creation of a Guinean national
fleet and maritime capability through the purchase of
vessels to be financed by long-term contracts of
affreighment with the Bauxite Receivers. While the
concept was plausible the parties underestimated the
resistance of the Bauxite Receivers ~hich felt no
obligation to finance a Guinean fleet and maritime
establishment by paying freight rates in excess of the
international market. SOTRAMAR could ad to its profits
by carrying North American grain to Europe as eastbound
cargo for which the bauxite cargo would be
backhaul, but only after the Bauxite Receivers
contracts affreightment enabled SOTRAMAR to charte.r in
vessels to carry C.B.G. bauxite to North America.
SOTRAMAR could finance the purchase of ships through
long-term contracts of affreightment but only if
long-term contracts of affreightment could be had, and
by mid-1973 they could not. Alternate plans had to be
formulated, and formulating them caused further delays
in getting SOTRAMAR underway. Short term arrangements
were subEtituted as the new objective of both parties.
The Bauxite Receivers continued to insist on
competitive rates and this led to the July 1973 so
called arbitrated rates, which appeared to be
acceptable to the Bauxite Receivers and SOTRAMAR,
though MINE apparently did not participate in the
negotiations. So far, there had been no breach. The
Tribunal was of the opinion that MINE did not breach
the convention by not concluding contracts of
affreightment after the arbitration meeting with bauxite receivers.n28
28. Ibid. I p.86.
151
After considering other allegations by Guinea against
MINE's deliberate attempt to abort the convention, the
tribunal concluded~:
"The tribunal finds that MINE did not breach the convention in failing to conclude contracts of affreightment and to charter-in covering vessels following the July 1973 meeting.n29 Guinea also took the plea that it lost all confidence
in MINE's professional ability. But it did not 1:ry to
renegotiate the convention to substitute another company for
MINE in SOTRAMAR. Never prior to Guinea's conclusion of its
agreement with AFROBULK did Guinea suggest to MINE either
that SOTRAMAR negotiate with third party carriers to
exercise the Art. 9 freight rights. Or that the sort of
arrangement which was concluded with AFROBULK was one that
SOTRAMAR ought to consider on a short term basis. On this
basis, the tribunal concluded:
''Although Guinea has described the AFROBULK arrangement
as a temporary measure designed to permit SOTRAMAR to
become a functioning and operational organization, the
Tribunal finds that Guinea's entering the AFORBULK
agreement was contrary to the spirit and express
provisions of the convention, because SOTRAMAR was the
only organization represented to the Bauxite Receivers
as authorized user of the Art. ,9 freight rights.
Guinea's conduct in secretly negotiating the AFROBULK
arrangement, and in denying its existence to MINE
thereafter, exhibits bad faith on its part, violating
the principle of good faith set forth in the French
civil Code. Guinea's subsequent offer to "cut the pea
in half" and permit MINE to share the AFROBULK
29. Ibid., p.87.
152
agreement, did not restore the possibility of
performance, and MINE reasonably rejected the offer.
The tribunal concludes unanimously that Guinea
prevented SOTRAMAR from performing under the
Convention, and thereby breached the convention when
Guinea entered the AFROBULK agreement in March 1974."30
Then the tribunal proceeded to evaluate the damages of
MINE. It said: w
"MINE contends that it is entitled to damages measured
by the profits it lost because Guinea breached the
Convention - that is, the expectancy of MINE's share of
the net profits that SOTRAMAR would have earned if
Guinea had performed the convention by letting SOTRAMAR
go into operation. The leading obstacle to this theory
of the damages is that SOTRAMAR never earned any
·profits; and because SOTRAMAR was a new venture, the
projection of expectancy of net profits is too
speculative to use in assessing damages. Other
contract theories are also unusable.n31
MINE advanced two basic theories of damages. The
tribunal considered the detailed presentation of these
theories but found that neither theory represented a usable
approach to MINE's loss of profits. However, it remarked:
"The tribunal ac_cepts the general principle that MINE
is entitled to be compensated for the profits that it
would have earned if Guinea had not breached t:he
convention.The lost profits need not be proven with
complete certainty, nor should recovery be denied
simply because the amount is difficult to ascertain.n32
Further,
"The tribunal finds that MINE's loss of profits may be
measured adequately by the AFROBULK agreement : that 50
3Q. ibid. 1 p.88.
31. Ibid.
32. Ibid. I p.89.
153
cents per ton which Guinea received from ALFOBULK for
the right to carry bauxite under ARt. 9 during a two
year period,rightfully belongs to SOTRAMAR.In addition,
it seems fair to conclude that such an arrangement
could have been extended, or negotiated with others, to
a total period of 10 years. While the convention was to
last 30 years,the Bauxite Receivers under the Harvery
Agreement were bound to CBG for only 20 years, and 10
years appears to be a reasonable perioc. considering
that the Convention contained provisions for early
termination.33
Guinea also made counter-claims on various grounds
particularly for MINE's resort to AAA Arbitration. The
tribunal denied this counter-claim for the reasons that
under the particular circumstances of the case MINE's
approach to the district court for an order to compel
arbitration was not an improper attempt to avoid ICSID
arbitration of the SOTRAMAR dispute. Guinea also claimed
damages for MINE's legal actions seeking attachment of the
property. Upon consideration of the arguments on this
counter-cla~m, the Tribunal awarded Guinea a sum toward its
costs and legal fees relating to the attachment proceedings
in Europe.
Amco Asia Corp. v. Republic of Indonesia34 this award
also affirmed a full value compensation standard but was
vacated on the ground that the arbitral tri~unal had failed
33. Ibid.,, p.90.
34. Amco Asia Corp. v. Republic of Indonesia, International
Legal Materials, vol.24, (1985), pp.l022-1039.
154
to apply Indonesian law properly. But its holding on
international law were not vacated. This holding is
important.
In this case two American investment companies had
brought an ICSID arbitration against the Government of
Indonesia for breach of an investment agreement, wrongful w
rev_ocation of an investment license, and expropriation of
the claimant's interest in a hotel. The tribunal, citing
General Assembly Resolution 1803, held that under
international law nationalization of alien property
requires the payment of compensation. However, on the facts
before it, the tribunal concluded that neither the
Indonesian army's assistance in handing over the disputed
hotel to private Indonesian interests nor the revocation of
company's license constituted an expropriation stricto sensu
under international law. The ~rmy's actions did constitute
a failure to protect alien property, giving rise to an
internationally wrongful act attributable to the government
of Indonesia. Similarly, the government's breach of the
company's investment contract violated the principles of
pacta sunt servanda and respect for acquired rights, giving
rise to compensable claims under international arbitral
practice. The tribunal cited Chorzow Factory and many other
international arbitral decisions. It granted damages
calculated to fully compensate the prejudice suffered by the
claimants. It calculated these damages by the DCF method
applied to investments as a going concern.
The tribunal emphasized that the principles pacta sunt
155
servanda is a principle of international law~'
"First it is so because of it being a general principle
of law in the meaning of article 38 of the statute of
the International Court of Justice, since it is common
to all legal systems in which the institution of
contract is known. Indeed, the principle is basic to
this institution. As a highly competent American
scholar puts it, contract or agreement seeks to secure
co-operation to achieve social purposes by the use of
promises given in exchanges arrived at through
bargain ... [E.A. Farnsworth, the Past of Promise; An
Historical Introduction to Contract, 69 Columbia Law
Review, _576, at 578 ( 1969)). Contract as a principle of
ordering rests on the proposition that individuals and
legal entities make, for their own accounts and on
their own responsibility significant decisions
respecting resource utilization and allocation. The
form of order which a society seeks to achieve by
accepting the institution of contract thus depends upon
the Fecognition that, in principle, pacta sunt servanda.
It follows that the binding force of contractual duties
for parties to a contract of agreement is recognised
in every legal orders that utilizes the institution of
contract.35
This principle is found in civil law systems. The
tribunal found its classical expression in article 1134 of
the French Civil Code:
"Agreements lawfully made take place of the law for
those who have made them. They cannot be revoked except
by mutual consent or on grounds allowed by law. They
must be performed in good faith."
The principle is equally vigorous in common law system.
The tribunal found its remarkable affirmation in .Printing
and Numerical Registering Cow. v. Samp (1875), L.R. at 465.
35. Ibid., p.1034.
156
" •... If there is one thing which more than another
public policy requires it is that men of full age and
competent understanding shall have the utmost liberty
of contracting and that their contracts when entered
into freely and voluntarily shall be held sacred and
shall be enforced by Courts of Justice.
Then the tribunal referred to American case law and
authorities. It also found worthwhile to note that p•acta
sunt; servanda is also a principle of traditional Islamic law
and gave the following illustrations;
saudi Arabia v. Arabian American Oil Company; Texaco
Oversees Petroleum Company and California Asiatic Oil
Company v. The Government of. Libyan Arab Republic. The
principle of pacta sunt servanda was embodied also in
article 26 of the Vienna Convention on the Law of Treaties.
However,it remarked.:
"To be s~re, the transposition of this principle to agreements between states. and private enterprises is
debated in contemporary doctrine. However, the tribunal is bound to note that it was applied in
leading international awards: ARAMCO and TOPCO, Saoohire International Oil Company, v. National IraniaQ Oil Company; Libyan American Oil Company v. Government of the Libyan Arab Republic.36 Further,
"Accordingly, the basic concept which underlies pacta sunt; servanda leads necessarily to the application, in the instant ~ase, of the very contents of the same, the party who has undertaken obligations is boul"d to perform them, except for cases established by law, and this fundamental rule applies to states as well as to private entitie• or persons.n37
36. Ibid. 37. Ibid.p.l035.
157
Then the tribunal applied another general principle of
law - the principle of respect for acquired rights:
"Moreover, independently from pacta sunt servanda and
its logically and morally necessary extension in the
present case, another principle of international law
can be considered to be the basis of the Republic's
international liability; it is the principle of respect
for acquired rights (German Interests in ~olisah Upper
Silesia (Merits); ARMCO award; Starett Housing
Corp.v. Iran; Shufeldt Claim). Indeed by receiving the
authorization to invest, AMCO was bestowed with
acquired rights (to realize the investment, to operate
it with a reasonable exp~ctation to make profit and to
have the benefit of the incentives provided by
law). These acquired rights could not be withdrawn by
the Republic, except by observing the legal requisites
of procedural conditions established by law, and for
reasons admitted by the latter. In fact, the Republic
did withdraw such rights, not observing the legal
requisites of procedure, and for reasons which,
according to law, did not. justify the said withdrawal.
The principle of respect of acquired rights was thus
infringed, and the Republic has committed its
international liability also in this respect.n38
The tribunal reasoned that if the state is not held
liable in the instant case, the very purpose of ICSID would
be defeated:
"Not to admit international liability in the
circumstances of this case, would amount to disregard
of the very aim of the ICSID convention as solemnly
expressed in the very first sentence of its Preamble:
The Contracting States considering the need for
38. Ibid.
158
international co-operation for economic development and
the role of private international investor therein." It
is in order to take this need and role into account, by
protecting host States as well as foreign investors
that the Convention was concluded. To deny the host
State's liability where the same infringes the
obligations undertaken towards the investor = as well
as to refuse, in other instances, the investor's
~liability where he infringes his own obligations
would move to empty the ICSID Convention of any
meaning.n39
Thus, the tribunal conclusively established Indonesian
liability towards claimants. It had already done so under
Indonesian law. It found that withdrawal of the investment
authorization engaged the liability of Indonesia under
Indonesian as well as under international law, thai: is.
under the two systems of law applicable in the instant case.
It then proceeded to determine the amount of damages to be
awarded in order to compensate the claimant's prejudices
which were the consequence of the state's organ's actions.
39. Ibid.
159
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