Cambridge University Press, British Institute of International and Comparative Law The International and Comparative Law Quarterly

British Institute of International and Comparative Law
Contracts between a State or a State Agency and a Foreign Company: Theory and Practice:
Choice of Law in a New Arbitration Case
Author(s): Jean-Flavien Lalive
Source: The International and Comparative Law Quarterly, Vol. 13, No. 3 (Jul., 1964), pp.
987-1021
Published by: Cambridge University Press on behalf of the British Institute of
International and Comparative Law
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CONTRACTS BETWEEN A STATE OR A
STATE AGENCY AND A FOREIGN COMPANY
THEORY AND PRACTICE:

CHOICE OF LAW IN A NEW ARBITRATION CASE
By
JEAN-FLAVIEN LALIVE *
I. IMPORTANCE AND NATURE OF " INTERNATIONAL CONTRACTS
MANY studies have been devoted in recent years to the question of

the so-called " international contracts " 1 concluded between a
State or a State-owned agency and a foreign corporation. F
number of reasons, social, economic as well as legal, the topic h
aroused a great deal of interest and controversy. These contrac
have proliferated lately with the intensification of internation
trade and with the emergence of new States desirous of develop
rapidly their economy and industry through the promotion of t
external trade and the encouragement of foreign investors
technical assistance. At the same time many of these States ha
adopted under a variety of forms and guises a system of contro
economy and Socialism, establishing for this purpose a serie
State agencies. Lawyers have endeavoured with only partial
cess to adjust the law to these rapid developments; they h
resorted to the familiar devices of either using old and time-tes
methods and techniques, or propounding new theories mor
keeping with the needs of modern times but with respect to wh
legislators and courts have been slow to react.
Attorney-at-Law (Geneva). Formerly: First Secretary, International Cour

Justice; General Counsel, UNRWA; Secretary General, International
Commission of Jurists.
1 For the sake of convenience and brevity these contracts are described here as
"international contracts," although this term is not perfect. It is the term
used, however, by Cheshire, International Contracts (1948), Graveson, Lectures
on the Conflict of Law and International Contracts (1951) and Battifol.
But other formulas are also inadequate: " State contracts," (Jennings, " State
Contracts in International Law," (1961) 37 B.Y.B.I.L. 156 et seq., Fatouros,
Government Guarantees to Foreign Investors (1962)), does not refer to the
frequent case where the public party is a State-owned agency, while " quasi-
international agreements," as suggested by Professor Verdross, has not gained
recognition (reference in note 12 below); the expression " Economic Develop-
ment Agreements," suggested by McNair, is somewhat one-sided and too
specific. A more accurate wording should be " transnational agreement."
987
988 International and Comparative Law Quarterly [VOL. 18
A further difficulty is that this matter is at the meeting place of

various fields of law, all complex and highly specialised, with the
result that analytical and unilateral methods have been applied to
the study of this problem rather than a synthetical approach which
might have been more useful. The difficulty may be illustrated in
listing the main headings under which international contracts may
be classified and studied: the so-called " international economic
law," or law of international transactions, which tends to become
a specialised field; foreign investments and their protection; te
nical assistance both of a public or private nature; foreign loan
contract law (with the perennial question of the " proper law "
the contract); conflict of laws, where the choice of law and
application of the principle of the " autonomie de la volont6 "
a source of great confusion; public international law (chapt
relating to responsibility of States, diplomatic protection, sovere
immunity, and to the basic question of international legal pers
ality etc.) 2; the law governing international organisations (man
contracts are entered into by private persons with internation
organisations, especially those organisations whose activities
operational rather than promotional, e.g., the agencies of th
United Nations entrusted with refugee problems, such as UNRW
and the High Commissioner's Office, or with other forms of dir
administration, such as the Organisation for the Congo, the Int
national Bank for Reconstruction and Development etc.)." In
countries where administrative law has developed as a separate
specialised branch of the law, the study of contracts conclu
between two " unequal " parties-the State, or a State agency
and a private person-has acquired special momentum, and of
solutions provided or propounded in this field may be of gr
practical value as guidance on the international level.4
In the field of arbitration, this matter is of special relevanc
and has attracted the attention of writers, who have studied the
contracts from different angles. As will be seen below, arbitrati
is of considerable importance in this field since in the present un
tainty of law and because of the lack of permanent courts com
tent to deal with these matters, international arbitration is, in s
of its imperfections, the least troublesome method of affording som
2 Among recent important contributions on this matter in general, see M

" State Contracts and International Responsibility " (1960) 54 A.J.I.L. 572
et seq.; Jennings, op. cit.
8 For contracts concluded by international organisations, see Jenks, The Pr
Law of International Organizations (1962), especially p. 133 et seq.
4 Waline, Droit administratif (1959), Duez et Debeyre, Traitg de droit
administratif (1952) passim.
JULY 1964] Contracts between State and Foreign Company 989
security solving possible conflicts, and helping in shaping the

law.,
A further difficulty confronting the student of international or

State contracts is that while learned writings are numerous, case
law is scarce in this specific field, and it is somewhat depressing to
see the same few examples cited again and again by different
writers.6 These cases are indeed of great value, but it is to be
hoped that there will be more of them, and that they will be
available for publication.7
This study purports to consider certain aspects of the question
of " international contracts " in the light of some cases, especially
one important recent arbitration case concerning the breach of an
oil concession agreement between a State-owned agency of Iran and
a Canadian corporation.8
The contracts under review and the case study to be made
below show the existence of the following common features:
5 Domke, "International Arbitration of Commercial Disputes," in Proceedings
of the 1960 Institute on Private Investments Abroad, Southwestern Legal
Foundation (1960); International Trade Arbitration: A Road to World-Wide
Cooperation (1958); Carabiber, " L'arbitrage entre gouvernements et parti-
culiers," (1950-1) 76 Recueil des Cours 221 et seq. " L'evolution de l'arbitrage
commercial international " (1960-I), 99 Recueil des Cours 119 et seq.
6 Arbitrations between a Government or a State-owned agency and a private
company, which are usually quoted in arbitration cases or by writers and
have a certain relevance to the questions of the proper law of an international
contract are the following: (a) The Lena Goldfields Case (1930), published
in (1950) 36 Cornell Law Quarterly 31 et seq.; (b) The case of Petroleum
Development (Qatar) Ltd. v. Ruler of Qatar (1951) International Law Reports
Case No. 38, p. 161 et seq. (This case is not very helpful because of the
extreme brevity of the decision and lack of reasons.) (c) The A bu Dhabi case,
between the Sheik of Abu Dhabi and Petroleum Development (Trucial Coast)
Ltd. (1956) International Law Reports Case No. 37, p. 144 et seq. (d) The
case of the Ruler of Qatar v. International Marine Oil Co. Ltd. (1953) Inter-
national Law Reports 534 et seq. (e) The Alsing case, between Greece and
the Alsing Trading Co. Ltd. and Svenska Tdindsticks Aktiebolaget (1956),
(1956) International Law Reports 633 et seq. The case was analysed in this
Quarterly by Schwebel, (1959) 8 I.C.L.Q. 320 et seq. (f) Case between
Saudi Arabia and The Arabian American Oil Co. (1958) (special publication).
There are others less known or unknown. One of them is an arbitration
between the Government of Ethiopia and the Socidt6 Rialet (breach of a
contract concerning a State monopoly for the importation, sale and manufac-
ture of alcohol). The company argued that it was a private law contract.
The Tribunal held however that it was a public utilities contract, governed
by Ethiopian administrative law. But finding no such law on Ethiopia, the
Tribunal looked elsewhere and applied the usage and law of European countries,
as general principles controlling the matter. (Unpublished).
7 An additional obstacle to the building up of a large body of case law resulting
from arbitration between States, or State-owned agencies and aliens is often
the confidential nature of arbitration. Litigation between States has been in a
number of cases settled before being submitted to the International Court of
Justice because one or both of the parties were anxious to avoid the publicity
inherent in a case before the Court. It is easier to keep an arbitral procedure
on a confidential basis. For example Article 45 of a concession contract of
the Pacific Western Oil Corporation (now Getty Oil Company) concluded in
1949, providing for a Board of Arbitration, stated that " The decision of the
Board shall be secret and confidential."
8 Sapphire International Petroleums Ltd. v. The National Iranian Oil Comp
(1963), see below, p. 1002 et seq.
990 International and Comparative Law Quarterly [VoL. 13
1. Parties. The " status " of the parties is unequal, in law, in

fact, or both in law and in fact. The foreign party is a private
company, usually a national of an industrialised country. The
other party is either an international legal person (a Government
or a public international organisation) or, often, a Government-
owned agency, for instance an industrial development corporation.9
2. Purpose. A second distinctive feature lies in the purpose of
the contracts under review. There are many types of international
contracts but the present study relates especially to a complex and
important category thereof 10: those which concern the construc-
tion of an industrial plant or power station, coupled with technical
assistance arrangements (building of steel plants, textile or ferti-
liser factories, etc.), or those which involve the development, exploi-
tation, mining of mineral or oil resources. These contracts are
complex in many ways. They establish a delicate balance between
the interests of the States concerned which need the technical skill
and know-how of foreign experts, and the interests of the com-
panies, reluctant to enter into far-reaching commitments and to
take great risks, without adequate guarantees. These contracts are
also complex because they involve the supply of material and
equipment from abroad as well as the participation of foreign engi-
neers and technicians. They often correspond to what has been
called " concession agreements," " economic development agree-
ments," or " quasi-international agreements." l" These expres-
sions are open to discussion, but they clearly indicate, as a rule, a
venture of some considerable complexity and duration, involving
the investment of capital as well as technical and industrial skill.12
9 In a great number of newly independent countries, rapid economic development

and industrialisation appear to be the necessary corollary to independence
and the panacea to internal difficulties. Hence such contracts as are concluded
with some of these new countries are subject to the danger of the foreign
party becoming involved in political or emotional issues with respect to this
performance, especially when problems of nationalisation, expropriation, change
of law are somehow connected or associated therewith.
10o Among other types one should mention the international loans agreem
between a State and a private corporation. See Delaume, " The Proper L
of Loans Concluded by International Persons, A Restatement and a For
cast," (1962) 56 A.J.I.L. p. 63 et seq. To another type belong contracts
concluded by public international organisations with private persons. The
development of international organisations has intensified the number of
these contracts. See Jenks, The Proper Law of International Organizations
(1962), especially Part III, " Legal Transactions of International Bodies
Corporate with Third Parties in the Conflict of Laws " (p. 133 et seq.)
11 See supra, note 1.
12 The complex and mixed character of these contracts has been emphasised in
a leading article on this matter by McNair, " The General Principles of Law
Recognized by Civilized Nations " (1957) 34 B.Y.I.L. 1 et seq.; Verdross,
" The Status of Foreign Private Interests Stemming from Economic Develop-
ment Agreements with Arbitration Clauses " (1958) 18 Zeitschrift f4r
ausldndisches 6ffentlices Recht und V6lkerrecht 635 et seq.; Hyde, " Economic
Development Agreements " (1962) 105 Recueil des Cours 269 et seq.; Carlston,
3. Arbitration. A third feature is that often these agreements

provide for arbitration in case of disputes concerning their interpre-
tation or performance. This is in line with a well-known modern
trend whereby arbitration is preferable to judicial procedure for
the settlement of trade disputes even on a national level. The
advantages seem obvious.13 The parties believe that the procedure
will be more flexible, less costly and quicker than the normal judi-
cial procedure. Experience shows however that such hopes are not
infrequently disappointed. Arbitration may furthermore give rise
to serious difficulties of enforcement, especially if one of the par-
ties is not acting in good faith. On the other hand, it is a fact that
the desire of security of the foreign company or investor will be
met, to a certain degree at least, by the insertion of an arbitration
provision.
As will be seen below,14 an arbitration provision, although a
remedial and procedural device, often reacts upon the choice of law
problem. This is somewhat surprising because the law governing
the contract is a matter of substance, while arbitration is a matter
of procedure. But the effect of such a provision is usually indirect
and negative, since it shows the intention of the contracting parties
to avoid the application of the lex loci contractus, or of the lex loci
executionis, or the lex situs. These connecting factors would, in the
case of most international or State contracts, point to the domestic
law of the State party to the contract.
The composition of the Arbitral Tribunal follows usually the
same pattern: the parties appoint the arbitrators; as to the
umpire, he is designated either jointly by the parties--or through
their arbitrators-or by a " neutral " authority of international
repute: the President of the International Court of Justice, or the
President of the Supreme Court of a State, such as Switzerland, or
Sweden, or the Court of Arbitration of the International Chamber
of Commerce.
II. CHOICE-OF-LAW METHODS FOR INTERNATIONAL CONTRACTS
Five possibilities are theoretically open and have been suggested

with respect to the law governing the substance of such contracts:
" Concession Agreements and Nationalization " (1958) 52 A.J.I.L. 260; on

the same topic, see also among other recent studies: Carlston, " International
Role of Concession Agreements " (1957) 52 Northwestern University Law
Review 618 et seq.; Ray, " The Law Governing Contracts Between States
and Foreign Nationals," Institute on Private Investments Abroad (South-
western Legal Foundation 1960); Bourquin "Arbitration and Economic
Development Agreements " (1960) The Business Lawyer 860 et seq.
13 See comments in Domke and Carabiber op. cit. supra, note 5, passim.
14 See below pp. 994-995.
(1) One or more national laws: the law of one of the parties; the
law of a third State, for instance that of the arbitration. (2) A
legal system sui generis, set up by the contract itself which under
this theory would be " self-containing." (3) Public international
law. (4) " Transnational " law, a new legal system, to be con-
sidered below. (5) A combination of several of these legal systems.
The question of the law governing these contracts is relevant
with respect to the capacity of the parties and to the validity of
the contract itself. But these points are mainly theoretical in the
field of international contracts. For the purpose of this study they
will be disregarded: the contract is assumed to be valid and the
parties to have the capacity to enter into agreements. The great
importance of the matter appears with respect to the effects of the
contract (performance and non-performance). For example, is
there a right of the injured party to cancel the contract, or alter
its terms, or to obtain reparation? If so, under what terms? On
which basis is the reparation to be calculated ? Should the damage
include only the actual loss suffered (damnum emergens) or can the
loss of profit also be recovered (lucrum cessans)?
It is striking that the great majority of agreements under review
very seldom contain a specific and clear-cut provision concerning
the applicable law. This situation is probably due to an excess of
caution rather than to ignorance or oversight. There is often a
deliberate intention on the part of the foreign corporations not to
antagonise the local government in the course of delicate negotia-
tions, when the commercial and financial stake is considerable, in
spelling out too clearly that local law should not govern the con-
tract. Yet it is in the obvious interest of the private party con-
cerned not to choose the law of that State as the proper law. But
lawyers on the government side also prefer to evade an issue which,
they hope, will remain moot, since the parties intend the contrac-
tual relationship to develop smoothly. They would also hesitate
to accept as the governing law that of the State of the company.
Be that as it may, it is a fact that in most cases, except in loan
contracts when the bargaining position of the lender is usually
stronger, the question of choice of law is at best approached, as it
were, in an oblique and indirect way. This is of course not con-
ducive to the necessary clarity and security of purpose which is so
needed in international business transactions.15
In order to find out the law of these contracts, the situation
should first be examined in the light of the conflict rules and by
applying the usual methods of interpretation available.
15 See ipnfra, some interesting examples taken from oil concession contracts, in
which the situation is not as obscure as in some other contracts.
1. A national law as proper law of international contracts. A

domestic system of law chosen by the contracting parties should in
principle govern the substance of these international contracts.1Y
As has been pointed out above, the use of Conflict of Laws methods
would in the majority of cases lead to the law of the State con-
cerned, as having a multitude of contacts with the agreement.
The two well-known theories to be applied where there is no
clear choice-of-law provision would not be of great assistance. As
is well known, according to the " objectivist school," the proper
law is that of the country with which the contract has " the most
real connection," while under the " subjectivist" theory it is con-
tended that the applicable law is that to which " the Parties
intended, or may fairly be presumed to submit themselves." 17
With respect to those 1" international contracts " which contain
no clear-cut provision regarding the applicable law, it is certain
that the tests developed by the science of conflicts would point to
the law of the State concerned. This is a consequence not only of
the objectivist theory which would seem to be the true criterion in
English law,'s whenever the parties have not selected the governing
law, but also as a rule of a sound interpretation of the intentions of
the parties.
It was also contended-this was the classical view-that the
connecting factor is settled by the fact that one of the parties is a
State. This view was widely held by writers and courts, notably
the International Court of Justice before the war.'9 This is no
longer the case. The House of Lords and the French Court of
16 See Mann's fundamental study of the question, " The Proper Law of Contracts
Concluded by International Persons " (1959) 35 B.Y.B.I.L. 41. For an
analysis of this question in the case of an oil contract, see Ramazani, " Choice-
of-Law Problems and International Oil Contracts: A Case Study" (1962)
11 I.C.L.Q. 506 et seq.
17 See, concerning the two theories, Cohn " The Objectivist Practice on the
Proper Law of Contracts " (1957) 6 I.C.L.Q. 327 et seq. Cheshire, Inter-
national Contracts 1948; Mann, " The Proper Law of Contract" (1950)
3 I.C.L.Q. 60; Morris, " The Proper Law of a Contract, a Reply " (1950)
3 I.C.L.Q. 197.
s8 See the references given in the preceding footnote, and Cheshire, Private
International Law (5th ed. 1957), p. 208 et seq., and as for the cases The
Assunzione [1954] A.C. 150; Bonthyn v. Commonwealth of Australia [1951]
A.C. 201, 219.
19 In a well-known dictum of its judgments in the Serbian and Brazilian Loans
cases, the court stated that " Any contract which is not a contract between
States in their capacity as subjects of international law is based on the
municipal law of some country " (P.C.I.J. Ser. A. Nos. 20/21, p. 41). As
Mann rightly states, however, this was not more than a " readily rebuttable
presumption," op. cit. (1959) 35 B.Y.B.I.L. 41. See also the remark made
by Hambro in his stimulating Hague lectures: ". . the categorical state-
ment of the Permanent Court of International Justice to the effect that all
contracts which are not contracts between States must be subject to a national
system of law is not tenable ": " The Relations between International Law
and Conflict Law " (1962-I) 105 Recueil des Cours 46.
Cassation have held that no particular presumption now applies to

contracts concluded by a State and a foreign national.20 Moreover,
in many cases the State concerned acts through the medium of a
State-owned agency which may be set up on the basis of private
or public law. While this aspect of the matter has more relevance
in other contexts, for instance in the field of sovereign immunity,
which should, prima facie, be ruled out when the instrumentality of
the State is a separate entity, it is interesting here also. Yet in
spite of all the obvious links between the contract and the domestic
law of the State concerned, it happens that in a great number of
these international contracts there are overriding reasons to show
that the parties intended to reach a different result.21 It will be
convenient now to examine how this intention of the will of the
parties is expressed. The two principal ways in which this inten-
tion is expressed are: (a) the insertion of a clause providing for
international arbitration of disputes; (b) a reference, either express
or implied, to general principles of law as the law governing the
contract.
There is abundant authority for the idea that, in itself, a

sion for international arbitration implies that the choice o
20 See, e.g., King v. International Trustee for the Protection of Bond

Aktiengesellschaft [1937] A.C. 500. It was held that whether one
parties is a government is irrelevant to find the proper law; it is n
in each case to look for the intention of the parties, either express or
Cf. Graveson, Conflict of Laws (4th ed., 1960), p. 218. In The Metam
(1953) I.W.L.R. 547 it was stated that the principle of law where
proper law of the contract is the law which the parties intended to
applies equally to contracts to which a sovereign State is a party as
contracts. In French law, see Battifol, Traitd dldmentaire de dro
national privd (1959), p. 44, no. 592 and reference to cases. In the
these developments it is interesting to note that in the recent arbitra
of Saudi Arabia v. Aramco the Tribunal adhered to the old theory: " The
Law in force in Saudi Arabia should also be applied to the content of the
Concession because this State is a Party to the Agreement, as grantor, and
because it is generally admitted, in Private International Law, that a
sovereign State is presumed, unless the contrary is proved, to have subjected
its undertakings to its own legal system." Award, p. 59.
21 It does not mean that the national law of the State should be completely
ousted. It is submitted that the " splitting up" of the contract, as
suggested by Ramazani in his searching analysis concerning the NIOC-
Pan-American Oil Contract of 1958 (" Choice-of-Law Problems and Inter-
national Oil Contracts: A Case Study " (1962) 11 I.C.L.Q. 503 et seq.), is
inadequate and bound to lead to great practical difficulties, because the
contract in his view, should be governed, simultaneously by the national law
of Iran, international law, the "principles of law recognised by civilised
nations " and the law of a third State, in instances where a sole arbitrator
is appointed (see below, p. 995). A more correct interpretation would lead
to the application of Iranian law at inception of the contract, with respect
to the capacity of the Iranian State-owned agency to enter into a contract and
with respect to labour and social security law for the local personnel and
traffic law. The effects of the contract should be governed by general
principles of law as part of a system which should be transnational law, as
will be shown below, p. 1006.
made in favour of the lex fori, the law of the umpire, or of the arbi-
tration, as the law governing the substance of the contract. This
solution may offer an easy way out of the practical and theoretical
difficulties of the matter, but its legal soundness is doubtful. At
best such an arbitration provision means that for one reason or
another the foreign party does not trust the local judiciary, or pos-
sibly the local law, considering it as inadequate. The solution that
the lex loci arbitrationis should be considered as proper law would
often lead to strange results, as is shown by a study of several oil
concession agreements concluded by the Iranian State-owned
Agency, the National Iranian Oil Company (NIOC) with foreign com-
panies, nationals of several States: an International Consortium,
AGIP Mineraria, an Italian concern, Pan American Petroleum
Corporation, a United States corporation, and Sapphire Inter-
national Petroleums Ltd., a Canadian company. These agreements
belong to a series of standard type contracts, with small differences
only. They are important, not only because of the special position
of oil concession agreements among international contracts, but
because a number of their provisions have been used as models in
contracts concluded by other States.22
Moreover, these agreements have been analysed in several valu-
able articles,23 while the most recent in date, between NIOC and
Sapphire, has been the subject of the important arbitration case
analysed below.24
In these agreements there is a complicated arbitration provision,
whereby the appointment of the third or sole arbitrator (umpire) is
to be made, as the case may be, by the President of the Supreme
Court of Switzerland, Denmark, Sweden, or Brazil. It is correct to
assume that these presidents would select as umpire or sole arbitra-
tor a judge or a lawyer from their own country.25 Therefore, if the
principle qui elegit judicem elegit jus were followed, at least in the
case of a sole arbitrator, the " proper law " would be Swiss, Dan-
ish, Swedish or Brazilian. There might thus be different and arti-
ficial solutions for the same facts and to the same problems.
It is true that the authorities for the opinion that an arbitration
22 Most of these contracts are not published. See, for instance, the agreement
concluded between the Shaik of Kuwait and the Arabian Oil Company of
Japan (1958), referred to infra.
23 See Farmanfarma, " The Oil Agreement between Iran and the International
Oil Consortium: the Law Controlling " (1955) 34 Texas Law Review 259
et seq.; Wall, " The Iranian-Italian Oil Agreement of 1957 " (1957) 7 I.C.L.Q.
736 et seq.; Ramazani, op. cit. (1962) 11 I.C.L.Q. 503.
24 See below, p. 1002 et seq.
25 This was Ramazani's hypothesis in his above-mentioned article (op. cit.
p. 513) and it proved correct in the Sapphire-NIOC arbitration case in which
the President of the Swiss Supreme Court appointed in 1961 a member of
that Supreme Court as sole arbitrator.
provision implies a choice of law are impressive. To quote English

authorities, Dicey stated that
" the submission to the jurisdiction of a specific court implies
the submission to the law of such a court." 26
While Dicey was probably only thinking of a court of law,

Cheshire goes farther. For him the submission to the jurisdiction
of a court
" is more than a mere submission to the judicial or arbitral

tribunal in the specified country. It is an express choice of
law of that country." 27
Battifol, the leading French writer on Conflicts, while sharing

apparently the views of Dicey and Cheshire and adducing some
cases in support, raised the question whether the localising value of
an arbitration provision continues if the country chosen for the
arbitration has no connection with the other elements of the
contract.28
Battifol gave an affirmative reply if the choice implied is based

on objective considerations, such as the special qualifications for
this type of cases of the judges selected; the answer should, on the
other hand, be negative if the choice is made solely in the desire to
escape from the imperative law, obviously or possibly, applicable,
as a result of the localisation of the contract. Battifol however did
not consider the not infrequent case of an arbitration clause being
motivated both by the desire to escape from the local law and to
select a qualified and impartial judge.
The theory propounded by these leading writers should, it is
submitted, be abandoned as leading to a paradoxical and unrea-
listic result: the choice of law would be accidental and based upon
an irrelevant criterion: the nationality of the umpire or sole arbi-
trator or-one further step remote-the nationality of the person
entrusted with the selection of the latter.
In those international contracts a provision for international
arbitration, in addition to ousting the jurisdiction of the local
courts, may at best imply that the law of the contracting State is
not the substantive law governing the contract. This negative test
was accepted in the arbitral award delivered in 1963 in the Sap-
phire v. NIOC case:
26 Conflict of Laws (7th ed., 1958), p. 731.

27 Private International Law (5th ed., 1957), p. 215; Ramazani shares this view:
. it would be reasonable to assume . . . that the submission of a dispute
to a Swiss, Danish, Swedish, or Brazilian arbitrator would imply the
application of their respective law." Op. cit. p. 514.
28 Traite' ddmentaire de droit international privd (3e 6d., 1959), p. 648, no. 595.
" It is not feasible in the present case to imply an intention to

the parties to submit to the substantive law of the forum of
the arbitration, a forum which they did not know of at the
time they concluded the agreement. However, if no positive
implication can be made from the arbitral clause, it is possible
to find there a negative intention, namely to reject the exclu-
sive application of Iranian law. If in fact the parties had
intended to submit their agreement to Iranian law and if the
only significance of the arbitral clause was to deprive the
Iranian authorities of jurisdiction in case of any dispute, the
authors of the agreement, whom one must suppose were com-
petent lawyers, would almost certainly not have failed to nega-
tive, by an express clause, any significance which such an
arbitral clause normally carries as a connecting factor accord-
ing to general doctrine." 29
If neither the national law of the State party to the contract

nor the law of the forum are applicable, what is then the solution?
It is evident that, failing a clear choice of law, other national legal
systems, which would have no connection whatsoever, or little con-
nection, with the contract, such as the law of the State of which
the company is a national, would be even less applicable.
2. The law of the contract to be derived from the contract
itself. It has been suggested that important international con-
tracts, such as concession agreements, create a legal system of their
own, by reference to which disputes arising from these contracts
should be settled. No less authorities than Verdross and Bourquin
hold the view that concession agreements-economic development
agreements, or " quasi-international agreements," as they call
them 3-0-create as lex contractus an " independent legal order "
regulating the relations between the parties exhaustively, and
resulting from their concordant wills."A The same argument was
propounded by Aramco in the Saudi Arabia-Aramco arbitration.32
Unpublished. Translation from the original French, see below, p. 1002 et seq.
30 See supra, note 12.
31 Verdross, op. cit., p. 452; cf. also " Protection of Private Property under
Quasi-International Agreements," in Varia Juris Gentium Liber Amicorum
J.P.A. Franqois (1959), p. 355 et seq.; Bourquin, " Arbitration and Economic
Development Agreements " (1960) The Business Lawyer 860.
32 It is to be hoped that the wealth of interesting material contained in the bulky
record of the proceedings of this arbitration will some day be made available
to the public. In the meanwhile some of the main arguments of the parties
have been published in separate articles. See on this specific point the
searching paper of George Ray, the then General Counsel of Aramco, " The
Law Governing Contracts Between States and Foreign Nationals " (1960):
" The parties to each agreement endeavour to prepare a kind of constitution
by which their relationship will be judged primarily. The agreement is as
A similar view is to be found in an analysis of French " juris-

prudence " by Donnedieu de Vabres.33 There are some practical
examples of this theory. For example in an agreement of June 80,
1958, between Tunisia and the Soci6t6 des Transports par Pipelines
du Sahara, it is provided that the contract shall constitute the
" whole law " of the parties.
This theory, however, is not satisfactory. It appears artificial
and begs the question. A contract must be inserted in a pre-
existing legal order and cannot remain in a vacuum. This order
should be clearly defined or, at least, ascertainable by way of legal
or judicial interpretation.84
3. International law or transnational law. If a national system
is to be ruled out, there would remain apparently only one alterna-
tive: international law. This solution has found some support in
recent years.35
A simple process of elimination has shown that the law govern-
ing the effects of an international contract of the type considered
here is not domestic law, nor can such a contract create a new and
independent legal order of its own. In this case, what is the
alternative ? Should it be public international law, as is contended
by those jurists for whom a legal system can only be national or
international ?
The traditional criterion of international law as the law govern-

ing the relationship between two States was adopted by the Arbi-
tral Tribunal in the Saudi Arabia-Aramco case. It held that
" As the Agreement of 1933 86 has not been concluded between
sufficient within itself as the parties can make it. There is seldom any
necessity for looking beyond its terms to ascertain the rights and obligations
of the parties " (p. 18).
83 Noting that French case law has developed a general theory of the inter-
national contract, Donnedieu de Vabres states that it is the nature of its
economic operation which confers upon a contract its international character.
He concludes that the jurisprudence demonstrates that there is " an inter-
national economic activity escaping the sovereignty of individual legislative
bodies and cloaked by its own juridical regulation, incapable of being reduced
to the simple confines of internal law in conflict." " L'Evolution de la
jurisprudence frangaise en mati're de conflits de lois " (1938), p. 553 et seq.
34 In the Saudi Arabia-Aramco arbitration this theory was discarded in an
important dictum: "It is obvious that no contract exists in vacuo, i.e.,
without being based on a legal system. The conclusion of a contract is not
left to the unfettered discretion of the Parties. It is necessarily related to
some positive law which gives legal effects to the reciprocal and concordant
manifestations of intent made by the Parties. The contract cannot even be
conceived without a system of law under which it is created " (p. 5). See
also Mann's vigorous criticism of this theory in " The Proper Law of Contracts
concluded by International Persons " (1959) 35 B.Y.B.I.L. p. 34 et seq.;
Fatouros, op. cit., p. 286.
35 See especially Mann, op. cit. (1959) 35 B.Y.B.I.L. p. 34 et seq.
36 The Concession Agreement.
two States, but between a State and a private American cor-

poration, it is not governed by Public International Law." 37
This negative answer was in conformity with traditional rules of
the law of nations. It is however possible for two parties, when
one of them is an international person-when neither of them is an
international person, stricto sensu,38 the question is more delicate-
to decide, in accordance with the theory of the autonomy of the
will, that their legal relationship will be governed by international
law. This does not make them " subjects " of international law.
This is only a choice-of-law clause, adopted for convenience or other
purposes.
In recent years, the " internationalisation " of the contract has
been adopted, expressis verbis or implicitly, in a number of inter-
national, and especially of oil, contracts.
The Libyan Petroleum Law of 1955 provided that an oil con-
cession agreement
" shall be governed by and interpreted in accordance with the
laws of Libya and such principles and rules of international
law as may be relevant, and the umpire or sole arbitrator shall
base his award upon those laws, principles and rules." 39
The Iranian Petroleum Act of 1957 which was to serve as a
basis for several oil concession agreements contained also a
reference to international law, in providing that the co
force majeure as used in the Act means " occurrences whic
recognised as such by the principles of international law." 4
In Article 37 of the two Concession Agreements concl
1958 by the National Iranian Oil Company with Pan Am
Petroleum Corporation, and Sapphire Petroleums Ltd., t
provision is inserted.41 This shows in no uncertain ter
international law may be applicable to this kind of relat
although none of the parties are " international persons,"
37 Award, p. 58. The Tribunal invoked the dictum of the Permanent

International Justice (Serbian Loans Case, P.C.I.J., Series A, no. 40,
See a criticism of this literal interpretation of the Court's dictum
Arbitral Tribunal in Mann, op. cit. (1959) 35 B.Y.B.I.L., who pointed out
that the International Court in 1929 " cannot have intended, by a dictum
unsupported by reasons, to negative a progressive development of the law
by a doctrine of internationalisation " (p. 481).
38 See below, p. 1001, the " Oil agreements " between the National Iranian Oil
Company, which is not an international person, and a number of foreign
corporations. Mann, op. cit., p. 43, and Hambro, op. cit., p. 46, would limit
this possibility to contracts between parties one of whom is an international
person.
39 Clause 28, paragraph 7, of the Second Schedule to the Libyanr Petroleum Law,
No. 25 of 1955 (1958) 1 Middle East Law Review 286.
40 Article 13.
41 " The term force majeure used in this Agreement means occurrences whi
are recognised as such by the principles of international law."
them being a private corporation, the other an agency with charac-

teristics of both public and private law.42
But international law has been considered in a number of cases
by courts as well as by writers as the proper law because of the
frequent reference to " general principles of law," or equivalent
expressions, in these international contracts. Whether these " gen-
eral principles " must necessarily be equiparated to public inter-
national law will be examined below.43 Be that as it may, the
fact is that these " principles " are now used extensively, either
expressly or by necessary implication, in international contracts
and agreements as well as in arbitration cases, thus giving rise to
two important problems, a well-known one and the other, far less
known, which will be considered below."
The first problem relates to the exact content of the general
principles. Objection has been raised due to their vague and
uncertain nature. Whether this is true will be examined especially
in the light of the Sapphire-NIOC arbitration.
The second problem, of a less conspicuous and more subtle
nature, is that of the legal system, or systems, in which the general
principles may be incorporated and of which they form part. Are
they necessarily part of international law only, and is it not prefer-
able to envisage a third and new system, called Transnational Law ?
The great majority of lawyers drafting contracts, judges, arbitra-
tors and writers have taken for granted that the " general princi-
ples " belong to international law and are to be equiparated to
" general principles of international law." A few examples will
throw some light on this matter.
In the Lena Goldfields case, between an English company and
the Government of the U.S.S.R., the arbitrators, after stating that
in regard to performance of the concession contract by both par-
ties inside the U.S.S.R., Russian law was the " proper law of the
contract," added that
i" . .. for other purposes the general principles of law such as
those recognised by Article 38 of the Statute of the Permanent
Court of International Justice at The Hague should be regarded
as the ' proper law ' of the contract." 45
42 Schwarzenberger recognises this possibility by implication: "In the absence

of overwhelming evidence to the contrary, the typical intention of parties to
public contracts is to subject such contracts to municipal law and not to
international law." International Law I (1957), p. 149.
43 See below, p. 1006.
44 Ibid.
4 (1950) 36 Cornell Law Quarterly 50; see comment by Nussbaum "The
Arbitration between the Lena Goldfields Ltd. and the Soviet Government"
ibid., p. 34.
In the Agreement concluded between Syria and the Middle East

Pipelines Ltd. (1949), Article 23, paragraph 2 provided that
" The procedure of arbitration shall be that followed, at the
time of arbitration, by the International Court of Justice, and
the award shall be based on the juridical principles contained
in Article 38 of the Statute of the International Court of
Justice." 46
In the Abu Dhabi case, the arbitrator, Lord Asquith of Bishop-

stone held that he had to resort to the general principles of law, as
a kind of modern law of nature.47
In the Iranian Consortium Agreement of 1954 there is a refer-

ence to the
"' principles of law common to Iran and the several nations in

which the other parties to this Agreement are incorporated."
In the absence of such common principles, the Article refers to
the
" principles of law recognised by civilised nations in general,

including such of those principles as may have been applied
by international tribunals." 48
The Agreement concluded in 1957 between the National Iranian

Oil Company and AGIP Mineraria also contains a reference to
the principles of law common to Iran and Italy, as the law governing
the contract. In the absence of such principles, the contract will
be governed
" according to the principles of law recognised as normal by
civilised nations, in particular such principles as have already
been applied by the International Tribunals." 49
The Agreement concluded between the Shaik of Kuwait and the
Arabian Oil Company of Japan (1958) first refers to the " princi-
ples of goodwill and good faith." Then it provides for the applica-
tion of the
4e Publication of the Ministry of Finance of the Republic of Syria, Department

of Financial Studies, p. 105.
47 (1951) International Law Reports 149; or (1952) 1 I.C.L.Q. 247. This wording
avoids any reference to international law and its sources, as stated in Article
38 of the Statute of the International Court.
48 Article 46.
49 Article 40. See Wall, op. cit. (1957) 6 I.C.L.Q. 736 et seq. In particular Wall
endeavours to answer the question of whether there are any obstacles in law
to the voluntary submission by persons of their disputes to the arbitramen
of international law. He finds a justification of that submission in the lega
status of NIOC as an agent of the Iranian Government. The soundness of
this conclusion is doubtful, but it shows the difficulty of writers facing the
dilemma between national and international law.
" principles of law common to Kuwait and Japan and, in the

absence of such common principles, then in conformity with
the principles of law normally recognised by civilised States in
general, including those which have been applied by inter-
national tribunals."
The reference to international tribunals in these two agreemen

concerns the law applied by these tribunals, which should normal
be international law.
In the Agreements concluded with Pan American Petroleum

and Sapphire Petroleum, in 1958, such a provision was left out, but
there were two references to good faith and goodwill, and to
international law in connection with force majeure.
Before examining further the general principles with respect to
their content as well as to their position in a legal system, it may
be appropriate to discuss here an important recent arbitration case,
the Sapphire-NIOC arbitration, where great use was made of
the " general principles," and which for this and other reasons
deserves to be fully quoted and calls for special comments.50
III. THE SAPPHIRE-NIOC ARBITRATION (1963)

This was a dispute arising between Sapphire International Petro-
leums Ltd., a small independent Canadian corporation, and the
National Iranian Oil Company.
On June 16, 1958, Sapphire had entered with NIOC into an
agreement which was of a standard type, based upon the Iranian
Petroleum Law of 1957 and similar to the Agreements concluded
with AGIP Mineraria, of Italy (1957) and the Pan American
Petroleum Corporation (1958). Under this Agreement the two par-
ties became partners in a joint structure relationship for the pro-
spection and exploitation of oil. This joint structure was complex
and need not be examined in detail here. It will be sufficient to
state that during the first period (exploratory operations a
prospection), Sapphire was carrying most of the obligations, es
cially the expenses. The moment that an oil field, capable of co
mercial working, was discovered, the parties were to be join
responsible for all the expenses, and previous expenses of Sapph
were to be reimbursed. The net profit was to be divided 25
50 Arbitral Judgment delivered in the dispute between Sapphire Internati

Petroleums Ltd. of Toronto (Canada) and the National Iranian Oil Compan
(NIOC) of Teheran (Iran), delivered on March 15, 1963, at Lausanne (Switzer-
land), by Mr. Justice Pierre Cavin, judge of the Federal Tribunal (Swiss
Supreme Court). This lengthy and very thorough decision is unpublished.
The most important parts in law are given in Appendix A to E to this article
(see below, p. 1011 et seq.).
cent. for Sapphire and 75 per cent. for NIOC and Iran. A time
limit of two years was given to Sapphire for beginning drilling
operations within the concession area. The failure to carry out this
and other obligations would have involved Sapphire in the risk of
cancellation of the contract, the forfeiture, as indemnity, of a bank
guarantee of $350,000, except in the case of force majeure, and the
loss of all expenditures already undertaken. The preamble stated
that the parties agreed to carry out the Agreement in a spirit of
good faith and reciprocal good will. Article 38 of the Agreement
restated the same obligations."5
The Agreement also contained complicated " dispute articles," 52
providing for the institution of a mixed Conciliation Commission of
four members, to be followed by arbitration. There was also a
provision for the submission to a board of three experts of disputes
concerning technical or accountancy questions.
Difficulties soon arose in the performance of the Agreement, the
main one being that during the period of prospection Sapphire was
responsible under the contract for the " full exclusive and effective
management and control " of operations, subject to the obligation
to prepare the plan of operations in consultation with NIOC,
and to submit to the latter detailed reports on the progress of the
work. NIOC claimed that these clauses required their consent
for every operation, and that they would be free to grant or refuse
this consent.
The situation further deteriorated and soon Sapphire found
itself unable to continue its work so long as NIOC persisted in
its attitude of non-co-operation and obstruction. In particular
Sapphire, which had already undertaken substantial expenditures
felt that it could not risk signing a drilling contract-for the next
stage of the operations-without knowing whether NIOC would
maintain its attitude, since the drilling work might cost several
millions of dollars. Sapphire therefore decided to go to arbitration
and to claim the reimbursement of the contractual penalty of
$350,000, unduly retained by NIOC, the indemnification for all
damage suffered (some $1,175,000) and the amount of the loss of
profit estimated at $5,000,000."5
51 " The Parties undertake to carry out the provisions of the Agreement in
accordance with the principles of good faith and good will and to respect the
spirit as well as the letter of the Agreement."
52 Articles 39-41.
53 Further difficulties arose in connection with this arbitration and the constitu-
tion of the Arbitral Tribunal. According to the Agreement, each party should
have appointed one arbitrator and the two of them jointly the umpire. as
President of the Arbitration Tribunal. Failing agreement on this latter point
or failing appointment of their arbitrator by either party, the umpire. or the
sole arbitrator, was to be appointed by the President of the Swiss Federal
Tribunal (or, alternatively, the president of the highest court of Denmark,
Mr. Justice Cavin delivered his judgment on March 15, 1963.

In addition to dealing with delicate questions of procedure in the
field of international arbitration, now in full development,54 this
judgment is of great importance with respect to the question of the
choice of law in international contracts, and of the general princi-
ples of law and their place in international arbitration.
Appendix A 55 to the present article sets out the arbitrator's
reasons for holding that the parties had intended to exclude the
application of Iranian law and did not choose another system of
positive law, adding that " this omission is on all the evidence
deliberate."
Although there was no specific reference to the general princi-
ples in the Agreement, it has been seen that there was one specific
reference to international law in connection with force majeure only
and two references to mutual good faith and good will. The arbi-
trator thus construed the Agreement as meaning that the parties
had intended to submit the interpretation and performance of their
contract to principles of law generally recognised by civilised
nations, and that account should be taken, when necessary, of the
decisions given by international tribunals. The arbitrator added
that he would try
" to find the rules of positive law common to civilised nations,
such as are formulated in their statutes or are generally recog-
nised in practice."
Going into the merits of the case, he then discussed the meaning
of the word " consultation " in the Agreement and found that it
did not imply " consent " on the part of NIOC:
" all it implied was a duty to inform and an obligation to seek
the view of the partner, but not an obligation to obtain their
consent."
After analysing the facts and the evidence, the arbitrator held
that NIOC had broken its obligations and that a fundamental
principle of law is that contractual undertakings must be respected:
" The rule pacta sunt servanda is the basis of every contrac-
tual relationship."
Did this breach release Sapphire from its own obligations as well
as give rise to damages? Is there a general principle of law to that
Sweden or Brazil). Finally, the President of the Swiss Federal Tribunal
appointed as sole arbitrator Mr. Justice Pierre Cavin, of the Federal Tribunal.
NIOC decided to default, alleging that the procedure of appointment of Mr.
Cavin as sole arbitrator by the Chief Justice of Switzerland was irregular.
and therefore invalid.
54 There is no room here for a study of this aspect of the case which will be
examined at a later date.
-s See Appendix A, infra.
effect? This question is examined in a passage which is quoted in

Appendix B to the present article.50
In another dictum of this important judgment, the arbitrator
went on to examine one specific point which should throw some
light on the difference between a general principle of contract law
and the technicalities existing in certain systems of law which can-
not be considered as of general application. While Sapphire at a
certain point had stopped carrying out their own obligations, it had
not given specific notice to NIOC to that effect, as is required
under certain systems of law. The arbitrator found that this was
not necessary. The relevant passage is quoted under Appendix C
to the present article.5"
Examining the question of damages, which the plaintiff has a
right to claim under the rules stated by him,58 the arbitrator
expressed his views in a passage which should be another powerful
contribution to international case law. The general principle is that:
"According to the generally held view, 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 con-
tract had been performed in the manner provided for by the
parties at the time of its conclusion. That should be the
natural consequence of the breach (Art. 1149, 11,50 of the
French Civil Code: Esmein-Radouant-Gabolde, op. cit., Vol.
VII, N. 855; Lehmann, op. cit., para. 14, VI, page 59; for
Anglo-Saxon law see the references in letter 8 above).59 This
rule is simply a direct deduction from the principle pacta sunt
servanda, since its only effect is to substitute a pecuniary obli-
gation for the obligation which was promised but not per-
formed. It is therefore normal that the creditor is thereby
given complete compensation. This compensation includes 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 obtained. The award of compensation for the lost profit
or the loss of a possible benefit has been frequently allowed by
international arbitral tribunals (cf. Uauriou, ' Les dommages
indirects dans les arbitrages internationaux,' Revue ge'ne'rale de
droit international public, pages 203 et seq. in particular pages
211 et seq. and the various precedents cited in this study)."
The method of assessing the actual damage (damnum emergens)
is expounded in Appendix D.60
56 Infra. 57 Infra.
58 See Appendix B, infra, paragraph 8. 59 See Appendix B, infra.
so Infra.
Equally interesting is the way the arbitrator approached the

delicate question of the loss of profit (lucrum cessans). When
Sapphire had to interrupt its activities in the concession area, oil
had not yet been found, although there was, according to expert
opinion, a very strong chance of finding it. The arbitrator, examin-
ing the case-law on a comparative basis, found that a number of
national courts had awarded damages in such cases for " the loss
of a chance " when the victim had lost the chance of making a
profit as a result of the action of the other party. He decided to
fix the amount of compensation for loss of profit at $2,000,000
($5,000,000 had been claimed). This passage of the judgment is
given below (Appendix E).61
IV. TRANSNATIONAL LAW AS A POSSIBLE SOLUTION
The arbitral judgment delivered in the Sapphire v. NIOC case is

very interesting in many respects and merits close attention and
lengthy comment. A few observations only will be made here with
respect to general principles of law and to the system of law which
should govern the international contracts under review.
Of great practical value, it is submitted, are the reasons stated
by Judge Cavin for excluding the lex loci contractus and the lex
loci executionis as the proper law of the contract, and the argu-
ment pointing to the irrelevance of any system of domestic law.
The importance of the general principles of law for this type of
contract has once more been brought into focus in this judgment
which should demonstrate that especially in the field of contracts
and commerce these principles are easier to find and to state than
some lawyers contend. The fact is that they now meet the fast
growing needs in the social and economic framework of today's
world and they correspond to a new stage of the law governing a
number of international transactions. There may be some value in
the contention that general principles, as such, are not a legal
system and that only a recognised legal system can be chosen as a
" proper law." 62 Yet this view is too dogmatic to meet the com-
plexities of modern conditions and to serve the interests of inter-
national economic transactions. It has been rightly pointed out by
Jenks that
" whether the general principles of law . . .can serve as a

proper law . . . depends not on any preconceived notion of
what constitutes a legal system, but on whether they can fulfil
61 Infra.
62 See Mann, The Proper Law of Contracts concluded by International Persons,
p. 44.
satisfactorily in practice the function of a proper law and are

in fact used for that purpose." 63
But the main source of the difficulties would appear to be the

fact that most jurists are prisoners of the false dilemma between
domestic law and international law. They have inevitably met with
a serious obstacle when, realising that in certain cases such as those
of the " international contracts " under review, national law could
not be the proper law, they have concluded that public inter-
national law only could be the alternative applicable. The confu-
sion was not dispelled by the fact that the reference, express or
implied, to general principles led to international law, since the
expression has become a term of art.64
In making applicable the general principles to the relationship
between one or more private parties, one would therefore have
either to make the latter " subjects " of international law, or at
least apply international law to their relationship, which it is very
difficult to accept, it is submitted, unless there is a clear-cut provi-
sion to that effect, like in the force majeure provision of the oil
agreements referred to above. Furthermore, it is to be noted that
in the Sapphire-NIOC case, the National Iranian Oil Company is
not to be equiparated to the State of Iran.65
As was already stated, the situation is frequent today of two
companies, one of them private and the other governmental, con-
cluding an economic or trade agreement and endeavouring to
exclude the application of a national law. There are other types of
situations of a similar nature, pointing to an " internationalisa-
tion " or " delocalisation " of the contract. Topical examples are
the so-called " international companies." 66
A further example is given by the labour law governing the rela-
tions between international organisations and their staff. This is
63 Jenks, The Proper Law of International Organizations (1963); see McNair.

op. cit. (1957) 33 B.Y.B.I.L. 1 et seq.; Jenks, The Common Law of Mankind
(1958), p. 3 et seq.; Mann, "Reflections on a Commercial Law of Nations,"
33 B.Y.B.I.L. 20. Also Schlesinger, "Research on the General Principles
of Law Recognized by Civilized Nations " (1957) 51 A.J.I.L., 277; Cheng.
The General Principles of Law as Applied by International Courts and
Tribunals (1953).
6 One of the three formal sources of international law under Article 38 of the
Statute of the International Court of Justice.
65 This is especially obvious in the field of sovereign immunity which is no
under review here.
66 Such as the Scandinavian Airline System, whose Articles of Association
specifically exclude the law of Denmark, Norway and Sweden, or the Company
AIRAFRIC established by several French-speaking African States. On this
question. see the searching article of Goldman (1963) 90 Journal de droil
intcrnational (Clunet) 320 et seq.
neither international law nor national law; it is a domestic and

internal legal system of the organisation."'
It is therefore likely that all these facts point to the emergence
of a new system of law, somewhat half-way between international
law stricto sensu and domestic law. This is transnational law.68
It cannot be said that the case law and the writings have yet
accepted this distinction. Mann holds that international contracts
should refer to public international law if they are not to be subject
to domestic law.69 Nor is the distinction made by Ramazani.70 A
convincing plea in favour of transnational law is made by Fatou-
ros.71 Batiffol, although with caution, appears also to accept the
concept of a new legal system in the making, but he thinks that its
growth will be slow.72
In the Sapphire-NIOC arbitration the sole arbitrator pre-
ferred to adopt the line of the concession agreement being governed
by international law, in spite of argument by counsel that trans-
national law should be the correct solution. It is true that this
would have made no difference whatsoever in the final results of the
case sub judice, since the general principles of law governing this
special case of breach of contract and the consequences flowing
therefrom would have been the same under either system and con-
struction. It is also true that the express reference to international
law for the interpretation of the force majeure clause in Article 37
of the 1958 Agreement pointed to this system, somewhat less bold
and novel than would have been the adoption of transnational law,
at a time when the whole law of international economic relations is
in a state of flux and rapid evolution."
67 Jenks includes this-not quite correctly, it is submitted-in "international

administrative law," of which this domestic law constitutes " as yet the most
developed part." The Proper Law of International Organizations, p. 25.
Gs Other terms have also been suggested, but Jessup's leading book on the
subject, Transnational Law (1956), gave roots to the term now most widely
accepted, which includes " all law which regulates actions or events that
transcend national frontiers." p. 2.
69 " The Proper Law of Contracts Concluded by International Persons," pp.
41-56.
70 Op. cit. (1962) 11 I.C.L.Q. 503 et seq.
71 Government Guarantees to Foreign Investors (1962), p. 284 et seq., a remark-
able analysis of the problem, but this was not convincing for everybody, as
appears from Drucker's trenchant criticism in this Quarterly ((1964) 13
I.C.L.Q. 311): " The law of State contracts is part of public international
law or of municipal law and nothing but confusion can ensue from the
introduction of the nebulous term ' transnational law ' in specific relation
to State contracts." It is on the contrary believed that the recognition of
this new social and legal phenomenon would contribute to dispelling the
present confusion.
72 In a recent lecture (May 1963) on " Are international contracts always
governed by a national law? "
73 The arbitrator was sharing the views held by Ramazani, Mann and some
other writers, although at times the terminology could be more precise. See
in Appendix A, below, the reference to the " general principles of international
Transnational law contains substantive rules which not only

transcend national frontiers but purport to govern, among other
things, the contractual relationship of two parties, usually unequal
in their status, whenever the will of the parties or the circum-
stances show that they intended to exclude and rule out a specific
national law. With respect to commercial contracts, transnational
law might result from special conventions, establishing " standard
type contracts," or from general principles of law. The distinction
between international law and transnational law appears indirectly
in Lord McNair's memorable study on general principles. The legal
system appropriate to certain international contract, he stated,
" is not public international law, but shares with public inter-
national law a common source of recruitment and inspiration,
namely the general principles of law recognised by civilised
nations." 74
In listing the advantages of resorting to the general principles,

it has been pointed out that often the State party to the contract
and to the litigation had no law of contracts, no commercial law
capable of meeting the intricacies of modern international trade
relations.75 This argument, however, is not very convincing and
should as a rule be disregarded.7"
law." The difference between the " principles of international law " and the
" general principles of law " is thus somewhat blurred, while the latter in
fact belongs to all the three systems: international law, domestic law and the
fast-growing transnational law. With respect to the " general principles " as
a source of both domestic law and international law, see Rousseau, who stated
that this expression indicates both " the principles universally accepted in
domestic legislation and the general principles of the international legal
order ": Principes gdndraux du droit international public (1944), p. 889 et seq.
Some national codes contain an express reference to general principles of law,
such as the Spanish and Egyptian Civil Codes. See also Swiss Civil Code,
Article 1.
T Op. cit. (1957) B.Y.B.I.L. 6.
45 This reason has been emphasised by Lord NcNair, in his above-mentioned
study on the General Principles, and the argument played an important role
in several arbitrations (Aramco v. Saudi Arabia, 1958; Petroleum Develop-
,ments-Trucial Coast Ltd. v. the Sheik of Abu Dhabi, 1951; Ruler of Qatar v.
International Marine Oil Company Ltd. (1953).
" For instance, in the great majority of the oil-producing countries, including
almost all Arab States, there is a fully developed contract and commercial
law which could be applicable if it were not for other factors tending to
" delocalise " or " denationalise " the agreements under review and to inter-
nationalise them. Some countries do not accept a special provision concern-
ing arbitration in their international contracts and the choice of law. As
a consequence, failing a special provision to the contrary, the only protection
afforded to the foreign company is that of the local courts of the State con-
cerned, subject to the rules of international law governing diplomatic protection
and the responsibility of States in case of denial of justice. In States where
there is no tradition of a strong, independent judiciary and where the executive
branch of the government is all-powerful, the remedy so granted is very
limited. Hence the importance attached to arbitration as an alternative
remedy.
To sum up, there are cogent reasons and practical advantages

in favour of resorting to transnational law made up of general
principles as the system governing this type of contract:
(a) When the contract is vague with respect to the applicable
law, except that there are clear negative factors pointing to a
" delocalisation " or " denationalisation " of this law, trans-
national law offers a convenient and sound alternative.
(b) It will be less necessary to prove foreign law, and the judge
will have more flexibility in finding the rules available.
(c) The judge will be in a position to make extensive use of the
comparative law method to find these principles and in case of
doubt he will develop the best and more suitable ones.
(d) The judge will not be a prisoner of the false problem created
by the dilemma between " national law or public international
law," resulting in artificial solutions.77
(e) There will be no dogmatic attempt to reconcile the appli-
cation of international law with the fact that one at least of the
two parties and sometimes both of them are not a subject of inter-
national law, in the classical sense.
It is clear that the search for general principles is not easy, that
many problems remain, one of them being for the judge not to use
his own national system, with which he is fully familiar, and call it
" transnational law." Another possible pitfall would be the dis-
tinction to be made between the general principles, on the one
hand, and the technicalities and arbitrary rules, on the other hand,
which are numerous in every national system and which result
from special and historical circumstances. In this connection also
the judgment in the Sapphire-NIOC arbitration case constitutes
very valuable case law.
Although the application of national laws will not disappear
from these " international contracts," it is likely that the parties
concerned will gradually accept, directly or otherwise, transnational
law as the proper law of the contract, a logical consequence of arbi-
tration-international or transnational arbitration-as the best
means for protecting their interests. This will require abl
used to the comparative method and capable of legal imagi
This is not easy, but not a new problem for students of lega
For the development of international economic relati
trade, in particular in the field of foreign investments (lat
and technical assistance, it is submitted that transnational law, the
bulk of which in the field under consideration is made of the " gen-
eral principles of law," especially of contract law, may already be
77 Such as an unrealistic scission or " splitting-up " of the contract into several
legal systems.
considered as a separate legal system and could contribute to over-

coming the main obstacles which have until now slowed down these
relations, especially the fear with respect to a change of law in the
contracting country. Transnational law, not being yet fully deve-
loped, should allay some of the worries of the States parties to these
contracts, in particular the new States, which could thus contribute
also to the building of this body of legal rules, through their accep-
tance of, and cooperation with, arbitral courts.
APPENDIX A
Arbitral Judgment delivered in the dispute between Sapphire Internation

Petroleums Ltd. and the National Iranian Oil Company, March 15, 1963, by
IMIr. Justice Pierre Cavin, Judge of the Swiss Federal Tribunal, as sole
arbitrator.
B. THE I AW APPLICABLE 1
(a) Procedural law
(b) Substantive law

1. Since the arbitration has its seat in Switzerland, Swiss private inter-
national law might be applicable, as the lex fori, for determining the substan-
tive law applicable to the interpretation and performance of the agreement.
However, in the view of some eminent specialists in private international law,
since the arbitrator has been invested with his powers as a result of the com-
mon intention of the parties, he is not bound by the rules of conflict in force
at the forum of the arbitration. Contrary to a State judge, who is bound to
conform to the conflict law rules of the State in whose name he metes out
justice, the arbitrator is not bound by such rules. He must look for the co
mon intention of the parties, and use the connecting factors generally used
doctrine and in case law and must disregard national peculiarities (Batiffol
Revue de l'Arbitrage, 1957, p. 111; Carabiber, L'Arbitrage International de
droit privd, Paris, 1960, pp. 50, 92). This consideration carries particular
weight in the present case, since, in view of the fact that they have not
directly agreed upon the seat of the arbitration and instead have only deter-
mined which authority should appoint the umpire or the sole arbitrator, the
parties cannot be presumed to have agreed upon the choice of a conflict rule
by their common choice of the forum of the arbitration.
It is not however necessary to decide this question, since the application
of the law of the forum leads to the same result. According to Swiss case-
law and doctrine it is in fact the intention of the parties, express or implied,
which primarily determines the law applicable in questions of contract (cf.
Sch6nenberger Jiiggi, Kommentar, N. 198-203, 243-246). It is only when there
is no such manifestation of intention that the judge determines the law appli-
cable according to the objective tests laid down by case-law.
For these reasons, since the agreement contains no express choice of law,
the arbitrator will determine which system of law should best be applied
according to the evidence of the parties' intention and in particular the evi-
dence to be found in the contract.
2. Since the contract was concluded in Teheran and was due to be per-
formed for the most part in Iran, the lex loci contractus and the lex loci
executionis both point to the application of Iranian law. However, though
these two connecting factors, and particularly the second, are important, they
are not necessarily decisive.
1 The original text is French.
It must be remembered that the present agreement is fundamentally differ-

ent from the usual commercial contracts envisaged by the traditional rules of
private international law. First of all it binds on the one hand a national
company or corporation whose dominant status is that of a public corporation,
and on the other hand a foreign commercial company, which has a foreign
civil status. Again the objects of the agreement are not the usual commercial
operations. On the contrary its aim is to grant Sapphire the long-term
exploitation of natural resources on Iranian territory and this exploitation
involves an obligation to make important investments and to establish per-
manent installations. It creates rights which are not merely "contractual"
but are concessions giving Sapphire, for the time being, possession and, to a
certain extent, control over the territory. These concessions give the contract
a particular character, which is partly public law and partly private law.
Finally the contract involves special tax arrangements for the foreign com-
pany, which are evidence of its public character. This public character is
further evidenced by the need for ratification by the Iranian Government.
Under the present agreement, the foreign company was bringing financial
and technical assistance to Iran, which involved it in investments, responsi-
bilities, and considerable risks. It therefore seems normal that they should be
protected against any legislative changes which might alter the character of
the contract and that they should be assured of some legal security. This
could not be guaranteed to them by the outright application of Iranian law,
which it is within the power of the Iranian State to change.
The result of these considerations is to reduce the likelihood of Iranian
civil law being applied to the interpretation and performance of the agreement.
They are reinforced by the following factors which are contained in the
contract, and which provide valuable pointers to the law applicable.
(a) The agreement contains an arbitration clause entrusting the task
of arbitrating any possible dispute to an arbitrator chosen by the Presi-
dent of the Supreme Court of Switzerland, Denmark, Sweden, or Brazil.
Now in doctrine and in case-law, an arbitral clause is generally
regarded as "one of the most frequent and most significant indications of
what the parties considered to be the nature of their operation, by which
the contract is connected to the legal system of the country thus chosen "
(Batiffol, Traitd e'lmentaire de droit international priv4 (3rd ed., Paris,
1959), N. 595, p. 648, as well as the different French and foreign cases
cited in the note; Dicey, Conflict of Laws (7th ed., London, 1958), p. 731;
Lord McNair, " The General Principles of Law Recognized by Civilized
Nations" (1957), B.Y.B.I.L., p. 6).
Undoubtedly the localising value of this connecting factor should not
be overestimated (Cheshire, Private International Law (6th ed., Oxford,
1961), p. 226), particularly as in this case, when the country where the
arbitration takes place has no connection with the other elements of the
agreement (Batiffol, op. cit., p. 649).
It is not feasible in the present case to imply an intention to the
parties to submit to the substantive law of the forum of the arbitration,
a forum which they did not know of at the time they concluded the agree-
ment. However, if no positive implication can be made from the arbitral
clause, it is possible to find there a negative intention, namely to reject
the exclusive application of Iranian law. If in fact the parties had
intended to submit their agreement to Iranian law and if the only signifi-
cance of the arbitral clause was to deprive the Iranian authorities of
jurisdiction in case of any dispute, the authors of the agreement, whom
one must suppose were competent lawyers, would almost certainly not
have failed to negative, by an express clause, any significance which such
an arbitral clause normally carries as a connecting factor according to
general doctrine.
(b) Article 38 of the agreement, which confirms an intention already

expressed in the preamble, provides that the parties undertake to carry
out its provisions according to the principles of good faith and good will,
and to respect the spirit as well as the letter of the agreement.
It has been held in several arbitral awards concerning similar legal
relations to the ones binding the parties in the present case (" Lena Gold-
fields Arbitration," (1950) Cornell Law Quarterly, p. 42; " Petroleum
Developments Limited, and the Ruler of Abu Dhabi," (1952) I.C.L.Q.,
p. 247; Ruler of Qatar, and International Marine Oil Company Limited),
that such a clause is scarcely compatible with the strict application of
the internal law of a particular country. It much more often calls for
the application of general principles of law, based upon reason and
upon the common practice of civilised countries, as was expressly
recognised by the above cited authorities.
These authorities are approved of by Lord McNair, former President
of the International Court of Justice (op. cit.).
In fact, in ordinary law, the judge who decides a difference concerning
the interpretation or performance of a contract normally refers to the
complementary rules contained in the positive law applicable to the
contract. On the other hand a reference to rules of good faith, together
with the absence of any reference to a national law, leads the judge to
determine, according to the spirit of the agreement, what meaning he can
reasonably give to a provision of the agreement which is in dispute. It
is therefore perfectly legitimate to find in such a clause evidence of the
intention of the parties not to apply the strict rules of a particular
system but rather to rely upon the rules of law, based upon reason,
which are common to civilised nations. These rules are enshrined in
article 38 of the Statute of the International Court of Justice as a source
of law, and numerous decisions of international tribunals have made use
of them and clarified them. Their application is particularly justified
in the present contract, which was concluded between a state organ and
a foreign company, and depends upon public law in certain of its aspects;
it has therefore a quasi-international character which releases it from the
sovereignty of particular legal system and it differs fundamentally from
an ordinary commercial contract. It should be mentioned that the
question of the law applicable did not altogether escape the draftsman
of the agreement-see letter (d) below; and the absence of any reference
to a national law can only confirm this conclusion.
Furthermore, according to the precedents cited above and to the
conclusions reached by McNair, to which he refers, the arbitrator finds
important evidence in clause 38, para. 1, of the Agreement of the intention
of the parties to exclude the application of Iranian law and a fortiori
of any other national law, and to submit, so far as concerns the inter-
pretation and performance of their agreement, to the general principles
of law based upon the practice common to civilised countries.
(c) This conclusion is supported in the present case by article 37 of
the Agreement, which concerns force majeure. Paragraph 2 of this
article provides that force majeure as used in the Agreement should be
defined according to the principles of international law. It is character-
istic that, in the only clause of their Agreement which defines a con-
tractual notion by a reference to a particular judicial system, the
parties should not have referred to Iranian law-which however recognises
this notion (Art. 229 of the Civil Code, according to Aghababian,
Ldgislation iranienne actuelle, Paris, 1951)-nor to the law of any other
nation, but that they appeal to the general principles of international law,
which they expressly state to be applicable.
If this clause is read with article 38, which it immediately precedes,
it can reasonably be regarded as having a wider application than simply
to force majeure. It is possible to find in it further evidence of the

intention of the parties to submit the interpretation and performance of
their Agreement to the general principles of law. This is the conclusion,
which is drawn by R. K. Ramazani in a strongly argued article ((1962)
I.C.L.Q. 503) for the agreement made between NIOC and the Pan-
American Petroleum Corporation in 1958, an agreement which had a
similar object and which contains clauses identical to those in the present
Agreement.
(d) Finally, the present contract is the last of several agreements made
by NIOC which have the same object. First of all there is the agreement
of October 1954 made with the International Oil Consortium. Article
41 of this agreement is identical to article 38 of the present contract.
In its article 44 it contains clauses relating to arbitration which are in
substance identical to those in the Sapphire contract. The difference
between this contract and the other agreement is that the agreement
made with the Consortium expressly lays down, in its article 46, the law
applicable as follows:
" In view of the diverse nationalities of the parties to this Agreement,
it shall be governed by and interpreted and applied in accordance
with the principles of law common to Iran and the several nations
in which the other parties to this Agreement are incorporated, and
in the absence of such common principles then by and in accordance
with principles of law recognised by civilised nations in general,
including such of those principles as may have been applied by
international tribunals."
A similar clause appears in the agreement made between NIOC and

the company Agip Mineraria in July 1957.
Undoubtedly, as Carabiber (op. cit. p. 49) points out, the wording
of this provision was discussed at length at the time of the conclusion
of the contract in 1954. The difficulties which the Iranian Treasury were
undergoing and the necessity to put an end to a situation which was
likely to become rapidly worse may have influenced the Iranian Govern-
ment in adopting this clause. But it does not alter the fact that the
parties to this agreement recognised that this was a legitimate means of
guaranteeing the foreign companies against the unilateral decisions of
Iran, which would automatically be applied if Iranian law had been
declared applicable.
Furthermore the particular circumstances existing at the time of the
1954 agreement were no longer applicable for the agreement made with
Agip in 1957, and yet this agreement, as has been seen, retained this
clause.
It is true that there is no such provision in the present Agreement,
nor in the one made in 1958 with the Pan-American Petroleum Corpora-
tion. But the essential character of all these contracts is the same; they
all have the same object and the same character, as is evidenced by the
complete similarity of several of their clauses, particularly those dealing
with performance and arbitration. By virtue of the principle of good
faith, NIOC cannot claim that the absence of an express provision
regarding the law applicable should be interpreted as a denial of a
principle contained in previous agreements which had the same object.
The requirements of a guarantee by the foreign company are the same;
therefore according to reason and good faith, the same solution should
be adopted, as NIOC formally agreed to with more powerful partners.
If then, in the present contract, NIOC had intended to cast aside a
principle which is recognized in the previous agreements and to refuse
Sapphire a guarantee which they had previously conceded as legitimate,
it must be presumed that the draftsman of the contract would have
expressly shown this intention.
3. It is quite clear from the above that the parties intended to exclude
the application of Iranian law. But they have not chosen another positive
legal system and this omission is on all the evidence deliberate. All the
connecting factors cited above point to the fact that the parties therefore
intended to submit the interpretation and performance of their contract to
principles of law generally recognised by civilised nations, to which article
37 of the Agreement refers, being the only clause which contains an express
reference to an applicable law.
The arbitrator will therefore apply these principles, in taking account,
when necessary, of the decisions taken by international tribunals.
He points out that, this being so, he has no intention of deciding the
case according to " equity," like an " amiable compositeur." On the contrary
he will try to find the rules of positive law, common to civilised nations, such
as are formulated in their statutes or are generally recognised in practice.
Concerning each rule of law to be applied, he will show first its character as
a rule of positive law, and then its generality.
Moreover this solution is the one which is advocated for such contracts by
the following recognised authorities : McNair, op. cit. and Jessup,
Transnational Law (Yale, 1956).
Such a solution seems particularly suitable for giving the guarantees of
protection which are indispensable for foreign companies, which undergo very
considerable risks in bringing financial and technical aid to countries in
the process of development. It is in the interest of both parties to such
agreements that any disputes between them should be settled according to
the general principles universally recognised and should not be subject to
the particular rules of national laws, which are very often unsuitable for
solving problems concerning the rights of the state where the contract is
being carried out, and which are always subject to changes by this state and
are often unknown or badly known to one of the contracting parties.
Finally, they being contracts sui generis which cannot be classified as
one of the contracts specially regulated by the codes, only the general rules
concerning performance or lack of performance of a contract can usefully
be applied. And this is one of the most unified areas of law. There the
differences are of secondary importance.
APPENDIX B
Extract from the Sapphire Arbitration, 1963

While Sapphire International faithfully carried out its obligations, the
defendants deliberately broke theirs, by hiding behind reasons which they
must have known were without validity and were once again taking up a
wholly negative attitude and were failing to perform duties which were
clearly defined in the agreement of the parties. Such an attitude is a further
breach of the obligations undertaken by NIOC since the parties had expressly
agreed to carry out their contract according to the rules of good faith and
in a spirit of good will.
The arbitrator therefore finds that it has been duly established that the
defendant deliberately refused to carry out certain of its obligations and that
this failure is a breach of contract.
Moreover it is a fundamental principle of law, which is constantly being
proclaimed by international courts, that contractual undertakings must be
respected. The rule pacta sunt servanda is the basis of every contractual
relationship. Besides it is contained in the laws of both parties in the case,
in article 219 of the Iranian Civil Code as well as in Canadian law.
8. It remains to examine whether, as is submitted by the plaintiff, this
breach of certain, of its obligations by NIOC resulted in the plaintiff being
released from its own obligations as well as giving rise to damages, as is

claimed by Sapphire International.
There is a general rule of private law to be found in positive systems of
law, which says that a failure by one party to a synallagmatic contract to
perform its obligations in breach of contract releases the other party from
its obligations and gives rise to a right to pecuniary compensation in the
form of damages. Although the methods of applying this principle differ,
particularly with regard to judicial techniques and the formalities required
for the carrying out of this right, this rule is a general rule, and constitutes
a general principle of law recognised by civilised nations.
It is a rule to be found in continental law. It is contained in article
1184 of the French Civil Code, according to which "in every synallagmati
contract there is an implied term releasing one party from the contra
the event of the other failing to satisfy his obligations" (translation). In
such a case the partner has the choice "of compelling the other (party)-to
perform the agreement when this is possible, or of demanding release from
the contract with damages" (translation). According to the cases, which
are supported by doctrine, it is the judge's task to consider whether in all
the circumstances the failure to perform is sufficiently serious for him to
allow the other party to be released. A deliberate failure to perform, made
with full knowledge of the facts, is sufficient justification for release even if
no damage can be shown, and the debtor in default cannot submit that the
breach could quite easily have been remedied (cf. Esmein, in Traitd pratique
de droit civil franqais, by Planiol and Ripert, Volume VI, Obligations (2nd
ed., Paris, 1952) N. 430, 431, and the case-law cited). This rule is the same
in German law. By virtue of para. 326 of the German Civil Code, the
failure by one party to perform its obligations allows the other party to stop
performance and demand full damages (cf. Lehmann, in Lehrbuch des
Biirgerlichen Rechts, of Enneccerus, Kipp and Wolff, Vol. 2 (14th ed.,
Tiibingen, 1954), p. 213 et seq.). It is useless to go on giving examples,
since nearly every continental legislation has been inspired in this field by
French or German law.
As far as Anglo-Saxon law is concerned, they admit that there is a
breach of contract whenever it is impossible to put forward any valid exc
for the failure to perform one or several contractual obligations. Accordi
to the common law, the breach of contract by one of the parties releases th
other from the performance of its obligations provided the respective oblig
tions of the parties constitute "mutually conditional promises." Moreove
the synallagmatic character of the contract is presumed in bilateral contrac
An anticipatory breach of contract is sufficient if the attitude of one
partner gives the other sufficient reason for considering that the first will n
carry out his obligations: the second party is then released from perfor
ance. A party who is released from performance as a result of the breac
of contract by his partner is entitled under the common law to damage
whose effect is to put the injured party in the same position that he wou
have been in if the contract had been carried out in the manner provided f
by the parties at the time of its conclusion (cf. Stephen's Commentaries
the Laws of England, Vol. III by Cheshire, Allen & Fifoot, translated b
Mitcheli (Paris, 1931), p. 208 et seq.; Williston, Contracts, revised editi
section 1288 and third edition, section 699; Restatement of the Law of
Contracts, published by the American Law Institute, sections 314, 315;
Arminjon, Nolde and Wolff, Traite de droit compard, Vol. III (Paris, 1951),
N. 827, 828, 830).
These principles are no more than an expression of a logical requirement,
which explains why they are generally recognised. However different the
judicial techniques employed may be, however divergent may be the theoretical
explanations given by doctrine, one point is certain: this principle is
explained by the interdependence of the obligations contained in the same
contract. It would be illogical and contrary to the most elementary notions

of equity if one party could obtain satisfaction while the other suffered a
loss. Whether the notion of the reciprocal effect of obligations, of the equal
value of obligations, or of the implied condition is relied on, it is impossible
to escape the essential and elementary conclusion that one of the parties must
not benefit from the performance of the contract by his partner while dodging
his own obligations. The disregarding of the contractual law by one of the
parties releases the other from its undertakings (cf. Josserand, Cours de
droit civil positif frangais (2nd ed., Paris, 1933), Volume II, p. 194).
It is necessary therefore to regard the rules set out above as rules of
positive law generally recognised by civilised nations. They are the ines-
capable and logical consequence of the principle of good faith, to which the
parties intended to submit the performance of their agreement.
In addition these rules are well known both in Canadian law, which
follows the common law, and in Iranian law. Though the Iranian civil code
does not appear to contain this principle in a general form like French or
German law, it does however expressly provide for its application to the
main synallagmatic contracts, such as sale, hire, and farming tenancies (Arts.
402 et seq., 492, 534 of the Iranian Civil Code). Such a principle can there-
fore be regarded as common to the national laws of both parties to the
contract.
The principle set out above cannot be cast aside by the fact that th
present contract contains elements which have their origin in administr
law, since it concerns the concession of territory. Rules of public law,
which might possibly differ from civil law, could only be taken into considera-
tion if the Iranian State had relied upon its sovereign rights and had taken
steps of a public law nature likely to endanger the performance of the
contract. This is not the case. All the same the respect for rights acquired
under concessions is only one aspect of the respect for acquired rights, which
is undoubtedly one of the general principles of law recognised by international
tribunals (cf. McNair, op. cit., p. 16 and the several decisions of international
tribunals cited by the author).
9. The application of the above rules to the present case calls for the
following considerations :
Without doubt NIOC had carried out one of its principal obligations in
allowing Sapphire International access to the concession area. But this was
not NIOC's only obligation; under the contract they were bound to collaborate
closely with their partner and to give Sapphire the benefit of their views,
which could be useful in view of their experience and the documentary
information at the disposal of this Iranian State organ concerning the
exploration of oil resources in the area of the Persian Gulf; they were also
bound to start verifying the statements of expense and consequently to
reduce the guarantees which had been given within the agreed time limits.
These obligations were not without importance for Sapphire International.
The material support of NIOC was likely to facilitate their work and to
avoid the expense of blind experimentation. The reduction of the letter
of credit allowed the Canadian company to extricate resources worth a
considerable amount.
In addition, and this is decisive, where a foreign company agreed to tak
considerable risks it was a necessary condition of their activity that th
should receive the proper and close collaboration of the State organ NIOC.
At a time when they were about to undertake extremely expensive drilling
operations, it would be unreasonable to require them to take on the risk of
considerable investments, when the attitude of their partner afforded them
reasonable grounds for thinking that the latter would continue to neglect its
obligations.
I.c.L.Q.-13 33
APPENDIX C
Extract from the Sapphire Arbitration, 1963.

For these reasons the arbitrator is of the opinion that the deliberate
failure by the defendant to carry out its obligations in breach of contract
having particular regard to the circumstances in which this refusal to perform
was made, justifies the plaintiff in not performing the contract. Since the
plaintiff was entitled to consider that their partner's attitude meant that, they
would continue to refuse to perform, the plaintiff was released from further
performance.
10. Undoubtedly, while stopping the prospection work Sapphire Inter-
national failed to inform NIOC expressly that they intended to repudiate
the contract. Now there are certain systems of law which require such a
declaration to be made immediately, or even lay down that a period of grace
must be first fixed (para. 326 of the German Civil Code, Arts. 107 to 109,
of the Swiss Federal Code of Obligations). But these rules are solely intended
to prevent the creditor from putting off his decision and speculating to the
detriment of the debtor. Both statute- and case-law limit the application
of them in this sense. However in the present case, apart from the fact that
the plaintiff had several times requested NIOC to release the guarantee,
requests which amounted to formal notices to perform or "mises en demeure,"
and apart from the fact that the contract contained provisions for this
release, NIOC's continual refusal to carry out the contract made any notice
to perform superfluous. The failure by the plaintiff to make a formal declara-
tion of termination cannot have caused the defendant any damage, nor even
to have caused them any doubt. There is therefore no need to examine
whether such rules, which are peculiar to certain systems of law only-
French law ignores them, and similarly the Anglo-Saxon systems-should in
principle be applied. For the defendant to invoke them would be incom-
patible with the principles of good faith and, for this reason alone, could
not possibly be taken into consideration.
11. The termination of a contract as a result of breaches by the defendant
means that the plaintiff has a right to damages, in accordance with the rules
enunciated under para. 8 above.
APPENDIX D
Extract from the Sapphire Arbitration, 1963
12. The first claim of the plaintiff is to sentence NIOC to refund Sapp
International for the sum of $U.S. 350,000, the amount of the letter of
credit cashed by NIOC on January 24, 1961.
Having been released from their obligations as a result of the failure of
their partner to carry out the contract in breach of it, Sapphire International
were also freed from the obligation imposed by article 16 of the Agreement
to start drilling within two years of the effective date.
Therefore NIOC cannot claim payment of the penalty laid down by
article 43, para. 2, of the contract in the event of this obligation not being
carried out.
They must refund this sum with interest at the usual rate of 5 per cent. pe
annum from the date of being enriched, that is from January 24, 1961.
13. The claim under heading 2 (a) is for the payment of compensation for
"the expenses incurred" in the conclusion of the agreement of the 16th
June, 1958, amounting to $U.S. 165,175.
This claim cannot be allowed by way of positive damages (Erfiillungs-
interesse) as is claimed by the plaintiff. Their claim should put Sapphire
International in the same pecuniary position as they would have been in
if the contract had been performed. But the repayment of the expenses
incurred in concluding the contract would tend to put them in the position
they would be in if the contract had never been concluded (negative damages).
As opposed to the expenses incurred in performing the contract, the expenses
of concluding it do not result from the contract, which they have preceded.
This is well illustrated by the fact that if at the very last moment the
contract had not been concluded or had not been ratified by the Iranian
political authorities, the plaintiff would not have been able to put forward
any claim under this head. Undoubtedly the plaintiff was justified in hoping
to recover the expenses of making the contract out of the profit which they
were expecting. But this is an element included in the compensation for loss
of profit.
Adding positive and negative damages together is a contradiction and
cannot be allowed.
14. The items 2 (b), (c), (d) of the claim is for payment of the following
compensation :
(b) The registration fees of the Canadian Companies in Teheran amounting
to $U.S. 3,500.
(c) The share in the capital of IRCAN subscribed by the plaintiff,
amounting to $U.S. 5,000.
(d) The cost of the prospection work carried out by Sapphire
International, amounting to $U.S. 1,018,932.
These are expenses incurred in performing the contract, in other words
the loss sustained by the plaintiff in carrying out the contract. They are
entitled to them in principle. They cannot however claim them beyond the
end of June 1960, the date by which they had clearly given up performing
their obligations.
The arbitrator is quite satisfied from the statement of expenses verified
by the Chartered Accountants Abrams, Caplan, Stekel and Zweig from
Toronto, and from the certificate signed by these four experts, that up to
the end of June 1960 the total amount of these expenses reached $U.S.
651,474. 82, including the cost of registering the companies in Teheran. A
further sum of $U.S. 5,000 should be added for the share in the capital of
IRCAN, whose return to the plaintiff has not been established whatever this
amount should have been. A deduction of $U.S. 5,600 must be made from
this total for the sale of installations. The total sum therefore which should
be awarded to the plaintiff under this head is $U.S. 650,874.
APPENDIX E
15. Under item 2 (e) the plaintiff claims the payment of $U.S. 5,000,0
for "loss of profit."
Once the principle on which such an award is based is recognised in law,
the determination of the amount of compensation becomes a question of fact
to be weighed up by the arbitrator.
(a) Since the question concerns the concession of an area which has not
yet been prospected, and where therefore the presence of oil-bearing beds
in commercially workable quantities was and still is today uncertain, the
existence of damage is not without doubt. No one today can affirm that the
operation would have been profitable, and no one can deny it. But if the
existence of damage is uncertain, it is however clear that the plaintiff had a
chance to discover oil, a chance which both parties regarded as serious. Does
the loss of this chance give the right to compensation?
It is not necessary to prove the exact damage suffered in order to award
damages. On the contrary, when such a proof is impossible, particularly as
a result of the behaviour of the author of the damage, it is enough for the
judge to be able to admit with sufficient probability the existence and extent
of the damage.
Thus the French courts have awarded damages for the "loss of a chance"
when the victim had lost the chance of making a profit as a result of what
someone else had done. Although in such cases the existence of damage is
uncertain, case-law has looked at the position at the time when the chance
was lost and has accepted that this chance itself has a value whose loss gives
rise to compensation (cf. Esmein, op. cit., Vol. VI, N. 542. 2.: Savatier,
Traite de la responsabilite civile en droit frangais, Vol. II (2nd ed., Paris,
1951), N. 461: H. et L. Mazeaud and Tunc, Traite thdorique et pratique de
la responsabilitd civile (5th ed., Paris, 1957), N. 219, and the cases cited by
these authors). Similarly an English decision: Chaplin v. Hicks [1911] 2
K.B. 786). A particularly rich source of information on this subject is the
American case-law, in which several decisions deal with the determination
of compensation for loss of land or unprospected mining or oil concessions.
In such cases, there is no need to prove the success of the search. It is
sufficient to establish a reasonable probability of success. This fact alone
gives the land or the concession a market value, which the courts estimate by
considering the following factors: transactions relating to neighbouring
territories, the appraisal of experts and especially geologists concerning the
probability of profit, and the comparison with neighbouring areas (cf. Montana
Railway v. Warren, U.S. Supreme Court, 1890; Philipps v. United States,
243 F. 2d.1.9th Circuit 1957; Eagle Lake Improvement v. United States 141 F.
2d. 562, 5th Circuit 1944).
(b) In the present case the plaintiff has put in evidence an expert report
by G. Meyer, a geologist from Dallas, in the state of Texas, who is a
specialist in the prospection and appraisal of oil-bearing concessions; Mr.
Meyer was also heard by the arbitrator.
It emerges from his report, which is summarised in the part of the judg-
ment headed "Facts," and from his verbal explanations, that it is highly
likely that the geological characteristics common to every oil-bearing territory
are to be found in the territory granted to Sapphire under the concession,
which is situated in a region which is very rich in oil. The geological con-
ditions of this territory make it possible to affirm that there is a very strong
chance, but not a certainty, that deposits of commercially workable oil exist
in the concession area. The expert supported his evidence by references to
similar conclusions formulated by other geologists and other oil companies
(in particular: A. Stahmer, in World Petroleum, June 23, 1952; Julian Fohs,
(1947) II Bulletin of American Association of Petroleum Geologists 31,
p. 137; an unpublished report of NIOC entitled "Geology of districts" III
and IV, documents which were put in evidence before the arbitrator). Finally
the expert mentioned that the surveys which Sapphire International had
started were likely to confirm these conclusions.
Undoubtedly, as the expert Meyer has also stressed, such an appraisal is
not free from uncertainty. But it is difficult to see what other proof could
reasonably have been required of the plaintiff.
Another factor to be considered is that NIOC, who certainly have an
extensive documentation available and possess great experience, would not
have made a concession of an area, where they did not think that there was
a serious chance of discovering oil. It is reasonable to suppose that they
would not have required a minimum investment of $U.S. 8,000,000 from a
company if they did not think that these investments had a serious possibility
of being turned to a profit, of which they and the Iranian Government would
take the largest share.
Moreover in the arbitrator's judgment the plaintiff has satisfied the legal
requirement of proof by showing a sufficient probability of the success of the
prospection undertaken, if they had been able to carry it through to a
finish. The plaintiff can therefore claim compensation for "loss of profit."
(c) As far as the amount of this compensation is concerned, it cannot
be established exactly. It is the arbitrator's task to decide it ex aequo et

bono by considering all the circumstances.
While he refuses to give anything more than a rough estimate, which
shows the simple order of magnitude, the expert Meyer considers that the
maximum workable reserve would be 25,000,000 cubic metres, which means
that, if everything goes as well as possible for the plaintiff, they would
receive a net income of $U.S. 46,000,000. On the other hand, in case of
failure, the minimum loss Sapphire would suffer would be the investment of
$U.S. 8,000,000 which they had undertaken in the contract, and to this should
be added certain expenses of the company in addition to the investments
provided for in the contract.
All the same, however useful they may be, the preceding appraisals do
not take into account all the risks inherent in an operation in a desolate
region, to which it is difficult to gain access and which has an unfavourable
climate, nor the troubles such as wars, disturbances, economic crises or
slumps in prices, which could affect the operation during the several decades-
25 years at least under the contract-during which the Agreement was to
last. Another plausible consideration is that, now that they are released
from the present contract, the plaintiff company can employ its resources,
its organisation and strength in other profitable activities which it could
probably not have kept on hand at the same time as the prospection and
exploration of the concession areas, which required expensive investments
and important personal obligations.
Finally the judge is given a wide discretion when he has to decide ex
aequo et bono the compensation for damage whose extent and existence are
not certain even though a sufficient probability has been established, and
when his assessment rests upon conjecture.
Therefore, in the arbitrator's judgment it is reasonable and equitable to
fix the amount of compensation for loss of profit at $U.S. 2,000,000.
16. The total amount of compensation for the expenses incurred and for
the loss of profit which the plaintiff claims under heading 2 of their claims
should therefore be fixed, according to the assessment of the arbitrator, at:
2,650,8714 Dollars U.S.
This compensation has fallen due -and immediate payment of it should be
made by the defendant.
It carries interest at the usual rate of 5 per cent. per annum, from the date
of the first step taken in the arbitration procedure, that is from September 28,
1960, the date when NIOC were asked to choose their arbitrator.

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British Institute of International and Comparative Law

Cambridge University Press, British Institute of International and Comparative Law

THEORY AND PRACTICE:

I. IMPORTANCE AND NATURE OF " INTERNATIONAL CONTRACTS

MANY studies have been devoted in recent years to the question of

Attorney-at-Law (Geneva). Formerly: First Secretary, International Cour

A further difficulty is that this matter is at the meeting place of

2 Among recent important contributions on this matter in general, see M

security solving possible conflicts, and helping in shaping the

A further difficulty confronting the student of international or

1. Parties. The " status " of the parties is unequal, in law, in

9 In a great number of newly independent countries, rapid economic development

3. Arbitration. A third feature is that often these agreements

II. CHOICE-OF-LAW METHODS FOR INTERNATIONAL CONTRACTS

Five possibilities are theoretically open and have been suggested

" Concession Agreements and Nationalization " (1958) 52 A.J.I.L. 260; on

1. A national law as proper law of international contracts. A

Cassation have held that no particular presumption now applies to

There is abundant authority for the idea that, in itself, a

20 See, e.g., King v. International Trustee for the Protection of Bond

provision implies a choice of law are impressive. To quote English

While Dicey was probably only thinking of a court of law,

" is more than a mere submission to the judicial or arbitral

Battifol, the leading French writer on Conflicts, while sharing

Battifol gave an affirmative reply if the choice implied is based

26 Conflict of Laws (7th ed., 1958), p. 731.

" It is not feasible in the present case to imply an intention to

If neither the national law of the State party to the contract

A similar view is to be found in an analysis of French " juris-

The traditional criterion of international law as the law govern-

" As the Agreement of 1933 86 has not been concluded between

two States, but between a State and a private American cor-

37 Award, p. 58. The Tribunal invoked the dictum of the Permanent

them being a private corporation, the other an agency with charac-

42 Schwarzenberger recognises this possibility by implication: "In the absence

In the Agreement concluded between Syria and the Middle East

In the Abu Dhabi case, the arbitrator, Lord Asquith of Bishop-

In the Iranian Consortium Agreement of 1954 there is a refer-

"' principles of law common to Iran and the several nations in

" principles of law recognised by civilised nations in general,

The Agreement concluded in 1957 between the National Iranian

4e Publication of the Ministry of Finance of the Republic of Syria, Department

" principles of law common to Kuwait and Japan and, in the

The reference to international tribunals in these two agreemen

In the Agreements concluded with Pan American Petroleum

III. THE SAPPHIRE-NIOC ARBITRATION (1963)

50 Arbitral Judgment delivered in the dispute between Sapphire Internati

Mr. Justice Cavin delivered his judgment on March 15, 1963.

effect? This question is examined in a passage which is quoted in

Equally interesting is the way the arbitrator approached the

IV. TRANSNATIONAL LAW AS A POSSIBLE SOLUTION

The arbitral judgment delivered in the Sapphire v. NIOC case is

" whether the general principles of law . . .can serve as a

satisfactorily in practice the function of a proper law and are

But the main source of the difficulties would appear to be the

63 Jenks, The Proper Law of International Organizations (1963); see McNair.

neither international law nor national law; it is a domestic and

67 Jenks includes this-not quite correctly, it is submitted-in "international