Amoco: Amoco International S.A., a company established under the laws of the Canton of Geneva, Switzerland, presently named Amoco Chemicals (Europe).
AIFC: Amoco International Finance Corporation, the Claimant, a corporation established under the laws of the State of Delaware, United States of America.
Casinghead Gas: Defined in relevant agreements to mean "Natural Gas which is produced from petroleum reservoirs with the related production of crude oil."
CSD: The Declaration of the Government of the Democratic and Popular Republic of Algeria concerning the Settlement of Claims by the Government of the United States of America and the Islamic Republic of Iran of 19 January 1981.
Dome Gas: Defined in all relevant agreements to mean "Natural Gas which is produced from petroleum reservoirs without the related production of crude oil."
Gas Purchase Agreement: Agreement executed effective 1 April 1967 between Khemco, on the one hand, and NIOC and PANINTOIL, on the other hand, for the purpose of sale and purchase of Natural Gas from the "NIOC/PANINTOIL Joint Structure Agreement Area."
JSA: Agreement entered into between Pan American Petroleum Company (whose rights on 19 May 1958 were assigned to PANINTOIL) and NIOC, dated 24 April 1958, generally referred to as the "Joint Structure Agreement." The alleged expropriation of PANINTOIL rights under the JSA is the subject matter of Case 55 presently pending before this Tribunal.
Khemco: Kharg Chemical Company Limited, a company established under the laws of Iran.
Khemco Agreement: Agreement executed as of 12 July 1966 between Amoco and NPC for the formation of Khemco as a joint venture.
LPG: Defined in relevant agreements to mean "liquified petroleum gas consisting primarily of butane and/or propane."
Natural Gas: Defined in relevant agreements to mean "Casinghead Gas, Dome Gas, and all other gaseous hydrocarbons produced through oil or gas wells, which Natural Gas may also contain other gaseous components such as hydrogen sulfide and carbon dioxide.
NGL: C sub5 plus Natural Gas Liquids, defined in all relevant agreements to mean "natural gasoline consisting of pentane and heavier hydrocarbons."
NIOC: National Iranian Oil Company, one of the Respondents, a company established under the laws of Iran.
NPC: National Petrochemical Company, one of the Respondents, a company established under the laws of Iran.
OSCO: Oil Service Company of Iran, a company established under the laws of Iran.
PANINTOIL: The Pan American International Oil Company, a company registered under the laws of Iran, presently named Amoco-Iran.
Treaty: The Treaty of Amity, Economic Relations, and Consular Rights between the United States and Iran signed 15 August 1955, entered into force 16 June 1957 (284 U.N.T.S., 93 T.I.A.S. No. 3853, 8 U.S.T. 900).
The Claimant, AIFC, contends that the Government of the Islamic Republic of Iran ("Iran"), independently and through its agencies and instrumentalities, deprived AIFC of its 50% property interest in Khemco. AIFC now seeks recovery of the value of its property interest in Khemco. The factual circumstances relevant to the present Case are generally not in dispute, but the Parties disagree as to the legal characterization and effects of these factual circumstances. The Parties also disagree as to the applicable standards of valuation of AIFC's property interest and the appropriate method of quantifying any damages or compensation to which AIFC may be entitled.
A Pre-Hearing conference was held on 8 May 1985. By Order of 8 July 1985 a Hearing was scheduled to take place on 10 and 11 December 1985. On 7 November 1985 the Respondents submitted a "Request to Postpone Hearing" (supplemented by a submission dated 21 November 1985). By Order of 22 November 1985 the Tribunal decided not to grant this request. On 5 December 1985 the Respondents submitted an "Objection to the Order of 22 November 1985" to which the Claimant responded by a submission received by the Tribunal on 9 December 1985. In view of these submissions, the Chairman met with the Agent of the United States of America, the Agent of the Government of the Islamic Republic of Iran, Counsel for the Claimant and Counsel for the Respondents at the Tribunal, on 9 December 1985. With the agreement of the Parties, the Tribunal then decided to make certain modifications in respect of the proceedings in this Case. These modifications were reflected in the Tribunal's Order of 11 December 1985 which stated as follows:
1. The Hearing in this Case on 10 and 11 December 1985 will be held as scheduled.
2. At this Hearing the Parties shall fully and finally argue all the issues in this Case with the exception of the issue of quantification of damages and the Counterclaims raised in this Case. In addition thereto, the Claimant may however present the oral testimony to be given by the three expert witnesses on the issue of quantification of damages.
3. The following written submissions shall be made by the Parties respectively:
a. The Respondents shall file by 10 February 1986 their final submission, solely as to the issue of quantification of damages.
b. The Claimant shall file by 10 February its final submission regarding the Counterclaims.
4. No extensions of the time limits set for the final written submissions will be granted.
5. A complementary Hearing in this Case is hereby scheduled on 10 March 1986, at 9.30 a.m, at which the Parties shall present full and final arguments solely regarding the issues of quantification of damages and of counterclaims.
The Tribunal finds that the terms of the CSD and the consistent jurisprudence of the Tribunal clearly recognize that the Tribunal is authorized to exercise jurisdiction over indirect claims asserted by corporations that are nationals of the United States on behalf of their wholly-owned foreign subsidiaries. Accordingly, AIFC may properly assert claims on behalf of Amoco.
Based on the evidence submitted, and in the absence of any specific objection by the Respondents, the Tribunal is satisfied that AIFC's claim in this Case, at all relevant times, has been owned by a national of the United States as defined in Article VII, paragraph 2 of the CSD.
The Claimant disputes that the Tribunal's jurisdiction depends on any assignment of rights from Amoco to it, as argued by the Respondents. Although the Claimant does not dispute that Amoco instituted arbitral proceedings prior to the date of the CSD it contends that the Respondents' assertion of possible prejudice is without merit as Amoco is not pursuing those arbitral proceedings.
The Tribunal holds that its jurisdiction is determined exclusively by the CSD and does not depend on or arise out of any contractual assignments. As to the alleged risk that the Respondents could be subject to multiple liabilities, the Tribunal notes that, in any event, the principles of res judicata or estoppel would bar Amoco in most, if not all, legal systems, from successfully prosecuting a claim, the merits of which have been finally determined by this Tribunal.
The Tribunal notes that the objections raised by the Respondents pertain to issues both of jurisdiction and of the merits of the present Claim. To the extent that these objections pertain to issues of jurisdiction, the Tribunal holds, as it has held earlier, that its jurisdiction over claims raised is determined exclusively by the provisions in the CSD, and that the does not condition the Tribunal's jurisdiction on the exhaustion of local remedies as the Respondents contend. See Amoco Iran Oil Company and Islamic Republic of Iran, Award No. ITL 12-55-2 (30 December 1982), reprinted in 1 Iran-U.S. C.T.R. 493.
The Respondents dispute that any claim was outstanding on 19 January 1981, as required by the CSD, since no claim had been formulated or communicated to the Respondents or filed with any court or other judicial institution prior to 19 January 1981.
Although the Tribunal finds no reason to dispute the separate corporate status of NIOC, NPC or Khemco, such status is irrelevant in determining whether these companies are proper Respondents. It is undisputed that these three companies are entities controlled by Iran within the terms of the CSD and are thus potentially proper Respondents to this claim. The claim in this Case is based on two distinct legal theories: first, expropriation and, second, breach of contract. It is clear that each of the named Respondents is prima facie a proper party to at least one of the alternative theories. Under the expropriation theory Iran is indisputably a proper Respondent. Each of the other Respondents was directly or indirectly involved in the contractual relationship here at issue, thus raising the possibility of liability under the breach of contract theory. Whether any of the Respondents is ultimately found liable on these theories is an issue which pertains to the merits of this Case. The Tribunal thus cannot determine the attributability of the claim to the respective Respondents named as a preliminary issue.
Finally, and in the absence of any objections raised, the Tribunal holds that the subject matter of this claim is within its jurisdiction pursuant to the terms of Article II, paragraph 1 of the CSD.
These conditions were reflected in the Khemco Agreement itself and the evidence submitted shows that the contractually required governmental ratification was obtained in due course. The transmittal letter dated 19 March 1967, co-signed by the President of the Senate and the Speaker of the Majlis, officially notes that the Khemco Agreement had been ratified by the Joint Economic and Financial Committees of the Majlis. Also in evidence are a letter dated 28 March 1967 in which the Prime Minister notified the Minister of Finance of this ratification and a letter of 29 March 1967 in which the Managing Director of NPC formally notified Amoco that the relevant conditions of the Khemco Agreement had been satisfied by the ratification of these committees, and by the prior approval of the High Council of Petrochemical Industries, the General Meeting of NIOC, and the Council of Ministers.
Pursuant to Article 2, paragraph 2 of the Khemco Agreement the ratification by the Joint Economic and Financial Committees of the Majlis was considered acceptance by the Government of all obligations of the Government and the grant by the Government of all facilities and privileges conferred by the Government under this Agreement, including privileges accorded to foreign companies under the "Law Concerning the Attraction and Protection of Foreign Investment in Iran" dated 7 Azar, 1334 (November 28, 1955), the "Act of 24 Teer 1344 (July 15, 1965) Concerning the Development of Petrochemical Industries", and any future amendments to such acts.
The Respondents have submitted an extract from a telex originating from the United States Department of State which reports a meeting with Mr. Abedi held in May 1979
Abedi confirmed that NPC had notified foreign partners in all four firms [i.e., Khemco and three other joint petrochemical ventures] of NPC's... desire/intention to acquire their equity interests and had invited these firms to send delegations to Tehran to negotiate the sale. According to Abedi, discussions will take place within the next 3-4 weeks.
The telex further stated that "NPC does not expect much if any opposition by its foreign partners to the proposed take-over."
The Respondents do not dispute that the announced policies were, in fact, carried out despite Amoco's protest. They argue, however, that these decisions were taken with the interest of Khemco in mind and that, furthermore, NPC was obligated to implement these policies by virtue of decisions taken by NIOC. The Respondents rely, inter alia, on a telex from NPC to Amoco of 14 August 1979, in response to Amoco's 6 August 1979 telex, in which NPC stated
that the arrangement for sales of Khemco's products was made to protect NPC's interest. Higher prices could be obtained by combining sales of sulphur from Kharg and Shampur plants. Similarly [LPG] can be sold through NIOC in conjunction with IMS product at higher prices.
This telex went on to state that:
With regard to transfer of your [Amoco's] Khemco's share to NPC we [NPC] are ready to resume negotiation immediately.
On 24 December 1980 Iran's Minister of Petroleum served notice on Amoco by telex that the Khemco Agreement was declared null and void by the Special Commission established in accordance with the provisions of the Single Article Act ("Special Commission"). The notifying telex stated in relevant parts:
This notification is served to inform you that the special committee convened by this ministry in accordance with the provisions of the Single Article Act approved by the Revolutionary Council of the Islamic Republic of Iran has, after due consideration of all relevant facts, declared the [Khemco Agreement] null and void.
The Single Article Act, inter alia, provides that any would be claim arising from the conclusion and execution of the said null and void agreement should be referred to and settled by the special committee.
As discussed further below, the Treaty recognizes the right of each party to nationalize the assets of the nationals and companies of the other party, under stated conditions. This recognition does not mean that any nationalization automatically is lawful, since this will be the case only if the conditions listed in Article IV are actually met. The Tribunal will consider at a later stage in this Award whether or not the expropriation here at issue was made in conformity with the requisites of the Treaty.
The first of the Respondents' objections to the applicability of the Treaty to the expropriation here at issue is by far the most elaborated one. The Respondents contend that (1) the Claimant's ownership interest in Khemco cannot be regarded as "property" within the meaning of Article IV, paragraph 2 of the Treaty, and (2) that Amoco, the party to the Khemco Agreement and the owner of 50% of the capital stock of Khemco, is a Swiss company whose property rights are not protected by the Treaty.
While that concession alone would suffice to condemn the Respondents' argument, the Tribunal notes that nothing in Article IV, paragraph 2 suggests that the word "property," as used in that paragraph, should be construed as applying only to rights in tangible assets. No convincing explanation has been adduced to justify such a narrow interpretation, which is not in line with the common usage of the word, nor with the express terms of the Treaty protecting not only "property" but also "interests in property."
Clearly the purpose of the second sentence of Article IV, paragraph 2 is to protect the property of the nationals of one party against expropriation by the other party. Expropriation, which can be defined as a compulsory transfer of property rights, may extend to any right which can be the object of a commercial transaction, i.e., freely sold and bought, and thus has a monetary value. The rights created by the Khemco Agreement had such a monetary value as was expressly recognized in the Khemco Agreement itself. Article 20 provides that the shares of either party could be transferred under certain conditions to any other company or companies and Article 24 granted NPC the right to purchase the shares of Amoco upon the termination of the Khemco Agreement. It is because Amoco's interests under the Khemco Agreement have such an economic value that the nullification of those interests by the Single Article Act can be considered as a nationalization.
More generally, it would be incongruous if Article IV, paragraph 2 could be construed as granting protection only against certain acts of expropriation, and not against others, according to the nature of the rights expropriated. Any interpretation of the term "property" to this effect would lead to "a manifestly absurd or unreasonable" result within the meaning of Article 32, paragraph b of the Vienna Convention. It therefore cannot be admitted.
It is worthwhile, in this context, to compare the provisions of Article IV, paragraph 2 of the Treaty with the customary rules of international law in the field of expropriation. A leading expression of these rules is the judgment of the Permanent Court of International Justice in the Case Concerning Certain German Interests in Polish Upper Silesia (Germany v. Poland), 1926 P.C.I.J., Ser. A, No. 7, (Judgment of 25 May 1926). As reflected in this case, the principles of international law generally accepted some sixty years ago in regard to the treatment of foreigners recognized very few exceptions to the principle of respect for vested rights. The Court listed among such exceptions only "expropriation for reasons of public utility, judicial liquidation and similar measures." Id. at 22. A very important evolution in the law has taken place since then, with the progressive recognition of the right of States to nationalize foreign property for a public purpose. This right is today unanimously accepted, even by States which reject the principle of permanent sovereignty over natural resources, considered by a majority of States as the legal foundation of such a right.
The provisions of Article IV, paragraph 2 of the Treaty must be read against this background, since the negotiation of the Treaty must be presumed to have taken place in this legal context. Although the provisions are phrased in a negative form and emphasize the principle of the respect due to foreign property, they nevertheless amount to a clear recognition of the right to nationalize. In stating that "[s]uch a property shall not be taken except for a public purpose," the Treaty implies that an expropriation which is justified by a public purpose may be lawful, which is precisely the rule of customary international law.
The other condition to a lawful expropriation provided for in the same paragraph is "the prompt payment of just compensation," an obligation which is also accepted as a general rule of customary international law as well. While a few recent resolutions of international bodies or conferences, including the General Assembly of the United Nations, have cast doubts on the existence of an international rule to this effect (see especially the Charter of the Economic Rights and Duties of States, G.A. Res. 3281 (XXIX) (12 December 1974)), other less controversial resolutions, such as G.A. Res. 1803 (XVII) (14 December 1962) on the Permanent Sovereignty over Natural Resources, confirm the existence of the rule. Furthermore, the rule is generally recognized and applied by international tribunals and reflected in the practice of States, notably in numerous conventions relating to the treatment of foreign property or to the settlement of disputes arising from nationalizations. A number of such awards and conventions were referred to by both Parties in their pleadings. The Treaty on this point is just another example of such a practice.
Conformity with domestic law is not usually cited as a condition for an internationally lawful nationalization, and the Treaty specifies no such condition. It is therefore doubtful whether it is one of the requisites of international law. The case law on this point is not very helpful. Violation of domestic law, when invoked, is most often analyzed as evidence of the lack of fulfillment of one of the conditions imposed by international law, such as the existence of a public purpose, as in the Amco Asia case referred to by the Claimant, Amco Asia Corporation and Republic of Indonesia, 24 Int'l Legal Mat'ls 1022, 1030-31, paragraph 190 (1985), or of the payment of compensation.
As noted above, the Claimant alleges that NPC and NIOC "moved to exclude [Amoco] from its rightful role in the management of Khemco, in violation of the Khemco Agreement" approximately in April 1979, when the chairman of the board of NPC "declared publicly that Iran sought to purchase all foreign interest in its petrochemical industry" and "specially identified Amoco International's interests in Khemco as one investment that Iran sought to purchase." The Claimant identifies the following events and decisions as having effectuated the taking by 1 August 1979:
In May 1979 the chairman of the board of NPC advised Amoco that the expatriate United States citizens employed by Khemco who had been forced to leave Iran for reasons of personal safety in December 1978 would not be permitted to return to Iran;
By letter dated 27 June 1979, the same chairman informed Khemco that from then on the sale of products of NPC "complexes," including Khemco, would be managed by NPC. This policy was explicitly rejected at Khemco's board of directors meeting on 7 July;
On 11 July 1979, NPC and NIOC decided nevertheless that all sales of liquids produced by Khemco would be handled by NIOC and all sales of sulfur produced by Khemco handled by NPC, the proceeds of all sales would be deposited in an account of NPC and all Khemco expenses borne by NPC;
By letter dated 17 July 1979 NPC directed Khemco's managing director to implement the decisions just described;
By letter dated 18 July 1979, Khemco's managing director agreed to put into effect those directives;
The dividend declared at a 7 July 1979 meeting of Khemco's shareholders was never paid to Amoco and Amoco has not, since 1978, received any of the loans and dividends to which it was entitled under the Khemco Agreement.
Article IV, paragraph 2 of the Treaty provides that the property of nationals and companies of either Party "shall not be taken... without the prompt payment of just compensation." The following sentence adds more precisely that
[S]uch compensation shall be in an effectively realizable form and shall represent the full equivalent of the property taken; and adequate provision shall have been made at or prior to the time of taking for the determination and payment thereof.
The question of the standard of compensation, i.e., what is "the full equivalent," will be discussed in a later section of this Partial Award (see Section IV.C infra). For the present purposes, it suffices to note that the Treaty does not require that the amount of the compensation should be determined at or prior to the time of the taking. It only provides that "adequate provision shall have been made" in due time. The implementation of such a provision raises some problems in the case of an expropriation realized through a process which extended for more than twenty months, as in the present Case. However, the transfer of property formally took place upon the decision of the Special Commission, notified on 24 December 1980, and the provisions relating to the payment of compensation were included in the Single Article Act and hence made "at or prior to the time of the taking."
Discrimination is widely held as prohibited by customary international law in the field of expropriation. Although Article IV, paragraph 2 does not expressly prohibit a discriminatory expropriation, paragraph 1 of the same article obliges each party to "refrain from applying unreasonable or discriminatory measures that would impair [the] legally acquired rights and interests" of the nationals and companies of the other party. This wording is so broad that it certainly applies to expropriations. In any event, the Respondents recognize that a discriminatory expropriation is wrongful, but deny that the expropriation was discriminatory in the instant Case.
The Tribunal finds it difficult, in the absence of any other evidence, to draw the conclusion that the expropriation of a concern was discriminatory only from the fact that another concern in the same economic branch was not expropriated. Reasons specific to the non-expropriated enterprise, or to the expropriated one, or to both, may justify such a difference of treatment. Furthermore, as observed by the arbitral tribunal in Kuwait and American Independent Oil Company (AMINOIL), (Reuter, Sultan & Fitzmaurice arbs, Award of 24 March 1982), reprinted in 21 Int'l Legal Mat'ls 976, 1019, a coherent policy of nationalization can reasonably be operated gradually in successive stages. In the present Case, the peculiarities discussed by the Parties can explain why IJPC was not treated in the same manner as Khemco. The Tribunal declines to find that Khemco's expropriation was discriminatory.
As to the remaining Respondents, the Respondents consider, on the basis of Article 30 of the Khemco Agreement, that Iranian law governs the Khemco Agreement and must be applied by the Tribunal. They assert that under Iranian law the Agreement was frustrated by force majeure. They contend further that the concept of "changed circumstances" incorporated in Article V of the CSD must also be applied to the interpretation and implementation of the Khemco Agreement and they assert their conclusion that the Khemco Agreement was terminated by frustration. Since the Khemco Agreement allegedly was terminated before any breach took place, the Respondents deny that there can be any breach of contract.
The choice of the parties relating to the law of the Khemco Agreement appears in Article 30, headed "Applicable Laws," which reads as follows:
1. This Agreement shall be construed and interpreted in accordance with the plain meaning of its terms, but subject thereto, shall be governed and construed in accordance with the laws of Iran.
2. The provisions of any current laws and regulations which may be wholly or partly inconsistent with the provisions of this Agreement shall, to the extent of any such inconsistency, be of no effect in respect of the provisions of this Agreement.
Article 21, paragraph 2 is of a quite different nature. It does not relate to applicable law but to performance of the Khemco Agreement. It reads as follows:
Measures of any nature to annul, amend or modify the provisions of this Agreement shall only be made possible by the mutual consent of NPC and AMOCO.
From the previous finding of the Tribunal that Iran was not party to the Khemco Agreement it is apparent that only NPC or Khemco could be held responsible for breach of contract. The facts of this Case demonstrate, however, that although NPC acted only for itself when it concluded the Khemco Agreement, it acted as an instrument of the Iranian Government when it took, together with NIOC, the measures characterized by the Claimant as breach and repudiation of the Khemco Agreement. It has already been emphasized that the minutes of the meeting at which these measures were adopted expressly reflect that they were taken "[i]n consideration of Government's policy that all sales of hydrocarbons produced in the country must be made by NIOC." See paragraph 64, supra. This clearly evidences that NPC did not act in its own interest, but as a performer of the government's policy of completely reorganizing the petroleum industry in Iran. In the framework of this reorganization, its own functions were to be reduced and its interest in Khemco sacrificed. NPC thus did not act independently, but with, and under the supervision of, NIOC which, although not a party to the Khemco Agreement, was to be the main actor and beneficiary of the reorganization.
Article V of the CSD obliges the Tribunal to "decide all cases on the basis of respect for law." According to Article II of the CSD, the Tribunal's jurisdiction extends to claims of nationals of the United States or Iran which arise, inter alia, out of contracts. To decide such cases "on the basis of respect for law" means to decide them on the basis of respect for the contracts validly entered into and binding the parties at the time the claims arose. Such has been the consistent approach of the Tribunal in all the cases decided up to now.
It is worthwhile to emphasize that the CSD, concluded in dramatic circumstances between two States with very different political and judicial beliefs and traditions, thus contributed, to a greater extent than any other international compact, to the consolidation of the rule of international law that a State has the duty to respect contracts freely entered into with a foreign party. As is well known, this rule was spelled out by the United Nations General Assembly in 1962 in G.A. Res. 1803 (XVII) on Permanent Sovereignty Over Natural Resources, reprinted in Basic Documents in International Law 141 (I. Brownlie 2d ed. 1972). While the rule has been questioned since then, the CSD constitutes an implied but unequivocal recognition of this rule, which has been constantly confirmed by the abundant case law of the Tribunal and is not disputed by the Parties in this Case.
In international practice, and notably in the cases submitted to international arbitration, the dispute has focused on the question of the so-called "stabilization clauses." For the reasons set forth in the preceding paragraph, it is not seriously questioned that, in the absence of such a stabilization clause, a contract does not constitute a bar to nationalization. That is one aspect of the evolution of international law in this area and of the general recognition of the right of States to nationalize. As a fundamental attribute of state sovereignty, this right, commonly used as an important tool of economic policy by many countries, both developed and developing, cannot easily be considered as surrendered. The award in the AMINOIL case, rightly in the view of the Tribunal, held that while contractual limitations on a State's right to nationalize are undoubtedly possible, "what that would involve would be a particularly serious undertaking which would have to be expressly stipulated for and be within the regulations governing the conclusion of State contracts; and it is to be expected that it should cover only a relatively limited period." AMINOIL, supra, para. 95, 21 Int'l Legal Mat'ls at 1023. In the present Case, the Khemco Agreement was concluded for a shorter period (35 years) than the concession in the AMINOIL case (60 years), but in economic and legal terms 35 years cannot be considered a "relatively limited period." Neither the Law concerning the Attraction and Protection of Foreign Investment in Iran of 28 November 1955 nor the Act concerning the Development of Petrochemical Industries of 15 July 1965, referred to in Article 2 of the Agreement, exclude nationalization. Furthermore, it would be particularly adventurous to construe any provision of a contract to which the State is not named as a party as forbidding nationalization.
This does not seem to have been questioned by any of the judges, although Judge Rabel, in "observations" appended to the judgment, expressed his regrets that this was not expressly said by the Court. The other judges dissenting on this point considered that the compensation should be limited to the value of the undertaking at the date of the taking without any right to an enhanced value.
On the basis of these principles, the Claimant considers that the proper methodology to be used in the instant case is the "Discounted Cash Flow" ("DCF") method. Such a method takes into account the fact that the value of any income-producing asset depends on two factors:
(1) the amount and timing of the revenue that is expected over the remaining life of the asset, less the costs required to operate and to maintain the asset (generally referred to as the 'future net cash flow' of the asset), and
(2) the rate at which the projected net cash flow should be 'discounted' to produce the 'present value' of the cash flow.
2. The suggested Methods of Valuation
This conclusion is fully in conformity with the practice of international arbitral tribunals, which, in considering lawful expropriation, have consistently tried to determine according to the law, by all the available means, often using several methods, the appropriate compensation to be paid in the circumstances of each case, even when the parties have submitted elaborate calculations made with the help of the DCF method. See, e.g., LIAMCO, supra, at 146-51, 62 I.L.R. at 208-10; AMINOIL, supra, paras. 146-49, 153, 21 Int'l Legal Mat'ls at 1033-35.
As previously noted by the Tribunal, the DCF method was specifically proposed by the Claimant as a method that would "place the foreign investor in as good an economic position as he was before the expropriation." Such a statement is equivalent to the words of the Permanent Court of International Justice in the Chorzow Factory case: "as far as possible, [to] wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if this act had not been committed." As discussed above, however, such a restitutio in integrum was contemplated by the Court only in the case of an unlawful expropriation. Since the Tribunal in the instant Case, has found the expropriation to be lawful, the DCF method prima facie seems not fitted to the present issue. See AMINOIL, supra, para. 138, 21 Int'l Legal Mat'ls at 1031.
See, e.g., S.P.P. (Middle East) Limited. v. Arab Republic of Egypt, (Bernini, Elghatit, Littman arbs., Award of 11 March 1983), reprinted in 22 Int'l Legal Mat'ls 752, 782-783 (1983); for a description of the practice of the U.S. Foreign Claims Settlement Commission, see R. B. Lillich, "The Valuation of Nationalized Property by the Foreign Claims Settlement Commission" in 1 The Valuation of Nationalized Property in International Law, 95-116 (R. B. Lillich ed. 1972).
For the Respondents, compensation for a lawful expropriation should be based on the book value of tangible assets, after deduction of the liabilities registered in the accounts, with no compensation for future profits. The many arguments invoked by them to support this contention actually address two distinct (although interrelated and complementary) theories:
(i) net book value is the proper measure of compensation for a lawful expropriation;
(ii) lost profits need not be compensated in case of a lawful expropriation.
The Respondents insist on taking into account the legitimate expectations of the parties, a central concept in the AMINOIL award. They underline that Amoco's initial investment was too small to give rise to legitimate expectations of a compensation of such magnitude as claimed by the Claimant, and still less if the returns made before the nationalization are taken into consideration. This reasoning is partially contradictory, since the high level of the returns obtained in the first years of the Khemco Agreement would normally have given birth to expectations of substantial revenues for the following years and, accordingly, of a higher level of compensation in case of expropriation. In any event, while the initial investment and the returns prior to the expropriation, whatever they are, may assist in evaluating the legitimate expectations of the owner, there is no proof that these expectations were limited to the net book value of the undertaking in case of expropriation.
Finally, in support of their contention that net book value must be considered as the right standard of compensation, the Respondents invoke the theory of unjust enrichment. This theory, indeed, has been recently cited by eminent writers as the legal basis for the obligation to compensate in case of expropriation. See, e.g., E. Jimenez de Arechaga, International Law in the Past Third of a Century, 1978 Recueil des Cours 299. It is a specific application of the general principle of equity. The theory of unjust enrichment normally extends to cases where a physical or legal person benefits at the expense of another from enrichment which is the result of neither a legal right, nor of tort or breach of contract. See Sea-Land Service, Inc. and Islamic Republic of Iran, Award No. 135-33-1, p. 27 (22 June 1984), reprinted in 6 Iran-U.S. C.T.R. 149. Its extension to a case in which the transfer is the product of a legal act -- namely nationalization -- is at least a new development of the theory, if not inconsistent with its equitable premises. Furthermore, the theory of unjust enrichment is referred to in the writings of several authorities, as a ratio legis of the applicable rule rather than as the rule itself.
As a starting point, the Tribunal finds that the measure of such compensation shall be the full value of the asset taken, pursuant to Article IV, paragraph 2, of the Treaty, that is the full equivalent of the property. Compensation which would only amount to a part of this value is, therefore, excluded.
The value of a going concern -- of Khemco in this case -- is "made up of the values of the various components of the undertaking separately considered, and of the undertaking itself considered as an organic totality -- or going concern -- therefore as a unified whole, the value of which is greater than that of its components parts," to take the words of the award in the AMINOIL case. AMINOIL, supra, para. 178, 21 Int'l Legal Mat'ls at 1041. The arbitral tribunal in that case added that account should also be taken "of the legitimate expectations of the owners." This last remark, however, has to be understood in relation to a previous finding of that tribunal, which noted that this concept of "legitimate expectations" had been used by the parties in their contractual relations with a specific meaning. In the present Case, the legitimate expectations of the Parties can only be deduced from the history of the concern and from its various components, as well as from the terms of the Khemco Agreement, taking into account the circumstances prevailing at the time of the taking. Finally, the liabilities of Khemco at the valuation date have to be deducted from the total value so determined.
The jurisdictional objection raised is, according to the Claimant, that the counterclaim does not arise out of the "same contract, transaction or occurrence" as the claim raised in this Case, as required by Article II, paragraph 1, of the CSD. The Tribunal agrees with the Claimant that the tax counterclaim raises an issue of jurisdiction. The Tribunal need not, however, decide this issue here as this counterclaim fails on grounds relating to the admissibility and the merits, as discussed in the following.
In support of these contentions the Respondents rely on a number of documents issued by taxation authorities of Iran. In chronological order, the first of these documents is Consultative Opinion No. 7368/17 of the "Taxation High Council" of the Ministry of Finance date 5 Azar 1352 (i.e., 26 November 1973) ("Consultative Opinion"), which states:
Whereas the five year tax exemption set forth in clause 3 of Article 15 of the [Khemco] Agreement... shall be subject to the terms and conditions of the preceding clauses and in particular Clause 1 of the said Article, therefore any income of [Khemco], derived from petrochemicals shall be tax exempt for five years from the date of operation of the related units and any income derived from other products thereof seem to be subject to taxation.
The Respondents also rely on a letter date 17 Day 1352 (i.e., 7 January 1974) from the "Petroleum Department General" to NIOC regarding the exemption of Khemco. This letter states that
this is to inform you that the opinion of tax experts and the records of the case was sent to Mr. Hadavi the Deputy Minister of Finance... for adoption of a final decision. Mr. Hadavi has in reply to our letter, served upon us the opinion of the Taxation High Council according to a letter numbered 9183/20 dated 1352/9/29.
Whereas in our opinion the products of [Khemco], except sulfur, e.g. LPG and NGL are considered to be petroleum products and may not be tax exempt therefore we would like to ask you [NIOC] to kindly provide us with your technical views on the above issue so that the applicable taxes may be collected with due consideration of the judgment issued by the Taxation High Council.
NIOC responded to the 7 January 1974 letter from the Petroleum Department General by a communication dated 23 Day 1352 (i.e., 13 January 1974) stating:
please not that LPG and NGL and in general the liquids obtained from natural gas are considered as crude oil in all petroleum contracts and are subject to regulations governing crude oil.
The Respondents have further submitted a copy of a letter dated 24 December 1981 from the Corporate Taxation Office to NPC. This letter states that
according to preliminary findings [Khemco's] tax liability, based on its incomes from NGL and LPG non-exempt products during 1970-74 as well as total revenues during 1975, 1976, 1977 and 1978 amounts to Rls 3,171,748,336 which shall be equally shared on a 50-50 basis between [NPC] and Amoco. It should be noted that the case file of the said Company for the above-mentioned years is under investigation, and it is anticipated that their unpaid income tax and statutory taxes will exceed the above figure which will be advised in due course.
A note at the bottom requested that Khemco "[p]lease act to pay on account against your tax liability demanded" the above-stated amount.
Finally the Respondents rely on a letter dated 23 May 1984 to Khemco from the Chief Tax Assessor on Petroleum. This letter, which refers to the Consultative Opinion, to NIOC's letter of 13 January 1974 and to the 24 December 1981 letter, states that Khemco
has made deficient payments and your [Khemco's] tax account is therefore short of Rials 3,057,731,102 with respect to two petroleum products known as LPG and NGL during 1970-1974 which were not tax exempt as well as the account of your total income for the years 1975, 76, 77 and 78 according to the schedule attached hereto. [This schedule is not in evidence.]
You are requested hereby to pay the above amounts plus penalties accrued thereon... you shall be otherwise deemed to have objected to assessed taxes and your file shall then be referred to the Special Petroleum First Instance Commission....
The Respondents also invoke Khemco's 1977 Annual Report which states:
Unresolved tax matters at the end of 1977 are as follows:
1. Tax exemption on interest paid to First National City Bank in 1972, Exposure on this item is about $180,000.
Further, a footnote to the balance sheet entry for "Contingent Liabilities - Taxation" states as follows:
On September 24, 1977, Khemco representatives attended a meeting at the Ministry of Finance in regard to tax on interest paid to First National City Bank in the amount of Rls. 12,624,619 in connection with a U.S. $6,600,000 loan obtained in February 1971. Khemco protested that interest on this loan is exempted from tax. On November 3, 1977 the Ministry of Finance requested Khemco to obtain specific approval for tax exemption from [NIOC] for this loan in question. Khemco requested NPC to obtain this approval from NIOC; to date this approval has not been issued by NIOC.
The next item on which the Respondents rely is an undated record of a meeting held on 25 Mordad 1361 (i.e., 16 August 1982) at the Ministry of Economic and Financial Affairs, which states:
The opinion of the meeting was declared as follows:
Whereas according to Clause 6 as amended to Article 112 of the Direct Taxation Act, the interest on loans received for development and promotion of agriculture, industries and mines, power, etc. are exempt from payment of taxes set forth in Article 39 and whereas the loan which is the agenda of the discussion of this meeting in the amount of $6,600,600 (six million, six hundred thousand US dollars) was not obtained for any of the above purposes, but received in order to pay the debts of the said company, therefore the said loan does not fall in the category described in clause 6 as amended to Article 112 of the said law.
The document is signed by two representatives of the Ministry of Economic and Financial Affairs as well as three representatives of NIOC.
The Claimant disputes the present counterclaim, contending that, if any taxes were owed, these taxes were the obligation of Khemco, and not of Amoco or the Claimant. Furthermore, the Claimant asserts that under Article 16, paragraph 3 of the Khemco Agreement, Khemco was expressly exempted from the withholding taxes at issue. This Article provides, in relevant part, that
[t]he following payments made abroad for the account of the Company with the approval of the Company and charged to the Company shall be considered as earned outside of Iran and not subject to withholding of Iranian taxes:
e. Payments of interest on funds borrowed abroad.
Consequently, the Claimant argues, the taxes were never due from Khemco.
It is indisputable that the first document on which the Respondents rely, i.e., the letter from NPC to NIOC dated 26 May 1974, does not prove the existence of any tax liability. Further, although Khemco's Annual Report of 1977 establishes that a dispute had emerged on this issue, Khemco's provisional allocation in its budget for a potential debt is not evidence of Khemco's recognition of the debt. The Tribunal finds no evidence of any kind as to what action, if any, was taken by Khemco or NPC in order to obtain the "specific approval for tax exemption" from NIOC for the loan in question. Indeed there is no evidence that any action at all was taken with respect to this issue before the meeting of August 1982. On the basis of the record before it, the Tribunal thus determines that no final decision as to the existence of a debt for the taxes here at issue was taken prior to 16 August 1982. The debt thus arose after 19 January 1981, and after Khemco was expropriated, and therefore is outside the jurisdiction of the Tribunal under the CSD. In view of the terms of the Article 16, paragraph 3, of the Khemco Agreement and in the absence of any contrary evidence, the Tribunal further disagrees with the Respondents apparent contention that Khemco's liability for the present tax debt, by the mere operation of Iranian tax law, can be deemed to have arisen prior to the decision taken on 16 August 1982.
Article 4 of the AIOC Service Contract provides that:
[Khemco] agrees to indemnify [AIOC] against, and hold [AIOC] harmless from, all loss, cost, damage and liability which might arise by virtue of all judgments against [AIOC] or by virtue of all claims asserted against [AIOC] in connection with or arising out of its services hereunder.
Article 5 provided further as follows:
All purchases of material, equipment and supplies, insurance contracts and all other obligations undertaken hereunder in connection therewith shall be made or taken by [AIOC] in the name of [Khemco], which latter company shall bear sole responsibility for payment of any sums due under any such purchases contracts or undertakings.
The Claimant disputes the Tribunal's jurisdiction over the present counterclaim because the goods in question were purchased pursuant to a separate and independent agreement between parties different from those in the present Case. Consequently this counterclaim allegedly does not arise out of the same "contract, transaction or occurrence" as the claim in this Case as required by the CSD.
The party which allegedly breached the service agreement, AIOC, is not a party to this proceeding. The Tribunal has previously recognized that "a counterclaim may not be asserted against any person or entity other than Claimant itself," even when the putative counter-respondent is the sole shareholder of the subsidiary or is the alleged guarantor of performance under the contract allegedly breached. See American Bell International Inc. and Islamic Republic of Iran, Award No. ITL 41-48-3, pp. 13-14 (11 June 1984), reprinted in 6 Iran-U.S. C.T.R. 74, 83. To the extent that this counterclaim is directed against AIOC it is clearly outside the Tribunal's jurisdiction.
The Tribunal finds no reference in the AIOC Service Contract either to the Khemco Agreement or to the Technical Services and Assistance Agreement, and no necessary relation between these agreements and the AIOC Service Contract. The Tribunal notes, moreover, that it has previously ruled that even such an express connection is not necessarily sufficient to form a basis for jurisdiction: "That the Contracts may refer to one another or may even contemplate the execution of one another does not necessarily make the linkage between them sufficiently strong so as to make them form one single transaction within the meaning of the Claims Settlement Declaration." See Morrison-Knudsen Pacific Ltd. and Ministry of Roads and Transportation, Award No. 143-127-3, p. 53 (13 July 1984), reprinted in 7 Iran-U.S. C.T.R. 54, 83. In this case, the alleged linkage between the AIOC Service Contract and the Khemco Agreement is even more tenuous. Thus, the Tribunal finds that there is no legal relationship between these contracts such that a breach of the AIOC Service Contract would amount to a breach of the Khemco Agreement. In view of the foregoing the Tribunal rejects the present counterclaim for lack of jurisdiction, and does thus not reach the merits thereof.
Article 8 of the Khemco Agreement stipulates that:
NPC and AMOCO will use their best efforts to have each of their respective affiliates, NIOC and PANINTOIL, sell in equal shares from their separate one-half of the total quantity of their joint production of Casinghead Gas from the NIOC/PANINTOIL Joint Structure Agreement Area... on the following principal terms and conditions:
a. Khemco will pay NIOC and PANINTOIL, and NIOC and PANINTOIL will each receive, two cents (U.S. $.02) per 1000 SCF... for their respective separate one-half quantity of the gas sold to the Company....
The Gas Purchase Agreement contained in Article 2, paragraph 1 the following provision:
NIOC and PANINTOIL each hereby agree to sell, in equal quantities, from the NIOC/PANINTOIL Joint Structure Agreement Area, and KHEMCO agrees to buy from NIOC and PANINTOIL Casinghead Gas produced from said Area to the extent available and which may be required for the operation of the... [Khemco] Plant...
It is further undisputed that, as evidenced by a letter to PANINTOIL dated 1 April 1967 from NIOC's chairman of the board and managing director, PANINTOIL and NIOC entered into an agreement ("April Agreement") which, in relevant part, provided as follows:
1. The gas to be supplied to KHEMCO shall be considered as natural gas required by NIOC for internal consumption in Iran pursuant to the provisions of Article 27(1) of the [JSA].
2. In observance of the considerations leading to the encouragement of Amoco's participation in KHEMCO and for the purpose of implementing the Khemco Agreement, NIOC shall make available and convey to PANINTOIL, at the well-head one half the quantity of the gas produced from the NIOC/PANINTOIL Joint Structure Agreement Area" which is to be supplied to KHEMCO pursuant to the aforesaid "Gas Purchase Agreement," free of any payment therefor.
3. It is understood that the provisions of the Khemco Agreement shall not prejudice the rights of NIOC and PANINTOIL under the [JSA]; provided, however that NIOC and PANINTOIL hereby recognize that they shall have no further claim with respect to the gas sold to KHEMCO under the "Gas Purchase Agreement," except as may otherwise be provided for therein.
The Tribunal also rejects the Respondents' contention that the Tribunal would have jurisdiction over a counterclaim asserted against the Claimant but based on allegedly improper actions by PANINTOIL solely on the ground that PANINTOIL is an affiliate of the Claimant. American Bell International Inc. and Islamic Republic of Iran, Award No. ITL 41-48-3, pp. 13-14 (11 June 1984), reprinted in 6 Iran-U.S. C.T.R. 74, 83.
VI. REQUEST FOR APPOINTMENT OF EXPERT
VII. INTEREST AND COSTS
For the foregoing reasons:
THE TRIBUNAL AWARDS AS FOLLOWS:
a) The shareholding interest of AMOCO INTERNATIONAL S.A. in Kharg Chemical Company Limited was lawfully expropriated by THE GOVERNMENT OF THE ISLAMIC REPUBLIC OF IRAN as of 24 December 1980,
b) THE GOVERNMENT OF THE ISLAMIC REPUBLIC OF IRAN shall pay to the Claimant, AMOCO INTERNATIONAL FINANCE CORPORATION, a compensation measured at fifty percent (50%) of the going concern value of Kharg Chemical Company Limited as of 31 July 1979, without addition of future lost profits beyond such value,
c) The Tribunal defers the determination of the amount of the compensation to be paid to the Claimant, AMOCO INTERNATIONAL FINANCE CORPORATION, until such time as the Parties to this Case have been given opportunity to submit further documentation, as determined in paragraph 267 of this Partial Award, pursuant to the schedule which will be determined by separate order,
d) All Counterclaims raised in this Case are dismissed.