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."
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 holds that this evidence satisfactorily proves the United States nationality of the Claimant within the terms of the CSD.
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 Claimant contends that the Tribunal's jurisdiction is established by the CSD and that the Single Article Act does not oust the Tribunal of jurisdiction conferred by the .
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."
On 11 July 1979 a meeting was held for the express purpose of "determining Company's policy for the sale of Khemco's products." Present at this meeting were a representative of NIOC (Mr. Reva Azima, Supervisor of International Affairs), and officials of NPC (Mr. H.A. Hajarizadeh, Supervisor of Management of Operations; M. Mofez, Supervisor of Management of Finance, Legal and Administrative Affairs; and Mr. A.H. Khakzad, Supervisor of Management of Training), as well as Khemco's managing director, Mr. Tayeban. According to the minutes of this meeting, the following was decided:
1. In consideration of Government's policy that all sales of hydrocarbons produced in the country must be made by NIOC, and also, in consideration of Iran and NPC's interests, and discussions made with Amoco for the purchase of their shares in Khemco, sale of liquid gas and naptha produced in Khemco's complex, will be handled totally by NIOC International Management.
2. On the basis of a policy which will be agreed upon later, in gaining the aim mentioned in Para. 1, Khemco will advise NIOC International Affairs [of] its stock and production of liquid gas and naptha. In addition, Khemco's personnel specialized in the sale of liquid gas will be transferred to NIOC International Management.
3.... NIOC will deposit to the account of NPC the funds derived from the sale of liquid gas and naptha produced by Kharg's complex.
5. On the basis of previous instructions, sale of sulfur produced by Khemco will be made totally by NPC Trading Management. The funds derived from the sale will be deposited in a special account in NPC. Of course, all Khemco's current expenses will be borne by NPC, effective the date this policy is executed.
7. Mr. Tayeban, Khemco's Managing Director, will advise Amoco of the NIOC and NPC's policy.
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.
It cannot seriously be questioned that the conditions in Iran in late 1978 and early 1979 amounted to a state of force majeure. Both Parties admit that the departure of Khemco's expatriate personnel in December 1978 was justified by force majeure. The consequences on the Khemco Agreement of such a situation depends on the terms of the Khemco Agreement. Article 19 of the Khemco Agreement deals with the question of force majeure. The two relevant paragraphs of this Article read as follows:
1. Where any force majeure occurrence, beyond the reasonable control of either of the parties hereto or the Company [Khemco], renders impossible or hinders or delays the performance of any obligation or the exercise of any right under this Agreement, then this failure or omission of either Party of the Company shall not be treated as a failure or omission to comply with this Agreement
3. If the performance of any obligation or the exercise of any right is rendered impossible, hindered or delayed by a force majeure cause for a period exceeding twelve (12) consecutive months, the parties shall, if practicable, consult together as to the best means of overcoming the applicable event of force majeure, but if they shall fail to achieve a solution or if consultation shall be impracticable then either Party may refer the situation to arbitration under Article 26 for solution.
According to the Respondents, the Treaty is applicable in the instant Case only if it was operative at the time of the expropriation, at the time of the submission of the claim to the Tribunal and, possibly, at the time of the award. The Respondents contend, however, that the Treaty was not operative at any of these times for several reasons. First, the Respondents argue that the Treaty was never binding on Iran, since it was executed by a Government installed as a result of a foreign intervention. If the Treaty was validly concluded, the Respondents continue, it ceased to be operative in November 1979 at the latest, by reason of the United States' violations of it by taking measures against Iranian assets, as well as by the general change of circumstances. At that time, the relations between the two countries could no longer be considered amicable, which fact is assertedly decisive, since the Tribunal is specifically authorized by Article V of the CSD to take into account changed circumstances. The Respondents deny that official notification of termination was necessary, since termination by conduct of the parties is largely admitted in international law. Furthermore, the Respondents argue that the decision to the contrary of the International Court of Justice in the Case Concerning United States Diplomatic and Consular Staff in Tehran (United States of America v. Iran), 1980 I.C.J. 3 (Judgment of 24 May 1980), reprinted in 19 Int'l Legal Mat'ls 653 (1980) is irrelevant, since this decision only concerned jurisdiction and the case was not argued by Iran. The Respondents similarly distinguish the Tribunal's similar holding in INA Corporation and Islamic Republic of Iran, Award No. 184-161-1, p. 9 (13 August 1985). Finally, the Respondents contend that even if the Treaty were operative, it would not be applicable to the circumstances of this Case.
The Tribunal further notes that at the time the Treaty was signed and ratified the two Governments were recognized by the whole international community. There is no evidence, and it has not been contended, that the Treaty was executed under duress, or by fraud, within the meaning of Articles 49, 51 and 52 of the Vienna Convention on the Law of Treaties, U.N. Doc. A/CONF. 39/27 (23 May 1969), entered into force 27 January 1980, reprinted in 8 Int'l Legal Mat'ls 679 (1969) ("Vienna Convention"). None of the provisions of the Treaty can be considered as contrary to an imperative norm of international law (jus cogens), in the meaning of Article 53 of the Vienna Convention. Nothing, therefore, suggests that the Treaty was null and void ab initio.
In its judgment of 24 May 1980 in Case Concerning United States Diplomatic and Consular Staff in Tehran, supra, the International Court of Justice held that the Treaty was in effect at least as of 29 November 1979. It is true that because Iran declined to participate in the argument the case was not argued as a case normally would be presented under the Statute and the Rules of the Court, but the Iranian Government stated its position in two communications to the Court. In these communications it objected to the jurisdiction of the Court, but made no suggestion that the Treaty was not in force on 29 November 1979 when the United States submitted the dispute to the Court, as was noted by the Court itself. See 1980 I.C.J. at 28, 19 Int'l Legal Mat'ls at 566.
While the Court dealt with the question of the applicability of the Treaty mostly in relation to the problem of jurisdiction, it did not make its findings thereon in its jurisdiction only on a prima facie basis. Rather, the Court pronounced itself on the validity of the Treaty, after a careful scrutiny, in its judgment on the merits. Its holding is still more forceful because, as the Court explained, it might have grounded its decision on two other conventions which already furnished an indisputable basis of jurisdiction, without addressing the question of the validity of the Treaty. Id. at 26, 19 Int'l Legal Mat'ls at 565. Furthermore, the Court dismissed the suggestion that the Treaty was rendered inapplicable because of the counter measures the United States had taken against Iran. Id. at 27-28, 19 Int'l Legal Mat'ls at 565-66. Finally, the Court emphasized, in this context, that "mutual undertakings [of the Parties] to ensure the protection and security of their nationals in each other's territory" are specially related to the "very purpose of amity and, indeed, of a treaty of establishment" like the Treaty. Id. at 28, 19 Int'l Legal Mat'ls at 566.
In addition to the Judgment of the International Court of Justice, three previous Awards of this Tribunal have concluded that the Treaty is applicable to the relations between the two nations at the time the relevant claims arose. INA Corporation and Islamic Republic of Iran, Award No. 184-161-1 (13 August 1985); Phelps Dodge Corp. and Islamic Republic of Iran, Award No. 217-99-2 (19 March 1986); Sedco Inc. and National Iranian Oil Company, Award No. ITL 59-129-3 (27 March 1986), reprinted in 25 Int'l Legal Mat'ls 629. The Tribunal sees no reason to depart from these precedents.
To some extent, the judgment of the International Court of Justice gives an anticipatory answer to the Respondents' argument that changed circumstances and violations of the Treaty brought about its termination. The most dramatic events invoked in support of this argument -- the Islamic Revolution, the attack on the United States Embassy in Tehran and taking of embassy personnel as hostages, and the subsequent presidential freeze orders and rescue attempt -- took place before the Court's finding that the Treaty was still in force. In any event, the Tribunal need not determine whether these events constituted changes of such a nature and magnitude as to justify the termination of the Treaty in conformity with customary rules of international law as declared in Article 62 of the Vienna Convention. As Article 62 clarifies, change of circumstances never automatically terminates a treaty. It is always up to the parties to evaluate the consequences of the change and, if one or both of them arrive at the conclusion that these consequences legally justify termination of a treaty, to take the necessary steps to this effect. The same is true in case of violation of a treaty by a party.
On the other hand, the events which took place in 1978, 1979 and 1980 and caused the revolutionary change of government in Iran, the overrun of the United States Embassy in Tehran and the prolonged detention of its nationals as hostages, could not be without consequences upon the implementation of the Treaty. It is clear that the part of the Treaty which relates to consular relations was suspended with the closure of the consulates of both nations and the rupture of diplomatic relations. The implementation of the articles relating to the treatment of nationals of the other country was greatly disturbed by the civil unrest and disorders which preceded and accompanied the revolution in Iran and continued for some time after the establishment of a new government, as well as by the counter measures taken by the President of the United States in connection with the crisis. These events brought about a virtually complete interruption of communications between the two countries until after the execution of the Algiers Accords. Obviously, such a legal and factual context has to be kept in mind in considering the application of the Treaty to specific facts during this period, but it does not necessarily lead to the conclusion that the Treaty was no longer applicable, since, in the words of the International Court, "[i]t is precisely when difficulties arise that the [T]reaty assumes its greatest importance." See Case Concerning United States Diplomatic and Consular Staff in Tehran, supra, at 28, 19 Int'l Legal Mat'ls at 566. Thus there was no termination by changed circumstances or alleged violations of the Treaty.
Similarly the Tribunal does not agree that the negotiation of the Algiers Accords in January 1981 constitutes a termination of the Treaty. The severe crisis which plagued relations between the two parties in 1979-1980 found its epilogue in the Algiers Accords. In the words of the Declaration of the Government of the Democratic and Popular Republic of Algeria ("General Declaration"), the Accords were the result of negotiation on "the commitments which each [of the Parties] is willing to make in order to resolve the crisis within the framework of the four points stated in the Resolution of November 2, 1980, of the Islamic Consultative Assembly of Iran." The Accords, which provided for the release of the 52 United States nationals and the lifting of the freeze of the Iranian assets, do not mention the Treaty. The general reference to "changed circumstances" in Article V of the CSD, which deals with the law to be applied by the Tribunal, cannot be construed as a notice of intention to terminate the Treaty, or as constituting a finding that the Treaty was terminated on such a basis.
Algiers AccordsBefore the , Iran could easily have denounced the Treaty if it thought it proper to do so. Such a decision could be notified at any time, pursuant to the procedure described in Article XXIII, paragraph 3 of the Treaty, or made known by any other means of publicity. If Iran considered the judgment of the International Court of Justice to be in error in finding that the Treaty remained applicable, it could certainly have remedied the error by an express notice of termination to remove all doubt. Such a course of conduct was adopted by the French Government after the International Court of Justice held that France's status as a party to the General Act of Arbitration, which France had considered to have lost its effectiveness and fallen into desuetude, provided a basis for jurisdiction over it. See The Nuclear Tests Case (Australia v. France), 1973 I.C.J. 99 (interim protection order of 22 June 1973). While France reiterated its position, it formally denounced the Act. Following the judgment of the International Court of Justice concerning the Treaty, however, Iran took no such action.
The Respondents submit a second line of arguments to the effect that even if the Treaty is deemed to be in force, it is not applicable to the expropriation of Amoco's interest in Khemco for four reasons: (1) Amoco's interest in Khemco is not "property" in the meaning of Article IV, paragraph 2 of the Treaty; (2) the Treaty clearly recognizes Iran's right to nationalize; (3) the Treaty creates rights and duties only between Iran and the United States, not for private entities; and (4) the United States and its nationals cannot take advantage of the Treaty's special standard of compensation, since the Treaty originated from the unlawful conduct of the United States. The Tribunal will discuss these arguments in reverse order.
The question raised by the third objection, whether the Treaty did or did not create rights or duties for private persons, cannot be answered in the abstract, but can be decided only by reference to the terms of the Treaty and the procedures available for its implementation. It is indisputable, however, that certain provisions of the Treaty, including Article IV, set standards of treatment that each party must accord to the nationals and companies of the other party. The nationals and companies concerned, therefore, are entitled to receive such treatment. In an adjudication before an international tribunal such as this, which is expressly authorized by Article V of the CSD to apply the rules and principles of international law, it is immaterial whether or not the enforcement of such treaty rights and law by domestic courts would be dependent on the enactment of legislation introducing the provisions of the treaty into the law of the State.
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.
As to the Respondents' objection that Amoco, as a Swiss corporation, is outside the protection of the Treaty, the Tribunal agrees that the legal protection afforded by the Treaty applies only to nationals of the parties to the Treaty. As a Swiss corporation, Amoco could not invoke such protection, just as it is not allowed to bring a claim before this Tribunal, which under the CSD has jurisdiction only over claims submitted by nationals of Iran or of the United States. In the present Case, however, the Claimant is not Amoco, but AIFC, the United States corporation which wholly owns and controls Amoco. AIFC relies on the terms of Article VII, paragraph 2 of the CSD, which defines "claims of nationals" as including claims that are owned indirectly by such nationals through ownership of capital stock or other proprietary interests in judicial persons, provided that the ownership interests of such nationals, collectively, were sufficient at the time the claim arose to control the corporation or other entity, and provided, further, that the corporation or other entity is not itself entitled to bring a claim under the terms of this agreement.
This phraseology is more elaborate than the simple phrase "interests in property" used in Article IV, paragraph 2 of the Treaty, and it contains specifications which substantially narrow its ambit. But, apart from this, the meaning is not very dissimilar. The property interests assertedly protected by the Treaty are not those of Amoco, but of AIFC. The term "interests in property" in ordinary usage, refers to the interests that one entity can own in the property of another entity. If such interests are owned by a national of one party to the Treaty, they are protected by the Treaty. See Sedco, Inc. and National Iranian Oil Company, Award No. 309-129-3, pp. 22-23 n. 9 (7 July 1987). The Tribunal concludes, accordingly, that the rights invoked by the Claimant fall within the scope of Article IV, paragraph 2 of the Treaty, which therefore is applicable.
As a lex specialis in the relations between the two countries, the Treaty supersedes the lex generalis, namely customary international law. This does not mean, however, that the latter is irrelevant in the instant Case. On the contrary, the rules of customary law may be useful in order to fill in possible lacunae of the Treaty to ascertain the meaning of undefined terms in its text or, more generally, to aid interpretation and implementation of its provisions.
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.
The rules of customary international law relating to the determination of the nature and amount of the compensation to be paid, as well as of the conditions of its payment, are less well settled. They were, and still are, the object of heated controversies, the outcome of which is rather confused. Terms such as "prompt, adequate and effective," "full," "just," "adequate," "adequate in taking account of all pertinent circumstances," "equitable," and so on, are currently used in order to qualify the compensation due, and are construed with broadly divergent meanings. The parties to the Treaty agreed on a common position on this problem by the choice of the term "just compensation" and by listing, in the last sentence of Article IV, paragraph 2, what should be included under this term. The wording of the sentence, however, does not solve the problem of the method to be used in order to determine the value of the property or interest in property which was expropriated.
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.
A precise definition of the "public purpose" for which an expropriation may be lawfully decided has neither been agreed upon in international law nor even suggested. It is clear that, as a result of the modern acceptance of the right to nationalize, this term is broadly interpreted, and that States, in practice, are granted extensive discretion. An expropriation, the only purpose of which would have been to avoid contractual obligations of the State or of an entity controlled by it, could not, nevertheless, be considered as lawful under international law. See AMINOIL, supra, para. 109, 21 Int'l Legal Mat'ls at 1025. Such an expropriation, indeed, would be contrary to the principle of good faith and to accept it as lawful would run counter to the well-settled rule that a State has the right to commit itself by contract to foreign corporations. Id. para. 90, 21 Int'l Legal Mat'ls at 1021-22. It is also generally accepted that a State has no right to expropriate a foreign concern only for financial purposes. It must, however, be observed that, in recent practice and mostly in the oil industry, States have admitted expressly, in a certain number of cases, that they were nationalizing foreign properties primarily in order to obtain a greater share, or even the totality, of the revenues drawn from the exploitation of a national natural resource, which, according to them, should accrue to the development of the country. Such a purpose has not generally been denounced as unlawful and illegitimate.
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.
Both Parties consider that this issue must be decided by reference to customary international law. The Tribunal agrees. Article IV, paragraph 2 of the Treaty determines the conditions that an expropriation should meet in order to be in conformity with its terms and therefore defines the standard of compensation only in case of a lawful expropriation. A nationalization in breach of the Treaty, on the other hand, would render applicable the rules relating to State responsibility, which are to be found not in the Treaty but in customary law.
By and large, both Parties refer to the same authorities in the discussion of their respective theses, but give them opposite interpretations. They agree that the leading case in this context is Case Concerning the Factory at Chorzow (Germany v. Poland), 1928 P.C.I.J., Ser. A. No. 17 (Judgment of 13 September 1928) ("Chorzow Factory"), decided by the Permanent Court of International Justice in 1928. The Tribunal shares this view. In spite of the fact that it is nearly sixty years old, this judgment is widely regarded as the most authoritative exposition of the principles applicable in this field, and is still valid today. It must be recognized, however, that its treatment of compensation is fairly complex and must be carefully analyzed.
Undoubtedly, the first principle established by the Court is that a clear distinction must be made between lawful and unlawful expropriations, since the rules applicable to the compensation to be paid by the expropriating State differ according to the legal characterization of the taking. Id. at 46-47. Such a principle has been recently and expressly confirmed by the celebrated AMINOIL case, also invoked by both Parties. AMINOIL, supra, para. 138, 21 Int'l Legal Mat'ls at 1031.
According to the Court in Chorzow Factory, an obligation of reparation of all the damages sustained by the owner of expropriated property arises from an unlawful expropriation. The rules of international law relating to international responsibility of States apply in such a case. They provide for restitutio in integrum: restitution in kind or, if impossible, its monetary equivalent. If need be, "damages for loss sustained which would not be covered by restitution" should also be awarded. See Chorzow Factory, supra, at 47. On the other hand, a lawful expropriation must give rise to "the payment of fair compensation," id. at 46, or of "the just price of what was expropriated." Id. at 47. Such an obligation is imposed by a specific rule of the international law of expropriation.
Restitutio is well defined by the Court. It means the restitution in kind or, if that is impossible, the payment of the monetary equivalent. In both cases the principle on which it lies is the same: "that reparation must, as far as possible, 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."2 Id. at 47. One essential consequence of this principle is that the compensation "is not necessarily limited to the value of the undertaking at the moment of dispossession" (plus interest to the day of payment). According to the Court, "this limitation would be admissible only if the Polish Government ]the expropriating State[ has had the right to expropriate, and if its wrongful act consisted merely in not having paid... the just price of what was expropriated." Id. This last statement is of paramount importance: It means that the compensation to be paid in case of a lawful expropriation (or of a taking which lacks only the payment of a fair compensation to be lawful) is limited to the value of the undertaking at the moment of the dispossession, i.e., "the just price of what was expropriated."
Obviously the value of an expropriated enterprise does not vary according to the lawfulness or the unlawfulness of the taking. This value can not depend on the legal characterization of a fact totally foreign to the economic constituents of the undertaking, namely the conduct of the expropriating State. In the traditional language of international law it equates the damnum emergens, which must be compensated in any case. Such a conclusion was already accepted by this Tribunal in Sedco Inc. and National Iranian Oil Company, Award No. ITL 59-129-3, pp. 11-12 (27 March 1986), reprinted in 25 Int'l Legal Mat'ls 629. The difference is that if the taking is lawful the value of the undertaking at the time of the dispossession is the measure and the limit of the compensation, while if it is unlawful, this value is, or may be, only a part of the reparation to be paid. In any event, even in case of unlawful expropriation the damage actually sustained is the measure of the reparation, and there is no indication that "punitive damages" could be considered.
What can be added to the value of the enterprise in order to meet the requirements of restitutio? An answer to this question can be found in the formulation of the questions on which an expert inquiry was arranged by the Court. See Chorzow Factory, supra, at 51. These questions are an integral part of the judgment, with the same authority as all the other parts, and have the advantage, with the benefit of explanations which the Court added to their terms, of being much more precise and concrete than the general principles previously enunciated.
The Court "considers it preferable to endeavor to ascertain the value to be estimated by several methods, in order to permit of a comparison and if necessary of completing the results of the one by those of the others." Id. at 53. Consequently, it contemplated essentially two methods, corresponding to two different questions. Both methods have the same purpose: to determine how "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." Id. at 47.
The comparison of the two subquestions (A) and (B) permits of only one conclusion: The lucrum cessans to be determined under subquestion (B) is something different from the "future prospects" mentioned in subquestion (A). The reasoning of the Court on this point is perfectly clear and was expressed without any ambiguity:
The purpose of question I is to determine the monetary value, both of the object which should have been restored in kind and of the additional damage, on the basis of the estimated value of the undertaking, including stocks, at the moment of [the] taking... together with any probable profit that would have accrued to the undertaking between the date of taking possessions and that of the expert opinion.
Id. at 52 (emphasis added). This statement confirms the previous finding that, for the Court, lost profit (lucrum cessans) is not incorporated in the value of the undertaking, although this value includes "future prospects." In other words, according to the Court, "future prospects" does not equal lost profit (lucrum cessans). Those are two different concepts. The first one clearly refers to the fact that the undertaking was a "going concern" which had demonstrated a certain ability to earn revenues and was, therefore, to be considered as keeping such ability for the future: this is an element of its value at the time of the taking. The second relates to the amount of the earnings hypothetically accrued from the date of the taking to the date of the expert opinion, had the enterprise remained in the hands of its former owner.
The other method used by the Court in order "to wipe out" the consequences of a wrongful taking consists of an estimation of the value of the undertaking at the time of the judgment. It is the object of Question II. The valuation of the undertaking is exactly the same, with the same components. Only the date changes. Furthermore, the valuation is hypothetical, since it refers to the undertaking as it would have been if it had remained in the hands of the expropriated owners. The Court deems that, in this second hypothesis, the profits, real or supposed, accrued between the taking and the judgment would be for the most part incorporated in the supposed value of the undertaking at the time of the judgment,3 since they would have been absorbed by the costs of upkeep of the corporeal properties and of improvement and normal development of the installation. Id. at 53. If, however, there remains "a margin of profit," it "should be added to the compensation to be awarded." On the contrary, if an investment of fresh capital would have been required for the normal development of the undertaking, the amount of such sums should be deducted. Accordingly, if the expert study was well performed, the results yielded by the two methods should have been identical and confirm each other. If, on the contrary, these results had been different, the Court would have had to combine them and to make the necessary adjustments. To this effect, it expressly and fully reserved its right to review the expert's valuations and to determine the sum to be awarded in conformity with the legal principles set out in the judgment. Id. at 53-54. Obviously, had the second method yielded a value of the undertaking at the time of the expert opinion which was lower than the value at the time of the taking, the higher value would have prevailed.4
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.
The case law developed since the judgment of the Court has generally followed the principles set forth in this judgment, at least on the distinction between lawful and unlawful expropriation. It is particularly remarkable that all the awards which adopted the standard of restitutio relate to expropriation found unlawful. See Lighthouses Arbitration Between France and Greece, (Verzijl, Mestre and Charbouns arbs., Claim 27, 24 July 1956), reprinted in 23 I.L.R. 299 (1956); Sapphire International Petroleums Ltd. v. National Iranian Oil Company, (Cavin arb., Award of 15 March 1963), reprinted in 35 I.L.R. 136, 186 (1967); BP Exploration Co. (Libya) v. Libyan Arab Republic, (Lagergren arb., Award of 1 August 1974), reprinted in 53 I.L.R. 297 (1979); Texaco Overseas Petroleum Co. (TOPCO) v. Libyan Arab Republic, (Dupuy arb., Award of 19 January 1979), reprinted in 53 I.L.R. 389 (1979); Benvenuti et Bonfant Srl. v. People's Republic of the Congo, (Trolle, Bystricky and Razafindralambo arbs., Award of 8 August 1980), reprinted in 21 Int'l Legal Mat'ls 740 (1982); AGIP Co. v. People's Republic of the Congo, (Trolle, Dupuy and Rouhani arbs., Award of 30 November 1979), reprinted in 21 Int'l Legal Mat'ls 726 (1982). The LIAMCO award could at first glance be considered as an exception, since it awards the Claimant a certain amount of lost profit after having found that the expropriation of LIAMCO by Libya was lawful. See Libyan American Oil Company (LIAMCO) v. Libyan Arab Republic, (Mahmassani arb., Award of 12 April 1977), reprinted in 62 I.L.R. 139 (1982). It is clear, however, that this part of the compensation, awarded on the basis of "equity," does not conform to the concept or the standard of restitutio in integrum. As already noted, the AMINOIL case clearly recognizes that it is only in cases relating to indemnifications due in consequence of illicit acts that the calculation is effected as the equivalent of a restitutio in integrum. In that case limited lost profit was awarded only on the basis of the concept, specifically agreed upon by the parties, of "legitimate expectations" and in implementation of such an agreement. AMINOIL, supra, para. 138, 21 Int'l Legal Mat'ls at 1031.
The standard of "just compensation" for a lawful expropriation referred to in Article IV, paragraph 2, of the Treaty is more precisely defined in the last sentence of the paragraph, which provides that "such compensation shall be in an effectively realizable form and shall represent the full equivalent of the property taken."
As previously noted, by the phrase "just compensation" the parties to the Treaty chose one of the various ways of describing the compensation due in case of nationalization. It is therefore apparent that the wording chosen in Article IV, paragraph 2, has as a first purpose and effect to exclude consideration of factors foreign to the value of the expropriated assets, such as excessive past profits or the rate of return on the initial investment, which have been invoked in a few cases of nationalization in order to reduce the compensation due to an amount less than the full value of these assets. Although counsel for the Respondents made some references to the rate of return on Amoco's initial investment, the Respondents do not appear to suggest that this factor should enter into the calculation of the compensation due, and no other factor of this kind was invoked.
"Just compensation" has generally been understood as a compensation equal to the full value of the expropriated assets. This is confirmed in the wording of Article IV, paragraph 2, which refers to "the full equivalent of the property taken." The Tribunal does not see any material difference between this phrase and the usual term of "just compensation." The Tribunal has expressed this point in the Sedco case, where it held that full compensation was the standard to be applied. See Sedco, Inc. and National Iranian Oil Company, supra, Award No. ITL 59-129-3 at 11-13. Such a finding, however, leaves without a precise answer the difficult question of the proper method to be used in order to determine what the "full value" or "full equivalent" of the property taken means in figures. This question of method goes beyond the issue of the standard of compensation, because several methods are available and the choice between them depends on the particular circumstances of each case. This will be dealt with in the following section.
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).
In the case of a going concern, as the AMINOIL tribunal aptly put it, the value of the enterprise as a whole is higher than the sum of the discrete elements which constitute it, see id. at para. 1781, 21 Int'l Legal Mat'ls at 1041, but it remains related to these elements. With the DCF method, as used in this Case, the alleged value of the undertaking has no relation whatsoever to the value of these elements -- and therefore to the investment made in order to create the concern and to maintain its profitability. The replacement value, that is the investment necessary to create a similar undertaking, is no more taken into consideration. The capitalization of the future earnings will probably amount to a much higher figure, which could lead to unjust enrichment for the beneficiary of such compensation, since he could, hypothetically, establish a similar enterprise with comparable earnings, spending only a portion of the compensation received, and earn additional revenues with the remaining part. If the enterprise were less profitable, the Claimant would probably refer to another method, as the claimant did in the Chorzow Factory case. It is one thing to recognize, as this Tribunal and many other international tribunals and courts before it have done, that the profitability of a going concern is one of the elements to be considered in the valuation of such a concern; it is another thing to substitute a capitalization of hypothetical future earnings for all other elements of valuation.
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
VIII. AWARD
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.
