The Government of the State of Kuwait (hereinafter ref erred to as "the Government") and American Independent Oil Company, a corporation organized under the laws of the State of Delaware in the United States of America (hereinafter referred to as "the Company") hereby agree as follows:
Whereas, on 28 June 1948 the Government and the Company entered into a Concession Agreement with respect to petroleum and related resources in what was then the Kuwait-Saudi Arabia Neutral Zone, and subsequently entered into other agreements amending and supplementing that Agreement ; and
Whereas, the Government by Decree Law no 124 of 19 September 1977 declared the Agreement of 28 June 1948 to be terminated and the property and assets of the Company to be nationalized, and
Whereas, differences and disagreements have arisen between the Government and the Company with respect to the aforesaid Concession Agreement as amended, and the actions of the Government and the Company in relation thereto, and with respect to various payments made or allegedly owed by the Parties to each other; and
Whereas, both the Government and the Company are desirous of resolving all differences and disagreements between them on the basis of law ;
The Parties hereby submit the said differences and disagreements to transnational arbitration as provided in the following articles.
1. The arbitral tribunal (hereinafter referred to as "the Tribunal") shall be composed of three members, one appointed by each Party as recited in paragraph 2 of this Article, and a third member who shall act as president, to be appointed by The President of the International Court of Justice.
2. The member of the Tribunal appointed by the Government shall be Professor Doctor Hamed Sultan. The member appointed by the Company shall be Sir Gerald G. Fitzmaurice, G.C.M.G., Q.C.
3. If at any time a vacancy shall occur on the Tribunal by reason of death, resignation, or incapacity for more than sixty days of any member, such vacancy shall be filled in the same manner as for the original appointment to that position. If the vacancy is not so filled within sixty days after its occurrence, either Party may request the President of the International Court of Justice to make the necessary appointment, and such appointment shall be final and binding on the Parties. Upon the filling of a vacancy, the proceedings shall be resumed at the point at which the vacancy occurred, after allowing any new member sufficient time to familiarise himself with the proceedings up to that time.
4. Upon its constitution, the Tribunal shall appoint a secretary who shall possess qualifications as a lawyer in the country of the place of arbitration, who shall assist the Tribunal in the administrative arrangements for the proceedings. The Tribunal may also employ such stenographic and other assistance as it deems necessary.
I. The Parties recognise that the restoration of the Parties to their respective positions prior to 2C September 1977 and/or the resumption of operations under the 28 June 1948 Agreement (as amended) would be impracticable in any event, and the Company will therefore seek monetary damages instead. Accordingly, the Parties agree to limit their claims against each other to claims for monetary compensation and/or monetary damages.
The Tribunal shall decide according to law :
i) The amount of compensation, if any, payable by the Government to the Company in respect of the assets acquired by the Government under Article 2 of Decree Law n° 124.
ii) The amount of damages, if any, payable by the Government to the Company in respect of termination of the Agreement of 28 June 1948 by Article I of Decree Law n° 124.
III) The amount payable to the Government by the Company, and/or the amount payable to the Company by the Government, in respect of royalties, taxes or other obligations of the Company, in which connection the Tribunal shall determine the validity or invalidity of any amendments or supplements to the 28 June 1948 Agreement which are relevant.
IV) The amount of interest, if any, payable by either Party to the other, the rate of such interest and the date from which it shall be payable to be awarded at the discretion of the Tribunal.
The law governing the substantive issues between the Parties shall be determined by the Tribunal, having regard to the quality of the Parties, the transnational character of their relations and the principles of law and practice prevailing in the modern world.
Unless otherwise agreed by the Parties, and subject to any mandatory provisions of the procedural law of the place in which the arbitration is held, the Tribunal shall prescribe the procedure applicable to the arbitration on the basis of natural justice and of such principles of transnational arbitration procedure as it may find applicable, and shall regulate all matters relating to the conduct of the arbitration not otherwise provided for herein.
The Tribunal shall hold a first meeting with the Parties as soon as practicable after being constituted, for the purpose of establishing the rules of procedure to govern the arbitration. This meeting, together with any other preliminary meetings held to determine procedural matters, shall not be counted for the purpose of calculating the time limit specified in subparagraph 3(viii) of this Article.
In determining the procedures for the arbitration, the Tribunal shall observe the following provisions :
i) The language of the proceedings shall be English. However, the Parties may put forward references to authorities, decisions, awards, opinions and texts (or quotations therefrom) in French without translation.
ii) The seat of the arbitration shall be Paris.
iii) The Tribunal may, if it deems appropriate, engage experts. The Parties may also call such expert testimony (written or oral) as they wish. Both Parties shall have the right to question any such experts.
iv) The Parties shall also have the right to present the oral testimony of witnesses. The Parties undertake to use their best efforts to present witnesses only to the extent necessary to establish their claims and to refrain from calling witnesses where the presentation of documentary evidence will be equally satisfactory. Both Parties hereby express their intention that the oral hearings shall not he unduly prolonged.
v) All decisions of the Tribunal shall be by majority vote. All awards, preliminary or final, shall be in writing and signed by each arbitrator and shall state the reasons upon which the award is based. In the event that one arbitrator refuses to sign the award, the two arbitrators forming the majority shall state in the award the circumstances in which the signature of the remaining arbitrator has been withheld.
vi) If either Party fails within the prescribed time to appear or to present its case at any stage of the proceedings, the Tribunal may of its own motion or at the request of the other Party proceed with the arbitration and make an award.
vii) The Tribunal shall keep records of all its proceedings and decisions, and a verbatim record of all oral hearings.
viii) The final award shall be given within 18 months from the date of the first oral hearing on the substantive issues following the exchange of the Parties' first written submissions on those issues. The Tribunal may extend this period in its discretion. However, such extension shall not exceed 6 months, except that such period shall be extended by the number of days by which the Tribunal may be unable to conduct its business due to unforeseen circumstances beyond the control of the Tribunal or the Parties, such as periods of delay due to the death, resignation or incapacity of any member of the Tribunal, or except with the consent of the Parties.
The final award of the Tribunal shall be binding on both Parties who hereby expressly waive all rights of recourse to any Court, except such rights as cannot be waived by the law of the place of arbitration. Each Party undertakes to comply therewith promptly and in good faith and within 120 days from the date of the final award.
Each Party will pay its own costs and expenses. The expenses of the Tribunal, including the honoraria of its members, the remuneration of the secretary and staff, and the expenses incurred by them, shall be borne by the Parties in equal shares.
1. This Agreement shall enter into force upon its signature by duly authorised representatives of both Parties. It shall be executed in three originals: one for each Party, and one to be delivered to the President of the Tribunal for deposit in the records of the Tribunal.
2. On the entry into force of this Agreement each Party will. discontinue any other proceedings it may have instituted against the other.
Signed on behalf of the Government at Kuwait on the 23rd day of July, 1979, corresponding to the 29th day of Shaban, 1399.
For the Government of the State of Kuwait :
SHEIKH ALI AL KHALIFA AL SABAH MINISTER OF OIL
Signed on behalf of the Company at Kuwait on the 23rd day of July, 1979, corresponding to the 29th day of Shaban, 1399, pursuant to authority granted by a resolution of the Company's Board of Directors adopted on the 5th day of July, 1979.
For American Independent Oil Company :
GEORGE E.TRIMBLE PRESIDENT
"The questions to be dealt with by the Parties in accordance with the preceding paragraphs, and the Party to speak first on each question, without prejudice to the burden of proof, shall be as follows :
1. The system of law governing the arbitration as a whole and the system of law applicable to the substantive issues in the case : the Government to start.
2. The agreements at any time existing between the Parties before 1973, and the meaning and effect of particular clauses in issue between them : the Government to start.
3. The validity and effect of the instruments of 1973, including the question of the Abu Dhabi formula : Aminoil to start.
4. The validity and effect of the Government's Decree Law n° 124 of 1977 : Aminoil to start.
4. The breaches alleged by Aminoil : Aminoil to start.
6. The breaches alleged by the Government : the Government to start.
7. In so far as not already dealt with under previous heads and in any case exclusive of all questions of pure quantum :
i) Aminoil's claims : Aminoil to start;
ii) the Government's claims : the Government to start."
It was added (head IV(b)) that
"The wording of the foregoing questions implies no taking of position by the Tribunal in regard to any of them."
For the Government of Kuwait (GR p. 195) :
"The Government's claims against Aminoil may be summarised as follows : -
|(1) Royalties and taxes|
|(a) balance due under the 1973 Agreement for the period 1st January to 19th September, 1977 (see paragraph 3.4 et seq).||$32,876,000|
|(b) amount due for the period 1st November, 1974 to 19th September, 1977 in accordance with the principles established by the Abu Dhabi Formula (see paragraph 3,107 et seq).||$92,007,000 (or such amount as the Tribunal determines to be equitable)|
|(2) Aminoil's liabilities to third parties (see paragraph 3,153 et seq).||$18,588,867|
|(3) Aminoil's operations and installations|
|(a) damages in relation to "lost oil" estimated at 190 million barrels -the Government's half share in the joint operations. (See para graph 5.21 of the Government's Counter-Memorial)||$5,780,750,000 (based on a figure of $30,425 per barrel and subject to adjustment).|
|(b) the Government's share of expenditure required at the oil fields at Wafra : -|
|(i) repairing Active wells||$8,285,950|
|(ii) properly plugging and abandoning suspended wells||$3,346,350|
|(iii) other items referred to in REMI's reports (e.g. repairs to pipelines)||An amount to be determined by the Tribunal|
|(c) expenditure required to bring the refinery at Mina Abdullah up to a proper standard. The quantum of this claim depends upon the Tribunal's of the basis of compensation for the refinery (see paragraph 4,204)||$65,000,000 (based on assessment made by JGC of major items, and subject to adjustment)|
|(4) Interest||An amount to be determined by the Tribunal."|
For Aminoil (AR p. 548) :
" Aminoil respectfully submits that the Tribunal should include in its Award :
(A) An award to Aminoil of the total of the following amounts :
(1) Lost profits in the amount of $2,587,136,000 ;
(2) If, for any reason, lost profits throughout the entire Concession period are not awarded, the value of physical facilities in the amount of $185,300,000 or such lesser amount as is appropriate by reference to Table 12 of Annex XIII to Aminoil's Memorial ;
(3) Aminoil's other assets and liabilities in an amount as may be agreed by the Parties' respective auditors or, in the absence of agreement, the amount of $30,356,000 ;
(4) Overpayments made by Aminoil to the Government in the amount of 2423,072,000 ;
(5) Interest on the above amounts, from 19 September 1977 or 19 March 1980, as appropriate,
(B) The rejection of all the Government's claims made against Aminoil, except that an amount be credited to the Government for appropriate liabilities of Aminoil paid or assumed by the Government."
By Article 1 it was provided that
"The period of this Agreement shall be sixty (60) years from the date of signature".
Article 2(C) provided that
"The Company shall conduct its operations in a workmanlike manner and by appropriate scientific methods and shall take all reasonable measures to prevent the ingress of water to any petroleum-bearing strata and shall duly close any unproductive holes drilled by it and subsequently abandoned. The Company shall keep the Shaikh and His Foreign Representative informed generally as to the progress and result of its drilling operations but such information shall be treated as confidential".
Article 3 provided for the immediate payment to the Ruler of a sum of 625,000 dollars, followed after thirty days by a sum of 7.25 million dollars, and subsequently by an annual royalty of 2,50 dollars for every ton of Aminoil's petroleum won and saved (as defined by the Concession Agreement) subject to a minimum annual royalty of 625,000 dollars. There were also other payments clauses that need not be detailed here.
Article 3(h) - the "Gold Clause" - provided that
"Any obligation hereunder to pay a specified sum in United States Dollars shall be discharged by the payment of a sum in United States Dollars equal to the official United States Government purchase price in force at the date of payment for such quantity of gold, of the standard and fineness prevailing at the date of the signature hereof, as such specified sum would have been sufficient to purchase at the date of signature of this Agreement at the official United States Government price then in force. The principle underlying this paragraph is that the present value of the United States Dollar shall be maintained throughout the term of this Agreement".
By Article 11 it was provided that the Ruler would have the right to put an end to the Concession before the expiry of the covenanted term of 60 years in any of three specified cases, viz. (a) failure by the Company to perform its obligations under Article 2 (vide supra)"in respect of geological or geophysical exploration or drilling"; (b) failure by the Company to make any of the payments due under Article 3; and (c)"if the Company shall be in default under the arbitration provisions of Article 18" (vide infra).
By Article 13 it was provided that, at the end of the Concession,
"... all the movable and immovable property of the Company in the State of Kuwait and said Neutral Zone shall be handed over to the Shaikh free of cost. Producing wells or borings at the time of such expiry shall be handed over in reasonably good order and repair".
Article 17 provided that
"The Shaikh shall not by general or special legislation or by administrative measures or by any other act whatever annul this Agreement except as provided in article 11. No alteration shall be made in the terms of this Agreement by either the Shaikh or the Company except in the event of the Shaikh and the Company jointly agreeing that it is desirable in the interest of both parties to make certain alterations, deletions or additions to this Agreement".
Finally, Article 18 contained provisions for the reference to arbitration of "any difference or dispute... between the Parties... concerning the interpretation or execution hereof, or anything herein contained or in connection herewith, or the rights or liabilities of either Party hereunder".
Article 6 (2) provided that
"No moneys paid by the Company to the Ruler under this Agreement shall, except in the case of an error in accounting, be returnable in any circumstance whatever".
" (B) Save as aforesaid this Agreement shall not be terminated before the expiration of the period specified in article 1 hereof except by surrender as provided in article 12 or if the Company shall be in default under the arbitration provisions of article 18.
(C) In any of the above mentioned cases the Ruler shall be entitled to terminate this Agreement without prejudice to any antecedent rights hereunder and the Company shall at that time transfer to the Ruler all its movable and immovable property within the State of Kuwait and the Concession Area to the extent that such property is directly employed in operations hereunder together with all such rights as it may have to the use of property so employed so far as such rights are transferable to whomsoever belonging, which are at that time enjoyed by it provided that the Ruler assumes from the date of transfer all the obligations devolving upon the Company in respect of its enjoyment of the said rights".
"If, as a result of changes in the terms of concessions now in existence or as a result of the terms of concessions granted hereafter, an increase in benefits to Governments in the Middle East should come generally to be received by them, the Company shall consult with the Ruler whether in the light of all relevant circumstances, including the conditions in which operations are carried out, and taking into account all payments made, any alterations in the terms of the agreements between the Ruler and the Company would be equitable to the parties".
The great number of wells, requiring extensive gathering facilities, was also one of the factors of high cost. The marketing of such a crude oil and its product was difficult.
"Private ownership is safeguarded. No person shall be prevented from disposing of his property save within the limits of the Law; and no person shall suffer expropriation save for the public benefit in the cases determined and in the manner prescribed by Law provided that he be equitably compensated therefor."
By Article 21 of the Constitution : "All of the natural wealth and resources are the property of the State."
Finally by Article 152 :
"Any concession for the exploitation of a natural resource or of a public utility shall be granted only by Law and for a determinate period."
"Aminoil believes... its basic relationship with the Government should change and that under the new relationship Aminoil should become a contractor, with the Government becoming the owner of all the Kuwait assets of the Company". - (GCM App. VI.3)
(1) an increase in the tax rate applicable to the Company's net income, from 57% to 80%, and
(2) an increase in the rate of computation or "make-up" payments, from 57% to 80%, both as of January 1, 1973 ;
(3) the expensing of royalties ;
(4) acceleration of payment of income tax and "make-up" payments (thereby reducing the 'lag' between operations and tax payments from about twelve months to about two and a half months) ;
(5) application to the Company of the Teheran Agreement, as supplemented by the two Geneva Agreements (Article 2(1)).
(a) the following paragraph was substituted for Article 2(C) of the Principal Agreement :
"(C) The Company shall at all times conduct its operations in the Concession Area in a proper and workmanlike manner and by appropriate scientific methods in accordance with good oilfield practice and shall take all reasonable measures to prevent fire and to prevent the ingress of water into petroleum-bearing strata and to prevent the pollution of the sea and shall close all unproductive holes drilled by it and subsequently abandoned. The Company shall keep the Appropriate Authority fully informed as to the progress and the results of its operations but such information shall be treated as confidential by the Appropriate Authority save insofar as it is required for the purpose of settling a dispute between the parties hereto."
(b) The above mentioned gold clause (Article 3(h) of 1948 - see paragraph (xxiv) supra) was deleted (Article 7, First Annex, First Part).
(c) The Government undertook to enact a new tax law in Kuwait, which the Company had requested in order to be able to claim double taxation immunity in the United States.
(d) The Draft Agreement also provided that
"Any future discussions between the Government and the Company regarding concession provisions will take into consideration that the Company should not be denied a reasonable opportunity of earning a reasonable rate of return (having regard to the risks involved) on the total capital employed in its business attributable to Kuwait." (First Annex, Second Part, V)
(e) A choice-of-law clause was introduced
(First Annex, Second Part, XIII) and a new arbitration clause was inserted (First Annex, Second Part, XIV).
"The Company will make payment of obligations arising under the 1973 agreement and the Kuwait (Specified Territory) Income Tax Decree n° 23 of 1961 with the amendments in the proposed 1974 Income Tax law in the same manner as if the 1973 agreement was effective on the date the Minister of Finance and Oil signs this letter and the proposed 1974 Income Tax law had come into force on that date and will treat all of the terms and provisions of such agreement as being effective on that date.
It is our understanding that the 1973 Agreement will be signed as soon as the final documents can be prepared, and that you will then take appropriate steps to obtain due ratification thereof." (AM Vol. VIII, Exh. 29)
"We also reconfirm our verbal advice given to you some time ago that effective 1st November 1974, royalty rate is twenty per cent of posted prices and applicable rate for oil income ---- is eighty-five percent generally applied since then in Gulf area" (AM Vol. VIII, Exh. 39).
In acknowledging this the Company denied having received advice from the Government "either verbal or written" of the new terms, and indicated that application of such terms would put it at a loss on every barrel produced. The Company then requested a formal discussion of the matter (AM Vol. VIII, Exh. 40).
" Article 1
The Concession granted to the American Independent Oil Company in accordance with the afore-mentioned Agreement dated 28 June 1948 shall be terminated.
All the interests, funds, assets, facilities and operations of the Company, including the refinery and other installations relating to the afore-mentioned Concession, shall revert to the State.
A committee named the Compensation Committee shall be set up by a decision of the Minister of Oil whose task it will be to assess the fair compensation due to the Company as well as the Company's outstanding obligations to the State or other parties. It shall decide what each party owes the other in accordance with this assessment.
The State or the Company shall pay what the Committee decides within one month of being notified of the Committee's decision.
A committee shall be set up by a decision of the Minister of Oil to make an inventory of the assets, funds and facilities which have reverted to the State in accordance with this Law. This inventory shall be turned over to the Executive Committee." (AM Vol. VII, Exh. 3; GM App. II.8).
Respecting the law applicable to the substantive issues in the dispute, which is what is really at stake between the Parties regarding the applicable law, the question is equally simple in the present case. It can hardly be contested but that the law of Kuwait applies to many matters over which it is the law most directly involved. But this conclusion, based on good sense as well as law, does not carry any all-embracing consequences with it, - and this for two reasons. The first is that Kuwait law is a highly evolved system as to which the Government has been at pains to stress that "established public international law is necessarily a part of the law of Kuwait" (GCM paragraph 3.97(5)). In their turn the general principles of law are part of public international law - (Article 38.1(c) of the Statute of the International Court of Justice), - and that this specifically applies to Kuwait oil concessions, duly results from the clauses included in these. For instance, in the 1973 Agreement between the Parties, First Annex, Second Part, XII (GM App. I.9) the following provision is to be found (punctuation of second sentence added) :
"The parties base their relations with regard to the agreements between them on the principle of goodwill and good faith. Taking account of the different nationalities of the parties, the agreements between them shall be given effect, and must be interpreted and applied, in conformity with principles common to the laws of Kuwait and of the State of New York, United States of America, and in the absence of such common principles, then in conformity with the principles of law normally recognized by civilized states in general, including those which have been applied by international tribunals".
Although the Parties did not, in the course of the present arbitral proceedings, make any reference to this particular text, it is of all the more interest to note that the ideas it embodies are no isolated features of Kuwait practice.
"The law governing the substantive issues between the Parties shall be determined by the Tribunal, having regard to the quality of the Parties, the transnational character of their relations and the principles of law and practice prevailing in the modern world."
Although it may in theory be possible for a litigation to be governed by an assemblage of rules different from that which, before the Arbitration, governed the situations and matters that are the object of the litigation, there must be a presumption that this is not the case. Thus, to the extent that Article III,2 of the Arbitration Agreement calls for interpretation, such an interpretation ought to be based on that provision which not only was freely chosen by the Parties in 1973 (see paragraph 6 supra), but also reflects the spirit which has underlain the carrying on of the oil concessions in Kuwait.
(A) - The meaning of Article 9 of the Supplemental (Concession) Agreement of 1961, which has been the vehicle of numerous modifications made to the Concession.
(B) - The legal signification of certain other agreements - in particular the one known as the"1973 Agreement".
(C) - The application of the "Abu Dhabi Formula" - (see Section II, paragraphs (liii) and (liv) above) - and the negotiations of 1976-77 in that connection.
"If, as a result of changes in the terms of concessions now in existence or as a result of the terms of concessions granted hereafter, an increase in benefits to Governments in the Middle East should come generally to be received by them, the Company shall consult with the Ruler whether in the light of all relevant circumstances, including the conditions in which operations are carried out and taking into account all payments made, any alterations in the terms of the agreements between the Ruler and the Company would be equitable to the Parties".
This text, it should be noted, received a kind of application even before it was drafted, for it was a generalization of the 50/50 sharing of profits formula which led both to a revision of the financial terms of the Concession in 1961, and at the same time -by means of Article 9 - to giving expression to the principles on which that revision was itself founded.
"It is understood that the word "benefits" includes arrangements not involving payments".
"We accept the 1973 Agreement as drafted in July of this year with the language changes agreed at the afore-mentioned meetings and with the following amendments requested by the Ministry..."
By these words the Company seems definitely to have accepted the July 1973 Agreement. The Letter continued :
"The Company will make payment of obligations arising under the 1973 agreement and the Kuwait (Specified Territory) Income Tax Decree n° 23 of 1961 with the amendments in the proposed 1974 Income Tax law in the same manner as if the 1973 agreement was effective on the date the Minister of Finance and Oil signs this letter and the proposed 1974 Income Tax law had come into force on that date and will treat all of the terms and provisions of such agreement as being effective on that date.
It is our understanding that the 1973 Agreement will be signed as soon as the final documents can be prepared, and that you will then take appropriate steps to obtain due ratification thereof.
We shall be obliged if you will signify your agreement with the foregoing amendments and procedures by signing and returning the accompanying copy of this letter (AM Vol. VIII, Exh. 29)."
"The Conference... decided to adopt a new pricing system based on the financial effect of the decision taken on the 10th and 11th November, 1974, in Abu Dhabi. In accordance with this decision the average Government take from the operating oil companies will be $10.12 per barrel for the marker crude."
In point of fact this decision had a revolutionary effect, not only on prices but on the very nature of the concessions. It embodied the notion that the revenues left to the Companies would be pre-determined on a fixed (package) basis of 22 cents per barrel of the product of reference - "marker crude" - thereby transforming the concessions de facto into service contracts. Equally, the system was based on a pre-determined estimate of costs, fixed at 0.12 cents a barrel, which could at a pinch be regarded as an acceptable mean for the case of "normal" oil deposits (taking account also of the other advantages which the major Companies had in respect of certain categories of products), but had no relation to the net costs of the products of Aminoil's Concession.
(i) Did the two Parties respect the letter and spirit of Article 9 in these negotiations ? If in fact either Party was in default under that head, this would have important consequences for the ensuing responsibility thereby incurred,
(ii) Do the negotiations throw light on the situation of the Parties in regard to their contractual relations generally ?
(iii) Do the negotiations enable the situation of the Parties concerning the application of the Abu Dhabi Formula to be precisely defined ?
"We recognize the Government's concern that the royalty rate, oil profit rate and crude postings applied to Aminoil be consistent with those used in other OPEC countries and we have no objection to adopting Abu Dhabi terms provided that our product reference prices are modified as discussed below".
But in spite of this statement the real negotiations were not to start until 1977, and in a very different style from those of 1976. At once, a speeding-up of the exchanges is to be noticed. On 27 March, 1977, the Government had appointed a "Negotiating Committee", giving it 45 days in which to finish. Meetings were held on 21, 23 and 24 April, and on 7, 8, 9 and 10 May; and then, on the basis of new offers from Aminoil, meetings took place on 27, 28 and 29 June and again on 25 and 26 July.
(i) A scrutiny of the negotiations fails to reveal any conduct on either side that would constitute a shortcoming in respect of Article 9 of the 1961 Supplemental Agreement, or of the general principles that ought to be observed in carrying out an obligation to negotiate, - that is to say, good faith as properly to be understood; sustained upkeep of the negotiations over a period appropriate to the circumstances; awareness of the interests of the other party; and a persevering quest for an acceptable compromise. The Tribunal here makes reference in particular to the well known dicta in the North Sea Continental Shelf and Lac de Lanoux cases.
(ii) With constancy, Aminoil kept to the line which it always followed throughout the difficulties arising from Article 9, and experienced in the course of operating, namely - (regarding its contractual position with the Government) - to maintain for itself, as far as circumstances permitted, the essential features of a contract of concession, while being willing to confine its profits within the limits of a "reasonable return" so that when, confidentially, but at a high level, the possibility was mooted of turning the contract of concession into a contract of service, the Company's representative stated on 5 April, 1976 that he preferred "to continue for several years under the present arrangements with modifications in the level of payments (AR Vol. V, Exh. 14).
(iii) The Company recognized that there was occasion to apply Article 9, and the Government was at one with the Company in recognizing that there was nothing automatic about the application of the Abu Dhabi Formula, and that a reasonable rate of return must remain available for the Company. It also appeared, according to the position taken up by the Company, that in applying the Abu Dhabi Formula, the question of assessing a reasonable rate of return could have a certain connection with that of the indemnification of the Company, should the possibility of terminating the Concession be simultaneously raised.
"... it must be doubted whether this Tribunal is competent to prescribe for the Parties the terms of an agreement which they could not make for themselves. The equitable revision of the terms of an agreement is not a function which a tribunal will normally undertake unless the intent of the Parties to confer such an extended competence upon it is clearly expressed."
In its Reply (GR paragraphs 3,105 and 3,106) the Government observed that
"In the present arbitration, however, the Government is not asking the Tribunal to make a new contract. There is no need to do so. The Government is asking the Tribunal to determine "the amount payable to the Government... in respect of royalties, taxes or other obligations of the Company" (see Article III, 1 (iii) of the Arbitration Agreement).
The reference to the "other obligations of the Company" in the Arbitration Agreement is plainly a reference to such legal obligations as Aminoil owed to the Government, including its obligation to implement the Abu Dhabi Formula. Accordingly, the Tribunal has jurisdiction to determine, first, whether Aminoil was under any obligation to implement the Abu Dhabi Formula and, secondly, if it was, how much it should nay to the Government under that Formula, either as royalties and taxes, or as damages for breach of the obligation".
In the course of the Oral Hearings the representatives of Aminoil made the following statements (Day 10,pp. 26, paragraph: H, 27, paragraphs A, B, C, 47, paragraph F and 48 paragraph A)
"I want to make clear that Mr. Redfern's version of the Company's position on this point is unfounded. It goes back to statements in Aminoil's Counter-Memorial, which were replying to proposals in the Government's Memorial, that this Tribunal should determine (Government Memorial, para. 4.17): "What can be considered 'equitable to the parties' on the basis of the Abu Dhabi formula". In its Reply at that time (Amin-oil Counter-Memorial 282). Aminoil questioned whether it would be proper for this Tribunal to make such a determination on an "equitable basis" and on the basis of the formula. The reason was that the Tribunal was directed to decide according to law, and that the application of the formula was in itself an issue in the Arbitration.
Aminoil, in no way then or now, intended to suggest that the Tribunal was not fully competent to decide, in accordance with the Arbitration Agreement, and on the basis of law, on the amounts which may be payable by either party to the other"................
"... the Parties did not reach a mutual agreement as envisaged by Article 9. Since they did not do so, there was no amendment whatever to the terms between them which existed at the time. The current arrangements stood. Therefore, no payment of any kind, or in any amount, is due by Aminoil to the Government by means of their failure to agree on an equitable application of the Abu Dhabi terms or otherwise and that is very fundamental.
I close my rebuttal by completing Mr. Redfern's reference to Article 3(1) of the Arbitration Agreement. The Tribunal will recall that that Article provides that the Tribunal shall decide according to law."
"It does not appear from the context of the judgement that the Tribunal thereby intended to depart from principles of law. The different intention was to say that, as the precise determination of the actual amount to be awarded could not be based on any specific rule of law, the tribunal fixed what the Court, in other circumstances, has described as the true measure of compensation and the reasonable figure of such compensation (Corfu Channel Case, Judgement of December 15th 1949, I.C.J. Reports 1949 p. 249)."
As was declared even more forthrightly by the same Court in the case already cited above of the North Sea Continental Shelf, paragraph 85 :
"... in short, it is not a question of applying equity simply as a matter of abstract justice, but of applying a rule of law which itself requires the application of equitable principles....."
(1) - In the course of these negotiations, both Parties observed the obligations incumbent on them as well in regard to Article 9 as to the general principles of law.
(2) - The requisite conditions for the application of Article 9 in respect of the Abu Dhabi Formula were present, and this was recognized by both Parties. From this it follows that in principle something is owing by Aminoil to the Government on Abu Dhabi account.
(3) - The total due must consist of the sum of the profits received by the Company in excess of what would have constituted a reasonable rate of return, after taking account of its operating conditions, - such a rate of return having always been the basis of its position and legitimate expectations at this time.
(4) - Within the framework of a general settlement of the consequences of the cancelling of Aminoil's Concession, which is the object of the special Arbitration Agreement concluded by the Parties, the Tribunal has jurisdiction to determine the amount due.
(1) No failure on the part of the Company can be alleged in determining the validity of the Decree Law. At the start of the written proceedings, the Government of Kuwait seemed to attach much importance to two aspects of the Company's behaviour that might be regarded as inconsistent with its contractual undertakings: to begin with the Company was said not to have conformed to its obligations under Article 9, - and, furthermore, not to have paid due regard to its obligations concerning "good oil-field practice" a matter that will be gone into later (see Section VI (B)). These two alleged shortcomings were said to be at the root of the Decree Law. Later, and in particular during the oral proceedings, this attitude was modified, and the Government put forward arguments directed to establishing the validity of the Decree Law without calling in question the Company's conduct.
(2) As regards the problem of non-conformity with Article 9, the Tribunal has already analysed that provision (Section IV(C)) and indicated the conditioned and limited obligation it created. It considers that the negotiations held in 1976 and 1977 do not reveal any bad faith on the part of the Company, which sought consistently and with flexibility for the means that might lead to an agreement, so that no complaint can be made against it on that score.
(3) With reference to the complaint of "bad oil-field practice", it was recognised that this had not been formulated at any time prior to Decree Law n° 124. It follows that it cannot in any way be taken into account for the purpose of determining the validity of that Decree. The Government's claim under this head raises a different issue -dealt with in Section VI (B) below.
(4) Another observation of a fundamental kind must be made about the characterisation to be given to Decree Law n° 124. The operation brought about by the Decree Law had a double aspect : it constituted at one and the same time the termination of a contract, and also a nationalisation. Indeed the two are linked. However, the arguments of the Parties distinguished, and to a certain extent contrasted, these two aspects. For Aminoil the nationalisation was carried out only in order to resolve a difference of view between the Parties arising in a contractual setting and falling to be resolved within that setting by the prescribed methods. On behalf of the Government it was maintained after a certain amount of hesitation that the essential character of the Decree was to put into execution an act of nationalisation even if this simultaneously terminated a contractual situation that could not go on indefinitely.
(A) Would Decree Law n° 124 have been legitimate if no account were taken of the lack of success of the negotiations for the revision of the agreements relating to the Concession ?
(B) Supposing Decree Law n° 124 to have been legitimate on the basis of question (A), would it remain so having regard to the fact that it occurred at the very time when a difficult negotiation between the Parties was still in progress ?
(C) Should there have been recourse to arbitration before Decree Law n° 124 was issued ?
"AOC's high-cost off-shore production operations are such as to give it a special position which requires a high degree of expertise. At the same time, it is working within the framework of a concession granted by both Kuwait and Saudi Arabia, so its position is completely different. Any modification of the concession must be agreed to by both countries." (AM Vol. VII, Exh. 3)
"The period of this Agreement shall be sixty (60) years from the date of signature... "
Article 17 of 1948 provided as follows :
"The Shaikh shall not by general or special legislation or by administrative measures or by any other act whatever annul this Agreement except as provided in Article 11. No alteration shall be made in the terms of this Agreement by either the Shaikh or the Company except in the event of the Shaikh and the Company jointly agreeing that it is desirable in the interest of both parties to make certain alterations, deletions or additions to this Agreement."
Finally, Article 7(g) of the Supplemental Agreement of 1961 provided for the deletion of Article 11 of 1948 and the substitution for it of a new Article 11. This new version, after indicating in a first paragraph (A) certain events (not here relevant) in which the Ruler of Kuwait would he entitled to terminate the Concession, went on in a second paragraph (B) to state
"(B) Save as aforesaid this Agreement shall not be terminated before the expiration of the period specified in Article 1 thereof except by surrender as provided in Article 12 or if the Company shall be in default under the arbitration provisions of Article 18."
These clauses combined, but especially Article 17, constituted what are sometimes called the "stabilisation" clauses of the contract. A straightforward and direct reading of them can lead to the conclusion that they prohibit any nationalisation. Such is the view maintained by the Company. The Government of Kuwait on the other hand, in a series of arguments the merits of which the Tribunal must now consider, maintained that, on the contrary, these clauses did not prevent a nationalisation.
Firstly, the more radical one consists in affirming that these clauses do no more than embody general principles of contract law, and that in consequence the legal regime of the Concession is the same as that of any contract, and that these clauses add nothing to what would in any event be the legal position. This argument cannot be accepted, for it is a well-known principle of the interpretation of contractual undertakings (and indeed of all juridical instruments) that the interpretation to be adopted must be such as will give each clause a worth-while meaning or object. In the present case, as Aminoil has pointed out, that object resides precisely in the fact that one of the Parties, being a State, had available to it all the powers of a public Authority and, by using them, could take those steps against which it was the very object of these clauses to protect the concessionaire.
Secondly, according to an initial Government contention, these provisions had a "colonial" character and were imposed upon Kuwait at a time when that State was still under British protectorate, and not in possession of its full sovereign powers. On this basis the stabilisation clauses were devoid of value. However, quite apart from any attempt to enquire into the factual circumstances in which these clauses were adopted, this contention cannot be upheld, for they were expressly confirmed on the occasion of the 1961 revision of the Concession after the attainment of complete independence by Kuwait, and again in 1973 when the text of the"1973 Agreement" was put into operation.
(i) - The public Authority can require a variation in the extent of the other party's liabilities (services, payments) under the contract. This must not however go so far as to distort (unbalance) the contract; and the State can never modify the financial clauses of the contract, - nor, in particular, disturb the general equilibrium of the rights and obligations of the parties that constitute what is sometimes known as the contract's "financial equation". This characteristic is also to be found in certain ordinary private law contracts, and respect for the equilibrium of reciprocal undertakings is a fundamental principle of the law; of contracts. But in the present case it has to be realized that the main difficulties that arise are not about respect for the financial equation that reflects the contractual equilibrium, but about the method of applying Article 9, - that is to say not over respect for the original equilibrium, but over the search for a new, equitable, equilibrium.
(ii) - The public authority may proceed to a more radical step in regard to the contract, namely to put an end to it when essential necessities concerning the functioning of the State (operation of public services) are involved, It is with this second aspect of the notion of an administrative contract that the present case could in theory be concerned. Yet even if Aminoil's Concession belonged to this category of contract, it would still be necessary that exigencies connected with essential State functioning should be such as to justify Decree Law n° 124.
"We have spent considerable time assessing and reviewing the various figures produced and in particular the liabilities referred to in the report of the Inventory Committee appointed by the Government. We have not been able to verify or reconcile completely all the various figures produced, but we have been able to reach broad agreement. The areas of difference between us are mostly of an immaterial amount or are differences concerning the basis of valuation. We consider that, in view of the amounts involved and of the nature of the differences between us, no point would be served in attempting* to arrive at a closer agreement."
Accordingly, the Tribunal has gone by the figures of this Joint Report, adopting their mean where they differ.
Before going into this question as a matter of law, the Tribunal will make certain general observations.
"Nationalisation, expropriation or requisitioning shall be based on grounds or reasons of public utility, security or the national interest which are recognised as overriding purely individual or private interests, both domestic and foreign. In such cases the owner shall be paid appropriate compensation, in accordance with the rules in force in the State taking such measures in the exercise of its sovereignty and in accordance with international law."
This text which obtained a unanimous vote in the
General Assembly, codifies positive principles, recognised by the Constitution and Law of Kuwait, that have not been contested in the present proceedings. It calls for a concrete interpretation of the term "appropriate compensation". Other disputes have long since turned upon different terms such as "fair", "just", "equitable", not to speak of "adequate", "effective", "prompt", etc. There are indeed, several tendencies, all appealing to the same principle, one of which however reduces compensation almost to the status of a symbol, and the other of which assimilates the compensation due for a legitimate take-over to that due in respect of an illegitimate one. These tendencies were in mutual opposition in the United Nations when the Resolutions following n° 1803 were voted, none of which obtained unanimous acceptance, and some of which, such as the Charter of the Economic Rights and Duties of States, have been the subject of divergent interpretations.
(i) - a method based on the sum total of the anticipated profits, reckoned to the natural termination of the Concession, but discounted at an annual rate of interest in order to express that total in terms of its "present value" on the day when the indemnification is due; and without taking account of the value of the assets that would have been transferred to the concessionary Authority, "free of cost", upon that termination;
(ii) - a method whereby total anticipated profits are counted and discounted in the same way over a limited period of years only, but taking countervailing account of the value of the assets (for this, Aminoil furnished examples of results calculated over ten year periods).
(a) - First,in respect of the foundation for the calculation of anticipated profits, which Aminoil takes as being exclusively the financial arrangements of 1961, the Tribunal has already found in Section IV above, both that the 1973 Agreements were valid, and that something is owing to the Government on Abu Dhabi account. Not only is no refund due of moneys paid to the Government under the 1973 arrangements, but the latter are also a component of the present "legitimate expectations" of the Company. Even more pertinent, the negotiations between the Parties about the application of the Abu Dhabi Formula involved a recognition of the principle of a monetary obligation to the Government, and of a modification for the future of the financial relations of the Parties. It is therefore on a combination of these data not on those of 1961, that the indemnification of the Company must be proceeded to.
(b) - Next - and this constitutes the second aspect of the difference between the Tribunal's and Aminoil's positions - the Tribunal cannot accept the projections as to the future of the petroleum industry based on the consultations of experts that the Company has relied upon. These have been criticized by the Government. If, however, the Tribunal does not accept them, this is not because they include speculative elements, since all methods of assessment, whatever they may be, will do that. It is because the Tribunal thinks that in the present case, as will be shown later, the Parties adopted a different conception in the course of their relations and negotiations, - namely that of the reasonable rate of return. This it is, therefore, that must guide the Tribunal.
As regards reasons of fact - it must be noticed that the overall results of negotiations about compensation are, more often than not, complex. They do not simply comprise the payment of an indemnity but also include bilateral arrangements of every kind - contracts of service, long term supply, contracts covering particular benefits, etc. Such contracts have not all been made public, and even the amounts of compensation paid and the method of computing them are not always known with certainty. What is certain is that in addition to the compensation, a preferential relationship was often instituted or maintained between the State and the foreign entity concerned (whereas in the case of Aminoil all relations were severed). It would be difficult to express in figures the value in terms of money of these preferential arrangements; for the advantages they bring depend on the structuring and policy of the former concessionaire Company. What can be affirmed is that the advantages for major integrated-concerns are often considerable. But even if such relations had been maintained for the benefit of Aminoil, their value could not have been the same because of the modest dimensions of that undertaking, not similarly integrated economically. At the most, it might be possible to go so far as to say that certain large transnational groups may have preferred compensation that had no relation to the value of their undertaking, if it was coupled with the preservation of good relations with the public authorities of the nationalising State with, possibly, resulting prospects for the future giving promise of greater worth than the compensation forgone.
(i) If reliance is to be placed on the precedents just mentioned - and always supposing them to be conclusive about the order of size of the indemnity (which, as has been seen, they are not) -it would still be necessary for them to constitute an expression of the opinio juris - (North Sea Continental Shelf case, I.C.J. Reports 1969, p. 45, paragraph 77). But, as it happens, the conditions in which these compensation agreements were concluded were peculiar, and the documentation submitted to the Tribunal brings out certain relevant aspects of the matter. These are : the circumstances in consequence of which the concerted petroleum policy of OPEC as from 1973 had to be taken into account ; the progressive character of the steps taken; the crucial preoccupations of concessionaire Companies to ensure the continued supply of petroleum products to consumers; and the passivity of the importing States. All this led the major transnational Companies to accept de facto what the exporting countries demanded. It can be maintained that such acceptance was wise -but it would be somewhat rash to suggest that it had been inspired by juridical considerations: the opinio juris seems a stranger to consents of that type.
(ii) Such consents were given under the pressure of very strong economic and political constraints; and in connexion with the consents given by Aminoil, the Tribunal has already considered whether these constitute a case of "duress", leading to invalidation, and has given a negative answer. Speaking generally, it can be held that the consents given in the course of this period were not obtained by means amounting to duress, and they were valid and final. But the economic pressures that lay at the root of them had nothing to do with law, and do not enable them to be regarded as components of the formation of a general legal rule. A juridical entity has the faculty, even in the case of pressure exercised through economic constraints, to handle its own business affairs in such a way as to produce concrete valid results; but it cannot be claimed that such dealing is apposite for generating general rules of law applicable in other cases too.
"Any future discussions between the Government and the Company regarding concession provisions will take into consideration that the Company should not be denied a reasonable opportunity of earning a reasonable rate of return (having regard to the risks involved) on the total capital employed in its business attributable to Kuwait."
(i) - Assuming that a normal level of profits has been determined having regard to the total capital invested, it would be ordinary business practice in the case of a concession intended to last, to add a reasonable profit margin that would preserve incentives, and allow for risks whether commercial or technological. But this necessity disappears when it is a question of deciding on the amount of compensation due for a concession that has already been terminated, - for in that event the risk (for the concessionaire) has ex hypothesi vanished.
(ii) - As regards a Concession which provides that, ultimately, all the installations and assets are to be handed over to the concessionary Authority "free of cost", it would be normal that at least a part of necessary current investment should be effected out of profits. Such was the position -fair in principle - of Aminoil at the start of the 1976 negotiations, and that was why, for the Company, the reasonable return of which it was claiming the benefit had to include an amount for operations that would ordinarily prove indispensable. But again, this point has not much relevance when the Concession has come to an end.
(iii) — A third point is that in the present case the reasonable rate of return has to be determined for two distinct purposes. First, in connection with the Abu Dhabi Formula, over the period stretching from 1 January, 1975 to 19 September, 1977, - this is a period for which the profits of Aminoil's undertaking are known, and in respect of which, it is not necessary to provide for the financing of works that were never carried out, or for what would constitute an incentive for further development. Secondly, the reasonable rate of return, assessed on a somewhat more liberal scale, constitutes one of the elements of compensation.
"The Tribunal takes note of the mutual intention of the Parties to direct their respective accountants to produce, if possible, a joint report on questions of quantum or, if this is not possible, to produce separate reports for the Tribunal before 1 November."
(1) Under the 1973 Agreement, Aminoil still owed, on 19 September, 1977, and amount as to which there is a slight difference of view between the two sets of accountants, - $33,210,000 as against $31,247,000. Taking the mean between these two figures gives $32,228,500. No difficulty of interest on this amount, nor of inflation, arises, since it is basically founded on the price of petrol, and only becomes payable after 19 September, 1977.
(2) the Application of the Abu Dhabi Formula, resulting from the decisions collectively taken in mid-December 1974, does not have to be contemplated until, at the earliest, January 1975. Here, a balanced appraisal of the circumstances leads the Tribunal to fix $10 million as a reasonable rate of return for Aminoil given the fact that the important works which were to have been carried out by the Company in the near future, and, financed, at least partly, out of the profits of the undertaking, ceased to be a charge on it. This total (of 10 million), valid for the year 1975, must be increased by 10% per annum to take account of inflation; but, allowing this return for only 261 out of 365 days in 1977, the amount for that year is $8,652,000 - say $29,652,000 for the three years 1975-77 inclusive. This sum is deductible against the total profits going to Aminoil in those three years. As to these, the Joint Report of the accountants gives two fairly close figures, of which the Tribunal has taken the mean - say $101,615,000. Deducting from this the above mentioned $29,652,000, an amount of $71,963,000 is shown as due from Aminoil under the Abu Dhabi Formula. For this total, inflation does not have to be allowed for, since this is already reflected in the price of oil. Nor does it call for the allowance of interest, if the late date of the opening of the negotiations proper is borne in mind, together with the practice of the Government of Kuwait of not requiring payment of interest in cases of this kind - see the evidence of Dr. Nurredin Farrag (GCM App. II.V, p. 12).
(3) Finally, with reference to the liabilities of Aminoil to third parties, discharged by the Government, the two Parties being in agreement about the principle, the figures given in the accountants' Joint Report ($19,114,000 and $18,585,000) will be taken at their mean by the Tribunal - say $18,849,500.
THE TRIBUNAL, unanimously, having regard to all of the above mentioned considerations,
AWARDS to Aminoil,
THE SUM OF ONE HUNDRED AND SEVENTY NINE MILLION, SEVEN HUNDRED AND FIFTY THOUSAND, SEVEN HUNDRED AND SIXTY FOUR UNITED STATES DOLLARS ($179,750,764) calculated on the basis of being payable on 1 July, 1982.
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