Cambridge University Press, British Institute of International and Comparative Law The International and Comparative Law Quarterly
Cambridge University Press, British Institute of International and Comparative Law The International and Comparative Law Quarterly
Cambridge University Press, British Institute of International and Comparative Law The International and Comparative Law Quarterly
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
Stable URL: http://www.jstor.org/stable/756038
Accessed: 18-09-2016 07:57 UTC
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CONTRACTS BETWEEN A STATE OR A
STATE AGENCY AND A FOREIGN COMPANY
By
JEAN-FLAVIEN LALIVE *
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988 International and Comparative Law Quarterly [VOL. 18
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JULY 1964] Contracts between State and Foreign Company 989
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990 International and Comparative Law Quarterly [VoL. 13
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JULY 1964] Contracts between State and Foreign Company 991
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992 International and Comparative Law Quarterly [VOL. 13
(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.
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JULY 1964] Contracts between State and Foreign Company 993
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.
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994 International and Comparative Law Quarterly [VOL. 13
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JULY 1964] Contracts between State and Foreign Company 995
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.
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996 International and Comparative Law Quarterly [VoL. 13
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JULY 1964] Contracts between State and Foreign Company 997
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
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998 International and Comparative Law Quarterly [VoL. 18
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.
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JULY 1964] Contracts between State and Foreign Company 999
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1000 International and Comparative Law Quarterly [VOL. 18
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JULY 1964] Contracts between State and Foreign Company 1001
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1002 International and Comparative Law Quarterly [VoL. 18
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JULY 1964] Contracts between State and Foreign Company 1003
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,
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1004 International and Comparative Law Quarterly [VoL. 13
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.
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JULY 1964] Contracts between State and Foreign Company 1005
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1006 International and Comparative Law Quarterly [VoL. 13
61 Infra.
62 See Mann, The Proper Law of Contracts concluded by International Persons,
p. 44.
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JULY 1964] Contracts between State and Foreign Company 1007
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1008 International and Comparative Law Quarterly [VOL. 13
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JULY 1964] Contracts between State and Foreign Company 1009
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.
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1010 International and Comparative Law Quarterly [VoL. 13
77 Such as an unrealistic scission or " splitting-up " of the contract into several
legal systems.
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JULY 1964] Contracts between State and Foreign Company 1011
APPENDIX A
B. THE I AW APPLICABLE 1
(a) Procedural law
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1012 International and Comparative Law Quarterly [VoL. 13
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JULY 1964] Contracts between State and Foreign Company 1013
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1014 International and Comparative Law Quarterly [VoL. 13
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JULY 1964] Contracts between State and Foreign Company 1015
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
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1016 International and Comparative Law Quarterly [VoL. 13
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JULY 1964] Contracts between State and Foreign Company 1017
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
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1018 International and Comparative Law Quarterly [VOL. 13
APPENDIX C
APPENDIX D
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
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JULY 1964] Contracts between State and Foreign Company 1019
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.
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1020 International and Comparative Law Quarterly [VOL. 13
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
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JULY 1964] Contracts between State and Foreign Company 1021
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