KUWAIT VS.

AMINOIL
66 ILR 518
Facts:
On 28 June 1948 His Highness Shaikh Ahmed Al Jabir al Sabah, Ruler of Kuwait from
1921 until 1950, granted American Independent Oil Company Aminoil, a concession to exploit
the oil reserves in the then so-called "Neutral Zone" a buffer strip between Kuwait and the
Kingdom of Saudi Arabia. The concession was secured upon an immediate down payment by
Aminoil of US $625,000. Aminoil then began drilling operations. More importantly the
Concession agreement contained a stabilization clause which 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 or agreed in the agreement.
Aminoil had sole control over the quantities of production and the prices at which
products were sold. The terms of the concession, based on a fixed payment per ton granted in
return for a 60-year exclusive right to exploit Kuwait's oil resources within the relevant area
(until 2008, when all assets were to be transferred to the Shaikh "free of cost").
On 1961 Kuwait gained independence from Great Britain and in consonance with the
general sentiment of the Arab Nations in nationalizing their oil industry, it entered into a
Supplemental Concession Agreement (1961 agreement) of 50/50 profit sharing in oil
concessions and 50per cent business taxes. Further negotiations in the early 1970s led to a
1973 Draft Agreement designed to take account of changes in the global oil market. The 1973
Draft Agreement was subject to ratification by the Kuwaiti parliament, but this never occurred
Nonetheless the Tribunal held that the 1973 Agreement was binding on the parties on an
"interim basis" because in December 1973 Aminoil undertook by letter to act "as if the 1973
Agreement was effective", and it made payments and conducted its subsequent operations on
that basis. Nevertheless, negotiations between the two parties broke down in 1977 and Kuwait
passed Decree Law No 124, article 1of which provided that Ammoil's concession "shall be
terminated ', and that All the interests, funds, assets, facilities and operations of the Company,
including the refinery and other installations relating to the aforementioned Concession, shall
revert to the State. Aminoil commenced arbitration proceedings in London, relying on Article 18
of the 1948 Concession which contained an arbitration agreement but Kuwait refused to
participate in the arbitration on the ground that the 1948 Concession had effectively been
superseded by the subsequent 1961 and 1973 Agreements.

Prepared by Jamalodin G. Gote

Issues:
1. What law should govern the arbitration proceedings?
2. Whether or not National Decree no. 124 constituted a breach of contract on the part of
Kuwaiti Government in light of the stabilization clause contained in said contract and in
violation of the customary international law of pacta sunt servanda and is therefore an
unlawful expropriation?
Ruling of the Tribunal:
1. While the arbitration agreement did not choose a national law to govern the
proceedings, it nevertheless authorized the tribunal to have freedom in determining
the applicable law in accordance with the transnational character of their relations
and the principles of law and practice prevailing in the modern world. In so doing the
Tribunal referred first to the law of Kuwait as the "law most directly involved" in
accordance with the traditional respect due to the state party to a state contract,
subject to the proviso that "this conclusion does not carry any all-embracing
consequences with it" because, as the Government had stressed, public
international law formed a constituent part of Kuwaiti law.
2. No. It is not. Kuwait was more successful with its contention that changes in the
political and economic landscape had transformed the nature of the concession. The
Government submitted that this was not a case of a supervening fundamental
change of circumstances (rebus sic stanhbus), but rather a process of change
brought about by mutual agreement or acquiescence. General changes in the
regime applicable to the concession, paralleling the "profound and general
transformation in the terms of oil concessions that occurred in the Middle-East" were
incorporated into. The Tribunal held that the Concession had become over time a
contract governed by a changed regime in which, as "in most legal systems, the
state while remaining bound to respect the contractual equilibrium, enjoys special
advantages" including ultimately, "the right to terminate it".

The balance of the

Concession had changed, so that "in 1977 the stabilization clauses did not prohibit a
non-confiscatory takeover" The Tribunal was influenced by UN General Assembly
("GA") Resolution 1803 that declared the "inalienable right of all States freely to
dispose of their natural wealth and resources in accordance with their national
interests " GA Resolution 1803 was considered an accurate reflection of customary
international law. Besides the Tribunal held that Aminoil impliedly acquiesced to the
expropriation as evidenced by its letter undertaking to act "as if the 1973 Agreement
was effective. Just compensation is also to be paid.

Prepared by Jamalodin G. Gote

SAPPHIRE INTERNATION PETROLEUMS LTD. Vs. National Iranian Oil Company

35 ILR 136
Facts:
In 1958, the National Iranian Oil Company (NIOC) and Sapphire Petroleums Ltd
(Sapphire), a Canadian company, entered into a contract to expand the production and
exportation of Iranian oil. The parties set up the Iranian Canada Oil Company (IRCAN) to carry
out the terms of the contract on behalf of the parties. Article 38 of the contract expressed an

intention to carry out the provisions of the contract according to the principles of good faith
and good will, and to respect the spirit as well as the letter of the contract.
The parties set up the Iranian Canada Oil Company (IRCAN), a joint stock company
and non-profit corporation, to carry out the operations under the contract on behalf of the two
parties (with respect to prospecting it would act as Sapphires agent only).
Sapphire International, Sapphires subsidiary to which the Sapphire assigned the
contract shortly after its conclusion, started works in the concession area and subsequently
claimed the reimbursement of it expenses through IRCAN, as agreed in the contract. However,
NIOC refused to reimburse the expenses arguing that Sapphire International had not consulted
NIOC before carrying out its operations. As a result, Sapphire International did not start drilling
in the concession area as planned, and NIOC subsequently repudiated the contract on the basis
that Sapphire International had not fulfilled its drilling obligations. In the subsequent months,
Sapphire International started work in the designated concession area and in May 1959, sent
two reports on the expenses incurred from the date of the contract until 31 March 1959. The
total amount of the expenses was $302,545.25. NIOC refused to refund the expenses on the
basis that it had not been consulted before the operations as required by the contract.
In July 1959, Sapphire International sent a letter to the Shah of Iran requesting a refund
of their losses. On 5 September 1959, the Prime Minister of Iran replied that Sapphire
International had not fulfilled its obligations and as a result NIOC were entitled to refuse the
refund. He referred Sapphire International to NIOC for the settlement of the dispute.
In September 1960, Sapphire initiated arbitration proceedings pursuant to the contract,
claiming the breach of contract and requesting compensation for expenses (incurred before and
after the conclusion of the contract), loss of profit and the refund the US$350,000 indemnity,
provided by Sapphire as a guarantee at the time of the contract conclusion, later cashed by
NIOC.

Prepared by Jamalodin G. Gote

Issues:
1. What law should govern the arbitration proceedings?
2. Basing on the facts and circumstances, which party is entitled to receive damages
for breach of contract by the other party? and what should be the extent of damages
to be awarded?
Ruling:
1. The arbitrator held that based on the intention of the parties and evidence found in
the contract, he would apply general principles of law. The arbitrator also declared
that he would not decide the cases according to equity, like an amiable
compositeur but would instead disentangle the rules of positive law, common to
civilised nations, such as are formulated in their statutes or are generally recognised
in practice. He reason reasoned that the characteristics of the contract were such
that they excluded the application of the traditional rules of private international law
and reduced the likelihood that Iranian law would be applied to the interpretation and
performance of the contract and basing on this, as further provided in the contract an
intention could be deduced specifically that the clause rejected the exclusive
application of Iranian law.
2. NIOC was the party in breach of the contract and as such Sapphire is entitled to
damages. The arbitrator was satisfied that the plaintiff had fulfilled its obligations

under the contract regarding the prospecting works at least until February 1960.
He also found that the defendant deliberately refused to carry out certain of its
obligations and that this failure was a breach of contract, or a violation of the rule
of international customary law of pacta sunt servanda , the basis of every
contractual relationship. The arbitrator also observed that there was a general
rule of private law that said the failure of one party to a synallagmatic contract( In
our civil law jurisdiction equivalent to bilateral contracts) to perform its obligations
releases the other party from its obligations and gives rise to a right to pecuniary
compensation in the form of damages. With regards to the extent of damages
recoverable by Sapphire, it was held, in accordance with the principle of ex
aequo et bono, that the compensation shall include the loss suffered (damnum
emergens), for example the expenses incurred in performing the contract, and
the profit lost (lucrum cessans), for example the net profit which the contract
would have produced. The arbitrator applied the general rule that the object of
damages is to place the party to whom they are awarded in the same pecuniary
position that they would have been in if the contract had been performed in the
manner provided for by the parties at the time of its conclusion.

Prepared by Jamalodin G. Gote