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