66 ILR 518 519

GOVERNMENT OF KUWAIT v. AMERICAN INDEPENDENT OIL COMPANY (AMINOIL)

Arbitration Tribunal. 24 March 1982

(Renter, President, Hamed Sultan and Sir Gerald Fitzmaurice, Members)

SUMMARY:1 The facts:—2 In 1948 the Government of Kuwait granted to

the American Independent Oil Company (Aminoil), a Delaware
corporation, an oil concession (the Concession) in an area then known as the

1.
Prepared by Mr C. J. Greenwood.
2.
The facts are set out in detail in Section II of the Award, p. 546, below.
520

Kuwait-Saudi Arabia Neutral Zone,3 The 1948 Concession was to run for a duration of
60 years.
Article 17 provided that
The Shaikh shall not by general or special legislation or by administrative measures or by
any other act whatever annul this Agreement except as provided in Article 11. No alteration
shall be made in the terms of this Agreement by either the Shaikh or the Company except in
the event of the Shaikh and the Company jointly agreeing that it is desirable in the interest of
both parties to make certain alterations, deletions or additions to this Agreement.
Article 18 provided for the reference of disputes to arbitration. Other provisions
4
required Aminoil to follow “good oil-field practice” in operating the Concession.
Production commenced in 1954.
Kuwait, which had had a special relationship with the United Kingdom, became fully
independent in 1961. In that year the Government of Kuwait and Aminoil concluded a
Supplemental Agreement amending the 1948 Concession. The Supplemental
Agreement increased the taxes and royalties payable to Kuwait, amended Article 11 of
the 1948 Concession,5 and inserted a new Article 9, which provided that
If, as a result of changes in the terms of concessions now in existence or as a result of the
terms of concessions granted hereafter, an increase in benefits to Governments in the Middle
East should come generally to be received by them, the Company shall consult with the Ruler
whether in the light of all relevant circumstances, including the conditions in which
operations are carried out, and taking into account all payments made, any alterations in the
terms of the agreements between the Ruler and the Company would be equitable to the
parties.
At the same time, the parties reached an understanding, embodied in a “Confidential
Letter”, concerning the details and arrangements for taking account of Aminoil's special
operating conditions.
In 1973 Aminoil and the Government of Kuwait drew up a Draft Agreement to
make further alterations in the terms of the 1948 Concession. The 1973 Draft
Agreement, provided for substantial increases in the amounts payable by way of taxes
and royalties to the Government. It also contained a new arbitration clause and a choice
of law clause which provided that
The parties base their relations with regard to the agreements between them on the
principle of goodwill and good faith. Taking account of the different nationalities of the
parties, the agreements between them shall be given effect, and must be interpreted and
applied, in conformity with principles common to the laws of Kuwait and of the State of
New York, United States of America, and in the absence of such common principles,

3.
The status of this Zone, which was the subject of an agreement between Kuwait and Saudi Arabia, is
discussed at pp. 546–7. The Zone was subsequently divided, leaving the concession area in the Kuwait part
of the Zone.
4.
Article 11 gave the Shaikh the right to terminate the Concession in the event of certain breaches by
Aminoil.
5.
The text of the amended Article 11 is set out at p. 550, below.
 66 ILR 518 521

then in conformity with the principles of law normally recognized by civilized

States in general, including those which have been applied by international
tribunals.
In addition, the Draft Agreement provided that future discussions concerning the
terms of the 1948 Concession would take into account that Aminoil “should not be
denied a reasonable opportunity of earning a reasonable rate of return (having regard to
the risks involved) on the total capital employed”. The Draft Agreement was to be
ratified by the Kuwait Parliament. The Kuwait Government was also to secure the
enactment of a new income tax law to enable Aminoil to take advantage of United
States double taxation immunity. The Draft Agreement was never ratified and no
change was made in Kuwait's income tax law. Nevertheless, by a letter of December
1973, Aminoil agreed, at the Government's request, to treat the Draft Agreement as
though it was in force. From that date Aminoil made payments to the Government on
the basis set out in the Draft Agreement.
In 1974, the Gulf States adopted the “Abu Dhabi Formula” providing for further
increases in tax and royalty rates. In October 1975 the Government of Kuwait
informed Aminoil that the Abu Dhabi Formula was to apply to Aminoil with effect
from November 1974. During 1976 extensive negotiations took place between Aminoil
and the Government. Aminoil conceded the principle that the Abu Dhabi Formula
should apply to determine its scale of payments as from October 1975 but rejected
retroactive application and sought other changes in the financial arrangements under
the Concession to ensure that it received what it regarded as a reasonable profit. No
agreement was reached and Aminoil continued to make payments on the basis laid
down in the 1973 Draft Agreement without applying the Abu Dhabi Formula. During
further negotiations in 1977, Aminoil suggested that the Concession be replaced by a
service agreement in which Aminoil would operate only as the Government's
contractor. The Government accepted this suggestion but no agreement was concluded
because of differences over the amount of compensation to be paid to Aminoil for the
assets which the Government would take over and the amount to be paid by Aminoil to
the Government by way of additional taxes and royalties under the Abu Dhabi Formula
for the period from November 1974.
On 19 September 1977 the Government of Kuwait promulgated Decree Law No.
124 which terminated the Aminoil Concession and nationalized all Aminoil's assets in
6
Kuwait. This Law provided for the assessment of compensation due to the company
and the extent of the company's outstanding obligations to the State of Kuwait by a
committee appointed by the Government. Aminoil protested at the enactment of Law
No. 124 and invoked the arbitration provisions of the 1948 Concession. These
arbitration proceedings were discontinued when Aminoil and the Government
concluded, on 23 June, 1979, an agreement establishing an ad hoc arbitration.

6.
The main provisions of Decree Law No. 124 are set out at p. 558, below.
522

The 1979 Arbitration Agreement7

The 1979 Arbitration Agreement provided for arbitration in Paris. Article IV(1)
provided that, “subject to any mandatory provisions of the procedural law of the place
in which the arbitration is held”, the Tribunal was to establish the rules of procedure
“on the basis of natural justice and of such principles of transnational arbitration
8
procedure as it may find applicable”.
Article III(2) provided that:
The law governing the substantive issues between the Parties shall be determined by the
Tribunal having regard to the quality of the Parties, the transnational character of their
relations and the principles of law and practice prevailing in the modern world.
By Article III(1) the parties recognized that the restoration of the position prior to 19
September 1977 was impracticable and agreed to limit their claims to claims for
monetary compensation or damages. Article III(1) went on to provide that
The Tribunal shall decide according to law:
(i) The amount of compensation, if any, payable by the Government to the
Company in respect of the assets acquired by the Government under Article 2 of
Decree Law No. 124.
(ii) The amount of damages, if any, payable by the Government to the Company in
respect of termination of the Agreement of 28 June 1948 by Article I of Decree
Law No. 124.
(iii) The amount payable to the Government by the Company, and/or the amount
payable to the Company by the Government, in respect of royalties, taxes or
other obligations of the Company, in which connection the Tribunal shall
determine the validity or invalidity of any amendments or supplements to the 28
June 1948 Agreement which are relevant.
The Tribunal was also to determine the amount of interest which might be payable.
The claims of the parties
The Government claimed payments in respect of:—
(a) Royalties and taxes due (i) under the 1973 Draft Agreement for the period 1
January 1977 to 19 September 1977 and (ii) under the Abu Dhabi Formula for the
period 1 November 1974 to 19 September 1977.
(b) Aminoil's liabilities to third parties as at 19 September 1977.
(c) Damages in relation to “lost oil” as a result of Aminoil's alleged failure to operate
the oil fields efficiently and in accordance with “good oil-field practice”.
(d) Expenditure required at the oil fields and the oil terminal as a result of Aminoil's
alleged failure to follow “good oil-field practice”.

7.
The full text of this Agreement is set out at p. 532, below.
8.
The Rules of Procedure drawn up by the Tribunal are set out at p. 539, below.
 66 ILR 518 523

Aminoil claimed payments in respect of:—

(a) Loss of profits.
(b) If compensation for loss of profits throughout the concession was not awarded,
the value of physical facilities.
(c) The value of Aminoil's other assets.
(d) Overpayments allegedly made by Aminoil to the Government.
Aminoil also asked that the Government's claims against it be rejected except that an
amount be credited to the Government in respect of such of Aminoil's liabilities as had
been paid or assumed by the Government.
Both parties sought interest.

Held:—9

The Applicable Law

(1) The parties had made a clear choice of law to govern the arbitration proceedings
(lex arbitri). Article IV of the Arbitration Agreement made the proceedings subject to
the mandatory provisions of French law as the law of the seat of arbitration, while
leaving it to the Tribunal to prescribe procedural rules, insofar as French law permitted,
on the basis of natural justice and principles of transnational arbitration (pp. 559–560).
(2) On the substantive issues, Kuwait law applied to many matters over which it was
the law most directly involved. However, public international law and the general
principles of law were also relevant. Public international law, which included the
general principles, was part of the law of Kuwait. It was a common feature of Kuwait's
oil concessions that they were to be interpreted and applied in accordance with the
principles of law common to Kuwait and the State of the concession-holder and, in the
absence of such common principles, by the general principles of law. Since it was
unrealistic to suppose that a different legal regime governed each of these concessions,
the general principles of law must have been of chief importance. The same result
followed from Article 3 (2) of the 1979 Arbitration Agreement. In the present case,
these different sources of law were not in contradiction, since international law was an
integral part of the law of Kuwait, while the general principles of law recognized the
rights of the State as protector of the general interest (pp. 560–2).

The Contractual Obligations of the Parties

(1) Article 9 of the 1961 Supplemental Agreement contained more than a
requirement of consultation. It was a recognition that, if there was a general
development in the terms of Middle East oil concessions in favour of the concessionary
States, there was an obligation in principle to adjust the balance of the Aminoil
Concession in favour of Kuwait. Only the amount of the adjustment remained to be
considered in the light of the requirement that the new arrangements should be
equitable to both parties. Article 9 was based on the assumption that notions of what
was equitable would change during the lifetime of the Concession (pp. 563–6).

9.
The Tribunal was unanimous regarding the dispositive part of the Award but Sir Gerald Fitzmaurice delivered
a separate opinion (p. 614), dissenting from some of the reasoning.
524

(2) The arrangements contained in the 1973 Draft Agreement were valid and
binding on the parties. Although the Draft Agreement had never formally entered into
force, Aminoil's letter of December 1973, in which the company undertook to make
payments on the basis laid down in the Draft Agreement, constituted a separate,
binding agreement to apply its terms on a provisional basis. The fact that Aminoil had
only consented to this arrangement in the hope of obtaining a formal agreement and a
new income tax law in the near future, neither of which it received, did not deprive the
provisional agreement of its validity. The delay in ratifying the 1973 Draft Agreement
and enacting a new tax law were not attributable to fault on the part of the
Government, which possessed a considerable measure of discretion in this respect. Nor
was Aminoil's consent vitiated by duress. In signing the December letter Aminoil had
responded to pressure from the Government but this pressure did not have the illicit or
overwhelming character required to substantiate a plea of duress. Nevertheless, even if
the fact that Aminoil's consent was given under constraint did not deprive the
agreement of its validity, it did mean that the scope of that consent should not be
enlarged by extensive interpretation (pp. 566–571).
Sir Gerald Fitzmaurice (concurring): There was a presumption that an enterprise with
the experience and resources of Aminoil was not acting under duress. In addition, the
effect of Kuwait's increase in prices was greatly to increase Aminoil's profits after 1973.
While this would not have affected matters if the original consent had been given under
duress, it did deprive Aminoil's argument of some of its force. Although Aminoil hoped
that its acceptance of the obligations imposed by the 1973 Agreement would lead to the
formal ratification and implementation of that Agreement by Kuwait, the payments
which it made were not conditioned thereon and there could be no question of Kuwait
being liable to return them. By January 1977, when Aminoil ceased to make payments
under the 1973 Agreement, it must have been clear that the consideration which
Aminoil had expected was unlikely to materialize. Aminoil would thus have been
entitled to terminate the Agreement. However, it had not done so and thus remained
liable to make payments under the Agreement for the period January—September 1977
(pp. 615–620).
(3) The 1948 Concession had also been modified by certain other tacit consents and
informal arrangements. Some of these were a response to orders legitimately given by
the Government in the exercise of its governmental powers. Others derived their
validity from Aminoil's consent (p. 571).
(4) In principle, the Abu Dhabi Formula applied to the Aminoil Concession, so
that there was an amount due from Aminoil to the Government under this head.
Although the parties had failed to reach agreement on the application of the Abu
Dhabi Formula, Aminoil had accepted that the adoption of this Formula in Middle
Eastern practice had brought about a situation in which Article 9 of the 1961
Supplemental Agreement was applicable. The disagreement between the parties had
concerned what constituted a reasonable rate of return for the company. The
amount thus due to the Government should consist of the sum of Aminoil's profits
in excess of what constituted a reasonable rate of return after taking account of
 66 ILR 518 525

operating conditions. The Tribunal had jurisdiction to determine this amount,

within the framework of a general settlement of the consequences of the cancelling
of the Aminoil Concession. This was not a case of modifying or completing the
contract of concession but of liquidating the consequences of the past conduct of
the parties under an agreement that was now at an end. The fact that the 1979
Arbitration Agreement directed the Tribunal to decide issues according to law did
not preclude it from determining what would be an equitable amount for Aminoil
to pay, since equitable considerations formed part of the law (pp. 572–582).
Sir Gerald Fitzmaurice (concurring): Although in strict law the failure of the parties
to agree upon the application of the Abu Dhabi Formula under Article 9 left the
Concession unchanged, the conditions for amending the Concession under Article 9
were undoubtedly present as Aminoil had conceded, and the parties disagreed only
about the figures. The Tribunal's action in determining the mode of application of the
Formula had, therefore, to be accepted, albeit with reluctance (pp. 620–1).

The validity of Decree Law No. 124

(1) Insofar as it was not confiscatory in character, Decree Law No. 124 was a valid
exercise of the right of nationalization which was not inconsistent with the Concession.
(a) The fact that the Aminoil Concession was the only concession nationalized by
Decree Law No. 124 did not make that Law discriminatory. Kuwait was engaged in a
gradual programme of nationalization and had already taken over 90% of its petroleum
industry. Different circumstances applied to the one remaining private concession
which justified Kuwait in treating it differently from the Aminoil Concession.
Moreover, there was no evidence that the nationalization of the Aminoil Concession
had been motivated by Aminoil's nationality (pp. 584–6).
(b) Decree Law No. 124 was not inconsistent with the stabilization
provisions of the Aminoil Concession (Article 17 of the 1948 Concession
and Article 11 of the 1961 Supplemental Agreement). These clauses were
valid and binding on Kuwait and were not ‘colonial’ in character or
inconsistent with the Constitution of Kuwait. Nor were they contrary to
public international law. There was no rule of ius cogens prohibiting States
from affording, by contract or by treaty, guarantees against the exercise of
public authority in regard to natural resources. If General Assembly
Resolution 1803 reflected the state of international law in 1962, the same
was not true of subsequent resolutions which had not commanded the same
degree of support. Even if these resolutions did reflect international practice,
it was not possible to deduce the existence of a rule prohibiting a State from
undertaking not to use its power of nationalization during a limited period.
Nevertheless, such an undertaking constituted so serious a restriction upon
the freedom of action of a State that it was not to be presumed from the very
general language of the stabilization clauses in the Aminoil Concession.
These clauses contained no express reference to nationalization and could not
be interpreted as prohibiting nationalization for the lifetime of an especially
526

long concession. The stabilization clauses did, however, provide a guarantee

against measures of a confiscatory character (pp. 586–591).
(c) The amendments to the Concession, beginning with the introduction of the new
Article 9 in 1961 and continuing until 1977 with the changes introduced by way of
implementing Article 9, brought about a change in the whole character of the
Concession. The State became the dominant partner, acknowledged as such by
Aminoil. The stabilization clauses thus lost the absolute character which they may once
have had. This was not a case of fundamental change of circumstances (rebus sic
stantibus) leading to a departure from the contract but of a change in the nature of the
contract resulting from the conduct of the parties (pp. 590–1).
(2) The nationalization was not rendered invalid because it came at a time when the
parties were negotiating. The failure of these negotiations to produce an agreement may
have been decisive for the date of nationalization but it was already the policy of Kuwait
to nationalize the Concession at some stage. Moreover, by September 1977 the basis of
the negotiations for both parties was that Kuwait would take over the Concession. The
failure to reach agreement concerned the terms of the projected nationalization (pp.
591–3).
(3) Kuwait had not been under an obligation to refer the dispute to arbitration before
nationalizing the Concession (pp. 593–4).
Sir Gerald Fitzmaurice (dissenting from the reasoning of the majority): The
stabilization clauses were clear and unambiguous. There was no need for them expressly
to state that they applied to nationalization of the Concession nor was there any
indication that they were not intended so to apply or were intended to preclude only a
confiscatory nationalization. They were clearly intended to preclude Kuwait from
unilaterally terminating the Concession which was exactly what Decree Law No. 124
purported to do. Nationalization, whether lawful or unlawful, was always confiscatory,
even if compensation was paid, in the sense that the concessionaire was deprived of his
rights under the Concession and required to accept money instead.
The changes to which Aminoil consented did not justify the nationalization, since
they were changes to be effected within the framework of a continuing concession.
Aminoil never consented to renounce its rights under the stabilization clauses and
Decree Law No. 124 was irreconcilable with them.
The assessment of compensation was, however, correct (pp. 621–7).

Government counter-claims against Aminoil

(1) Aminoil was required to compensate the Government in respect of those of its
liabilities assumed by the Government under Decree Law No. 124. Where accountants
for the Government and the company had failed to agree on the amounts involved, a
mean figure would be used (pp. 594–6).
(2) The Government's claim that Aminoil had failed to observe “good oil-
field practice”, as required by the 1948 Concession and the later agreements,
was not substantiated by the evidence. At no time during the life of the
Concession had the Government complained of Aminoil's conduct of its
operations. Some of Aminoil's decisions regarding expenditure on equipment
 66 ILR 518 527

and maintenance might appear mistaken now but they had to be judged in the
light of the scientific and economic considerations prevailing at the time. Nor
could Aminoil be faulted in its observance of Kuwait legislation (pp. 596–9).

Principles of Indemnification
(1) The amount of compensation due in respect of the nationalization had to be
determined according to law, which meant, principally, international law. The general
principle, set out in General Assembly Resolution 1803, was that “appropriate
compensation” was to be paid but the determination of what was appropriate depended
on the circumstances of the case rather than interpretation of terms such as “prompt,
adequate and effective” or “fair”. The amount of compensation had to be realistic, since
this was to be expected of Kuwait, a major investing State as well as a recipient of
foreign investment (pp. 599–603).
(2) Compensation had to be assessed with regard to the legitimate expectations of the
parties reflected in the “equilibrium” of the contract. Those expectations had been
modified, and the equilibrium had shifted over the years so that the Tribunal could not
base its awards on the profits Aminoil would have made if the Concession had run its
full course on the basis of the 1961 financial arrangements. Nor, on the other hand, was
the amount of compensation to be restricted merely because other oil companies had
accepted limited amounts by way of compensation. These precedents did not give rise
to a general rule of law. The terms frequently included preferential arrangements for
future oil supply, the value of which was difficult to quantify, and the details were
frequently not made public. Motivated as they were by political and economic rather
than juridical considerations, the actions of the companies were not an expression of
opinio iuris. The fact that the companies had often given their consent to the terms of
nationalization under pressure did not deprive those consents of their validity but it did
weaken their value as precedents (pp. 603–8).
(3) The award of compensation would be based upon the concept that Aminoil was
entitled to a reasonable rate of return. This would take into account:
(i) the significance of the stabilization clauses which, while not forbidding
nationalization, created a legitimate expectation that the terms of any nationalization
would respect the contractual equilibrium and not be confiscatory;
(ii) the fact that in the negotiations with the Government Aminoil had made clear
that its aim was a reasonable rate of return, not speculative profits. While the attitudes
of parties in negotiations which ultimately proved unsuccessful could not form the basis
of an arbitral or judicial decision, the record of the negotiations in the present case
made clear that Aminoil's expectations were confined to a reasonable rate of return;
(iii) it was unnecessary to include in the assessment of what constituted a reasonable
rate of return any allowance for risk or capital investment, because, as the concession
had terminated, the risk and need for investment had ended;
528

(iv) the reasonable rate of return had to be assessed for the separate purposes of the
application of the Abu Dhabi Formula to the profits actually made by Aminoil between
1974 and 1977 and the compensation due in respect of the nationalization (pp. 608–
610).
(4) Rather than base its assessment on any one method of accounting, such as loss of
profits, the Tribunal would make a separate appraisal of the value of the undertaking as
a source of profit and the value of the physical assets. In doing so, allowance had to be
made for inflation so that a reasonable figure was arrived at. In addition, account had to
be taken of the fact that, because oil was a wasting asset, both the State and the
company had to provide for the day when the asset was finally used up (pp. 609–611).

The Amount of Indemnification

(1) The debts of Aminoil

(a) Under the 1973 Agreement; Aminoil owed U.S.$32,228,500 (the mean of the
two figures produced by the parties' accountants).
(b) Applying the Abu Dhabi Formula with effect from January 1975, the Tribunal
fixed U.S.$10 million as a reasonable annual rate of return for Aminoil for the year
1975 and increased by 10% per annum thereafter to allow for inflation. The reasonable
profit for 1975–1977 was thus U.S.$29,652,000. Deducting this figure from Aminoil's
total profits for the period left U.S.$71,963,000 which was thus owed to the
Government.
(c) Aminoil's liabilities to third parties were assessed at U.S.$18,849,500.
The total thus held due from Aminoil to the Government, as at 19 September 1977,
was U.S.$123,041,000 (pp. 611–2).

(2) Amounts due to Aminoil

The value of the fixed assets, taking account of depreciation and inflation, and the
value of the undertaking as a whole, on the basis of the legitimate expectations of the
parties was assessed at U.S.$206,041,000.
The total amount held due to Aminoil, as at 19 September 1977, after deducting
Aminoil's liabilities to the Government, was thus U.S.$83,000,000 (pp. 612–3).

(3) Interest and inflation allowance

Interest was awarded at 7.5% per annum from 19 September 1977 and the amount
due was increased by 10% per annum to allow for inflation, giving a compound increase
of 17.5% per annum (p. 613).
The Tribunal thus awarded U.S.$179,750,764 to Aminoil, calculated on the basis of
being payable on 1 July 1982.

The following is the text of the Award:

 66 ILR 518 529

TABLE OF CONTENTS

Page
Introductory Information Notes 529
I. Account of the Proceedings 532
II. Statement of the Facts 546
III. The Applicable Law 559
IV. The Contractual Obligations of the Parties 562
V. The Validity of Kuwait Decree Law No. 124 582
VI. Other Counter-Claims of the Government of Kuwait 594
VII. The Question of Indemnification 599
VIII. Operative Section (Dispositif) 613
Separate Opinion of Sir G. Fitzmaurice 614

INTRODUCTORY INFORMATION NOTES

(a) The Award is divided into the following main Sections:

I —Account of the proceedings.

II —Statement of the facts.
III —The applicable law.
IV —The contractual obligations of the Parties.
V —The validity of Kuwait Decree Law No. 124.
VI —Other counter-claims of the Government of Kuwait.
VII —The question of indemnification.
VIII —Operative Section (Dispositif).
(b) The paragraphs of the Award are numbered:
As to Sections I to II, consecutively throughout in bracketed Roman numerals, (i) to
(lxx).
As to Sections III to VIII, consecutively throughout in unbracketed Arabic numerals, 1
to 179.
(c) In order to keep the Award within reasonable limits of length, the statement of
facts has been limited as much as possible, and the wealth of argument presented by the
Parties has been reduced to its essentials. Equally reduced to the unavoidable minimum
are all references to the documentation and records of the proceedings. Where
references are given, the following abbreviations are utilized:

GM = Government (written) Memorial

AM = Aminoil Memorial
530

GCM = Government Counter-Memorial

ACM = Aminoil Counter-Memorial
GR = Government Reply
AR = Aminoil Reply
Day 1, 2, 3,
= Daily verbatim Record of the Oral Hearings
etc.

(d) The following symbols and abbreviations, where used, have the meanings
respectively assigned to them below:

The Government The Government of Kuwait

The Ruler The Ruler of Kuwait
The Sheikh or Shaikh The Ruler
Aminoil The American Independent Oil Company
The Company Aminoil
KOC The Kuwait Oil Company
AOC The Arabian Oil Company
BP The British Petroleum Company
Gulf The Gulf Oil Company
Getty The Getty Oil Company
Aramco The Arabian-American Oil Company
The Organization of Oil Producing and Exporting
OPEC
Countries
Gulf States The Oil Producing States of the Arabian Gulf
The Concession, or the 1948 The Concession granted to Aminoil in 1948 by the
Concession Sheikh of Kuwait
The 1961 Agreement The Supplemental Concession Agreement of 1961
The Letter so headed of 29 July 1961 from the
The Confidential Letter
President of Aminoil to the Ruler of Kuwait
The unratified draft Agreement of July 1973 Aminoil's
The 1973 Agreement of July
Letter of 22 December 1973 relative to the July 1973
1973 The 22 December
Agreement The stated Article of the 1948 Concession,
Letter, or December Letter
the 1961 Supplemental Agreement, or the July 1973
Article—of 1948 1961 1973
Agreement, as the case may be
 66 ILR 518 531

The terms of payments to be made to Governments

by concessionaire Companies, provisionally agreed by
The Abu Dhabi Formula certain OPEC States at Abu Dhabi in November 1974
and subsequently adopted at the Vienna OPEC
meeting of December 1974
Aminoil or other Company holder or grantee of a
The Concessionaire
Concession
The Concessionary or
The State or Government grantor of a Concession
concessionary Authority
The Kuwait Law of 19 September 1977, terminating
Decree Law No. 124
Aminoil's Concession

The nationalization of Aminoil by Decree Law No.

The “take-over”
124
The Agreement of 23 July 1979 referring the present
The Arbitration Agreement
case to arbitration
The Order of the Tribunal of 1 July 1981 for the
The July Order
regulation of the oral hearings in the case.
The Joint Report of the London and New York
The Joint Report branches of the accounting firm of Messrs. Peat,
Marwick, Mitchell & Co. on matters of quantum
The Reports of the Decisions of the International
ICJ Reports
Court of Justice, the Hague
The United Nations Series of Reports of International
RIAA
Arbitral Awards
MEES The Middle East Economic Survey
The Vienna Convention The 1969 Vienna Convention on the Law of Treaties
532

[4] SECTION I

Account of the Proceedings

(i) A dispute having arisen between the Government of the State of Kuwait
(hereinafter called “The Government”) and the American Independent Oil Company
(hereinafter called “Aminoil”), an Arbitration Agreement was signed in Kuwait by the
two Parties on 23 June 1979.
(ii) Its terms are as follows:—

ARBITRATION AGREEMENT
The Government of the State of Kuwait (hereinafter referred to as “the
Government”) and American Independent Oil Company, a corporation organized
under the laws of the State of Delaware in the United States of America (hereinafter
referred to as “the Company”) hereby agree as follows:

I
Whereas, on 28 June 1948 the Government and the Company entered into a
Concession Agreement with respect to petroleum and related resources in what was
then the Kuwait-Saudi Arabia Neutral Zone, and subsequently entered into other
agreements amending and supplementing that Agreement; and
Whereas, the Government by Decree Law No. 124 of 19 September 1977 declared
the Agreement of 28 June 1948 to be terminated and the property and assets of the
Company to be nationalized; and
Whereas, differences and disagreements have arisen between the Government and the
Company with respect to the aforesaid Concession Agreement as amended, and the
actions of the Government and the Company in relation thereto, and with respect to
various payments made or allegedly owed by the Parties to each other; and
Whereas, both the Government and the Company are desirous of resolving all
differences and disagreements between them on the basis of law;
The Parties hereby submit the said differences and disagreements to transnational
arbitration as provided in the following articles.

II
1. The arbitral tribunal (hereinafter referred to as “the Tribunal”) shall be composed
of three members, one appointed by each Party as recited in paragraph 2 of this Article,
and a third member who shall act as president, to be appointed by The President of the
International Court of Justice.
[5] 2. The member of the Tribunal appointed by the Government shall be Professor
Doctor Hamed Sultan. The member appointed by the Company shall be Sir Gerald G.
Fitzmaurice, G.C.M.G., Q.C.
 66 ILR 518 533

3. If at any time a vacancy shall occur on the Tribunal by reason of death,

resignation, or incapacity for more than sixty days of any member, such vacancy shall be
filled in the same manner as for the original appointment to that position. If the
vacancy is not so filled within sixty days after its occurrence, either Party may request
the President of the International Court of Justice to make the necessary appointment,
and such appointment shall be final and binding on the Parties. Upon the filling of a
vacancy, the proceedings shall be resumed at the point at which the vacancy occurred,
after allowing any new member sufficient time to familiarize himself with the
proceedings up to that time.
4. Upon its constitution, the Tribunal shall appoint a secretary who shall possess
qualifications as a lawyer in the country of the place of arbitration, who shall assist the
Tribunal in the administrative arrangements for the proceedings. The Tribunal may
also employ such stenographic and other assistance as it deems necessary.

III
1. The Parties recognize that the restoration of the Parties to their respective
positions prior to 20 September 1977 and/or the resumption of operations under the
28 June 1948 Agreement (as amended) would be impracticable in any event, and the
Company will therefore seek monetary damages instead. Accordingly, the Parties agree
to limit their claims against each other to claims for monetary compensation and/or
monetary damages.
The Tribunal shall decide according to law:
(i) The amount of compensation, if any, payable by the Government to the
Company in respect of the assets acquired by the Government under Article 2
of Decree Law No. 124.
(ii) The amount of damages, if any, payable by the Government to the Company
in respect of termination of the Agreement of 28 June 1948 by Article 1 of
Decree Law No. 124.
(iii) The amount payable to the Government by the Company, and/or the
amount payable to the Company by the Government, in respect of royalties,
taxes or other obligations of the Company, in which connection the Tribunal
shall determine the validity or invalidity of any amendments or supplements
to the 28 June 1948 Agreement which are relevant.
[6] (iv) The amount of interest, if any, payable by either Party to the other, the
rate of such interest and the date from which it shall be payable to be awarded
at the discretion of the Tribunal.
2. The law governing the substantive issues between the Parties shall be determined
by the Tribunal, having regard to the quality of the Parties, the transnational character
of their relations and the principles of law and practice prevailing in the modern world.
534

IV
1. Unless otherwise agreed by the Parties, and subject to any mandatory provisions of
the procedural law of the place in which the arbitration is held, the Tribunal shall
prescribe the procedure applicable to the arbitration on the basis of natural justice and
of such principles of transnational arbitration procedure as it may find applicable, and
shall regulate all matters relating to the conduct of the arbitration not otherwise
provided for herein.
2. The Tribunal shall hold a first meeting with the Parties as soon as practicable after
being constituted, for the purpose of establishing the rules of procedure to govern the
arbitration. This meeting, together with any other preliminary meetings held to
determine procedural matters, shall not be counted for the purpose of calculating the
time limit specified in sub-paragraph 3(viii) of this Article.
3. In determining the procedures for the arbitration, the Tribunal shall observe the
following provisions:
(i) The language of the proceedings shall be English. However, the Parties may
put forward references to authorities, decisions, awards, opinions and texts (or
quotations therefrom) in French without translation.
(ii) The seat of the arbitration shall be Paris.
(iii) The Tribunal may, if it deems appropriate, engage experts. The Parties may
also call such expert testimony (written or oral) as they wish. Both Parties shall
have the right to question any such experts.
[7] (iv) The Parties shall also have the right to present the oral testimony of
witnesses. The Parties undertake to use their best efforts to present witnesses
only to the extent necessary to establish their claims and to refrain from
calling witnesses where the presentation of documentary evidence will be
equally satisfactory. Both Parties hereby express their intention that the oral
hearings shall not be unduly prolonged.
(v) All decisions of the Tribunal shall be by majority vote. All awards,
preliminary or final, shall be in writing and signed by each arbitrator, and
shall state the reasons upon which the award is based. In the event that one
arbitrator refuses to sign the award, the two arbitrators forming the majority
shall state in the award the circumstances in which the signature of the
remaining arbitrator has been withheld.
(vi) If either Party fails within the prescribed time to appear or to present its case
at any stage of the proceedings, the Tribunal may of its own motion or at the
request of the other Party proceed with the arbitration and make an award.
(vii) The Tribunal shall keep records of all its proceedings and decisions, and a
verbatim record of all oral hearings.
(viii) The final award shall be given within 18 months from the date of
the first oral hearing on the substantive issues following the exchange
of the Parties' first written submissions on those issues. The Tribunal
may extend this period in its discretion. However, such extension shall
 66 ILR 518 535

not exceed 6 months, except that such period shall be extended by the
number of days by which the Tribunal may be unable to conduct its
business due to unforeseen circumstances beyond the control of the
Tribunal or the Parties, such as periods of delay due to the death,
resignation or incapacity of any member of the Tribunal, or except
with the consent of the Parties.

V
The final award of the Tribunal shall be binding on both Parties who hereby
expressly waive all rights of recourse to any Court, except such rights as cannot be
waived by the law of the place of arbitration. Each Party undertakes to comply
therewith promptly and in good faith and within 120 days from the date of the final
award.

[8] VI
Each Party will pay its own costs and expenses. The expenses of the Tribunal,
including the honoraria of its members, the remuneration of the secretary and staff, and
the expenses incurred by them, shall be borne by the Parties in equal shares.

VII
1. This Agreement shall enter into force upon its signature by duly authorised
representatives of both Parties. It shall be executed in three originals: one for each Party,
and one to be delivered to the President of the Tribunal for deposit in the records of the
Tribunal.
2. On the entry into force of this Agreement each Party will discontinue any other
proceedings it may have instituted against the other.
Signed on behalf of the Government at Kuwait on the 23rd day of July, 1979,
corresponding to the 29th day of Shaban, 1399.
For the Government of the State of Kuwait:
Sheikh Ali Al Khalifa Al Sabah
Minister of Oil
Signed on behalf of the Company at Kuwait on the 23rd day of July, 1979,
corresponding to the 29th day of Shaban, 1399, pursuant to authority granted by a
resolution of the Company's Board of Directors adopted on the 5th day of July, 1979.
For American Independent Oil Company:

George E. Trimble
President
536

[9] (iii) As provided by Article VII, paragraph 1, of the Arbitration Agreement, the
latter entered into force on the day of its signature.
(iv) In application of its Article II, paragraph 1, the two Parties, on 23 July 1979,
addressed a request to the President of the International Court of Justice for the
appointment of a President of the Tribunal. By a letter dated 1 November 1979, the
President of the Court informed the Parties of the appointment of Monsieur Paul
Reuter, Professor of Law at the University of Paris.
(v) On 19 December 1979 the Tribunal held a first meeting with the Parties in Paris,
in order to organize the proceedings. At this meeting each of the Parties submitted to
the Tribunal a draft project for the Rules of Procedure. The Tribunal, however, decided
to leave the adoption of the Rules until later, but fixed 2 June 1980 as the date for the
simultaneous deposit of the Parties' written Memorials, it being understood that the
Counter-Memorials were to be delivered 120 days after that date, and the Replies 60
days after the Counter-Memorials.
(vi) During the same Paris meeting, the Tribunal appointed Monsieur Philippe
Cahier, Professor of Law at the Graduate Institute of International Studies, Geneva, as
Secretary to the Tribunal, and Monsieur Bernard Audit, Professor of Law at the
University of Paris, as Deputy-Secretary.
(vii) At a private meeting of the Tribunal held in Geneva in July 1980, Rules of
Procedure were adopted on the 16th of that month pursuant to Article IV, paragraph 2,
of the Arbitration Agreement, in order to supplement and complete the procedural
provisions of that Article. These Rules are set out in the Annex to the present Section.
[10] (viii) The Parties deposited their Memorials with the Secretary on 2 June 1980.
(ix) By a letter dated 21 August 1980, the Government of Kuwait requested an
extension of the time-limit for depositing the Counter-Memorials, and Aminoil having
been consulted, the Tribunal, by an Order of 12 September 1980, fixed 5 January 1981
as the date for the delivery by both Parties of their Counter-Memorials, which were
duly deposited on that date.
(x) Aminoil, having on 30 January 1981 requested an extension of the time-limit for
the deposit of the Replies, and the Government of Kuwait having made no objection,
the Tribunal, by an Order of 25 February 1981, fixed 27 April 1981 as the date for
such deposit, and this date was duly adhered to by both Parties.
(xi) On 26 June 1981 the Tribunal held a meeting with the Parties in Geneva in order
to settle various points in connection with the forthcoming oral hearings. Following upon
this meeting, the Tribunal, by an Order dated 30 June 1981, fixed 16 November as the
 66 ILR 518 537

date for the opening of the hearings in Paris. It was also provided that a week of the
hearings should be devoted to receiving the oral evidence of witnesses and experts. In
head X of the Order it was stated that
(xii) The Tribunal takes note of the mutual intention of the Parties to direct their
respective accountants to produce, if possible, a joint report on questions of quantum or, if
this is not possible, to produce separate reports for the Tribunal before 1 November.
(xiii) As regards the order in which the Parties were to plead, head IV(a) of the
Tribunal's 30 June [11] Order specified that
The questions to be dealt with by the Parties in accordance with the preceding paragraphs,
and the Party to speak first on each question, without prejudice to the burden of proof, shall
be as follows:
1. The system of law governing the arbitration as a whole and the system of law
applicable to the substantive issues in the case: the Government to start.
2. The agreements at any time existing between the Parties before 1973, and the
meaning and effect of particular clauses in issue between them: the Government to
start.
3. The validity and effect of the instruments of 1973, including the question of the
Abu Dhabi formula: Aminoil to start.
4. The validity and effect of the Government's Decree Law No. 124 of 1977: Aminoil
to start.
5. The breaches alleged by Aminoil: Aminoil to start.
6. The breaches alleged by the Government: the Government to start.
7. In so far as not already dealt with under previous heads and in any case exclusive of
all questions of pure quantum:
(i) Aminoil's claims: Aminoil to start;
(ii) the Government's claims: the Government to start.
It was added (head IV(b)) that
The wording of the foregoing questions implies no taking of position by the Tribunal in
regard to any of them.
[12] (xiv) On 30 October 1981, the Chartered Accountant firms of Peat, Marwick,
Mitchell and Co., London, and Peat, Marwick, Mitchell and Co., New York, sent the
Tribunal a Joint Report on questions of quantum. In the absence of agreement on
certain points, the first of the above mentioned firms deposited a separate Report on
behalf of the Government of Kuwait.
(xv) Under head VIII of its Order of 30 June 1981, the Tribunal had provided for a
second stage of the oral hearings to be devoted exclusively to questions of quantum.
However, this was eventually found by the Tribunal to be unnecessary, and did not take
place.
(xvi) Oral hearings took place in Paris at the Hotel Hilton, from 16 November to 17
December 1981. The Tribunal heard, on behalf of
538

the Government of Kuwait, Dr. Abdul Rasul Abdul Reda, as Agent, Mr. D. A. Redfern,
Professor A. S. El Kosheri and Mr. J. M. H. Hunter, as Counsel; and on behalf of
Aminoil, Mr. William L. Owen, as Agent, Maître Jean-Flavien Lalive, Mr. R. Young,
Mr. J. L. O'Donnell and Mr. W. M. Ballantyne, as Counsel.
(xvii) In the course of the week of 7 to 15 December 1981, there were heard as
witnesses and experts—on behalf of the Government of Kuwait: His Excellency Mr.
Abdul Rahman Al Attiqi, Miss Siham Razzouki, Professor Z. Mikdashi, Mr. A.J. Zak
and Mr. Y. Matsui,—and on behalf of Aminoil: Messrs. L. Ison, J. T. Mitchell, J. B.
Watson, T. M. Doniguian, G. L. Gates and W. C. Dougherty, and Dr. C. R. Hocott.
(xviii) The Tribunal wishes to express its great appreciation for the help it has
received from the Parties throughout the proceedings in the form of written and oral
statements and documentation that have been in conformity with the highest
professional standards.
[13] (xix) The Conclusions of the Parties, as given in their respective written Replies
were as follows:
For the Government of Kuwait (GR p. 195):
The Government's claims against Aminoil may be summarised as follows:—

(1) Royalties and taxes

(a) balance due under the 1973 Agreement for the
period 1 January to 19 September 1977 (see paragraph $32,876,000
3.4 et seq).
(b) amount due for the period 1 November 1974 to $92,007,000 (or such
19 September 1977 in accordance with the principles amount as the
established by the Abu Dhabi Formula (see paragraph Tribunal determines
3.107 et seq) to be equitable)
(2) Aminoil's liabilities to third parties (see
$18,588,867
paragraph 3.153 et seq).
(3) Aminoil's operations and installations
$5,780,750,000
(a) damages in relation to “lost oil” estimated at 190 (based on a figure of
million barrels—the Government's half share in the
joint operations. (See paragraph 5.21 of the
$30,425 per barrel
Government's Counter-Memorial) and subject to
adjustment).
[14] (b) the Government's share of expenditure
required at the oil fields at Wafra:—
(i) repairing active wells $8,285,950
(ii) properly plugging and abandoning suspended wells $3,346,350
 66 ILR 518 539

An amount to be
(iii) other items referred to in REMI's reports (e.g. repairs to
determined by the
pipelines)
Tribunal
(c) expenditure required to bring the refinery at Mina $65,000,000 (based
Abdullah up to a proper standard. The quantum of on assessment made
this claim depends upon the Tribunal's assessment by JGC of major
of the basis of compensation for the refinery (see items, and subject to
paragraph 4.204) adjustment)
An amount to be
(4) Interest determined by the
Tribunal.
For Aminoil (AR p. 348):
Aminoil respectfully submits that the Tribunal should include in its Award:
(A) An award to Aminoil of the total of the following amounts:
(1) Lost profits in the amount of $2,587,136,000;
(2) If, for any reason, lost profits throughout the entire Concession period are not
awarded, the value of physical facilities in the amount of $185,300,000 or such
lesser amount as is appropriate by reference to Table 12 of Annex XIII to
Aminoil's Memorial;
[15] (3) Aminoil's other assets and liabilities in an amount as may be agreed by the
Parties' respective auditors or, in the absence of agreement, the amount of
$30,356,000;
(4) Overpayments made by Aminoil to the Government in the amount of
$423,072,000; and
(5) Interest on the above amounts, from 19 September 1977 or 19 March 1980, as
appropriate.
(B) The rejection of all the Government's claims made against Aminoil, except that an
amount be credited to the Government for appropriate liabilities of Aminoil paid
or assumed by the Government.

[16] ANNEX

THE TRIBUNAL'S RULES OF PROCEDURE

RULE 1

Place of Arbitration
(a) The Tribunal's Award shall be given at the seat of the arbitration, Paris.
(b) However, the Tribunal may, if it deems it convenient, meet elsewhere for the
purposes of its private meetings or deliberations or for consultation with the Parties.
540

RULE 2

Vacancies in the Membership of the Tribunal

In the event of a vacancy in the membership of the Tribunal, the Tribunal, as
constituted after the filling of the vacancy, shall determine the period necessary for the
new member to familiarize himself with the proceedings up to that time before the
resumption of the proceedings pursuant to Article II (3) of the Arbitration Agreement.

RULE 3

President: Functions
(a) The President of the Tribunal shall superintend the administrative arrangements
of the Tribunal, and shall preside at all hearings conducted by the Tribunal.
(b) The President, after consultation with the other members of the Tribunal, shall
fix time limits, where required, for the various stages of the arbitration and determine
the time and date of all hearings conducted by the Tribunal.

[17] RULE 4

Secretariat
(a) A Secretary and a Deputy Secretary shall be appointed by the Tribunal in
accordance with Article II (4) of the Arbitration Agreement. The Deputy Secretary shall
assist, and will have authority, if necessary, to replace the Secretary in those duties; in
addition he shall act as a personal assistant to the President.
(b) The Secretary shall, under the direction of the President, make all the necessary
administrative and financial arrangements for the conduct of the arbitration, including:
(i) provision of suitable premises and facilities and
(ii) the engagement and supervision of such clerical and stenographic staff and
other assistance as may be necessary.
(c) The Secretary shall keep the official records of the arbitration, which shall include
decisions, rulings, pronouncements, and written communications of the Tribunal or the
President; pleadings and all attachments thereto, and written communications
submitted by the Parties; and verbatim transcripts of all oral hearings. He shall attend
all hearings of the Tribunal, and shall maintain and dispose of the record in accordance
with Rule 15 of these Rules.
 66 ILR 518 541

(d) The Secretary shall, under the direction of the President, have charge of the
financial accounts of the Tribunal, shall establish necessary bank accounts and shall
make all required disbursements.
[18] (e) Except where otherwise decided by the President, the Secretary shall act as
intermediary for communications between the Tribunal and the Parties and between
the Parties.
He shall ensure that all communications be duly recorded.
(f) In addition to the foregoing, the Secretary shall perform such other duties as may
be directed by the Tribunal or the President.

RULE 5

Expenses of The Arbitration

(a) The Tribunal is authorized to incur such expenses for staff and other purposes as
may be necessary for the proper conduct of the arbitration.
(b) The Secretary shall request from each Party advance payments sufficient to cover
fees and expenses, foreseeable or already incurred.
(c) Each Party shall pay, within three months after the close of the organizational
meeting provided for in Article IV (2) of the Arbitration Agreement, an equal share of
an amount fixed by the Tribunal as an advance toward the expenses of the arbitration.
Further advances shall be made from time to time by both Parties in equal shares within
15 days of their being requested to do so by the Secretary. If one of the Parties fails to
render a payment or payments when requested, the Tribunal shall have discretion and
authority to take appropriate measures to ensure the orderly continuance of the
arbitration.
[19] (d) Within 60 days after the final Award is rendered, the Secretary shall provide
each Party with an accounting, approved by the President, of all expenses of the
Tribunal and shall return to the Parties any excess amounts advanced in the proportion
in which those amounts were advanced.

RULE 6

Agents and Counsel

(a) Each Party shall be represented by an Agent and/or Counsel before the Tribunal.
(b) All communications from the Tribunal to the Parties shall be sent to the Agents
representing the Parties, copies being sent to one other representative of each of the
Parties designated by the respective Agents.
542

(c) The Parties may communicate to the Tribunal either through their Agent or such
other person as may be authorized by the Agent.
(d) Each Party may also be assisted by advisers and experts.

RULE 7

Organization of The Proceedings

The proceedings shall consist of two distinct phases: written proceedings and oral
hearings.

RULE 8

Written Proceedings
(a) The written proceedings shall consist of three successive pleadings to be submitted
simultaneously:
[20] (1) a memorial, containing a statement of the claims of each Party, the basis
of its claims and contentions and the relevant considerations in support
thereof;
(2) a counter-memorial, containing the defence of each Party to the claims set
out in (1) above; and
(3) a reply.
(b) Documents and other written evidence on which a Party relies shall be submitted
with the relevant pleadings.
(c) A number of twenty copies of each pleading and the attachment thereto, shall be
filed by each Party with the Tribunal. The Secretary shall transmit ten copies of each
Party's pleadings to the other Party as promptly as possible, and shall similarly furnish
each member of the Tribunal with such copies as he may require. When a time limit
has been fixed for any such filing, the official date of receipt by the Secretary shall
determine compliance with that limit.
(d) Correction of an error in any written pleading or communication to the
Tribunal, after it has been filed, may be made at any time during the arbitration with
the consent of the other Party or with the permission of the Tribunal.

RULE 9

Time Limits: Closure of Written Proceedings

(a) The memorials setting out the claims of each Party shall be filed with the Tribunal not
later than 2 June 1980. The counter-memorials shall be filed not later than one hundred and
twenty (120) days after the filing date for the [21] memorials. The replies shall be filed not
 66 ILR 518 543

later than sixty (60) days after the filing date for the counter-memorials.
(b) Upon application of either Party, the President of the Tribunal may, after
consultation with the other Party, grant a reasonable extension of any time limit. Any
such extension shall be applicable to both Parties. Any application for extension shall be
filed with the Secretary not less than twenty (20) days before the expiry of the time
limit concerned.
(c) Unless the Tribunal directs otherwise, the written proceedings shall be considered
closed after the time for filing of the replies has expired.
(d) After the end of the written pleadings, no further documents may be submitted
to the Tribunal by either Party, except with the consent of the other Party. In the
absence of such consent, the Tribunal may, if it considers the document necessary,
authorize its production.

RULE 10

Adjudication of The Case

(a) At the end of the written proceedings, and after deliberation and taking into
consideration any views expressed by the Parties, the Tribunal may, for a better
regulation of the case, decide that the oral hearings shall be divided into two or more
stages, the particular subject-matter of which it will determine. The ultimate stage will
include the precise determination of any financial amounts due from either Party to the
other.
[22] (b) At any time during the oral hearings, the Tribunal may give a preliminary
ruling concerning matters already debated. Ultimately the Tribunal shall give its final
Award, which will bear upon the whole case.

RULE 11

Oral Hearings
(a) After the closure of the written proceedings, the Tribunal shall commence oral
hearings on a date to be fixed by the Tribunal after consultation with the Parties.
(b) The conduct of the oral hearings shall be under the direction of the President
who shall rule on all procedural points or questions in accordance with the provisions of
Article IV of the Arbitration Agreement and with the rules of procedure established by
it on 16 July 1980. In the absence of any specific provision or rule governing a
procedural point or question, the Tribunal shall rule on the basis of natural justice
544

and in accordance with such principles of transnational arbitration procedure as it may

find applicable.
(c) The oral hearings shall consist of the hearing by the Tribunal of the arguments of
the Parties' agents and counsel and of depositions by experts, of testimony by witnesses,
including any exhibits offered in support thereof.
(d) The order in which the Parties shall be heard shall be decided by the Tribunal
after consultation with the Parties.
(e) The Parties may also call such expert testimony, written or oral, as they wish.
[23] (f) The Tribunal also may, if it deems appropriate, engage experts who shall
submit to the Tribunal oral or written deposition setting out their investigations and
conclusions.
(g) The Tribunal and the Parties shall have the right to question any such experts.
(h) The Tribunal and each Party shall inform the Secretary in good time, as specified
by the Tribunal, of the names, occupations and addresses of the experts that the
Tribunal or the Party wishes to produce, with the indication of the points on which
evidence, investigations or conclusions will be requested or given. If the Tribunal or
either Party wishes to question any of the experts so appointed at an oral hearing, notice
shall be given to the Secretary specifying the part or parts of the oral or written evidence
in respect of which clarification is sought.
(i) If either Party wishes to present the testimony of witnesses, it shall inform the
Secretary in good time of the names, occupations and addresses of the witnesses that
Party wishes to produce with the indication, in general terms, of the points or facts on
which evidence will be sought. The Tribunal shall, if necessary, draw the attention of
the Parties to their duty to use their best efforts to present witnesses only to the extent
necessary to establish their claims and to refrain from calling witnesses where the
presentation of documentary evidence will be equally satisfactory. The Tribunal shall
have the right and the duty to implement the clauses of Article IV and to conduct the
arbitration's oral proceedings accordingly.
(j) The Tribunal may itself invite the Parties to present witnesses or request them to
produce additional [24] evidence on points or facts on which the Tribunal desires
further information.
(k) The President may at any stage of the oral hearings intervene in order to direct
the course of the proceedings. The President and the other members of the Tribunal
may put questions to or ask for information from agent, counsel, experts or witnesses.
Both Parties shall enjoy a similar right.
(l) Before presenting his deposition before the Tribunal each expert
shall declare as follows: “I hereby solemnly declare, on my honour
 66 ILR 518 545

and in all conscience, that my statement will reflect my best professional judgement”.
(m) Before giving evidence, each witness shall declare as follows: “I hereby solemnly
declare, on my honour and in all conscience, that I shall say the truth, the whole truth
and nothing but the truth”.
(n) When the Tribunal deems that the Parties have completed the presentation of
their cases, the Tribunal shall declare the hearings closed.

RULE 12

Taking of Testimony and Reports

(a) Witnesses and experts, when giving evidence orally, shall first be questioned by
the agent or counsel of the Party presenting them.
(b) Witnesses and experts may then be examined by the agent or counsel of the
opposing Party.
(c) Further examination by either Party will be allowed in the discretion of the
Tribunal on points arising out of, or directly connected with, the previous questioning
or examination.
[25] (d) Any objections to questions addressed to witnesses or experts or to any
specific line of argument being pursued by counsel shall be allowed or disallowed at the
discretion of the President, who may give his ruling immediately or defer it to a later
sitting. The ruling may take the form of disallowing the objection for immediate
purposes, but noting it as one that the Tribunal may bear in mind for the purposes of
its eventual delibertation.

RULE 13

Private Nature of The Proceedings:

Transcript of The Record

(a) The proceedings shall take place in private. Only the Tribunal, the Secretary and
Deputy Secretary and members of the Tribunal's staff, the Parties' agents, counsel,
experts, witnesses, and officials associated with either Party, shall be entitled to attend
the oral hearings or other sessions of the Tribunal with the Parties.
(b) A verbatim transcript shall be kept of each oral hearing. Copies of the transcript
of each hearing shall be furnished in principle daily to the Parties. One copy shall be
authenticated by the Secretary for the record.
(c) The written pleadings, with the attachments thereto, and oral testimony and any
exhibits in support thereof, shall be treated as confidential, to be used solely for the
purposes of the arbitration, until after the delivery of the final Award.
546

[26] RULE 14

Final Award
(a) The final Award shall be in reasoned form with a statement of any minority
views, or the text of any minority opinion, annexed.
(b) Seven original copies of the final Award shall be signed by the members of the
Tribunal joining therein and by the Secretary. One such copy shall be retained by each
member of the Tribunal and by the Secretary and the Deputy Secretary; and one copy
shall be delivered to each Party.

RULE 15

Disposition of The Record

The official record of the arbitration shall be retained by the Secretary under the
direction of the President until such time as the President shall have received proof
satisfactory to him that the Award has been complied with, or until such time as both
Parties give the Secretary written notice that the record no longer be maintained. New
expenses incurred for disposition of the record shall be shared by the Parties.

RULE 16

Rules Part of Record; Amendment; Clarification

(a) These rules shall be made part of the official record of the arbitration.
(b) These rules may be amended by the Tribunal after consultation with the Parties.
The President may issue such clarifications or interpretations of the rules as may be
required for the efficient conduct of the arbitration.

[27] SECTION II

Statement of the Facts

(xx) Aminoil is an American Company incorporated in 1947 in the State of
Delaware with the object of exploring for, producing, refining and selling petroleum,
natural gas and other hydrocarbons. At that time it was controlled by a group of other
American oil Companies.
(xxi) After having, on 26 June 1948, obtained the agrément of the Government of the
United Kingdom, which was then in special relations with the State of Kuwait, Aminoil
was, on 28 June, granted a Concession by its Ruler for the exploration and exploitation of
 66 ILR 518 547

petroleum and natural gas in what was then called the Kuwait “Neutral Zone”. The
location of the frontier between Kuwait and Saudi Arabia in this region was uncertain,
and the British authorities, acting in agreement with those two countries, had in 1922
established this neutral zone to which both had access.
(xxii) On 7 July 1965, Kuwait and Saudi Arabia concluded a Treaty by which they
shared this zone, henceforth to be known as the “Divided Zone”. Aminoil's Concession
was situated in the Kuwait part of the Divided Zone, while Saudi Arabia had granted a
Concession in its part of the Zone to the Getty Oil Company. The two Companies, in
their mutual interest, concluded an agreement on 26 June 1956, approved by the
Governments of these two States, and established a common and coordinated
programme of exploitation in the Zone, with a common Authority (a Joint Operations
Committee) to supervise their respective field operations.
(xxiii) In 1961 the special relationship between Kuwait and the United Kingdom
came to an end, and on 11 November 1962 the Constitution of Kuwait was
promulgated.
[28] (xxiv) The principal clauses of Aminoil's 1948 Concession relevant to the
present dispute were as follows:
By Article 1 it was provided that
The period of this Agreement shall be sixty (60) years from the date of signature.
Article 2 (C) provided that
The Company shall conduct its operations in a workmanlike manner and by appropriate
scientific methods and shall take all reasonable measures to prevent the ingress of water to any
petroleum-bearing strata and shall duly close any unproductive holes drilled by it and
subsequently abandoned. The Company shall keep the Shaikh and His Foreign
Representative informed generally as to the progress and result of its drilling operations but
such information shall be treated as confidential.
Article 3 provided for the immediate payment to the Ruler of a sum of 625,000
dollars, followed after thirty days by a sum of 7.25 million dollars, and subsequently by
an annual royalty of 2.50 dollars for every ton of Aminoil's petroleum won and saved
(as defined by the Concession Agreement) subject to a minimum annual royalty of
625,000 dollars. There were also other payments clauses that need not be detailed here.
Article 3(h)—the “Gold Clause”—provided that
Any obligation hereunder to pay a specified sum in United States Dollars shall be discharged by the
payment of a sum in United States Dollars equal to the official United States Government purchase
price in force at the date of payment for such quantity of gold, of the standard and fineness prevailing at
548

the date of the signature hereof, as such specified sum would have been sufficient to purchase at the date
of signature of this Agreement at the official United States Government price then in force.
[29] The principle underlying this paragraph is that the present value of the United States
Dollar shall be maintained throughout the term of this Agreement.
By Article 11 it was provided that the Ruler would have the right to put an end to the
Concession before the expiry of the covenanted term of 60 years in any of three
specified cases, viz. (a) failure by the Company to perform its obligations under Article
2 (vide supra) “in respect of geological or geophysical exploration or drilling”; (b) failure
by the Company to make any of the payments due under Article 3; and (c) “if the
Company shall be in default under the arbitration provisions of Article 18” (vide infra).
By Article 13 it was provided that, at the end of the Concession,
… all the movable and immovable property of the Company in the State of Kuwait and
said Neutral Zone shall be handed over to the Shaikh free of cost. Producing wells or borings
at the time of such expiry shall be handed over in reasonably good order and repair.
Article 17 provided that
The Shaikh shall not by general or special legislation or by administrative measures or by
any other act whatever annul this Agreement except as provided in Article 11. No alteration
shall be made in the terms of this Agreement by either the Shaikh or the Company except in
the event of the Shaikh and the Company jointly agreeing that it is desirable in the interest of
both parties to make certain alterations, deletions or additions to this Agreement.
Finally, Article 18 contained provisions for the reference to arbitration of “any
difference or dispute … between the Parties … concerning the interpretation or
execution hereof, or anything herein contained or in connection herewith, or the rights
or liabilities of either Party hereunder”.
[30] (xxv) Two other oil Companies were operating in Kuwait at about this time.
Much the most important one, the Kuwait Oil Company (KOC), was jointly owned by
the British Petroleum Company (BP) and the Gulf Oil Corporation (Gulf), and had
had a Concession since 1934. The other, Arabian Oil Company (AOC), was Japanese
owned, and in 1958 obtained a Concession relating to the Continental Shelf of the
Divided Zone, outside a six-mile territorial sea belt and exclusive of certain islands.
(xxvi) From information given by the Government of Kuwait (GM p. 31), it appears that Aminoil's
share of the State's total crude oil production was always proportionally slight, amounting for instance,
 66 ILR 518 549

even as late as 1972, to only some 2.5% of total Kuwait output. Its undertaking was,
from the start, carried on under special difficulties of extraction and refining, due inter
alia to the nature of the ground and the chemical composition of the oil taken from it.
It was what is called a “high cost, low yield” enterprise—see paragraph (xxxv) below.
(xxvii) Aminoil's commercial production and exportation of petroleum products
began in 1954, and in 1958 its refinery was opened at Mina Abdullah.
(xxviii) As mentioned earlier, an Agreement dated 19 June 1961 between the Ruler
of Kuwait and the Government of the United Kingdom put an end to the special
relationship between the two countries and Kuwait became fully independent.
(xxix) Already during the preceding months, the Government of Kuwait and Aminoil
had entered into negotiations for the revision of the 1948 Concession, which led to the
signature on 29 July 1961 of a Supplemental Agreement.
[31] (xxx) By Article 11, this Supplemental Agreement, was to be “construed as an
amendment and supplement to the Principal Agreement” [the 1948 Concession], and
“all the provisions of the Principal Agreement shall continue in full force and effect
except in so far as they are inconsistent with or modified by this [Supplemental]
Agreement”.
(xxxi) One of the main objects of the Supplemental Agreement was to modify the
financial clauses of the 1948 Concession, resulting in increased payments to the Ruler.
In addition, it subjected the Company to Kuwait Income Tax law, the details being
embodied in a separate “Submission to Tax Agreement”, also dated 29 July 1961. By
this, Aminoil was made liable to a levy of 50% as from 1955, and of 57% as from 1961.
To this was added by Article 3 of the Supplemental Agreement, “make-up” payment
equal to the excess, if any, of “the greater of … 50% of the Oil Profit or … 57% of the
Oil Income” over “the aggregate of” the royalty and income-tax payments due under
the Agreement.
(xxxii) Under Article 4, the Comany had the obligation both to “establish and
announce”, or procure the establishment and announcing, of “its posted prices”.
Article 6 (2) provided that
No moneys paid by the Company to the Ruler under this Agreement shall, except in the
case of an error in accounting, be returnable in any circumstance whatever.
(xxxiii) By Article 7(g) a new Article 11 was substituted for the existing Article 11 of the 1948 Concession—
see supra—which was deleted. The new Article 11 (paragraph (A)) gave the Ruler the right to terminate
550

the Concession in the event of a default by the Company in its payments, and then
continued as follows:
[32] (B) Save as aforesaid this Agreement shall not be terminated before the expiration of
the period specified in Article 1 hereof except by surrender as provided in Article 12 or if the
Company shall be in default under the arbitration provisions of Article 18.
(C) In any of the above mentioned cases the Ruler shall be entitled to terminate this
Agreement without prejudice to any antecedent right hereunder and the Company shall at
that time transfer to the Ruler all its movable and immovable property within the State of
Kuwait and the Concession Area to the extent that such property is directly employed in
operations hereunder together with all such rights as it may have to the use of property so
employed so far as such rights are transferable to whomsoever belonging, which are at that
time enjoyed by it provided that the Ruler assumes from the date of transfer all the
obligations devolving upon the Company in respect of its enjoyment of the said rights.
(xxxiv) Finally a provision was incorporated as Article 9, reading as follows:
If, as a result of changes in the terms of concessions now in existence or as a result of the
terms of concessions granted hereafter, an increase in benefits to Governments in the Middle
East should come generally to be received by them, the Company shall consult with the Ruler
whether in the light of all relevant circumstances, including the conditions in which
operations are carried out, and taking into account all payments made, any alterations in the
terms of the agreements between the Ruler and the Company would be equitable to the
parties.
(xxxv) A third understanding was reached, equally dated 29 July 1961, in the shape
of a “Confidential Letter”, containing details and arrangements for taking account of
the special conditions of Aminoil's undertaking. These were indeed technically
complex. The crude oil was not of good quality; it was a low gravity oil, with high
sulphur-hydrogen-sulphide, water and salt content, requiring expensive processing and
refining, before marketing. [33] The great number of wells, requiring expensive
gathering facilities, was also one of the factors of high cost. The marketing of such a
crude oil and its product was difficult.
(xxxvi) With reference to Article 9 (supra) of the Supplemental Agreement, it was
provided by paragraph 9 of the Confidential Letter, as being understood, that “the
word ‘benefits’ includes arrangements not involving payments”.
(xxxvii) On 11 November 1962, as mentioned earlier, a Constitution was
promulgated by the Ruler of Kuwait. Its Article 18 provided:
Private ownership is safeguarded. No person shall be prevented from
disposing of his property save within the limits of the Law; and no person shall
 66 ILR 518 551

suffer expropriation save for the public benefit in the cases determined and in the manner
prescribed by Law provided that he be equitably compensated therefor.
By Article 21 of the Constitution:
All of the natural wealth and resources are the property of the State.
Finally by Article 152:
Any concession for the exploitation of a natural resource or of a public utility shall be
granted only by Law and for a determinate period.
(xxxviii) Owing to the conditions of the petroleum market, the end of the 1960s was
a difficult period for Aminoil which suffered financial losses and saw its production go
down. In 1970 its shares were wholly bought by R. J. Reynolds Industries Inc.
(xxxix) In the course of the sixties, negotiations had taken place between the
Government and Aminoil concerning the financial aspects of the undertaking, [34]
particularly with respect to the expensing of royalties, i.e. the charging of royalty
payments as a cost against the Company's income rather than as a credit against income
tax obligations (resulting in greater tax obligations for the Company). A draft agreement
was prepared in 1968 but was never signed.
(xl) In February 1971, an agreement known as the Teheran Agreement was concluded
between some of the Gulf States and a number of the major oil Companies. Its object
was to apply various resolutions of OPEC, and in respect of the period 1971 to 1975 it
provided for an increase in posted prices and an increase in the level of tax payments to
55%, the Companies receiving in exchange certain guarantees as to stabilization,
particularly in the matter of governmental participation in their undertakings.
(xli) However, in view of the weakness of the dollar, a new agreement was concluded
in January 1972 (the Geneva I Agreement). It provided for an increase of 8.49% in
posted prices and made further adjustments in oil revenues based on an index for
measuring changes between the exchange rate of the dollar and nine specified
currencies. Another agreement of June 1973 (the Geneva II Agreement) added two more
currencies to these nine.
(xlii) These Agreements led to new negotiations between the Government and
Aminoil, the Government aiming at the application of the (Teheran and Geneva)
Agreements, while Aminoil placed the emphasis on the special conditions of its
undertaking. In a Memorandum of 24 May 1971, the Company adumbrated a
transformation in its Concession, declaring that:
[35] Aminoil believes … its basic relationship with the Government should
change and that under the new relationship Aminoil should become a contractor,
552

with the Government becoming the owner of all the Kuwait assets of the Company.—(GCM
App. VI.3)
(xliii) This idea was not accepted by the Government, and the negotiations
continued, ending in 1973 in a projected revision of the concessionary Agreements of
1948 and 1961. This projected revision was embodied in a Draft Agreement dated 16
July 1973. The Draft Agreement proposed to bring about numerous changes in the
relationship between the Parties.
(xliv) As to the financial terms, the principal changes contemplated by the Agreement
were:
(1) an increase in the tax rate applicable to the Company's net income, from 57% to
80%, and
(2) an increase in the rate of computation or “make-up” payments, from 57% to
80%, both as of 1 January 1973;
(3) the expensing of royalties;
(4) acceleration of payment of income tax and “make-up” payments (thereby
reducing the ‘lag’ between operations and tax payments from about twelve months to
about two and a half months);
(5) application to the Company of the Teheran Agreement, as supplemented by the
two Geneva Agreements (Article 2(1)).
(xlv) In a First Annex, various other amendments to the 1961 Agreement were
introduced:
(a) the following paragraph was substituted for Article 2(C) of the Principal
Agreement:
[36] (C) The Company shall at all times conduct its operations in the Concession Area in
a proper and workmanlike manner and by appropriate scientific methods in accordance with
good oilfield practice and shall take all reasonable measures to prevent fire and to prevent the
ingress of water into petroleum-bearing strata and to prevent the pollution of the sea and
shall close all unproductive holes drilled by it and subsequently abandoned. The Company
shall keep the Appropriate Authority fully informed as to the progress and the results of its
operations but such information shall be treated as confidential by the Appropriate Authority
save insofar as it is required for the purpose of settling a dispute between the parties hereto.
(b) The above mentioned gold clause (Article 3(h) of 1948—see paragraph (xxiv)
supra) was deleted (Article 7, First Annex, First Part).
(c) The Government undertook to enact a new tax law in Kuwait, which the
Company had requested in order to be able to claim double taxation immunity in the
United States.
(d) The Draft Agreement also provided that
Any future discussions between the Government and the Company
regarding concession provisions will take into consideration that the Company
should not be denied a reasonable opportunity of earning a reasonable rate of
 66 ILR 518 553

return (having regard to the risks involved) on the total capital employed in its
business attributable to Kuwait. (First Annex, Second Part, V)
(e) A choice-of-law clause was introduced (First Annex, Second Part, XIII) and a new
arbitration clause was inserted (First Annex, Second Part, XIV).
(xlvi) The coming into effect of the Draft Agreement was made subject to its
ratification in accordance with the laws of Kuwait (Article 4), that is by the Parliament.
[37] (xlvii) Before the Draft Agreement was ratified, the “October War” broke out in
the Middle East (1973). A consequence of it was the decision of OPEC members on 16
October to take into their hands the fixing of posted prices, hitherto decided by the
Companies—see Article 4 of the 1961 Agreement, supra. Thus Aminoil, like other
Companies, was instructed that posted prices would be raised a first time, as of 16
October and, a second time, as of 1 November 1973, and that further “adjustments”
would be notified periodically as required by the Government. It was stated that
Companies which would not agree should stop production. Aminoil, like other
Companies, complied with these new conditions.
(xlviii) At the same time, the Government began to press the Company for
immediate payments under the Draft Agreement of July 1973, that is to say without
awaiting its formal execution and ratification by the Kuwait authorities. This, together
with modifications to the Draft Agreement, was discussed at meetings between the
Parties held in Kuwait between 10 and 17 December 1973 (AR Vol. V, Exh. 9). The
Company eventually agreed to comply with the Government's request. Its acceptance
was formalized in a crucial letter dated 22 December 1973 addressed by Mr. Ison, Vice
President and General Manager for Kuwait Operations of Aminoil, to His Excellency
Abdul Rahman Salem el Attiqi, Minister of Finance and Oil of Kuwait, who signed it as
being agreed on 22 December 1973.
(xlix) In the first paragraph, the representative of the Company formally “accepted”
the 1973 Agreement “as drafted in July of this year”, together with language changes
agreed during the December meetings. [38] In addition, the two paragraphs before the
last read:
The Company will make payment of obligations arising under the 1973 agreement and
the Kuwait (Specified Territory) Income Tax Decree No. 23 of 1961 with the amendments
in the proposed 1974 Income Tax law in the same manner as if the 1973 agreement was
effective on the date the Minister of Finance and Oil signs this letter and the proposed 1974
Income Tax law had come into force on that date and will treat all of the terms and
provisions of such agreement as being effective on that date.
It is our understanding that the 1973 Agreement will be signed as soon as the final
documents can be prepared, and that you will then take appropriate steps to obtain due
ratification thereof. (AM Vol. VIII, Exh. 29).
554

(1) After the signing of this letter, the Company made a payment of approximately
$13 million in respect of the retroactive effect of the financial arrangements, and it
thereafter effected payments under the new terms contemplated in the July 1973
Agreement. But the proposed 1974 Income Tax Law was never passed, or even
presented as a bill to the Parliament. Indeed, the 1973 Agreement was modified three
times in the year 1974 at the request of the Government and in a manner that increased
significantly the payments due by the Company to the Government. In February of
1974, a “final draft of the 1973 Agreement” was prepared, incorporating further
changes, mainly for the application to the Company of future changes in the Teheran
and Geneva Agreements, both retroactively and for the future (new Article 2(1), see
AM Vol. VIII, Exh. 34). On 16 July the Government notified the Company of an
increase in the royalty rate from 1212% to 1412% [39] as of 1 July 1974, (AM Vol.
VIII, Exh. 35). On 7 October the Government notified the Company of an increase in
the royalty rate to 16.67% as of 1 October 1974, and an increase of the percentage of
the oil profit payable to the Government to 65.75% (AM Vol. VIII, Exh. 36). All this
was done by way of unilateral decision by the Government. In fact, the Government
was implementing decisions taken by OPEC members (respectively on 18 June and 13
September). But it may be recalled here that the official, or “posted”, price of oil was
quadrupled during the year 1974, so that although the Company complied with the
now more onerous terms imposed by the Government, its profits rose from $3,990
million in 1973 to $24,670 million in 1974 and later $30,637 million in 1975, and to
$40,649 million in 1976.
(li) In 1974, the Government acquired a 60% share in KOC and, in conjunction
with the Saudi Arabian Government, a 60% interest in the AOC Concession (GM p. 9
et seq.). The following year, the entire KOC Concession was taken over by the
Government; agreement was reached as to compensation for its foreign shareholders
and a long-term supply agreement was concluded. This left Aminoil as the sole totally
private operator in Kuwait.
(lii) In the same period Conservation Regulations were adopted in Kuwait, pursuant
to Law No. 19 of 1973 on the Conservation of Petroleum Resources (GM App. IV. 1),
and came officially into force in 1976, after a trial period of six months.
(liii) In the fall of 1974, OPEC countries had begun discussing new financial terms
to be imposed on the Companies in the form of taxation. In November, three Gulf
States, members of OPEC, put up royalty levels to 20%, and tax levels to 85%, [40] on
posted prices; and in December 1974 a resolution was formally adopted in Vienna by
the other Gulf States, Kuwait amongst them, embodying the same terms which are
generally referred to as the “Abu Dhabi Formula”.
 66 ILR 518 555

These terms were enforced against major concessionaires. As between the

Government and Aminoil, the question of the application of the “Abu Dhabi Formula”
was informally raised in the course of 1975, but no formal request to that effect was
made by the Government until October 2 of that year. After informing the Company
of a new increase in posted prices, the Government stated:
We also reconfirm our verbal advice given to you some time ago that effective 1
November 1974, royalty rate is twenty per cent of posted prices and applicable rate for oil
income … is eighty-five percent generally applied since then in Gulf area (AM Vol. VIII,
Exh. 39).
In acknowledging this the Company denied having received advice from the
Government “either verbal or written” of the new terms, and indicated that application
of such terms would put it at a loss on every barrel produced. The Company then
requested a formal discussion of the matter (AM Vol. VIII, Exh. 40).
(liv) There followed a round of negotiations initiated by a letter from the
Government to the Company dated 25 January 1976 (AM Vol. III, Exh. 41). The
avowed purpose of the Government was (i) to devise financial terms as close as possible
to those of Abu Dhabi and (ii) to have those terms applied retroactively in order to
recoup what it termed “windfall profits”, i.e. profits which were attributable to the
“explosion” of oil prices rather than to the concessionaire's efforts.
[41] (lv) Negotiations took place from 23 February through April of 1976, formal
discussions being held, inter alia, on 23 and 24 February (Government's minutes of
meeting in GM App. VII. 2), 19 and 29 March, and 4 and 5 April. In the course of
these negotiations—more precisely on 19 March—the Company made a written
proposal (GM App. VII. 1; AR Vol, V. Exh. 12) to the effect that it would accept in
principle the Abu Dhabi Formula (subject to particular reference prices) and its
application as from 1 October 1975 (the day preceding the Government's formal
request). The reference price was to be adjusted so that the Company would have the
opportunity of realizing a “reasonable level of earnings” on its Kuwait operations. The
Company valued at about $18 million the profit necessary to maintain the required
level of capital expenditures (the Government's take being valued at $202.5 million).
Oil income rate would in that case be increased from 85% to 90%.
(lvi) No agreement was reached on this proposal and there followed a long gap in the
negotiations. During that time, the Parties were operating under the terms agreed to in
December 1973, as amended in 1974.
(lvii) On 27 March 1977, a Committee was appointed by the
Government to complete all negotiations of pending matters with the
556

Company within a period of forty-five days. The discussions which followed may be
divided into two phases.
(lviii) In the first phase the Company, on 15 April 1977, submitted a written
proposal, essentially updating that of 19 March of the previous year, whereby its profits
would amount to $18 to $20 million a year, corresponding to 70c a barrel [42] (GM
App. VII. 1). The proposal was discussed formally, first at a meeting held on 19 April
(Government's minutes GM App. VII.2; Company's memorandum AR Vol. V, Exh.
18). The Government's position as expressed during the meeting, was that a net return
of $4.5 to $6 million would be fair enough to the Company, considering its
investment, and that such profit would be achieved by applying a rate of income tax of
9712%. During the following days, meetings took place between the Company and the
Government's Technical Affairs Department (T. A.D.), on 21 April (Company's
memorandum AR Vol. V, Exh. 19) and 23 April (Company's memorandum Ar Vol. V,
Exh. 20), when the question of capital expenditure was discussed.
(lix) During a second official meeting between the Committee and the Company's
representatives, held on 24 April (Government's minutes, GM App. VII.2; Company's
memorandum, AR Vol. V, Exh. 22), the Company handed out a new written proposal
revising that of 15 April (AR Vol. V, Exh. 21; GM App. VII. 1). Under the new
suggested terms, the Company would make retroactive payments as from 1 November
1974, of over $37 million, and oil income rate would be gradually raised from 85% in
1974 to 95% from 1978. The proposal was immediately discussed, but the
Government's representative (although not as an official response) indicated that the
Company's proposal was still not acceptable.
(lx) On 7 May the Parties met again (Government's minutes, GM App. VII.2;
Company's memorandum AR Vol. V, Exh. 23). The Company had no new proposal
to make and the Government offered orally that the Company be allowed a profit in
the order of $7.5 million a year, insisting that this was not actually a new proposal
but an ultimate effort on its part in order [43] to reach an agreement. This figure
(corresponding, although this was not officially stated, to some 25c profit per barrel)
would be applicable as from 1 January 1975 and therefore would entail a retroactive
payment by the Company to the Government of about $56 million. Discussions
followed on the same day and at a meeting held on 8 May (Government's minutes,
GM App. VII.2; Company's memorandum, AR Vol. V, Exh. 24). A group of experts
also met on 9 May to work on the figures involved in the various proposals and on
other technical matters (AR Vol. V. Exh. 25). At the next formal meeting, held on 10
May both Parties expressed the view that their respective positions were
irreconcilable. The Company's representative accounted for the gap between the
 66 ILR 518 557

return per barrel requested by Aminoil and that achieved by other Companies, by the
fact that the latter were not putting up any capital or engaging in refining and
marketing; therefore their return could be regarded as a mere management fee.
However, this explanation was not followed up by any suggestion as to how the
difference should be taken into account. The meeting was adjourned without any
date being fixed for the next one (Government's minutes, GM App. VII. 2; AR Vol.
V, Exh. 26).
(lxi) The time set by the Government to reach an agreement expired, and on 21 May
the Government set a new deadline of one month for coming to a conclusion, under
threat of a shut-down of the Company's operations in Kuwait. This opened a new
round of negotiations.
(lxii) In this second phase, after informal discussions had taken place in late May
between Mr. Ison and several high officials of the Government, the Company presented
a totally new proposal in a letter dated 22 June 1977 (GM App. VII. 1). The existing
[44] Concession would be terminated and replaced by a renewable ten-year service
contract. The Government would take over the Company's assets free of charge, and all
financial claims pending would be abandoned. The Company would manage the
technical and administrative operations for a service fee based on oil income.
(lxiii) On 26 June the Council of Ministers of Kuwait endorsed the principle of a
take-over and invited the Committee to resume negotiations for this purpose.
(lxiv) A formal meeting on 27 June (Government's minutes, GM App. VII.2;
Company's memorandum, AR Vol. V, Exh. 30) and a meeting of experts on 28
June (Company's memorandum, AR Vol. V. Exh. 31) were devoted to the
clarification of the Company's proposal; and at a second formal meeting on 29
June, the Government indicated its position (Government's minutes, GM App.
VII.2; Company's memorandum, AR Vol. V, Exh. 32). Concerning the take-over,
the Government insisted that compensation should be calculated on the basis of net
book value and that all past financial claims be negotiated between the Parties.
Concerning the future, the Government favoured a simple marketing contract (or,
alternatively, the sale of oil by the Government to the Company at a discounted
price), for a period of three to five years. In the negotiations that followed, the main
discussions turned around the valuation of the Company's assets in Kuwait and the
sum which the Company would be prepared to pay in addition, in satisfaction of
the Government's retroactive claims (meeting of 26 July, Government's minutes,
GM App. VII. 2; Company's memorandum, AR Vol. V, Exh. 33). By a letter of 6
August 1977 the Company informed the Government that, based on a [45]
valuation of its Kuwait assets, net of liabilities, of $44.6 million, it
558

was prepared to make a $5 million cash payment (AR Vol. V, Exh. 34; GCM App.
VI.2). No answer was received.
(lxv) On 19 September 1977, the Government of Kuwait issued Decree Law No.
124, “Terminating the Agreement between the Kuwait Government and Aminoil”. Its
main provisions were as follows (English translation of the Arabic, taken from the
Middle East Economic Survey):

Article 1
The Concession granted to the American Independent Oil Company in accordance with
the aforementioned Agreement dated 28 June 1948 shall be terminated.

Article 2
All the interests, funds, assets, facilities and operations of the Company, including the
refinery and other installations relating to the aforementioned Concession, shall revert to the
State.

Article 3
A committee named the Compensation Committee shall be set up by a decision of the
Minister of Oil whose task it will be to assess the fair compensation due to the Company as
well as the Company's outstanding obligations to the State or other parties. It shall decide
what each party owes the other in accordance with this assessment.
The State or the Company shall pay what the Committee decides within one month of
being notified of the Committee's decision.

Article 4
A committee shall be set up by a decision of the Minister of Oil to make an inventory of
the assets, funds and facilities which have reverted to the State in accordance with this Law.
This inventory shall be turned over to the Executive Committee. (AM Vol. VII, Exh. 3; GM
App. II.8).
(lxvi) In an Explanatory Memorandum accompanying this Decree Law, it was stated
that it had been [46] rendered necessary in the national interest by Aminoil's failure to
agree to the Government's terms; and at a press conference on the following day this
explanation was repeated with the addition that there had “from the beginning … been
a specific plan for the State to take over full ownership of its oil resources and put them
under national management.” (AM Vol. VII, Exh. 3).
(lxvii) The take-over was formally protested by the Company in a letter dated 20
October (AM Vol. VII, Exh. 4). Meanwhile, the Government undertook the operation
of the Company's concession, and the operations were later entrusted to KOC and a
newly created Kuwait National Oil Company (KNOC) (GM App. II. 10).
 66 ILR 518 559

(lxviii) On 20 December the Company notified the Ministry of Oil of its intention
to initiate proceedings for arbitration, pursuant to Article 18 of the Concession
Agreement of 1948.
(lxix) The Compensation Committee set up by Decree Law No. 124 was established,
and it invited a high Company representative to represent the Company's point of view
at one of their meetings (letter of 7 January 1978, GM App. V.1). The Company
declined in view of the arbitration proceedings initiated (letter of 8 January 1978;
ibid.).
(lxx) Under Article 18 of the 1948 Agreement, the place of arbitration was to be
London, unless otherwise agreed. At the request of the Government, the Parties
eventually agreed to hold an ad hoc arbitration in Paris. Thus the Arbitration
Agreement of 12 July 1979 was concluded and the London arbitration initiated by the
Company discontinued. Thenceforward the arbitral proceedings progressed as described
in the immediately preceding Section I of this Award.

[47] SECTION III

The Applicable Law

1. The Parties have approached the question of “the applicable law” by distinguishing
the procedural law of the arbitration—or law governing the arbitration as a whole—and
the law governing the substantive issues in the case.
2. On these topics they have furnished rival analyses and concepts which, on the
scientific and academic levels, possess very great interest; but the Tribunal, in carrying
out the function entrusted to it, has not experienced any difficulty as to the
determination of the applicable law. The essential reason for this is twofold: the Parties
themselves, by their mutual arbitral commitments, have defined with adequate clarity
what the applicable law is; and the legal systems that either do, or may, call for
consideration in this connection have characteristics such that, for this case, the solution
of the problem becomes easy.
3. With regard to the law governing the arbitral procedure in the broadest sense, it is
not open to doubt that the Parties have chosen the French legal system for everything
that is implied in the statement in Article IV, 1 of the Arbitration Agreement to the
effect that the proceedings are subject to “any mandatory provisions of the procedural
law of the place where the arbitration is held” (namely Paris); and both Parties
“expressly waive all rights of recourse to any Court, except such rights as cannot be
waived by the law of the place of arbitration” (Article V).
560

[48] 4. But this does not in the least entail of itself a general submission to the law of
the tribunal's seat which was designated as Paris. In actual fact the Parties themselves, in
the Arbitration Agreement, provided the means of settling the essential procedural rules,
when they conferred on the Tribunal the power to “prescribe the procedure applicable
to the arbitration on the basis of natural justice and of such principles of transnational
arbitration procedure as it may find applicable” (Article IV, 1), which was done by the
Rules adopted on 16 July 1980.
5. Having regard to the way in which the Tribunal has been constituted, its
international or rather, transnational character is apparent. It must also be stressed that
French law has always been very liberal concerning the procedural law of arbitral
tribunals, and has left this to the free choice of the Parties who, often, have not had
recourse to any one given national system. French law has thus befriended arbitrations
the transnational character of which has been well in evidence. This tendency has been
enhanced for the future by recent French legislation (Decree No. 81–500 of 12 May
1981) which, even more specifically than before, affords recognition to transnational
arbitration.
6. Respecting the law applicable to the substantive issues in the dispute, which is
what is really at stake between the Parties regarding the applicable law, the question is
equally simple in the present case. It can hardly be contested but that the law of Kuwait
applies to many matters over [49] which it is the law most directly involved. But this
conclusion, based on good sense as well as law, does not carry any all-embracing
consequences with it,—and this for two reasons. The first is that Kuwait law is a highly
evolved system as to which the Government has been at pains to stress that “established
public international law is necessarily a part of the law of Kuwait” (GCM paragraph
3.97(5)). In their turn the general principles of law are part of public international
law—(Article 38, 1(c) of the Statute of the International Court of Justice),—and that this
specifically applies to Kuwait oil concessions, duly results from the clauses included in
these. For instance, in the 1973 Agreement between the Parties, First Annex, Second
Part, XII (GM App. I.9) the following provision is to be found (punctuation of second
sentence added):
The parties base their relations with regard to the agreements between them on the
principle of goodwill and good faith. Taking account of the different nationalities of the
parties, the agreements between them shall be given effect, and must be interpreted and
applied, in conformity with principles common to the laws of Kuwait and of the State of
New York, United States of America, and in the absence of such common principles, then in
conformity with the principles of law normally recognized by civilized States in general,
including those which have been applied by international tribunals.
 66 ILR 518 561

Although the Parties did not, in the course of the present arbitral proceedings, make
any reference to this particular text, it is of all the more interest to note that the ideas it
embodies are no isolated features of Kuwait practice.
7. Equally, the Offshore Concession Agreement of the Arabian Oil Company (AOC)
(AR Vol. VI, Exh. 39), contains the same provision, except that reference [50] is made
to the principles common to Kuwait and to Japanese law (Article 39). The Oil
Concession Agreement with the Kuwait National Petroleum Company and Hispanica
de Petroleos, concluded in 1967 (AR loc. cit.), refers to the principles common to
Kuwait and to Spanish law. Yet it would be quite unrealistic to suppose that these three
Concessions were governed by three different régimes. Clearly, it must have been the
general principles of law that were chiefly present to the minds of the Government of
Kuwait and its associates.
8. But there is a second consideration which has greatly eased the task of the Tribunal,
namely that the Parties have themselves, in effect, indicated in the Arbitration
Agreement what the applicable law is. Article III, 2 of the Agreement provides that
The law governing the substantive issues between the Parties shall be determined by the
Tribunal, having regard to the quality of the Parties, the transnational character of their
relations and the principles of law and practice prevailing in the modern world.
Although it may in theory be possible for a litigation to be governed by an
assemblage of rules different from that which, before the Arbitration, governed the
situations and matters that are the object of the litigation, there must be a presumption
that this is not the case. Thus, to the extent that Article III, 2 of the Arbitration
Agreement calls for interpretation, such an interpretation ought to be based on that
provision which not only was freely chosen by the Parties in 1973 (see paragraph 6
supra), but also reflects the spirit which has underlain the carrying on of the oil
concessions in Kuwait.
[52] 9. Article III, 2, with good reason, makes it clear that Kuwait is a sovereign State
entrusted with the interests of a national community, the law of which constitutes an
essential part of intra-community relations within the State. At the same time, by
referring to the transnational character of relations with the concessionaire, and to the
general principles of law, this Article brings out the wealth and fertility of the set of
legal rules that the Tribunal is called upon to apply.
10. The different sources of the law thus to be applied are not—at least in the present case—
in contradiction with one another. Indeed, if, as recalled above, international law constitutes an
integral part of the law of Kuwait, the general principles of law correspondingly recognize
562

the rights of the State in its capacity of supreme protector of the general interest. If the different
legal elements involved do not always and everywhere blend as successfully as in the present
case, it is nevertheless on taking advantage of their resources, and encouraging their trend
towards unification, that the future of a truly international economic order in the investment
field will depend.

[52] SECTION IV

The Contractual Obligations of the Parties

11. Seen as a whole, the present litigation is essentially concerned with the
contractual obligations of the Parties and must be determined in the light of those
obligations. The Tribunal will not, however, in this Section of the Award, go into all of
them, and will reserve two groups for another Section—one relatively subsidiary but the
other of primary importance.
12. To the first of these groups belong (a) certain obligations technically distinct
from the others, and requiring separate study, namely those relating to what is known
as “good oil-field practice”; and (b) the question of Aminoil's obligation to refund
certain amounts paid out by the Government in discharge of the unpaid liabilities of
the Company towards third parties, still subsisting at the date of the take-over. Both
these matters are dealt with in Section VI below.
13. To the second group belong the obligations centering on what are known as the
“stabilization clauses” of the Concession. These are so intimately connected with the
question of the validity and effect of Kuwait Decree Law No. 124, imposing the take-
over, that they are best considered in that context in Section V below.
14. In consequence, the subject-matter of the present Section, in historical order of
occurence in the relationship of the Parties, will be:
[53] (A)—The meaning of Article 9 of the Supplemental (Concession)
Agreement of 1961, which has been the vehicle of numerous modifications
made to the Concession.
(B)—The legal signification of certain other agreements—in particular the one
known as the “1973 Agreement”.
(C)—The application of the “Abu Dhabi Formula”—(see Section II, paragraphs
(liii) and (liv) above)—and the negotiations of 1976–77 in that connection.
 66 ILR 518 563

A—Interpretation of Article 9 of the Supplemental Agreement of 1961.

15. The meaning of this Article depends basically on its text which reads as follows:
If, as a result of changes in the terms of concessions now in existence or as a result of the
terms of concessions granted hereafter, an increase in benefits to Governments in the Middle
East should come generally to be received by them, the Company shall consult with the Ruler
whether in the light of all relevant circumstances, including the conditions in which
operations are carried out and taking into account all payments made, any alterations in the
terms of the agreements between the Ruler and the Company would be equitable to the
Parties.
This text, it should be noted, received a kind of application even before it was
drafted, for it was a generalization of the 50/50 sharing of profits formula which led
both to a revision of the financial terms of the Concession in 1961, and at the same
time—by means of Article 9—to giving expression to the [54] principles on which that
revision was itself founded.
16. A corresponding clause, incorrectly called in professional circles the “most-
favoured-Nation” clause, was inserted into most of the Gulf concessionary contracts;
but although the principle thus proclaimed has been applied elsewhere, even in the
absence of express clauses, the Tribunal will, for the purposes of this analysis, proceed
upon the basis of the wording employed in Article 9 of the Supplemental Agreement of
1961.
17. Three constituents can be drawn from the text of this Article (see paragraph 15
above):
(i) it institutes a procedure for consultation,
(ii) when certain conditions are fulfilled, and
(iii) with a view to reaching an agreement presenting certain features.
18. As to (i)—“consultation”—the text differs from what became the practice. It lay
with the Government—which alone ranked for the purpose of receiving the benefits of
the modifications requested—and not with Aminoil, to take the initiative; and it was
more a matter of “negotiation” than of “consultation”, as is shown by the long and
difficult dealings that took place on frequent occasions from 1964 to the end of the
Concession.
19. As to (ii)—to give rise to the right to claim the initiation and
pursuit of negotiations, some development had to have occurred
generally in Middle-Eastern oil concessions in the direction of fresh
564

benefits going to the concessionary States. A first estimate has to be made by the two
Parties as to whether such a development has indeed occurred. [55] Assuming that it
has, the Company does not thereby recognize only its obligation to negotiate, but also
the existence in principle of an obligation, of which only the numerical computation
remains unsettled prior to the negotiation. It is not always a simple matter to determine
whether some process of change has become general in the Middle-East—for, as the
case of Aminoil shows, certain provisions of the agreements concerned remain
confidential. Also, while Article 9 itself only functioned in respect of financial benefits,
a phrase in the “Confidential Letter” of 29 July 1961 (GM App. I.8; and paragraphs
(xxxv) and (xxxvi) of Section II above) stated that
It is understood that the word “benefits” includes arrangements not involving payments.
20. As to (iii)—Article 9 provides details concerning the object of the negotiations: it
is a matter of concluding an agreement which had to have some noteworthy
characteristics,—the agreement has to introduce, in favour of the Government, changes
in the previous provisions of the Concession, and yet remain “equitable to the
parties”—i.e. to Aminoil also. It is neither stated, nor to be presumed from this, that
the original contract of concession was not “equitable to the Parties” at the time when it
was drawn up,—for a freely concluded agreement establishes as a matter of principle an
equilibrium of interests between the Parties. In spite of that, this original equilibrium
will be modified in favour of another equilibrium deemed equally equitable. It seems
therefore that the system established by Article 9 rests on the implied concept of a
progressive process of justice revealing itself in the course of a sufficiently general
historical evolution to be [56] recognized for what it is by the Parties. This is how they
can be said to have based themselves in advance on the assumption that a division of
profits equitable today will need to be modified in order still to be regarded as equitable
tomorrow.
21. Article 9 is somewhat more explicit about the factors to be taken into
consideration in deciding on the amendments to be made in the Concession;—this is to
be done “in the light of all relevant circumstances, including the conditions in which
operations are carried out and taking into account all payments made”. From this
phraseology there follows an important consequence, namely that the requisite changes
must be based on a study of all the financial aspects of the Concession, past as well as
future. Adjustments to a concession must necessarily be special to each undertaking and
highly individualized. Their expression in figures has nothing of the automatic about it,
and often comes up against real difficulties. The long and arduous negotiations
 66 ILR 518 565

between the Government and Aminoil regarding the application of Article 9

demonstrate these difficulties.
22. Attempts have been made to clarify the sense of Article 9 by appealing to general
juridical concepts or doctrines. It has been attempted to liken this article to the clausula
rebus sic stantibus of public international law, or to the theory of the unforeseen as
enshrined in certain modern legal systems such as that of Kuwait. The Government has
had recourse to such exercises, which are not without their usefulness; but the Tribunal
will keep to what the text of Article 9 requires: in effect, it institutes an appeal from an
original equilibrium to a more mature one, when the latter has become generalized
throughout an extensive cirle [57] of contractual relationships. As to this, the existence
of divergences between the Parties on two essential points must be amphasized.
23. The first point is that the usual tendency of the Government—without denying
that the putting into effect of Article 9 depended on negotiation and mutual
agreement—was to reduce the scope of the negotiation as much as possible by seeking
to make the extension to Aminoil's Concession of the changes generally applied in the
Middle-East, as automatic as possible. This is readily understandable. For one thing, the
Government wished to obtain the greatest benefits available,—for another it could fear
that by granting Aminoil more favourable conditions than to other concessionaires,
these might then claim equivalent advantages even if their particular situation did not
justify that. Legitimately, Aminoil pleaded the reverse by requesting that its appreciably
higher costs of production should be fully taken account of.
24. The second point is that the process contemplated by Article 9 did not provide
for any other method of applying the criteria enunciated than agreement by mutual
consent. The question here involved—one of those that are central to the present
litigation—is a difficult one, known to all legal systems. An obligation to negotiate is
not an obligation to agree. Yet the obligation to negotiate is not devoid of content,
and when it exists within a well-defined juridical framework it can well involve fairly
precise requirements. In some cases the failure of the negotiations can be attributed
to the conduct of one of the parties, and if so, the matter becomes transposed onto
the plane of responsibility, and must find its solution there. It is not unknown for
this possibility to materialize in practice; but international, as well as national
precedents show [58] that it occurs rarely. In other cases a study of the remaining
clauses of the contract, as also of its juridical setting, must determine the way in
which it can be modified or brought to an end. However, if the system instituted by
Article 9 does not suffice of itself to indicate what the concrete content of the new
566

obligation is to be, the Parties' agreement to put it into effect operates as a

recognition of the principle of the obligation.
25. The discussion of this matter is, for the present, left at this point to be resumed
in connection with the concrete topic of the Abu Dhabi Formula in Subsection (C)
below, paragraph 49 et seq.

B—Legal relevance of certain Agreements: in particular that of 1973.

26. Aminoil's legal obligations derive from two groups of sources: the contracts that
were concluded in solemn form (the 1948 Concession and the Supplemental
Agreement of 1961); and the simple form undertakings of which the chief consists in
the letter of 22 December 1973 (herein called the “December 1973 Agreement”),
together with others even less formal. It is this second (informal) group that has given
rise to the legal difficulties which have to be resolved here. These are the validity and
effect of the 1973 Agreement, including the complaint of duress; and the question of
certain informal arrangements and tacit consents.

(1) The 1973 Agreement

(a) Validity and effect in general

27. The lengthy and arduous negotiations kept up over many years, with the object,
on the Government's part—and in the light of the contractual [59] transactions of
1961—of bringing about accession to its requirements based on Article 9, were to finish
in 1973. After the interchanges in May of that year, a draft agreement was drawn up on
16 July (AM Vol. VII, Exh. 23). The events of October 1973 created some new
difficulties, inasmuch as the Government decided to take into its own hands the fixing
of posted prices—a matter that under Article 4 of the 1948 Concession had hitherto
been for the Company to effect. The Parties met again on 10 December, when the
Government called for the immediate putting into execution of the July draft, even
prior to its ratification by the Kuwait Parliament, and also for certain amendments to
be made to it.
28. It was thereupon—by means of a Letter of 22 December 1973 (hereinafter called
the “22 December Letter”), signed by Aminoil and counter-signed by the Minister of
Finance and Oil—that a legal agreement between the Parties materialized. In the
opening paragraph of this Letter it was stated on behalf of Aminoil that
We accept the 1973 Agreement as drafted in July of this year with the language changes
agreed at the aforementioned meetings and with the following amendments requested by the
Ministry …
 66 ILR 518 567

By these words the Company seems definitely to have accepted the July 1973
Agreement. The Letter continued:
The Company will make payment of obligations arising under the 1973 agreement and
the Kuwait (Specified Territory) Income Tax Decree No. 23 of 1961 with the amendments
in the proposed 1974 Income Tax law in the same manner as if the 1973 agreement was
effective on the date the Minister of Finance and Oil signs this letter and the proposed 1974
Income Tax law had come into force on that date and will treat all of the terms and
provisions of such agreement as being effective [60] on that date.
It is our understanding that the 1973 Agreement will be signed as soon as the final
documents can be prepared, and that you will then take appropriate steps to obtain due
ratification thereof.
We shall be obliged if you will signify your agreement with the foregoing amendments and
procedures by signing and returning the accompanying copy of this letter (AM Vol. VIII,
Exh. 29).
29. No instrument in the form of the July 1973 draft was annexed to the December
Letter, and the representatives of the Parties endeavoured to draw up an authentic text
early in 1974, with a view to getting it signed and ratified. A text in which a fresh
modification was introduced was prepared in February (AM Vol. VIII, Exh. 34). Other
amendments were effected in June and October (ibid. Exh. 38), after which the draft
was not further amended, and the Government made no further reference to its
intention of taking the steps mentioned in the December Letter as being its concern,
although Aminoil went on applying the provisions of the 1973 Agreement “as if” they
were in force.
30. The Company, relying on these facts, has maintained that the agreement brought
into being by the 22 December Letter did not constitute a proceeding which now binds
Aminoil as to the past—and this for several reasons: first, the Letter only had a
provisional character,—and next, Aminoil wanted a counterpart, a quid pro quo,—
finally, the Government had incurred responsibility by failing—whether from lack of
diligence or [61] serious intention—to take the necessary steps to bring the projected
July 1973 Agreement into force.
31. The estimate arrived at by the Tribunal proceeds from a different standpoint.
According to this, the 22 December Letter constituted an agreement separate and
distinct from what would have been that of July 1973 if it had come into force. The
December Letter, which the Parties sometimes (and in the actual course of the present
arbitral proceedings) referred to as an “arrangement”, is in fact an agreement viable per
se and with its own characteristics.
32. Both in national and international practice, cognizance has often been taken of cases of
contracts or treaties, the final conclusion of which as a legal transaction required a somewhat
lengthy course of dealing, but which the parties wished to bring into force without
568

delay, on a provisional, or rather, an interim basis—as to all or part of the text—(Article 25

of the Vienna Convention on the Law of Treaties). This is what the Parties did in the present
case. Such an interim agreement does not act as an exemption from continuing to seek the
definitive putting into force of the main agreement itself; and the 22 December Letter never
took the place of the July 1973 Agreement, or of the Kuwait Tax Law which was to be passed
by virtue of it, but was not.
33. Such an interim agreement is different in two respects from the definitive
agreement the place of which it provisionally takes. The first is that it can be concluded
in simplified form,—such is its raison d'être. On the Kuwait side it was concluded by
the Minister of Finance and Oil. It is a matter entirely of Kuwait law whether that
Minister had capacity so to act, and Aminoil has correctly accepted [62] him as duly
authorized, and the Government of Kuwait has always recognized that the Minister
legally bound the State. Thus this Agreement (December 1973) was always valid ab
origine, and the Tribunal only needs to point out that it is entirely normal and useful
that, in transnational economic relations, the capacity of the Minister in charge of
economic matters should be presumed, as is that of a Minister for Foreign Affairs in
inter-State relationships.
34. A second difference exists between an interim and a definitive agreement, namely
the right for either Party to put an end to the former, the “provisional” not being
intended to last for ever, so that, despite silence on the point in the interim agreement,
it would be natural that a party to it should be able to give notice to bring it to an end if
the conclusion of the definitive agreement was unduly delayed. This is what Article 25
of the Vienna Convention may be taken as implying; but in the present case, neither
Party thought to notify any termination of the interim agreement, which remained in
force until 19 September 1977 (date of the take-over).
35. In addition to the question of “duress” (considered under the next sub-head)
Aminoil puts forward one more argument. The Company had signed the December
Letter in the hope of obtaining a quid pro quo in the shape of the conclusion of a
definite agreement by means of the ratification of the July 1973 draft agreement. Its
expectation would therefore have been frustrated, and for this the Government would
bear a certain responsibility.
36. The Tribunal considers it to be hardly open to doubt that the Company
experienced a very real need for stability, and that in its absence the normal [63]
requirements for the management of an undertaking were not satisfied. The fact that it
did not have the benefit of that stability, without there having been any negligence on
its part, is not wanting in legal consequence, and the Tribunal will revert to the point
later. But whether responsibility for this failure can be attributed to the Government of
Kuwait is quite another question.
 66 ILR 518 569

37. To begin with—in regard to the process of ratification—a Government possesses

a large measure of discretionary power that does not allow that mere delay in taking the
final decision should be held against it. Then, reasons are not lacking for thinking that
it could have been in the Company's own interests not to have the Agreement
submitted to the Kuwait Parliament at the very time when decisions falling to be taken
about the influential Kuwait Oil Company could create difficulties there for the
Government. Finally, the Government of Kuwait—a participator in the decisions taken
in OPEC and the Arab world—was concerned about instability in economic petroleum
relationships; so that it can hardly be said that the very real difficulties that resulted for
Aminoil were tied up with malevolent intentions or neglectfulness on the Government's
part.
38. Aminoil has attributed special importance to the fact that in not formally
adopting a new Tax Law, legally characterizing as tax payments an important part of the
amounts paid over to Kuwait, the Government deprived the Company of the benefit of
certain provisions of American law, allowing it (so far as that law was concerned) credits
for the avoidance of double taxation. In a case of this kind, the Tribunal believes, it
would be possible to enquire whether the Company did not suffer some disturbance in
the financial equilibrium of its interim agreement [64] with the Government, and if so,
to take account of that in the final reckoning, even in the absence of all tortious action
imputable to the Government. However, since Aminoil has not given any precise
indication of the damage caused, the Tribunal has not been led to consider the matter
in any more detail.
39. Moreover, referring to the study of Article 9 of the 1961 Agreement already
effected, it is pertinent to observe that in the year 1973 Aminoil not only recognized
that the extant situation was of the kind contemplated by that provision, but also
recognized that the solutions propounded in the projected July Agreement of that year
were “equitable for the Parties”. In those circumstances the revocation of the agreement
realized by the December 1973 Letter, and of its effects, would have left intact the
problem it was supposed to resolve.

(b) The complaint of duress

40. With regard both to the lengthy negotiations which preceded the July
1973 Agreement, and to the changes that immediately preceded and followed
the December 1973 Letter, Aminoil has claimed that its consent was vitiated
because its undertaking was threatened with “shut-down” or, what comes to the
same thing, that all exportation would be prohibited, if it did not agree to give
its consent to certain demands. These threats had been tendered both on the
570

occasion of the conclusion of the interim agreement and on that of certain measures
taken before or after it.
41. The object of this complaint was as follows. For Aminoil it was a question of
destroying the obligatory force of the Letter of 22 December; and what is involved
therefore is the nullification of [65] that agreement. If however, as will be
demonstrated, the nullity of the consents given by Aminoil is not established, it will not
in any way follow from this that those consents were forthcoming under all the
conditions that could be wished for in respect of a consent. These consents were
evidently given in circumstances which, for the Company, constituted strong economic
pressure, and this can result in depriving such consents of certain supplementary or side
effects. In particular their application should not be enlarged by means of extensive
interpretations. To take a concrete example, in October 1973 the Government of
Kuwait, contrary to the terms of the Concession then in force (Article 4 of 1948),
prescribed of its own motion the level of posted prices. By conforming to this behest in
the circumstances of the moment, and without making any protest, the Company
surrendered the right to claim the nullity of its acquiescence. But although, even in the
absence of duress, it then laboured under constraints, it did not thereby forfeit the right
on another occasion to withhold its consent in analogous conditions, though in point of
fact it did not do so.
42. Next, as the Tribunal will again be led to say, consents that are legally valid as
regards the abandonment of a specific individual right, but which have been given
under economic constraint, cannot serve as precedents for establishing a customary rule
of general validity.
43. That reservation having been made, it is necesary to stress that it is not just
pressure of any kind that will suffice to bring about a nullification. There must be a
constraint invested with particular characteristics, which the legal systems of all
countries have been at pains to define in terms either of the absence of any other
possible course than that to which the consent was given, or of the illegal nature of the
object in view, or of [66] the means employed. But the illicit character of the threats
directed against Aminoil has not been fully proved.
44. Supposing however that there were such threats, Aminoil gave way without even
making the qualification that the Company was conscious that something illicit was
being imposed upon it. It is understandable that it avoided resort to arbitration because
of the delays, risks and costs of arbitral proceedings—but Aminoil entered neither
reservations of position nor protests. In truth, the Company made a choice; disagreeable
as certain demands might be, it considered that it was better to accede to them because
it was still possible to live with them. The whole conduct of the Company shows that
the pressure it was under was not of a kind to inhibit its freedom of choice. The
 66 ILR 518 571

absence of protests during the years following upon 1973 confirms the non-existence,
or else the abandonment, of this ground of complaint.
45. This outcome does not involve any denial of the fact that since 1971 the balance
of advantage in the Gulf region had tilted in favour of Governments, and that Aminoil
had been subjected to strong pressure to accept the repeated demands of the Kuwait
Government. But—and this is the only point the Tribunal has to decide—it has not
been shown that these constraints were of such a nature as to cause the nullification of
the interim Agreement of 1973, or of certain other consents (as to which see sub-section
(2) below).
46. Having recognized the validity of the interim Agreement of December 1973, the
Tribunal does not need to go into the question that any finding to the contrary would
raise concerning the applicability of the “gold clause”, figuring as Article 3(h) of the
1948 Concession,—and in any case that clause was cancelled by paragraph 7 of the
First Annex, First [67] Part to the July 1973 Agreement (supra, Section II, paragraphs
(xxiv) and (xlv).

(2) Informal arrangements and tacit consents

47. Apart from the case of the interim Agreement of 22 December 1973, Aminoil
consented promptly to several requests made by the Government. Instances already
indicated above were the Government's October/November 1973 invitation to bring
posted prices up to a specified level; and the 1974 amendments to the projected July
1973 Agreement in respect either of the application by Aminoil of the Teheran and
Geneva Agreements, or of the level of the financial payments to be made by the
Company. It may well be asked what juridical characterization should appropriately be
given to some of these transactions. The minatory tone of certain of the demands
presented by the Government gives them occasionally the look of an order. Thus at the
time of the opening of Middle-Eastern hostilities in 1973 an embargo on shipments of
oil and petrol to certain countries was proclaimed; and although not provided for under
the various contracts of concession, the embargo was validly imposed upon the
concessionaires.
48. In the case of other demands not in themselves justified (for they were
inconsistent with the relevant contracts), it was the consent given by Aminoil that
conferred upon them their validity, whether this result is arrived at on the basis of the
mutual conduct of the Parties as constituting an informal agreement, or whether—
denying the existence of any contractual element—it is considered that the Company
simply acquiesced in an unjustified compulsion. Whatever view is taken however, the
content of the Company's obligations was to that extent modified.
572

[68] C—The interpretation and application of the Abu Dhabi Formula, and the
negotiations of 1976–1977.

(1) The nature and signification of the Abu Dhabi Formula

49. The application of Article 9 of the 1961 Supplemental Agreement had always
been troublesome and difficult, involving long delays and retroactive payments clearly
adverse to a rational management of the undertaking. On the morrow of the interim
Agreement constituted by the Letter of 22 December 1973, Aminoil's financial future
was uncertain. According to the evidence given to the Tribunal by its directors, some of
them feared that the new financial liabilities would be too heavy, while others thought
they would be reasonable. But the increase in posted prices imposed upon the
concessionaire Companies by OPEC as a body, and hence by Kuwait upon Aminoil,
brought about an appreciable amplification of their revenues. Yet at the same time, as
from 1974, the Kuwait authorities specified what changes would have to be made in the
current interim Agreement in order to raise the level of the payments coming from
Aminoil. The latter accepted them without reservation or objection, the overall
outcome being so advantageous that it was thought better not to bring up any question
of principle.
50. Towards the end of 1974 the outlines became visible of a new process of change
that was to prove to be the origin of the final crisis. The nature of this change, and the
reasons why it led to the ending of Aminoil's Concession, must now be described.
Whereas previous increases in the liabilities of the oil Companies had nevertheless left
them a certain [69] margin of managerial scope, those entailed by the “Abu Dhabi
Formula” were more severe. The Gulf States that were members of OPEC and
propounded this formula, no doubt weighed its advisability, for it was only three of
them that, in November 1974, decided immediately to put up the royalty level to 20%,
and the tax level to 85% on posted prices which, for the Companies that used actual
receipts as their tax base would have been a very drastic step. The other Gulf States,
Kuwait amongst them, waited for the 42nd (Vienna) meeting of OPEC (12 and 13
10
December 1974) to adopt a decision known only through a press communiqué as
follows:
The Conference … decided to adopt a new pricing system based on the financial effect of
the decision taken on 10 and 11 November 1974, in Abu Dhabi. In accordance with this
decision the average Government take from the operating oil companies will be $10.12 per
barrel for the marker crude.

10.
See Information Department Press Release No. 10–74, Vienna, 13 December 1974.
 66 ILR 518 573

In point of fact this decision had a revolutionary effect, not only on prices but on the
very nature of the concessions. It embodied the notion that the revenues left to the
Companies would be predetermined on a fixed (package) basis of 22 cents per barrel11
of [70] the product of reference—“marker crude”—thereby transforming the
concessions de facto into service contracts.12 Equally, the system was based on a pre-
determined estimate of costs, fixed at 0.12 cents a barrel, which could at a pinch be
regarded as an acceptable mean for the case of “normal” oil deposits (taking account
also of the other advantages which the major Companies had in respect of certain
categories of products), but had no relation to the net costs of the products of Aminoil's
Concession.
51. It is not without significance that simultaneously with this, negotiations were
starting in Saudi Arabia for the nationalization of the Aramco Company, which made it
possible to foresee a general end to the concessionary régimes. Indeed, it was clear that
for a Company such as Aminoil, these events would bring about difficult negotiations
tending to reduce its financial returns to the point where there would be a risk of
putting it into deficit, coupled with the ever-present shadow of potential
nationalization.
52. The negotiations which are the subject of the next subsection below, have been
described above in Section II, paragraphs (liv) to (lxiv), but will to some extent be
recapitulated where necessary in order to make the reasoning clear.

(2) The negotiations between Aminoil and the Government

53. The negotiations between the Kuwait authorities and Aminoil concerning the
Abu Dhabi Formula have a [71] major importance for the solution of some of the
questions that the Tribunal has to deal with—and in particular the following ones:
(i) Did the two Parties respect the letter and spirit of Article 9 in these negotiations?
If in fact either Party was in default under that head, this would have important
consequences for the ensuing responsibility thereby incurred.
(ii) Do the negotiations throw light on the situation of the Parties in regard to their
contractual relations generally?
(iii) Do the negotiations enable the situation of the Parties concerning the
application of the Abu Dhabi Formula to be precisely defined?

11.
This is only an approximate description. As regards the group of Companies from which the State had
acquired 60% of their issued capital, each Company was allocated 54 cents per barrel in respect of their own
remaining 40% share, but nothing in respect of the 60% produced for the State. Thus the total of the mean benefit,
i.e. 54x40/100 = 216/10 = 21.6, came to 22 cents per barrel to the nearest cent.
12.
See Middle East Economic Survey, Vol. XVIII, No. 8, 13 December 1974.
574

54. Before outlining certain features of the negotiations it must be observed that their
content was made known to the Tribunal by means of two sets of descriptions which,
in a general way, are mutually corroborative, the one on the Government side
containing more in the nature of administrative information, and that on the
Company's side furnishing greater indications as to the atmosphere of the meetings and
the attitudes of the participants.
55. It is certain that the heads of the Company understood at once the gravity of the
situation in which it was to find itself: the criterion adopted in Vienna (supra, paragraph
50) would soon become general, and would set in motion the mechanism of Article 9;
the Company would see itself obliged, in part retroactively, to give up some of the
profits it had been making—yet the Abu Dhabi Formula [72] could not be literally
applied to it without causing immediate ruin. Thus the negotiations would be arduous.
56. The local representative of the Company therefore at once made unofficial
contact with the Kuwait authorities, and tried to sound them as to their intentions, but
without success,—and it was not until ten months later, on 2 October 1975, that the
Government notified Aminoil in New York, of its intention to apply to the Company
retroactively “a royalty rate of 20% of posted prices and rate of 85% for oil profits”.
Aminoil immediately asked for the opening of negotiations, and the Minister fixed the
date for 23 February 1976. Here there is straightway apparent a significant feature of
the negotiations, namely the delays that characterised them into 1977. After
preliminary contacts on 23 and 24 February 1976, Aminoil sent in, on 19 March, a
very complete formal proposal explaining and justifying its position; and further
meetings were held on 29 March and 4 and 5 April, limited however, on the side of the
Kuwait representatives, to asking for information and clarification, without otherwise
making their own position known. To enquiries about the future of the negotiations,
several times put in by Aminoil, the answer given was that resumption was not for the
moment being contemplated. In short, the year 1976 was a year of contacts only, and
the real negotiations did not start until 9 April 1977.
57. This process of delay is somewhat surprising. It has been explained by reference
to the overload of work weighing on the Kuwait technical and administrative staff. It is
also possible that the Kuwait authorities wanted to bring the nationalization of the [73]
Kuwait Oil Company (KOC) Concession to a successful conclusion in order to put
themselves in a position the more easily to settle the case of Aminoil afterwards. Be that
as it may, in so proceeding the Government did no more than act within its rights: yet
this conduct had important consequences.
 66 ILR 518 575

58. First of all, Aminoil remained for more than two years in uncertainty as to the
receipts that would ultimately be still available to it; and the technical and financial
management of its affairs undoubtedly suffered from that. But in any case important
sums were destined to end up in Aminoil's banking accounts abroad; and this fact, far
from facilitating negotiation, was going to make it more difficult, by inevitably arousing
feelings of mutual suspicion.
59. The above-described “contact” phase of the negotiations, indicates what the
position of Aminoil was, respecting not only its general contractual relations with the
Government but also as regards the application of the Abu Dhabi Formula. Granted
that a party cannot be held to attitudes taken up in the course of negotiations—
involving, as is often the case, concessions and renunciations offered for the sake of
reaching an agreement—the same is not true of an initial position taken up at the outset
of the negotiations, for this reflects, at least grosso modo, the way in which that party
assesses its rights and obligations on the juridical plane.
60. It is therefore important briefly to evaluate Aminoil's formal proposal of 19
March 1976, contained partly (in general terms) in a letter from the President of the
Company to the Minister of Oil, and as to its details in an information booklet
attached [74] to that letter (AR Vol. V, Exh. 12; GM App. VII. 1). The Company,
within certain bounds, started from the basis of the prevailing tendency to transform oil
concessions by placing an upper limit on the returns that these should bring. Hence the
Company accepted that agreements should be drawn up giving it the possibility (but not
any guarantee) of earning limited profits,—in this differing from contracts known as
service contracts which guarantee a minimum return. Thus the proposal implied a
renunciation of one of the attractions of the classical concession which, subject to the
payments to be made to the concessionary authority, leave the remainder of the realized
revenues to the concessionaire.
61. To set against this, the Company estimated its costs at a fairly high figure so as
to cover itself against various risks; and in particular asked that the possible returns
should be such as to enable it to finance investment for modernization and
development. It was therefore the Company which took the initiative in raising this
further matter. The last important investment—for a desulpherizer—went back to
1968; and now certain installations needed to be brought up to date, while new
exploration teams were required. The Company therefore requested that, in accordance
with normal practice in the industry, returns should be such as to allow such
expenditure to be financed out of revenue. It must be recognized that this attitude on
the Company's part was in line with the one it had taken up in the past (AR Vol. V,
576

Exh. 10—and see to similar effect a letter of 28 July 1972, GCM App. VI.9).
62. The Tribunal however registers equally that [75] the Company, from the outset,
recognized that Article 9 was, as such, applicable, and that in consequence the principle
of a re-adjustment (which could only be in favour of the Government) had to be
admitted—see the 19 March 1976 Letter (ubi supra) in which it was stated that
We recognize the Government's concern that the royalty rate, oil profit rate and crude
postings applied to Aminoil be consistent with those used in other OPEC countries and we
have no objection to adopting Abu Dhabi terms provided that our product reference prices
are modified as discussed below.
But in spite of this statement the real negotiations were not to start until 1977, and
in a very different style from those of 1976. At once, a speeding-up of the exchanges is
to be noticed. On 27 March 1977, the Government had appointed a “Negotiating
Committee”, giving it 45 days in which to finish. Meetings were held on 21, 23 and 24
April, and on 7, 8, 9 and 10 May; and then, on the basis of new offers from Aminoil,
meetings took place on 27, 28 and 29 June and again on 25 and 26 July.
63. In the course of these meetings the Government unmistakeably brought out the
nature of the change it intended to effect in the essential principle of Aminoil's
Concession. It offered as a basis of the normal annual return to be obtained by the
Company, a definite amount, at first 6 million dollars, which was afterwards increased
to 7.5 million; whereas Aminoil had asked for 18 million. But the Government,
regarding the Concession as “matured”, failed to recognize that the Company had
recently carried out a new programme of investment, and refused to take its present
proposed programme into account (Minutes of the first meeting, GM App. VII.2). [76]
The Company was thus faced with being allocated a fixed basis of return, deemed by it
insufficient; and it was afraid of not being protected against inflation, and generally of
finding itself in a less easy and more precarious position than with a contract of service.
64. This second phase of the negotiations saw the introduction of a new prospect—
that of nationalization. It may not be entirely clear which side took the initiative over
that. It was on 21 May 1977 that the Minister of Oil requested Aminoil to table new
proposals, and on 22 June that Aminoil suggested a “take-over” (GM App. VII. 1). The
course of the negotiations, as sketched above, had shown that they would come to this.
The notion of a nationlization had equally not been absent from the mind of the
Government which, as far back as 5 April 1976 (AR Vol. V, Exh. 14), had unofficially
proposed it, tempered by the suggestion of a contract of service.
 66 ILR 518 577

65. However, Aminoil's take-over proposition not only did not resolve the issue of
the Abu Dhabi Formula, but brought that issue into the question of the compensation
to be afforded in respect of a nationlization. Indeed, rather than have these two matters
dealt with separately, Aminoil proposed to eliminate the compensation question on the
basis of a retention by the Company of a substantial part of the profits received by it
since 1975 but liable to revert to the Government on Abu Dhabi account. In addition,
the Company wanted the benefit of a service contract. This solution was intended by
Aminoil to bypass a difficult exercise—that of evaluating the compensation that would
be due to it for renouncing the benefit of the Concession.
66. This proposition did not obtain the concurrence [77] of the Government,—
whether because the latter was chiefly concerned with improving its own position,—or
rather, because it wanted to be able to present its Parliament with a more clear-cut
transaction, separately detailing all the various elements of the settlement.
67. Account must also be taken of the fact that, amongst other causes of the ultimate
failure of the negotiations, a marked deterioration in the “climate of attitude” occurred
in 1977, although personal relations between the Kuwait Authorities and Aminoil's
representatives always remained perfectly courteous. On both sides, oppositions of
feeling and contradictory preoccupations had developed.
68. The Government of Kuwait had just crowned its petroleum policy by the
completed nationlization of the Kuwait Oil Company. In the world at large, the view
points of the petroleum-producing countries and of OPEC had in great measure
triumphed. Even when the companies' oil revenues, amassed in consequence of the
increases in the price of petroleum products, were lodged abroad in foreign bank
accounts in the name of the concessionaire company, they were psychologically
considered by the producing States as being morally their property, apart from the
modest amounts the Governments would be willing to leave to the Companies as
remuneration for their services of extraction, processing and marketing. In the case of
Aminoil, the delays in applying the Abu Dhabi Formula had, from the Government's
standpoint, allowed an important capital sum to accumulate in the hands of the
Company which, in the eyes of some, appeared as the holder of a stake, the restitution
of which was being bargained for. Thence, [78] annoyance and suspicion, perhaps
hastening the oncoming of a “shut-down” the possibility of which had never been
excluded.
69. As for the Company, it felt itself helpless. It had learnt from experience that no
one was much interested in the ultimate fate of small or middle-sized producing
companies. The major companies, in the arrangements they entered into, could find
an indirect satisfaction in the operations of processing, converting and marketing.
578

The smaller undertakings did not enjoy similar advantages, yet had to submit to the
rigours of a régime not fashioned to their situation. Such feelings had been vividly
experienced by the representatives of Aminoil at each negotiation about Article 9,—
and not without some reason they feared that the Company's fate over compensation,
in the event of a nationalization, would be worse still.
70. Thus, in reviewing the history of the negotiations in the light of hindsight, it
would be possible—as with all negotiations that have come to grief—to pin-point lost
opportunities, and chances of agreement that were disregarded. It is not the Tribunal's
function to weigh these up, but to state the law. As to that, the main points are as
follows:
(i) A scrutiny of the negotiations fails to reveal any conduct on either side that would
constitute a shortcoming in respect of Article 9 of the 1961 Supplemental Agreement,
or of the general principles that ought to be observed in carrying out an obligation to
negotiate,—that is to say, good faith as properly to be understood; sustained upkeep of
the negotiations over a period appropriate to the circumstances; awareness of the
interests of the other party; and a persevering quest for an [79] acceptable compromise.
The Tribunal here makes reference in particular to the well known dicta in the North
Sea Continental Shelf13 and Lac de Lanoux14 cases.
(ii) With constancy, Aminoil kept to the line which it always followed throughout
the difficulties arising from Article 9, and experienced in the course of operating,
namely—(regarding its contractual position with the Government)—to maintain for
itself, as far as circumstances permitted, the essential features of a contract of
concession, while being willing to confine its profits within the limits of a “reasonable
return”: so that when, confidentially, but at a high level, the possibility was mooted of
turning the contract of concession into a contract of service, the Company's
representative stated on 5 April 1976 that he preferred “to continue for several years
under the present arrangements with modifications in the level of payments—”. (AR
Vol. V, Exh. 14).
(iii) The Company recognized that there was occasion to apply Article 9, and
the Government was at one with the Company in recognizing that there was
nothing automatic about the application of the Abu Dhabi Formula, and that a
reasonable rate of return must remain available for the Company. It also
appeared, according to the position taken up by the Company, that in applying
the Abu Dhabi Formula, the question of assessing a reasonable rate [80] of
return could have a certain connection with that of the indemnification of the

13.
I.C.J. Reports, 1969, p. 47; [41 I.L.R. 29 at 76–7].
14.
Reports of International Arbitral Awards (RIAA). Vol. XII, p. 315; [24 I.L.R 101].
 66 ILR 518 579

Company, should the possibility of terminating the Concession be simultaneously

raised.

(3) The Tribunal's competence to apply the Abu Dhabi Formula

71. The competence of the Tribunal is a question that only arises if it is established
that something is due from Aminoil under this head. Since the Tribunal finds
affirmatively on this point it must begin by considering whether it has jurisdiction to go
into the matter.
72. The respective attitudes of the Parties in this respect involve important questions
of principle. As far back as in its Counter-Memorial (ACM paragraphs 34 and 282),
Aminoil—citing international precedent in the shape of the Tacna-Arica question15—
expressed the view that
… it must be doubted whether this Tribunal is competent to prescribe for the Parties the
terms of an agreement which they could not make for themselves. The equitable revision of
the terms of an agreement is not a function which a tribunal will normally undertake unless
the intent of the Parties to confer such an extended competence upon it is clearly expressed.
In its Reply (GR paragraphs 3. 105 and 3. 106) the Government observed that
[81] In the present arbitration, however, the Government is not asking the Tribunal to
make a new contract. There is no need to do so. The Government is asking the Tribunal to
determine “the amount payable to the Government … in respect of royalties, taxes or other
obligations of the Company” (see Article III, 1 (iii) of the Arbitration Agreement).
The reference to the “other obligations of the Company” in the Arbitration Agreement is
plainly a reference to such legal obligations as Aminoil owed to the Government, including
its obligation to implement the Abu Dhabi Formula. Accordingly, the Tribunal has
jurisdiction to determine, first, whether Aminoil was under any obligation to implement the
Abu Dhabi Formula and, secondly, if it was, how much it should pay to the Government
under that Formula, either as royalties and taxes, or as damages for breach of the obligation.
In the course of the Oral Hearings the representatives of Aminoil made the following
statements (Day 10, pp. 26, paragraph: H, 27, paragraphs A, B, C, 47, paragraph F and
48 paragraph A)
I want to make clear that Mr. Redfern's version of the Company's position on this point is
unfounded. It goes back to statements in Aminoil's Counter-Memorial, which were replying
to proposals in the Government's Memorial, that this Tribunal should determine
(Government Memorial, para. 4. 17): “What can be considered ‘equitable to the parties’ on
the basis of the Abu Dhabi formula”. In its Reply at that time (Aminoil Counter-Memorial

15.
RIAA, Vol. II, p. 928; [3 Ann. Dig. 112, 357].
580

282) Aminoil questioned whether it would be proper for this Tribunal to make such a
determination on an “equitable basis” and on the basis of the formula. The reason was that
the Tribunal was directed to decide according to law, and that the application of the formula
was in itself an issue in the Arbitration.
Aminoil, in no way then or now, intended to suggest that the Tribunal was not fully
competent to decide, in accordance with the Arbitration Agreement, and on the basis of law,
on the amounts which may be payable by either party to the other …
[82] … the Parties did not reach a mutual agreement as envisaged by Article 9. Since they
did not do so, there was no amendment whatever to the terms between them which existed at
the time. The current arrangements stood. Therefore, no payment of any kind, or in any
amount, is due by Aminoil to the Government by means of their failure to agree on an
equitable application of the Abu Dhabi terms or otherwise and that is very fundamental.
I close my rebuttal by completing Mr. Redfern's reference to Article 3(1) of the
Arbitration Agreement. The Tribunal will recall that that Article provides that the Tribunal
shall decide according to law.
73. The Tribunal has thought it necessary to quote fully these views, expressed by the
Parties, because in this matter it is its own competence that is in question, and this
depeneds entirely on the common will of the Parties. The international aspects of the
Tribunal's mandate create a special duty for it to be scrupulous regarding jurisdiction.
Its competence relative to this question is challenged in two quite distinct respects: that
of the power of a tribunal to complete an incomplete contract; and that of the right of
an arbitral tribunal to proceed on the basis of equity. These will be considered in turn.
74. As to the first, there can be no doubt that, speaking generally, a tribunal cannot
substitute itself for the parties in order to make good a missing segment of their
contractual relations—or to modify a contract—unless that right is conferred upon it
by law, or by the express consent of the parties. The law does often give a tribunal this
right, and precedents in many countries could be cited of cases in which, on the basis of
the applicable [83] law, courts have completed a contract. But arbitral tribunals cannot
allow themselves to forget that their powers are restricted. It is not open to doubt that
an arbitral tribunal—constituted on the basis of a “compromissory” clause contained in
relevant agreements between the parties to the case, and seized in the matter unilaterally
by one of the parties only—could not, by way of modifying or completing a contract,
prescribe how a provision such as the Abu Dhabi Formula must be applied. For that,
the consent of both parties would be necessary.
75. But in the present case, the Tribunal thinks that it is not really a
question of modifying or completing the contract of concession. The
Tribunal is not expected to devise new provisions that will govern the
 66 ILR 518 581

contractual relations of the Parties for the future, but to liquidate the various
consequences of their past conduct, and of the contractual clauses that once bound
them but are now at an end. Under this head, the Arbitration Agreement founding the
competence of the Tribunal is widely drawn, and confers jurisdiction to investigate
whether, as part of a general settlement of the issue pending between the Parties, and on
the basis of their respective attitudes and of the principles the Tribunal must rely on for
effecting such a settlement, a liability can be ascribed to Aminoil on Abu Dhabi
account.
76. As to this, the Tribunal, before going further, takes note of the fact that, during
the whole course of the negotiations between the Parties on this matter, Aminoil never
questioned but that the requisite conditions for bringing Article 9 into play were
present, and that a liability, of which only the actual amount remained unsettled,
existed.
[84] 77. The second objection made to the jurisdiction of the Tribunal in respect of
this matter (see paragraph 73 above) was to the effect that it could not proceed to apply
Article 9 because, by the very terms of that provision, such a process could only be
based on equitable considerations, whereas, by virtue of the terms of the Arbitration
Agreement, the Tribunal cannot decide except according to law.
78. This argument cannot however be accepted in the context of the assessment of a
sum of money—for if it had to be, it would by that very token cause the Tribunal to
lack capacity to make an assessment of the amounts due to Aminoil by way of
compensation for the nationalization. It is well known that any estimate in money
terms of amounts intended to express the value of an asset, of an undertaking, of a
contract, or of services rendered, must take equitable principles into account. As the
International Court of Justice said in a well known case16 concerning a tribunal which
had held that “redress will be ensured ex aequo et bono by the granting to the
complainant of the sum set forth below”:
It does not appear from the context of the judgement that the Tribunal thereby intended
to depart from principles of law. The different intention was to say that, as the precise
determination of the actual amount to be awarded could not be based on any specific rule of
law, the Tribunal fixed what the Court, in other circumstances, has described as the true
measure of compensation and the reasonable figure of such compensation (Corfu Channel
[17]
Case, Judgement of December 15th 1949, I.C.J. Reports, 1949, p. 249 ].”
[85] As was declared even more forthrightly by the same Court in the case already
cited above of the North Sea Continental Shelf, paragraph 85:

16.
Administrative Tribunal case (ILO and UNESCO), Advisory Opinion of 23 October, 1956, I.C.J. Reports
1956, p. 100; [23 I.L.R. 517 at 537].
[17. 16 Ann Dig. 342 at 343.]
582

… in short, it is not a question of applying equity simply as a matter of abstract justice,

[18]
but of applying a rule of law which itself requires the application of equitable principles …
79. To sum up,—the foregoing enquiry into the circumstances of the 1976–1977
negotiations leads the Tribunal to come to the following conclusions:
(1)—In the course of these negotiations, both Parties observed the obligations
incumbent on them as well in regard to Article 9 as to the general principles of law.
(2)—The requisite conditions for the application of Article 9 in respect of the Abu
Dhabi Formula were present, and this was recognized by both Parties. From this it
follows that in principle something is owing by Aminoil to the Government on Abu
Dhabi account.
(3)—The total due must consist of the sum of the profits received by the Company
in excess of what would have constituted a reasonable rate of return, after taking
account of its operating conditions,—such a rate of return having always been the basis
of its position and legitimate expectations at this time.
(4)—Within the framework of a general settlement of the consequences of the
cancelling of Aminoil's Concession, which is the object of the special Arbitration
Agreement concluded by the Parties, the Tribunal has jurisdiction to determine the
amount due.

[86] SECTION IV

The question of the validity of Kuwait Decree Law No. 124

80. The question of the validity of Decree Law No. 124 lies at the core of the present
litigation. It was therefore to be expected that a full and sometimes fine-drawn set of
arguments on this topic should have been submitted to the Tribunal by the Parties. An
important part of this controversy puts in question the interpretation of certain articles
of the Concession which the Tribunal has had occasion to consider in Section IV above.
The present Section will be concerned with, on the one hand, the “stablization” clauses
(Article 17 of the 1948 Concession Agreement, and Article 11 as amended by the
Supplemental Agreement of 1961); and, on the other hand, the impact of the
“adaptation” clause (Article 9 of 1961), already considered in Section IV.
81. Before proceeding to a general examination of the essential questions here
involved, it is desirable to call attention in a preliminary way to certain fundamental
points.

[18. 41 I.L.R. 29 at 76.]

 66 ILR 518 583

(1) No failure on the part of the Company can be alleged in determining the validity
of the Decree Law. At the start of the written proceedings, the Government of Kuwait
seemed to attach much importance to two aspects of the Company's behaviour that
might be regarded as inconsistent with its contractual undertakings: to begin with the
Company was said not to have conformed to its obligations under Article 9,—and,
furthermore, not to have paid due regard to its obligations concerning “good oil-field
practice”—a matter that will be gone into later (see Section VI(B)). These two alleged
shortcomings were said to be at the root of the Decree Law. Later, and in [87]
particular during the oral proceedings, this attitude was modified, and the Government
put forward arguments directed to establishing the validity of the Decree Law without
calling in question the Company's conduct.
(2) As regards the problem of non-conformity with Article 9, the Tribunal has
already analysed that provision (Section IV(C)) and indicated the conditioned and
limited obligation it created. It considers that the negotiations held in 1976 and 1977
do not reveal any bad faith on the part of the Company, which sought consistently and
with flexibility for the means that might lead to an agreement, so that no complaint can
be made against it on that score.
(3) With reference to the complaint of “bad oil-field practice”, it was recognized that
this had not been formulated at any time prior to Decree Law No. 124. It follows that
it cannot in any way be taken into account for the purpose of determining the validity
of that Decree. The Government's claim under this head raises a different issue—dealt
with in Section VI (B) below.
(4) Another observation of a fundamental kind must be made about the
characterisation to be given to Decree Law No. 124. The operation brought about by
the Decree Law had a double aspect: it constituted at one and the same time the
termination of a contract, and also a nationalization. Indeed the two are linked.
However, the arguments of the Parties distinguished, and to a certain extent contrasted,
these two aspects. For Aminoil the nationlization was carried out only in order to
resolve a difference of view between the Parties arising in a contractual setting and
falling to be resolved within that setting by the prescribed methods. [88] On behalf of
the Government it was maintained after a certain amount of hesitation that the essential
character of the Decree was to put into execution an act of nationalization even if this
simultaneoulsy terminated a contractual situation that could not go on indefinitely.
82. In order to go fully into the competing contentions of the Parties the Tribunal
will consider in turn the following questions:
(A) Would Decree Law No. 124 have been legitimate if no account
584

were taken of the lack of success of the negotiations for the revision of the agreements
relating to the Concession?
(B) Supposing Decree Law No. 124 to have been legitimate on the basis of question
(A), would it remain so having regard to the fact that it occurred at the very time when
a difficult negotiation between the Parties was still in progress?
(C) Should there have been recourse to arbitration before Decree Law No. 124 was
issued?

Question A
83. Various objections to the validity of the nationalization ordained by Decree Law
No. 124 have been put forward,—on the one hand that it did not conform to certain
general requirements for the validity of an act of nationalization; on the other, that it
was contrary to some precise contractual undertakings applicable in the circumstances.
These different objections will now be considered.
84. The Parties are at one in saying that a nationalization is effected by a transfer, in
the public interest, of property from the private to the public sector. However, in order
to distinguish nationalization from other comparable measures, it is [89] also claimed
that a nationalization must apply to the totality of a given sector of the economy—that
is to say, without discrimination, to an assemblage of undertakings.
85. In regard to Decree Law No. 124, it has been objected that by reason of its
specific character, it took the form of a single measure not directed to any object of
general interest. This contention does not seem to be well founded. It is generally
known that all Middle-Eastern States belonging to OPEC (as well as other producing
countries) have always considered that their over-all petroleum policy must, in its final
phases, result in the nationalization of the whole local petroleum industry, and it is the
fact that the entity operating much the most important concession in the land (the
Kuwait Oil Company)—after having been made the object of a 60% participation in its
share capital by the Government—was subjected very soon afterwards, and before
Decree Law No. 124, to a total nationalization. In short, after having nationalized over
90% of petroleum production in its territory, the Kuwait Government, now in
possession of staff and plant already in situ, was able without difficulty to nationalize
Aminoil's much less important undertaking.
86. The Tribunal does not see why a Government that was pursuing a coherent policy
of nationalization should not have been entitled to do so progressively. It is hardly
necessary, additionally, to stress the reasonable character of a policy of nationalization
operating gradually by successive stages, in step with the development of the necessary
 66 ILR 518 585

administrative and technical availabilities. The 1976—1977 negotiations are revealing

on this point. As the Tribunal has indicated earlier (Section IV(C)), these brought out
the existence of tendencies much in favour of nationalization. As early as the [90]
meeting of 23 February 1976, the representative of the Government was declaring (AR
Vol. V, Exh. 10; GM App. VII.2) that nationalization was not contemplated “at this
time” (emphasis added); (and see also per Mr. Adasani, Under-Secretary of State at the
Ministry of Oil, in GCM App. II.4). It may be added that the official stand taken by
the Kuwait Government in the statements following upon the Decree Law cited the
carrying out of a general programme—for in a press conference held on 20 September
1977 the Minister for Oil (AM Vol. VII, Exh. 3) made a declaration which, subject to
the correctness of the press translation, was as follows:
I would like to clarify and stress one point: from the beginning there has been a specific
plan for the State to take over full ownership of its oil resources and put them under national
management.
87. If however, the progressive character of the measures of nationalization concerned
does not justify the assumption that there was no general plan of nationalization,
another question emerges. In 1977 nationalization was not extended to both of the
Companies then operating as concessionaires, viz. Aminoil and the “Arabian Oil
Company” (AOC). The latter was spared. The question accordingly arises whether the
nationalization of Aminoil was not thereby tainted with discrimination, and whether
this differentiation does not show that the Decree Law had other objects than that of
realising a programme of economic development. The Tribunal does not think so. First
of all, it has never for a single moment been suggested that it was because of the
American nationality of the Company that the Decree Law was applied to Aminoil's
Concession. Next, and above all, there were adequate reasons for not nationalizing
Arabian Oil. At the press conference mentioned above, [91] the Minister for Oil had
touched upon this question and had given the following reasons for the non-
nationalization of AOC—which there is no difficulty in finding convincing:
AOC's high-cost off-shore production operations are such as to give it a special position
which requires a high degree of expertise. At the same time, it is working within the
framework of a concession granted by both Kuwait and Saudi Arabia, so its position is
completely different. Any modification of the concession must be agreed to by both
countries. (AM Vol. VII, Exh. 3).
88. Accordingly, the Tribunal sees nothing in the conclusions to be
drawn from an examination of the above-mentioned circumstances that
would prima facie prevent recognition of the validity of the
nationalization effected by Decree Law No. 124. Nevertheless, Aminoil's
586

concessionary contract contained specific provisions in the light of which it may be

queried whether the nationalization was in truth lawful. The provisions concerned are
Articles 1 and 17 of the Concession Agreement of 1948, and Article 7(g) of the 1961
Supplemental Agreement which introduced a new version of Article 11 of 1948. The
relevant part of Article 1 of 1948 provided that
The period of this Agreement shall be sixty (60) years from the date of signature.

Article 17 of 1948 provided as follows:

The Shaikh shall not by general or special legislation or by administrative measures or by
any other act whatever annul this Agreement except as provided in Article 11. No alteration
shall be made in the terms of [92] this Agreement by either the Shaikh or the Company
except in the event of the Shaikh and the Company jointly agreeing that it is desirable in the
interest of both parties to make certain alterations, deletions or additions to this Agreement.
Finally, Article 7(g) of the Supplemental Agreement of 1961 provided for the
deletion of Article 11 of 1948 and the substitution for it of a new Article 11. This new
version, after indicating in a first paragraph (A) certain events (not here relevant) in
which the Ruler of Kuwait would be entitled to terminate the Concession, went on in a
second paragraph (B) to state
(B) Save as aforesaid this Agreement shall not be terminated before the expiration of the
period specified in Article 1 thereof except by surrender as provided in Article 12 or if the
Company shall be in default under the arbitration provisions of Article 18.
These clauses combined, but especially Article 17, constituted what are sometimes
called the “stabilization” clauses of the contract. A straightforward and direct reading of
them can lead to the conclusion that they prohibit any nationalization. Such is the view
maintained by the Company. The Government of Kuwait on the other hand, in a series
of arguments the merits of which the Tribunal must now consider, maintained that, on
the contrary, these clauses did not prevent a nationalization.
89. The Tribunal will begin by discarding two arguments which it does not consider
reliable.
Firstly, the more radical one consists in affirming that these clauses do no more than
embody general principles of contract law, and that in consequence the legal régime of
the Concession is the same as that of any contract, and that these [93] clauses add
nothing to what would in any event be the legal position. This argument cannot be
accepted, for it is a well-known principle of the interpretation of contractual
undertakings (and indeed of all juridical instruments) that the interpretation
 66 ILR 518 587

to be adopted must be such as will give each clause a worthwhile meaning or object. In
the present case, as Aminoil has pointed out, that object resides precisely in the fact that
one of the Parties, being a State, had available to it all the powers of a public Authority
and, by using them, could take those steps against which it was the very object of these
clauses to protect the concessionaire.
Secondly, according to an initial Government contention, these provisions had a
“colonial” character and were imposed upon Kuwait at a time when that State was still
under British protectorate, and not in possession of its full sovereign powers. On this
basis the stabilization clauses were devoid of value. However, quite apart from any
attempt to enquire into the factual circumstances in which these clauses were adopted,
this contention cannot be upheld, for they were expressly confirmed on the occasion of
the 1961 revision of the Concession after the attainment of complete independence by
Kuwait, and again in 1973 when the text of the “1973 Agreement” was put into
operation.
90. Other Government arguments were as follows:—
(1) It was contended that the stabilization clauses—initially valid and effective—were
annulled by the emergence of a subsequent factor in the shape either of the Kuwait
Constitution of 1962, or of a public international law rule of ius cogens forming part of
the law of Kuwait. The relevant [94] provisions of the Kuwait Constitution were those
registering the permanent sovereignty of the State over its natural resources, and in
particular Articles 21 and 152 which provided as follows (translation from the Arabic
taken from AM Vol. VII, Exh. 13):—
Article 21: All of the natural wealth and resources are the property of the State. The State
shall preserve and properly exploit those resources heedful of its own security and national
economy requisites.
Article 152: Any concession for the exploitation of a natural resource or of a public utility
shall be granted only by Law and for a determinate period. Preliminary measures shall
guarantee the facilitation of exploration and discovery and shall ensure publicity and
competition.
However, it does not appear from these provisions that they in any way prevented
the State from granting stabilization guarantees by contract. Even if they should be
interpreted as doing so, it was the State's duty towards its co-contractant to notify the
latter of the putting into force of the resulting constitutional modifications to current
contracts. This was not done; nor was it done either at the time of the revision of 1961,
or of that of 1973.
(2) Equally on the public international law plane it has been claimed that permanent
sovereignty over natural resources has become an imperative rule of ius cogens prohibiting States
from affording, by contract or by treaty, guarantees of any kind against the exercise of the
588

public authority in regard to all matters relating to natural riches. This contention lacks all
foundation. Even if Assembly Resolution 1803 (XVII) adopted in 1962, is to be [95] regarded,
by reason of the circumstance of its adoption, as reflecting the then state of international law,
such is not the case with subsequent resolutions which have not had the same degree of
authority. Even if some of their provisions can be regarded as codifying rules that reflect
international practice, it would not be possible from this to deduce the existence of a rule of
international law prohibiting a State from undertaking not to proceed to a nationalization
during a limited period of time. It may indeed well be eminently useful that “host” States
should, if they so desire, be able to pledge themselves not to nationalize given foreign
undertakings within a limited period; and no rule of public international law prevents them
from doing so.
(3) Another argument advanced by the Government of Kuwait requires
consideration. According to this, Aminoil's Concession belonged to the general category
of “administrative contracts” in respect of which—as much by Kuwait law as on the
basis of general legal principles—special faculties were reserved to the State, of which
account must be taken in the interpretation of the stabilization clauses.
91. The “administrative contract”, as it was originally developed in French law, and
subsequently in other legal systems such as those of Egypt and Kuwait, is based on the
idea that certain contracts concluded by the State, or by public entities, are governed by
special rules, the two principal ones being as follows:
(i)—The public Authority can require a variation in the extent of the other party's
liabilities (services, payments) under the contract. This must not however go so far as to
distort (unbalance) the contract; and the State can never modify the [96] financial
clauses of the contract,—nor, in particular, disturb the general equilibrium of the rights
and obligations of the parties that constitute what is sometimes known as the contract's
“financial equation”. This characteristic is also to be found in certain ordinary private
law contracts, and respect for the equilibrium of reciprocal undertakings is a
fundamental principle of the law of contracts. But in the present case it has to be
realized that the main difficulties that arise are not about respect for the financial
equation that reflects the contractual equilibrium, but about the method of applying
Article 9,—that is to say not over respect for the original equilibrium, but over the
search for a new, equitable, equilibrium.
(ii)—The public authority may proceed to a more radical step in regard to the contract
namely to put an end to it when essential necessities concerning the functioning of the State
(operation of public services) are involved. It is with this second aspect of the notion of an
 66 ILR 518 589

administrative contract that the present case could in theory be concerned. Yet even if
Aminoil's Concession belonged to this category of contract, it would still be necessary that
exigencies connected with essential State functioning should be such as to justify Decree Law
No. 124.
92. In order to find an answer to this question, in connection with that of the effect
of the stabilization clauses of the Concession, the matter has to be seen in its historical
perspective.
93. It seems fair to say that what the Parties had in mind in drafting the stabilization
clauses in 1948 and 1961, was anything which, by reason of its [97] confiscatory
character, might cause serious financial prejudice to the interests of the Company.
Thus, as mentioned earlier, Article 7(g) of 1961, instituting a new revised Article 11 of
1948, enumerated and strictly limited all the instances in which the Concession can
terminate through a forfeiture of the concessionaire's rights (for failure in its
obligations), but is silent as to all acts that would lead to the ending of the Concession
without having a confiscatory character. It can be held that the case of nationalization is
precisely one of those acts, since as a matter of international law it is subject inter alia to
the payment of appropriate compensation.
94. The case of nationalization is certainly not expressly provided against by the
stabilization clauses of the Concession. But it is contended by Aminoil that
notwithstanding this lacuna, the stabilization clauses of the Concession (Articles 17 and
revised 11) are cast in such absolute and all-embracing terms as to suffice in
themselves—unconditionally and in all circumstances—for prohibiting nationalization.
That is a possible interpretation on the purely formal plane; but, for the following
reasons, it is not the one adopted by the Tribunal.
95. No doubt contractual limitations on the State's right to nationalize are juridically
possible, but what that would involve would be a particularly serious undertaking which
would have to be expressly stipulated for, and be within the regulations governing the
conclusion of State contracts; and it is to be expected that it should cover only a
relatively limited period. In the present case however, the existence of such a stipulation
would have to be presumed as being covered by the general language of the stabilization
clauses, and over the whole period [98] of an especially long concession since it
extended to 60 years. A limitation on the sovereign rights of the State is all the less to be
presumed where the concessionaire is in any event in possession of important
guarantees regarding its essential interests in the shape of a legal right to eventual
compensation.
96. Such is the case here,—for if the Tribunal thus holds that it cannot interpret Articles
17 and 7(g)—revised 11—as absolutely forbidding nationalization, it is nevertheless the
fact that these provisions are far from having lost all their value and efficacity on that
590

account since, by impliedly requiring that nationalization shall not have any
confiscatory character, they re-inforce the necessity for a proper indemnification as a
condition of it.
97. There is another aspect of the matter which has weighed with the Tribunal.
While attributing its full value to the fundamental principle of pacta sunt servanda, the
Tribunal has felt obliged to recognize that the contract of Concession has undergone
great changes since 1948: changes conceded—often unwillingly, but conceded
nevertheless—by the Company. These changes have not been the consequence of
accidental or special factors, but rather of a profound and general transformation in the
terms of oil concessions that occurred in the Middle-East, and later throughout the
world. These changes took place progressively, with an increasing acceleration, as from
1973. They were introduced into the contractual relations between the Government
and Aminoil through the play of Article 9, or else as the result of at least tacit
acceptances by the Company, which entered neither objections nor reservations in
respect of them. These changes must not simply be viewed piece-meal, but on the basis
of their total [99] effect,—and they brought about a metamorphosis in the whole
character of the Concession.
98. This Concession—in its origin a mining concession granted by a State whose
institutions were still incomplete and directed to narrow patrimonial ends—became one
of the essential instruments in the economic and social progress of a national
community in full process of development. This transformation, progressively achieved,
took place at first by means of successive increases in the financial levies going to the
State, and then through the growing influence of the State in the economic and
technical management of the undertaking, particularly as to the control of pricing
policy, taken over in 1973, and the regulation of works and investment programmes.
The contract of Concession thus changed its character and became one of those
contracts in regard to which, in most legal systems, the State, while remaining bound to
respect the contractual equilibrium, enjoys special advantages.
99. In relation to Aminoil's undertaking therefore, the State thus became, in fact if
not in law, an associate whose interests had become predominant. Moreover, in spite of
its unfinished, and in certain ways improvised character, the text of the projected
Agreement of July 1973, made applicable by the 22 December 1973 Letter, bears
witness to this evolution.
100. The faculty of nationalizing the Concession could not thence-forward be
excluded in relation to the régime of the undertaking as it resulted from the sum total
of the considerations relevant to its functioning. This conclusion concerning the
interpretation of the stabilization clauses, as being no longer possessed of their former
 66 ILR 518 591

absolute character, which the Tribunal has thus reached, is in harmony with that régime
as it stood in 1977,—and a contrary interpretation would, in addition, disregard its
other [100] contractual components.
101. The Tribunal wishes however to stress here that the case is not one of a
fundamental change of circumstances (rebus sic stantibus) within the meaning of Article
62 of the Vienna Convention on the Law of Treaties. It is not a case of a change
involving a departure from a contract, but of a change in the nature of the contract
itself, brought about by time, and the acquiescence or conduct of the Parties.
102. The Tribunal thus arrives at the conclusion that the “takeover” of Aminoil's
enterprise was not, in 1977, inconsistent with the contract of concession, provided
always that the nationalization did not possess any confiscatory character.

Question B
103. Does Decree Law No. 124—supposing it to be lawful within the meaning of
Question (A), remain so, having regard to the fact that it supervened at a moment when
a difficult negotiation between the Parties was still in progress?
104. The Tribunal has just found that, leaving out of account the negotiations for
revision taking place in 1977, a lawful nationalization of Aminoil's undertaking had
occurred. It is nevertheless quite undeniable that the state of relations between the
Company and the Government at the time of the interruption of negotiations played a
major part in the termination of the Concession involved by the Decree Law. The
official documentation of the period openly shows it, and the contentions put forward
by the Government in the course of the arbitral proceedings [101] make much of the
condition of relations between the Parties on the eve of the Decree.
105. On the juridical level, the Government at a certain moment even went so far as
to profess that it was the attitude of the Company that had brought about this lack of
success of the negotiations, through a failure to respect the obligations incumbent upon
it under Article 9 of 1961. Later, the Government confined itself to saying that the
perpetuation of this state of affairs created a situation on the contractual level that could
not be indefinitely prolonged, and that even involved an “intolerable” aspect. Hence,
this condition of the contractual relationship would for the Government constitute an
additional motive for nationalization, and would in some degree strengthen the basis of
the one that was declared by Decree Law No. 124.
106. For Aminoil on the other hand, this aspect of the Decree Law constituted one of the chief elements
of its lack of validity. The fundamentally important circumstance was the disagreement that occurred
592

in the course of the negotiations for the revision of the Concession. The Decree Law, by
its recourse to the concept and forms of nationalization would in this case only be a
stratagem, a procedural malversation employed to resolve a dead-lock which, according
to Article 9 of 1961, ought to be resolved by agreement, but which could in no event be
resolved unilaterally, and thus it was that the Government had committed a
fundamental breach of contract.
107. The dialectic thus developed by the two Parties highlights an essential facet of
the difficulties which arise in contract law in those cases where—for the amendment of
certain provisions, or the formulation of supplementary ones—the Parties have created
an obligation to negotiate, the results of which will depend entirely on the freely given
consent of both of them. If the negotiations break down, [102] what then is the legal
position? In private law, as in international law relationships, there are only palliatives.
Judicial annulment of the contract has the drawback of abolishing it entirely:
termination unilaterally pronounced by one of the parties is worse still.
108. As regards certain contracts (the “administrative contracts” of French law), the
right reserved for the benefit of the party representing the public authority, of
terminating the contract unilaterally, is practicable only because the regularity of such
acts is subject to the control of judicial organs enjoying the confidence of both the
parties. If this were not the case, and if the State had to be regarded as being entitled to
have recourse to nationalization at its discretion, there would be an end to any
possibility of a negotiation that enabled reasonable account to be taken of the interests
of both parties, since the negotiation would only be conducted under the threat of a
nationalization that would supervene at the first serious difficulty.
109. Thus the apprehensions that motivated the reasoning of the Company can be
perfectly well understood, and it can be conceded in its favour that a nationalization
whose alleged justification lies solely in the advantages to be derived from putting a term
to a contractual dispute, would not be regular. Nevertheless, in the circumstances of the
present litigation, that is not precisely the point. It is incontrovertible that, though
without haste, Kuwait had consistently pursued a general programme aimed at placing
the State in control over the totality of the petroleum industry, and that a
nationalization of Aminoil was in itself lawful (see answer to Question (A) above). The
problem is to decide whether [103] this nationalization, in itself legitimate, became
illegitimate because it additionally enabled an end to be put to a contractual situation
which has been the subject of a difficult negotiation that had not reached a result
during the preceding months.
110. The Tribunal does not think it possible to go so far. The existence
of this situation may have been decisive for the choice of the date
 66 ILR 518 593

of the nationalization, but the latter obtained its justification from a general policy duly
established and substantiated. In the concrete case submitted to the Tribunal, it would
be all the more unacceptable to claim the contrary, seeing that although the first stage
of the negotiations of 1976—1977 was about a revision of the Concession, the Parties
subsequently sought an agreement for realising the nationalization of the Concession:
the negotiations, without departing from their initial aim, were enlarged, so that it
became indeed a question of the conditions for the transfer to the State of all the
components of the undertaking in Kuwait territory. As from that point, it becomes
difficult to contend (merely because there was, for the moment, no outcome to a
negotiation having as its object to settle terms of nationalization by mutual agreement)
that a nationalization subsequently imposed by the public authority was rendered
illegitimate in principle solely by virtue of that fact.

Question C—as to the obligation to have recourse to arbitration

111. Even on the assumption that all the foregoing conclusions are correct Aminoil
has also contended that since there was a dispute between the Parties, [104] the most
serious complaint to be made against the Government was that it did not have recourse
to the arbitral procedures provided for in the contract, but clinched the matter
unilaterally. This being so, the Tribunal believes that some comments are called for on
the place of arbitration in the present context.
112. The Tribunal will disregard the controversy between the Parties as to whether,
failing the arbitration clause in the July 1973 Agreement which Aminoil did not
recognize, the analogous clause of the Concession Agreement was operative; and it will be
assumed that there did exist some provision enabling a Party to set the machinery of
arbitration in motion. But in the present context the possibility (prior to the issuing of
Decree Law No. 124) of seizing an arbitral tribunal with the particular question over
which the parties had failed to come to an understanding—namely the application of the
Abu Dhabi Formula—did not exist, because unless and until the Government took some
concrete step—such as nationalization—in consequence of that failure, there would have
been no definite complaint with which to seize any arbitral tribunal (see Section IV
above, paragraph 74). Therefore, to all intents and purposes the Parties would have had
to request the arbitrators to draw up fresh contractual provisions applying that formula.
Technically, the conclusion of a Special Agreement (“Compromis”) to that effect was
possible; but it is not at all clear that the Parties would have been able to agree on the
terms of such a Compromis, and no complaint could have been made against either for
not being able so to agree. The only definite issue for arbitration would
594

therefore have been the claim of one of the Parties that the termination of the
Concession ought to be pronounced in the absence of an understanding [105] as to the
conditions of a revision, the principle of which both Parties accepted as legally
necessary. The complaint made by Aminoil against the Government consequently
comes to this, that by unilaterally terminating the Concession, the Government took a
step which it ought to have left to an arbitrator to take,—but which the arbitrator could
not have taken without first deciding what were the terms for the application of the
Abu Dhabi Formula that the Parties ought to have agreed upon, but had failed to do.
113. However, quite apart from the impracticable nature of such a course, at that
stage, this argument does not appear well-founded since, as the Tribunal has already
ruled, the Concession had become a contract under the changed régime of which the
State had, over the years, acquired a special position that included the right to terminate
it, if such a step became necessary for the protection of the public interest, and subject
to the payment of adequate compensation. In the course of the long delays inseparable
from the arbitral process, sums of money, of which a preponderant part might
eventually redound to the State, would have gone on being accumulated abroad. The
Company, in a situation of absolute uncertainty as to its future, and as to what sums
would ultimately remain at its disposal, would have continued not to be able to carry
out the major work of renovation and development which each passing day made more
urgent.
114. Looked at in this way, Decree Law No. 124 appears, and did legitimately appear
to the Government of Kuwait, as a necessary protective measure in respect of essential
national interests which it was bound to safeguard. By subsequently submitting the
totality of its dispute with Aminoil to the present [106] arbitral process, the
Government of Kuwait has accorded to internationl arbitration its due place.
115. Subject to the foregoing observations, the Tribunal considers that Decree Law
No. 124 did not constitute a violation by Kuwait of its obligations towards Aminoil, as
these stood in 1977.

[107] SECTION VI

Other Government Counter-Claims

116. The Government of Kuwait has made two counter-claims against Aminoil
which, in its Final Conclusions (see Section I above, paragraph (xix)), are entitled
Aminoil's Liabilities to Third Parties and Aminoil's Operations and Installations. The
first concerns amounts due but unpaid by the Company on 19 September 1977 (the
date of the take-over), for which the Government, in the normal course of business,
 66 ILR 518 595

assumed responsibility. The second concerns what has been called “bad oil-field
practice”. These claims, which involve totally different questions, and have weighed
very unequally with the Parties, must be dealt with separately.

A—Aminoil's liabilities to third parties

117. The relevant Agreements between the Parties did not contain any provisions
regulating the situation resulting from a possible end of the Concession by reason of the
unilateral act of the public Authority. Decree Law No. 124, and the measures taken
under it, determined the transfer of the Company's assets and operations on the basis of
the clause in the Concession providing for a normal completion of its term (GM App.
V).
118. This way of dealing with the matter was not opposed by Aminoil. The transfer
of the assets gave rise to a credit in its favour, whereas that of the liabilities created a
debt. The sums due at the date of 19 September 1977, and paid by the Government,
have to be refunded by the Company, as [108] provided in Ministerial Decision No.
53 instituting a Compensation Committee and instructing it to pay “any debts relating
to the Company's operations” (AM Vol. VII, Exh. 3, p. IV).
119. The Government claims certain refunds from Aminoil (GM paragraph 4.20;
GCM paragraph 4.27) and the latter has conceded the principle of this (ACM
paragraph 54) while requesting that the amounts involved should be checked and a
guarantee given for the final extinction of the debts vis-à-vis third parties.
120. Both sides were in agreement during the proceedings to submit these matters to
a joint audit (ACM paragraph 62, GCM paragraph 4.27, and GR paragraph 3.154).
This audit was carried out in respect of the sum total of Aminoil's liabilities by the
London and New York branches of the accounting firm of Peat, Marwick, Mitchell &
Co., who are the regular auditors of Aminoil's books on behalf, respectively, of the
Government and of the Company. Their Joint Report, dated 30 October 1981, was
duly furnished to the Tribunal which will have occasion to revert to it (infra, paragraph
172). In this Report (p. 14) the Accountants say:
We have spent considerable time assessing and reviewing the various figures produced and
in particular the liabilities referred to in the report of the Inventory Committee appointed by
the Government. We have not been able to verify or reconcile completely all the various
figures produced, but we have been able to reach broad agreement. The areas of difference
between us are mostly of an immaterial amount or are differences concerning the basis of
valuation. We consider that, in view of the amounts involved and of the nature of the
differences between us, no point would be served in attempting to arrive at a closer
agreement.
596

[109] Accordingly, the Tribunal has gone by the figures of this Joint Report,
adopting their mean where they differ.

B—The claim of “bad oil-field practice”

121. The Government of Kuwait makes a financial claim against Aminoil based on
an allegation according to which the Company was said to have failed in respect of
certain usages applicable to the technological operation of the undertaking. These
usages make up a body of rules that may be called in a general way the rules of “good
oil-field practice”.
122. An initil distinction must be drawn with reference to the juridical character of
the rules the infraction of which is alleged: they can either emanate from the legislative
or regulatory power of the State, or be embodied in the contracts of Concession. In the
latter case they have a contractual character, and make reference to professional
standards and practices traditionally of general acceptance. Historically as regards
Kuwait, the case is one of the original contractual provisions of the 1948 Concession,
slightly modified as to their wording by subsequent amendments to it, but without
substantial alteration—(Article 2(C) of 1948; Article 8, paragraphs (3) and (6) of 1961;
and Article 6 of the First Part of the First Annex to the July 1973 Agreement). The
standards contemplated by these provisions are professional ones: “in workmanlike
manner”, “appropriate scientific methods”, “all reasonable measures”, “according to
good oil-field practice”, etc. It was only at a late date that Kuwait introduced any
legislation—(Law No. 19 [110] on the Conservation of Petroleum Resources—see GM
App. IV. 1)—and still later that Regulations on that matter were issued by the Minister
of Oil, in 1974, to be applied only in 1976 however, and on a trial basis of 6 months
before coming officially into force.
123. These provisions instituted a detailed and strict régime not suited to the special
conditions of Aminoil's undertaking; but subsection 4 of Section 1 of Part E of the
Regulations provided for a relief procedure, under which Aminoil had made
applications that were in the course of consideration at the moment of the take-over.
The correspondence between Aminoil and the official Kuwait technical services shows
that the Company's conduct in its reations with the Administration over this legislation
could not be faulted.
124. There remains for consideration the behaviour of the Company regarding those
general standards of practice with which the relevant contractual provisions, as
mentioned above, were concerned.
125. It must first of all be noticed that never, during the whole
period of the Concession, was any complaint of failure profferred by
the Kuwait authorities against the Company. Even allowing for the
 66 ILR 518 597

inevitable delays for installing in a newer State the technical services requisite for the
supervision of the concessions, this fact raises an extremely strong presumption that the
conduct of Aminoil had been correct. This presumption is further reinforced by the fact
that all its oil-field operations were carried on by agreement and in common with
another oil Company—Getty—which also functioned in the [111] Divided Zone (see
Section II, paragraph (xxii) above) under a Concession from, and subject to the
superintendence of Saudi Arabia—and that Aminoil's operations never gave rise to any
criticism coming from Getty or the Saudi Arabian authorities. If the various obligations
to report, which were incumbent on the Company under the contracts of Concession,
are taken into account, as well as the supervisory powers available to the concessionary
Authority, it has to be concluded that the latter was in possession of all the means of
being perfectly well informed.
126. There is a further necessary general observation: the standards governing the
practices which should prevail in an oil-field undertaking must inevitably possess a
considerable element of flexibility; and it scarcely needs saying that they undergo an
evolution in the light of scientific progress. This was considerable between 1954 (when
exploitation by Aminoil began) and 1977. Such an evolution is also influenced by
certain economic factors. Standards concerned with safety, and the protection of human
life, have an absolute character,—but it cannot be so with standards for the
exploitation, in the economically most rational way, of natural resources. Thus,
expenditures that would be quite unjustified when the barrel of oil was worth little
more than a dollar, become normal when it rises to thirty dollars.
127. Passing now to the criticisms advanced in respect of Aminoil' s operations, and
in order to assess these more concretely, two groups of installations must be
distinguished—on the one hand surface installations exclusive of wells, but including
refineries; and, on the other, the oil wells themselves.
[112] 128. As regards the surface installations—conduit pipes, reservoirs for
stocking, refinery and sundry other plant—the objection made by the experts who
were consulted by the Government was not that these installations were not in a fit
state to function at the date of the take-over,—nor could it have been, for these
installations went on functioning after that date, and in the same condition as
before—a condition which had not called forth any expression of disapproval from
the competent governmental services. The objection made by the experts called by
the Government was that one of the components of the refinery (the desulphurizer)
worked unsatisfactorily in a refinery itself of inferior design. In this connection it is
certainly not possible to impute any lack of factual information to one of those
598

experts, for it was his own business undertaking which had carried out the task of
planning and executing the work on the component and plant concerned. However,
such objectivity in the giving of evidence would have been more convincing if it had
not been at the expense of his former clients.
129. The Tribunal believes that the Management of Aminoil was extremely anxious
to keep its expenditures down to the minimum—(thus the general look of the plant
would not have given an impression of opulence)—and also, as much as practicable, to
defer putting important works in hand until a later date. That was why the Company
took the initiative of requesting that, in the assessing of the reasonable return the
allocation of which it was asking for in the course of the 1976–1977 negotiations, there
should be included at least a part of the amounts that would be needed for investments
of which the State would ultimately be the chief beneficiary. But no quarrel can be
picked with the Company for [113] operating under a régime of some austerity when a
similar restrictiveness was being forced upon it in respect of its own final profits.
130. It was however, with the topic of oil-well construction and maintenance that
the written and oral proceedings, and the testimony of the witnesses and experts of the
Parties, was mainly concerned. Here, the Government's contentions did not, as in the
case of the surface installations just considered, stop at alleging that the oil-well
equipment was not in a condition that could be called brilliant. The allegation was that
the oil-well casings both in themselves and as to their upkeep against corrosion; the
defective sealing off of wells the working of which was in suspension; the delays in
repairing leaking wells, etc.—had collectively caused a major deterioration in one of the
oil-reservoirs (at First Eocene level) by means of infiltrations of external water of a high
degree of salinity. These infiltrations had not only led to a faster deterioration of the
wells, and an increase in the costs of treating and refining the oil raised, but had also, by
reason of the abnormal quantity of water coming into the deposit of oil, resulted in the
loss of a large volume of otherwise recoverable oil, and/or to the considerable
expenditure required for such recovery, in particular by the sinking of new wells in
order to work deposits cut off from the main mass by the abnormal level of the water.
131. Substantial expert reports, and the oral evidence of witnesses and experts called
by both sides, were devoted to this matter, which puts in issue the correct running of
the oil-fields, back to a somewhat remote date between 1954 and 1962.
[114] 132. On the legal place the question is one of establishing whether, at the time
of the alleged bad oil-field practices, these practices were such as to be inconsistent with
the course that should have been followed by a skilled and circumspect operator. The
 66 ILR 518 599

Tribunal considers that this has not been affirmatively established,—and that is the
essential point. Moreover, if there existed in this First Eocene reservoir a large quantity
of water rich in chlorides, it has not been denied that the level concerned has an
extremely complicated geomorphic structure. The levels above it (the Dammam
formation) seem to have characteristics that can lead to infiltration despite all the
precautions that can be taken by the concessionaire.
133. The most that might be allowable in the light of the technology of today, and of
the present price of oil, would perhaps be to regret that some extra care was not taken
over certain of the operations of more than twenty years ago. But this could in no way
affect the fundamental finding that neither a departure from the standards applicable at
that time, nor the nexus of cause and effect between the practices followed and the
actual condition of the oil reservoir concerned, has been established.
134. The Tribunal is satisfied as to the impartiality and thorough knowledge of the
experts whose views were placed before it in regard to a multiplicity of technical
questions, turning in particular on the salinity and external presence of the water; the
effects of the presence of that water; the size of the oil deposits lodged in the reservoir,
etc. … If these assessments reflect serious divergences of view, these are not due to any
lack of qualifications on the part of those who support them, any more than to a want
of rigour, but to the complexities of the [115] subject and to the impediments to
scientific development that exist even to-day.
135. The multiplication of expert opinions could only bear witness to the difficulties
and limitations involved. In these circumstances the Tribunal considers that it is not
called upon to conduct an independent investigation of its own, as one of the Parties
has suggested.
136. The Tribunal therefore disallows the Government's claim under this head.

[116] SECTION VII

The question of Indemnification

1. Principles and Methods

137. The Tribunal notes in the first place that there is a very considerable gap
between the amount of the claim made by the Company following upon Decree
Law No. 124, and the offer made by the Government. The latter maintains that,
all in all, it owes no more to the Company than the “net book value” of the
assets transferred to the State. The Company on the other hand calculates the
amount of the payment due to it by bringing in all the revenues which it would
600

have received up to the expiry of the concessionary period,—these revenues being

quantified on the basis of the 1961 Agreement by means of projections as to the
amount of oil produced, the cost of producing it, and the price of oil during the period
1977–2008.
Before going into this question as a matter of law, the Tribunal will make certain
general observations.
138. The determination of an indemnification has always presented technical
difficulties. This has been the case in regard to indemnifications due in consequence of
illicit acts, where it is as the equivalent of a restitutio in integrum that the calculation is
in principle effected. But it has been so especially for indemnities due in consequence of
acts of expropriation or of legitimate nationalizations. Indeed, in this last case, the
difficulties are added to by controversial questions of foreign investments, and
operations involving an important [117] economic complex. Since the end of the 19th
century, every kind of economic, moral and ideological consideration has been put
forward by “host” countries in the endeavour to keep in their own hands the evaluation
of the indemnifications due, and to reduce them to the minimum or nothing. When
the international political outlook was favourable, the investing States espoused more or
less energetically the claims of their nationals and, at least on the level of principle,
upheld the rule of equivalence in monetary terms to the value of what had been taken.
139. Since the end of the second World War, nationalizations have multiplied, and
have given rise to much regulation by Convention, but to few arbitrations. Through
decolonization and the development of older countries that were never colonized, or
became independent much earlier, a “Third World” had emerged, dominating the
debates in the United Nations. This has led to the adoption of numerous General
Assembly Resolutions which, with few exceptions, have more often than not been the
occasion of confrontations between the older investing countries, reduced to a small
numerical minority, and large majorities of newer countries wanting to render
nationalizations as easy as possible.
140. Many regulations agreed upon by Convention have also been arrived at during
this period, particularly in the field of nationalizations in the petroleum industry; and it
has been sought to maintain that these furnish a body of precedent from which it is
possible to deduce rules of customary international law. This important matter will be
reverted to later.
141. First however, a caveat of a general kind must be entered concerning the
succession of events taking place on the world plane in the petroleum [118] industry
since 1971, which have been abundantly invoked in the course of the present case.
These events, in their totality, have undoubtedly constituted an important general
historical episode because of their political and economic repercussions. They
 66 ILR 518 601

call for appraisals of every kind, political, moral, economic and ideological, all of which
are quite outside the competence of the Tribunal. These events have led to the
frequently progressive elimination of foreign investments from producing countries.
The final result of the nationalizations concerned is today secured as a matter of law,
and is no longer contested. This consolidation has resulted from consents given by the
interested Companies, and sometimes by the States they belong to. These facts do not
compel the conclusion that, at the time when it was taken, each of these measures (the
combined effect of which has led to the now existing situation) was then necessarily in
conformity with the obligations incumbent on the State instituting them. This
Tribunal is not however called upon to pronounce on such matters, alien to the present
litigation.
142. What the Tribunal does have to do—as was provided in the Arbitration
Agreement and was stressed by the Parties in the course of the proceedings—is to
decide according to law, signifying here principally international law which is also an
integral part of the Law of Kuwait. The Tribunal will first indicate the general legal
rules applicable to the case, and will then enquire into the circumstances intrinsic to it.

A. The applicable general rules

143. The most general formulation of the rules [119] applicable for a lawful
nationalization was contained in the United Nations General Assembly Resolution No.
1803 (XVII) of 14 December 1962, on Permanent Sovereignty over Natural Resources,
Article 4 of which provides that
Nationalization, expropriation or requisitioning shall be based on grounds or reasons of
public utility, security or the national interest which are recognized as overriding purely
individual or private interests, both domestic and foreign. In such cases the owner shall be
paid appropriate compensation, in accordance with the rules in force in the State taking such
measures in the exercise of its sovereignty and in accordance with international law.
This text which obtained a unanimous vote in the General Assembly, codifies
positive principles, recognised by the Constitution and Law of Kuwait, that have not
been contested in the present proceedings. It calls for a concrete interpretation of the
term “appropriate compensation”. Other disputes have long since turned upon
different terms such as “fair”, “just”, “equitable”, not to speak of “adequate”,
“effective”, “prompt”, etc. There are indeed, several tendencies, all appealing to the
same principle, one of which however reduces compensation almost to the status of a
symbol, and the other of which assimilates the compensation due for a legitimate take-
over to that due in respect of an illegitimate one. These tendencies were in mutual
602

opposition in the United Nations when the Resolutions following No. 1803 were
voted, none of which obtained unanimous acceptance, and some of which, such as the
Charter of the Economic Rights and Duties of States, have been the subject of divergent
interpretations.
[120] 144. The Tribunal considers that the determination of the amount of an
award of “appropriate” compensation is better carried out by means of an enquiry into
all the circumstances relevant to the particular concrete case, than through abstract
theoretical discussion. Moreover the Charter of the Economic Rights and Duties of
States, even in its most disputed clause (Article 2, paragraph 2c)—and the one that
occasioned reservations on the part of the industrialized States—recommended taking
account of “all circumstances” in order to determine the amount of compensation—
which does not in any way exclude a substantial indemnity.19
145. Careful consideration of the circumstances proper to each case sometimes
enables certain difficulties to be set aside. Thus the opposition manifested by some
States to any but the most incomplete compensation may be explicable on the basis that
their object is to do away with foreign investments entirely, because they do not
welcome foreign capital and are even less favourable to investing abroad themselves.
What they want is to break loose from the round of foreign investment; and it can be
concluded that in their own mutual relations inter se such States apply very restrictive
rules in the matter of compensation.
[121] 146. But as regards States which welcome foreign investment, and which even
engage in it themselves, it could be expected that their attitude towards compensation
should not be such as to render foreign investment useless, economically. In this respect it
is not disputed that Kuwait is a country favouring foreign investment, and itself an
important investor abroad. The Tribunal does not intend either to examine, or resolve the
complex of juridical problems created by the fact that there are some States that are
motivated by very different sets of conceptions about foreign investment, possibly involving
within the framework of the international community what the International Court of
Justice has called an “intense conflict of systems and interests” (Barcelona Traction, etc. case,
I.C.J. Reports, 1970, p. 47, paragraph 89[20]). The Tribunal will therefore confine

19.
As was recently stated by the United States Court of Appeals for the Second Circuit in Banco Nacional de Cuba
v. Chase Manhattan Bank, (4 August 1981),
It may well be the consensus of nations that full compensation need not be paid ‘in all circumstances’ …
and that requiring an expropriating State to pay ‘appropriate compensation’—even considering the lack of
precise definition of that term,—would come closest to reflecting what international law requires. But the
adoption of an ‘appropriate compensation’ requirement would not exclude the possibility that in some cases
full compensation would be appropriate. [See above, p. 421, at p. 438.]
20.
[ 46 I.L.R. 1 at 221.]
 66 ILR 518 603

itself to registering that in the case of the present dispute there is no room for rules of
compensation that would make nonsense of foreign investment.
147. This is a fundamental precept. It is pertinent during the lifetime of a
concession; it is equally pertinent when a concession comes to an end. Compensation
then, must be calculated on a basis such as to warrant the upkeep of a flow of
investment in the future.
148. Both Parties to the present litigation have invoked the notion of “legitimate
expectations” for deciding on compensation. That formula is well-advised, and
justifiably brings to mind the fact that, with reference to every long-term contract,
especially such as involve an important investment, there must necessarily be economic
calculations, and the weighing- [122] up of rights and obligations, of chances and risks,
constituting the contractual equilibrium. This equilibrium cannot be neglected—
neither when it is a question of proceeding to necessary adaptations during the course of
the contract, nor when it is a question of awarding compensation. It is in this
fundamental equilibrium that the very essence of the contract consists.
149. For assessment of that equilibrium itself, and of the legitimate expectations to
which it gives rise, it is above all the text of the contract that signifies, and it is of
moment that this text should be precise and exhaustive. But it is not only a question of
the original text; there are also the amendments, the interpretations and the behaviour
manifested along the course of its existence, that indicate (often fortuitously) how the
legitimate expectations of the Parties are to be seen, and sometimes seen as becoming
modified according to the circumstances.
150. It is on the footing of these general principles that the Tribunal will now
enquire into the circumstances specific to the case of Aminoil.

B. Circumstances specific to Aminoil's case

151. The first and principal question is to ascertain on what basis Aminoil's
compensation is to be evaluated. Some long-term concessionary contracts
expressly provide for the possibility of a termination prior to the maturity of the
concession, and therefore regulate the conditions of it; but this is not so as regards
Aminoil's Concession. In order to resolve certain of the problems produced by the
nationalization, the Parties to the present litigation have, up to a point, derived
instruction from the [123] rules provided by the Concession for its termination at
the end of its period of 60 years (see Section VI, paragraph 117). The most
important of these was Article 13 of 1948 which provided that at the expiry of the
Concession, the entire undertaking should be “handed over to the Shaikh”—i.e.
the Government—“free of cost”—that is, without compensation. Since,
604

however, this is not appropriate to the present circumstances, the factors that have to be
taken into account for the indemnification of Aminoil have still to be determined. In
order to do so, the Tribunal will consider the arguments of the Parties in turn, which
will lead it progressively to define its own position, to be reverted to later.
152. On behalf of Aminoil, it has been shown that there was a choice between two
methods:
(i)—a method based on the sum total of the anticipated profits, reckoned to the
natural termination of the Concession, but discounted at an annual rate of interest in
order to express that total in terms of its “present value” on the day when the
indemnification is due; and without taking account of the value of the assets that would
have been transferred to the concessionary Authority, “free of cost”, upon that
termination;
(ii)—a method whereby total anticipated profits are counted and discounted in the
same way over a limited period of years only, but taking countervailing account of the
value of the assets (for this, Aminoil furnished examples of results calculated over ten
year periods).
153. Subject to what is stated later as to the system for determining the annual
profits involved, the Tribunal agrees in principle that both of the methods suggested by
Aminoil are acceptable and [124] can be checked against each other. But, while aware
that the first method may have been adopted in certain arbitrations, the Tribunal
considers that in effecting a general evaluation, it is preferable to employ a combination
of methods, according to the different factors that have to be taken into account.
Moreover, the Tribunal disagrees with Aminoil's assumptions and calculations on two
basic points. In this connection the Company has furnished an estimate on the lines of
the principle of a restitutio in integrum founded on the assumption that the Concession
should have continued for its full term under the contractual conditions fixed in 1961,
without modification. This calculation is based on a projection of the quantities of oil
recovered, the prices, the costs of production, and the operations to be undertaken until
the end of concession. The Company has also produced its estimate of the value of the
assets, in case the Tribunal should choose the second method.
154. The two basic points on which the Tribunal differs from Aminoil's position are
as follows:
(a)—First, in respect of the foundation for the calculation of anticipated profits,
which Aminoil takes as being exclusively the financial arrangements of 1961, the
Tribunal has already found in Section IV above, both that the 1973 Agreements
were valid, and that something is owing to the Government on Abu Dhabi account.
Not only is no refund due of moneys paid to the Government under the 1973
 66 ILR 518 605

arrangements, but the latter are also a component of the present “legitimate
expectations” of the Company. Even more pertinent, the negotiations between the
Parties about the application of the Abu Dhabi Formula involved a recognition of the
[125] principle of a monetary obligation to the Government, and of a modification for
the future of the financial relations of the Parties. It is therefore on a combination of
these data, not on those of 1961, that the indemnification of the Company must be
proceeded to.
(b)—Next—and this constitutes the second aspect of the difference between the
Tribunal's and Aminoil's positions—the Tribunal cannot accept the projections as to
the future of the petroleum industry based on the consultations of experts that the
Company has relied upon. These have been criticized by the Government. If, however,
the Tribunal does not accept them, this is not because they include speculative
elements, since all methods of assessment, whatever they may be, will do that. It is
because the Tribunal thinks that in the present case, as will be shown later, the Parties
adopted a different conception in the course of their relations and negotiations,—
namely that of the reasonable rate of return. This it is, therefore, that must guide the
Tribunal.
155. On behalf of the Government, it was maintained that the only compensation
Aminoil was entitled to claim must be determined by precedents resulting from a series
of transnational negotiations and agreements about compensation. These precedents, so
it was said, had instituted a particular rule, of an international and customary character,
specific to the oil industry. Attention was called to the fact that a number of
nationalizations of oil concessions had occurred in the Middle East, and elsewhere in
the world, in the years 1971–77. However, the solutions adopted in the case of these
precedents were not identical but had certain common features: [126] the
compensation granted was very incomplete and had reference only to the “net book
value” of the redeemable assets These precedents, it was claimed, had generated a
customary rule valid for the oil industry—a lex petrolea that was in some sort a
particular branch of a general universal lex mercatoria. That was why Kuwait, in the
course of the 1977 discussions, had offered no more than the net book value of the
redeemable assets as compensation for the expropriation.
156. The Tribunal cannot share this view, for reasons of fact, as of law.
As regards reasons of fact—it must be noticed that the overall results of negotiations
about compensation are, more often than not, complex. They do not simply
comprise the payment of an indemnity but also include bilateral arrangements of
every kind—contracts of service, long term supply, contracts covering particular
benefits, etc. Such contracts have not all been made public, and even the amounts of
606

compensation paid and the method of computing them are not always known with
certainty. What is certain is that in addition to the compensation, a preferential
relationship was often instituted or maintained between the State and the foreign entity
concerned (whereas in the case of Aminoil all relations were severed). It would be
difficult to express in figures the value in terms of money of these preferential
arrangements; for the advantages they bring depend on the structuring and policy of the
former concessionaire Company. What can be affirmed is that the advantages for major
integrated concerns are often considerable. But even if such relations had been
maintained for the benefit of Aminoil, their value could not have been the same because
of the modest dimensions of that undertaking, [127] not similarly integrated
economically. At the most, it might be possible to go so far as to say that certain large
transnational groups may have preferred compensation that had no relation to the value
of their undertaking, if it was coupled with the preservation of good relations with the
public authorities of the nationalizing State with, possibly, resulting prospects for the
future giving promise of greater worth than the compensation forgone.
157. As regards the reasons of law—
(i) If reliance is to be placed on the precedents just mentioned—and always
supposing them to be conclusive about the order of size of the indemnity (which, as has
been seen, they are not)—it would still be necessary for them to constitute an
expression of the opinio iuris—(North Sea Continental Shelf case, I.C.J. Reports, 1969, p.
45, paragraph 77[21]). But, as it happens, the conditions in which these compensation
agreements were concluded were peculiar, and the documentation submitted to the
Tribunal brings out certain relevant aspects of the matter. These are: the circumstances
in consequence of which the concerted petroleum policy of OPEC as from 1973 had to
be taken into account; the progressive character of the steps taken; the crucial
preoccupations of concessionaire Companies to ensure the continued supply of
petroleum products to consumers; and the passivity of the importing States. All this led
the major transnational Companies to accept de facto what the exporting countries
demanded. It can be maintained that such acceptance was wise—but it would be
somewhat rash to suggest that it had been inspired by juridical considerations: the
opinio iuris seems a stranger to consents of that type.
[128] (ii) Such consents were given under the pressure of very strong economic and
political constraints; and in connection with the consents given by Aminoil, the Tribunal
has already considered whether these constitute a case of “duress”, leading to invalidation,

[21. 41 I.L.R. 29 at 73–4.]

 66 ILR 518 607

and has given a negative answer. Speaking generally, it can be held that the consents
given in the course of this period were not obtained by means amounting to duress, and
they were valid and final. But the economic pressures that lay at the root of them had
nothing to do with law, and do not enable them to be regarded as components of the
formation of a general legal rule. A juridical entity has the faculty, even in the case of
pressure exercised through economic constraints, to handle its own business affairs in
such a way as to produce concrete valid results; but it cannot be claimed that such
dealing is apposite for generating general rules of law applicable in other cases too.
158. The Tribunal now comes to the basis on which the evaluation of the legitimate
expectations of Aminoil must proceed. There exist, as well in the contract of
Concession as in the attitude of Aminoil, indications concerning this, which it is right
to recall and describe.
159. To start with, as was mentioned earlier in connection with Aminoil's
nationalization, whereas the contract of concession did not forbid nationalization, the
stabilization clauses inserted in it (and equally—by 1977—not forbidding that) were
nevertheless not devoid of all consequence, for they prohibited any measures that would
have had a confiscatory character. These clauses created for the concessionaire a
legitimate expectation that must be taken into account. In this context they dissipate all
doubts as to the strength of the respect [129] due to the contractual equilibrium.
160. But above all, account must be taken of the position of Aminoil in its relations
with the Government of Kuwait. From the time when its rate of production reached a
satisfactory level, Aminoil was in the position of an undertaking whose aim was to
obtain a “reasonable rate of return” and not speculative profits which, in practice, it
never did realize. As stated earlier it was threatened with two dangers. One was not to
be able to dispose of products the high net cost of which made their sale on the market
difficult; and the other was to have to agree to payments to the Government of Kuwait
that did not allow the Company to ensure the viability of the enterprise. The persistent
desideratum of its representatives was to see the prospect of retaining for it a reasonable
rate of return. It was on this note that it opened the negotiations of 1976–77, and in
the light of this expectation that appropriate compensation has now to be assessed.
161. It is correct to say that the attitudes taken up by a party over the long course of
a negotiation that eventually breaks down cannot be made the basis of an arbitral or
judicial decision. But there is no question here of facing Aminoil with the latest
proposals it made in 1977 in a final effort to come to terms. The point is simply to
register the fact that, over the years, Aminoil had come to accept the principle of a
moderate estimate of profits, and that it was this that constituted its legitimate
expectation.
608

162. There are not wanting indications given by Aminoil as to what could be a
reasonable rate of return. They appear in particular in a letter of 28 July 1972 (GCM
App. VI.9 and “Notes on Meetings of 12 and 13 May 1973” GCM App. VI. 1), and in
the [130] opening proposals for the 1976 negotiation (AR Vol. V, Exh. 12). Moreover,
in the Second Part of the First Annex to the July 1973 Agreement, Section V, it was
stated that:
Any future discussions between the Government and the Company regarding concession
provisions will take into consideration that the Company should not be denied a reasonable
opportunity of earning a reasonable rate of return (having regard to the risks involved) on the
total capital employed in its business attributable to Kuwait.
163. Here three points need to be brought out:
(i)—Assuming that a normal level of profits has been determined having regard to
the total capital invested, it would be ordinary business practice in the case of a
concession intended to last, to add a reasonable profit margin that would preserve
incentives, and allow for risks whether commercial or technological. But this necessity
disappears when it is a question of deciding on the amount of compensation due for a
concession that has already been terminated,—for in that event the risk (for the
concessionaire) has ex hypothesi vanished.
(ii)—As regards a Concession which provides that, ultimately, all the installations
and assets are to be handed over to the concessionary Authority “free of cost”, it would
be normal that at least a part of necessary current investment should be effected out of
profits. Such was the position—fair in principle—of Aminoil at the start of the 1976
negotiations, and that was why, for the Company, the reasonable return of which it was
claiming the benefit had to include an amount for operations that would ordinarily
prove indispensable. But again, this point has not much relevance when the Concession
has come to an end.
[131] (iii)—A third point is that in the present case the reasonable rate of return has
to be determined for two distinct purposes. First, in connection with the Abu Dhabi
Formula, over the period stretching from l January 1975 to 19 September 1977,—this
is a period for which the profits of Aminoil's undertaking are known, and in respect of
which, it is not necessary to provide for the financing of works that were never carried
out, or for what would constitute an incentive for further development. Secondly, the
reasonable rate of return, assessed on a somewhat more liberal scale, constitues one of
the elements of compensation.
164. Having thus described the place occupied by the notion of a
reasonable rate of return in the indemnification of Aminoil, the
Tribunal must now indicate what principles are, in its view, valid for
 66 ILR 518 609

determining the compensation due in respect of the Company's assets. As the Tribunal
has stated earlier, it considers it to be just and reasonable to take some measure of
account of all the elements of an undertaking. This leads to a separate appraisal of the
value, on the one hand of the undertaking itself, as a source of profit, and on the other
of the totality of the assets, and adding together the results obtained.
165. As regards deciding on a method for valuing the physical assets, it is not possible
to postulate any absolute rule. Doubtless it is necessary in all cases to consider the value
of the assets as at the date of transfer, taking due account of the depreciation they have
undergone by reason of wear and tear and obsolescence. But in general, only [132]
values for accounting or taxation purposes can be utilized—and they must always be
reasonably arrived at. Thus, the method called that of the net book value may be suitable
when it is a case of a recent investment, the original cost of which was not far from that
of the present replacement cost. But when that is not so, other methods are indicated.
166. This leads to a last general observation, touching upon the combined evaluative
problems concerning Aminoil. If these problems had arisen in concreto in a stable
economic world, it would be possible to express matters in terms of some given
monetary unit—for instance to regard the dollars of 1948 and succeeding years as being
assimilable to those of 1977 or 1982. But the proportions assumed by world inflation
must lead to appraisals that are more in line with economic realities, and the
determination of an indemnification cannot be tied down to the inflexible
consequences of a purely monetary designation. That is why, in calculating the value of
depreciating assets, it would be unfair to settle it on the basis of a superannuated cost
consisting of the original purchase price, when that price has no relation to the actual
present cost.
167. One of the most pertinent economic considerations justifying the profits
claimed by the countries producing non-renewable oil or other minerals, is that these
profits are not truly in the nature of income, but represent a capital value, since the
State must aim at reconstituting the worth of the oil or mineral deposits against the day
when these will be exhausted. But it is no less of a necessity [133] for the oil or mining
undertaking to reconstitute in real terms the capital value of the investment it put into
it. Such an undertaking can in no way be assumed to go out of business at the end of its
Concession: it must carry on elsewhere or in another form. It must re-invest.
168. Moreover, the need not to neglect the economic effects of inflation goes beyond
the case of assets liable to depreciation. For instance, in the course of the oral proceedings,
different appraisals were made, bringing in various factors expressed in money terms and
610

stretching from 1948 to 1977—being either added together or compared. But for such
calculations to be in point they must be carried out on the basis of components
expressed in units having a comparable economic signification, and if it were thought
necessary to arrive at the total figure of the capital invested by Aminoil in its
undertaking, it would be appropriate to do so without holding the dollars of 1977 to be
equivalent to those of 1948.
169. The Tribunal has to point out that the general principle of the preservation of
the value of money which has just been discussed is consistent with the spirit of the
contract of Concession and, grosso modo, with the attitudes of the Parties, in particular
during the petroleum crisis after 1973; in the negotiations for the revision of the
Concession; and in the proceedings before the Tribunal. Thus the original (1948)
Concession contained a “gold clause” (Article 3 (h)) the text of which will be found in
Section II, paragraph (xxiv) supra. A similar preoccupation with expressing values for
economic transactions in a manner independent of purely monetary fluctuations is
equally apparent in the politics of petrol prices. Such was the case at the level of [134]
the Gulf States and the major oil Companies in respect of the Geneva Agreement of
January 1972 which adopted the principle of adjusting oil revenues by reference to a
“basket of currencies”. It was the same in the relations between Aminoil and Kuwait:
for the July 1973 Agreement on the one hand cancelled Article 3(h) of the 1948
Concession containing the “gold clause” (see head (7) of the First Part of the First
Annex to the 1973 Agreement),—and, on the other hand (Article 2(2) (v) of the main
Agreement), took account of “the purchasing power or real value of revenues related to
oil exported from Kuwait”.
170. This need for stability is such that in the present proceedings the Government
of Kuwait has argued that in the event of the 1973 Agreement not being held
applicable, and of the relations between the Parties remaining governed by the 1961
Agreement, the Tribunal ought, even in the absence today of any “official United
States Government purchase price” for gold (see Article 3(h) of 1948), to have
reference to other equitable standards in order to replace that official price. But this
problem is no longer actual, since the Tribunal has found that the 1973 Agreement
was applied by the two Parties up to the end of the Concession. However, the position
taken up by the Government on the subject remained significant,—and if the
correspondence exchanged between the Parties, and the minutes of their meetings are
looked at, it can be seen that inflation had an important place in their discussions.
Especially in the negotiations of the years 1976 and 1977, did Aminoil adjust its
proposals to take account of it. The Government sometimes discussed from this point
of view the evaluations that were made, and did not reject the principle (AR Vol.
 66 ILR 518 611

V, Exh. 14, p. 3; Exh. 18, p. 2; Exh. 21, p. 6; Exh. 22, p. 1; and Exh. 30, p. 6).
[135] 171. The Tribunal has not overlooked the fact that there may be different
ways of assessing the levels of inflation. As regards the payments made by Aminoil
under the 1973 Agreement, or any to be made under the Abu Dhabi Formula, these
have, by reason of the method of calculating them, been automatically indexed on the
petroleum products market in the Gulf States. In the compensation to be paid to
Aminoil, it would be natural to take account of the progress of inflation generally, and
in particular by reference to the price of refined petroleum products on the American
market.

2. The Figures
172. In order to calculate the amount of the indemnification due, the Tribunal has
available to it numerous elements furnished by the Parties and by the experts they have
commissioned for that purpose. In particular, the Tribunal has had available to it the
Joint Report dated 30 October 1981, referred to in paragraph 120 above. This Report
had been the subject of head X of the Order of the Tribunal of 1 July 1981, which
stated
The Tribunal takes note of the mutual intention of the Parties to direct their respective
accountants to produce, if possible, a joint report on questions of quantum or, if this is not
possible, to produce separate reports for the Tribunal before 1 November.
173. Having given careful consideration to this Report and to the analyses,
statements and counter-statements to be found in the written proceedings and
furnished by Counsel and experts during the oral hearing, the Tribunal is persuaded
that it is not indispensable for the final adjustment of the present case to hear the
Parties again on matters of quantum, and the Parties were so informed in a
communication from the Secretary of the Tribunal. Where there are differences
between the accounting firms above-mentioned, the Tribunal has taken the mean of the
two totals indicated.
[136] 174. The Tribunal has however determined for itself certain factors in respect
of which it did not possess any data as numerically worked out as those that are
included in the above-mentioned Joint Report. As regards these factors the Tribunal
had a choice between various alternatives the merits of which were comparable although
they could lead to different results. Where this was the case, the Tribunal has taken each
of these factors into account within the global conspectus of a balanced
indemnification.
175. The Tribunal must now first determine the balance-sheet of
the financial rights and obligations of the Parties as at 19 September
1977. It will then be possible to determine the situation at the date
612

fixed for the carrying out of this Award. The state of the Parties' rights and obligations
as at 19 September 1977 involves examining seriatim their respective debts and credits
at that time.
176. The debts of Aminoil—
(1) Under the 1973 Agreement, Aminoil still owed, on 19 September 1977, an
amount as to which there is a slight difference of view between the two sets of
accounts,—$33,210,000 as against $31,247,000. Taking the mean between these two
figures gives $32,228,500. No difficulty of interest on this amount, nor of inflation,
arises, since it is basically founded on the price of petrol, and only becomes payable after
19 September 1977.
(2) the Application of the Abu Dhabi Formula, resulting from the decisions
collectively taken in mid-December 1974, does not have to be contemplated until, at
the earliest, January 1975. Here, a balanced appraisal of the circumstances leads the
Tribunal to fix $10 million as a reasonable rate of return for Aminoil given the fact that
the important works which were to have been carried out by the Company in the [137]
near future, and financed, at least partly, out of the profits of the undertaking, ceased to
be a charge on it. This total (of 10 million), valid for the year 1975, must be increased
by 10% per annum to take account of inflation; but, allowing this return for only 261
out of 365 days in 1977, the amount for that year is $8,652,000—say $29,652,000 for
the three years 1975–77 inclusive. This sum is deductible against the total profits going
to Aminoil in those three years. As to these, the Joint Report of the accountants gives
two fairly close figures, of which the Tribunal has taken the mean—say $101,615,000.
Deducting from this the above mentioned $29,652,000, an amount of $71,963,000 is
shown as due from Aminoil under the Abu Dhabi Formula. For this total, inflation
does not have to be allowed for, since this is already reflected in the price of oil. Nor
does it call for the allowance of interest, if the late date of the opening of the
negotiations proper is borne in mind, together with the practice of the Government of
Kuwait of not requiring payment of interest in cases of this kind—see the evidence of
Dr. Nurredin Farrag (GCM App. II. V, p. 12).
(3) Finally, with reference to the liabilities of Aminoil to third parties, discharged by
the Government, the two Parties being in agreement about the principle, the figures
given in the accountants' Joint Report ($19,114,000 and $18,585,000) will be taken at
their mean by the Tribunal—say $18,849,500.
177. Thus, the total liabilities of Aminoil as at 19 September 1977, come to
$123,041,000.
178. Amounts due to Aminoil—
(1) These are made up of the values of the various components of
the undertaking separately considered, and of the undertaking itself
considered as an organic totality—or going concern—therefore as a
 66 ILR 518 613

unified whole, the value of which is greater than that of its component parts, and which
must also take [138] account of the legitimate expectations of the owners. These
principles remain good even if the undertaking was due to revert, free of cost, to the
concessionary Authority in another 30 years, the profits having been restricted to a
reasonable level.
(2) As regards the evaluation of the different concrete components that constitute the
undertaking, the Joint Report furnishes acceptable indications concerning the assets
other than fixed assets. But as regards the fixed assets, the “net book value” used as a
basis merely gives a formal accounting figure which, in the present case, cannot be
considered adequate.
(3) For the purposes of the present case, and for the fixed assets, it is a depreciated
replacement value that seems appropriate. In consequence, taking that basis for the
fixed assets, taking the order of value indicated in the Joint Report for the non-fixed
assets, and taking into account the legitimate expectations of the concessionaire, the
Tribunal comes to the conclusion that, at the date of 19 September 1977, a sum
estimated at $206,041,000 represented the reasonably appraised value of what
constituted the object of the takeover.
(4) According to the above mentioned data, the sum total of the amount due to
Aminoil as at 19 September 1977, comes to $206,041,000 less the liabilities of
$123,041,000, that is to say $83,000,000. This represents the outcome of the balance-
sheet of the rights and obligations of the Parties as at 19 September 1977.
(5) In order to establish what is due in 1982, account must be taken both of a
reasonable rate of interest, which could be put at 7.5%, and of a level of inflation which
the Tribunal fixes at an overall rate of 10%,—that is to say at a total annual increase of
17.5% in the amount due, over the amount due for the preceding year.
[139] (6) Capitalizing the above-mentioned figure of $83,000,000 at a compound
rate of 17.5% annually, gives the amount specified in the Operative Section (Dispositif)
below.

SECTION VIII

Operative Section (Dispositif)

179. For these reasons,
The Tribunal, unanimously, having regard to all of the above mentioned
considerations,
Awards to Aminoil,
614

The sum of one hundred and seventy nine million, seven hundred and fifty
thousand, seven hundred and sixty four United States dollars ($179,750,764) calculated
on the basis of being payable on 1 July 1982.

Done in Paris this 24th day of March 1982.

The Separate Opinion of Sir Gerald Fitzmaurice follows.

[140] SEPARATE OPINION OF SIR G. FITZMAURICE

1. I am in entire agreement with the Operational Part (Dispositif) of the Award,
which is unanimous,—and except on one cardinal question, I am in substantial
agreement with much of the reasoning on which the Award is based. Moreover my
difference of view on this particular question, though involving some important points
of principle, does not affect my concurrence in the Award as such.
2. Before coming to this question—which is that of the effect of what are known as
the “stabilization” clauses of Aminoil's Concession Agreements (see paragraph 19
below), I should like to state my position respecting one claim made by the Company
which the Tribunal has disallowed, and certain of the claims put forward by the
Government of Kuwait. Amongst these are the allegations of “bad oil-field practice” by
Aminoil, and the Government's claim to recover the sums paid out in discharge of
liabilities of the Company still extant at the time of the “take-over”. With reference to
these two heads of claim I have nothing to add to what is contained in Section VI of the
Award. This leaves (a) the question of the validity and effect of what is known as “the
1973 Agreement” and, as part of that question, Aminoil's claim to recover the moneys
paid to the Government under that Agreement; and the Government's claim for sums
still unpaid under it at the date of the take-over,—and (b) the complex of questions
revolving around the interpretation of Article 9 [141] of the Supplementary Concession
Agreement of 1961, and the negotiations of 1976—1977 about the effect and
application of the “Abu Dhabi Formula”, as it is generally known. But in order to avoid
needless repetition and unduly extending the length of this Opinion, I shall, for a
description of the nature of these various questions and a statement of the facts relating
to them, rely mainly on what is contained in the relevant Sections of the Award to
which I must be deemed to refer whenever some further explanation seems necessary.
 66 ILR 518 615

The 1973 Agreement

3. It is clear, in my view, that Aminoil did, in principle, accept the unsigned and
unratified draft Agreement of July 1973, by means of the subsequent Agreement
embodied in what is known as the 22 December 1973 Letter addressed by Aminoil to
the Minister of Finance and Oil of Kuwait, and countersigned by him, in the opening
paragraph of which, after a mention of certain meetings that had recently taken place, it
was explicitly stated on behalf of the Company that
We accept the 1973 Agreement as drafted in July of this year with language changes
agreed at the aforesaid meetings and with the following amendments requested by the
Ministry during the aforesaid meetings …
The December Letter then went on to state, inter alia, that certain new or further
payments to the Government, provided for by the draft July 1973 Agreement, would be
made by Aminoil “as if” that Agreement was in force—(this was not of course all that
the Letter contained, and I shall come back to that).
[142] 4. Given this clear initial acceptance, much of the discussion that took place in
the course of the proceedings as to whether there was not, in any event, subsequent
acceptance by conduct, becomes irrelevant, unless it could be shown that the original
acceptance was either vitiated by some fundamental flaw in the consent given, or was
only of a conditional or temporary (provisional) character. For reasons which I shall
give, I have—though with some hesitation—come to the conclusion that neither of
these propositions can be established, at least in that form. What can be established is
that at a certain point the Company would have been within its rights in giving notice
to terminate participation in the July 1973 and 22 December Letter Agreements, or of
its intention to make no further payments under these. In fact, however, the Company
did not do so. Thus Aminoil's case in respect of the 1973 Agreement and Letter
depends on demonstrating either that the original consent was vitiated ab origine by
some fundamental flaw attaching to it and rendering it void ab initio, or that it was
given subject to a condition, the non-fulfilment of which operated retroactively to
nullify that consent, together with Aminoil's obligations under the Agreements,—in
which event any sums already paid would become repayable by, or recoverable from,
the Government, and any sums not already paid would cease to be due.

The issue of Duress

5. The ground, and sole ground, for contending that Aminoil's
consent was never a truly genuine consent, was that it was obtained
under duress. The nature of the allegation is described in paragraphs 40
et seq of the Award, and I agree with the reasons there given for not
616

admitting it. In the case of an [143] entity having transnational interests, and the
resources in money, expertise, and legal and technical advice available to Aminoil, the
plea of having acted under duress—as that concept is to be understood in strict law—is
not an easy one to sustain,—at least the presumption is contra. That the Company was
under constraint—strong economic constraint—is not open to doubt. But the essence
of this constraint—so it seems to me—was not so much any direct Government threat
of a “shut-down” (though a latent threat of it unquestionably existed), as Aminoil's own
natural desire—and hence long-term policy—of wanting to continue to operate in
Kuwait, if it was at all possible to do so on reasonable terms. In consequence, however
unwillingly, and even if they felt that their hand was being forced, they were prepared
in the last resort to accept demands they regarded as unjustified, provided these would
still leave them with the possibility of going on operating at a worthwhile, even if
relatively exiguous, profit. The picture is not an agreeable one,—all the cards were in
the Government's hands which—as was of course its legal right—took full advantage of
that. But such was the situation, and in my view it cannot be said to have amounted to
a situation of duress in law. This is not the place to enter into a dissertation on the
technicalities of what constitutes legal (that is to say illicit) duress; but there is one other
point that needs to be noticed.
6. However onerous the terms of the 1973 Agreement and Letter may have seemed at
the time, the explosion in oil prices consequent upon the increases decreed by OPEC in
the autumn of 1973 led, before long, to such greatly increased profits for the oil
Companies (Aminoil amongst them) as entirely to change the de facto situation.
Government demands, conformity [144] with which had entailed a sacrifice, now
became, financially, relatively easy to comply with. This could not of course affect
matters de iure if the original consent had indeed been given under duress. But it could
not implausibly be said that the continuing acceptance sub-silentio of markedly greater
profits, though it did not act as a sort of exculpation or condonation of Government
pressure, did take a good deal of the force out of the complaint. This consideration,
while not being the ground of my view that the plea of duress cannot be sustained, does
come as a reinforcement of it.

The issue of conditional or provisional acceptance

7. What was undoubtedly regarded by Aminoil as constituting the quid pro quo for
their acceptance of the increased payments and other liabilities stemming from the July
1973 Agreement and 22 December Letter was expressed as follows:
 66 ILR 518 617

It is our understanding that the [July] 1973 Agreement will be signed as soon as the final
documents can be prepared, and that you [the Minister] will then take appropriate steps to
obtain due ratification thereof.
It was further added that the Company would be obliged if the Minister would
signify his agreement “with the foregoing amendments and procedures by signing and
returning the accompanying copy of this letter”. This the Minister duly did,—but the
July 1973 Agreement remained unsigned and unratified.
8. There can be no doubt that these clauses (the “understanding” clauses of the
Letter) embodied the hope and expectation of Aminoil that the signature and
ratification of the July 1973 Agreement would [145] now be proceeded with,—and this
was of genuine importance to Aminoil as a quid pro quo—for the reasons stated in the
22
footnote below. The question is however, whether these clauses amounted to the
expression of a condition of the Company's own acceptance of the obligations
involved—a condition such that its non-fulfilment would not only release Aminoil
from those obligations, but even render the Company's original acceptance of them
void ab initio—so as not only to cancel any obligation to continue making payments,
but also to impart a provisional character to all previously made payments, and cause
them to become refundable.
9. I find it extremely difficult to read such far-reaching effects into the actual
language of these clauses. That they were intended to convey an intimation of that
kind, or that it was hoped they would do so, can well be believed (and also that the
Minister understood matters in that sense),—but that is a different thing from the
statement of a condition in law. It is equally a different thing from the question I come
to later, of whether the eventual withholding of the quid pro quo caused Aminoil's
obligations under the December Letter to cease as from the moment when such
withholding could be deemed to have become an accomplished fact, so [146] that
further payments thenceforward stopped being due. But assuming this to be the case, it
would still have no retrospective effect such as to make previous payments repayable.
10. It is easy to see why Aminoil were not more explicit in the
December Letter: they knew, or feared, that nothing more explicit would
be accepted. This, however, only serves to put the matter on the same

22.
The Company longed for a stability it was never to receive over payments to the Government. The signature—
and solemn ratification by the Kuwait Parliament of the July 1973 Agreement—a very detailed and comprehensive
instrument arrived at after painful negotiations—would have given some assurance of this, though of course no real
guarantee of it. Moreover, the July Agreement provided for the introduction by legislation or legislative decree of a
regular Kuwait Tax Law. This was important for the Company because, under United States law, it was only on the
basis of a legislative obligation to pay Kuwait tax that, by way of immunity from double taxation, exemption could be
claimed from US tax on the Company's profits. Such legislation was never passed or even presented to Parliament.
618

sort of footing as that of the question of duress, already discussed above. The Company
were under great pressure to accept the July-December 1973 terms, and were afraid of a
shut-down if they did not. But as these terms still allowed them to operate at a profit, it
was preferable to accept them and not attach any condition to that acceptance which
the Government would almost certainly reject. They therefore fell back, even if with
misgiving, on expressions of “understanding” that could not be said to amount to an
actual condition.
11. Several considerations, without being in any way decisive in themselves or even,
strictly, considerations of law, nevertheless serve to reinforce the view above expressed:
(a) There is the point made in paragraph 6 above, in connection with the question of
duress, and equally applicable here. The increased price of oil, and hence greatly
increased profits of the Company as from late 1973, reconciled it to the increased
amounts payable to the Government under the December Letter, and make it less likely
that those payments were being made—or were continuing to be made—on a purely
conditional basis.
(b) The Company does not seem to have accompanied any actual payment with a
concrete statement that it was conditional or provisional. It did, [147] at least on
occasion, mention that the payment was made subject to the “understanding” clause of
the December Letter,—but this could not retroactively impart to that clause any
character other than it originally had. It could only operate as a reminder to the
Government of the action it was supposed to take under this clause, and was not yet
taking, and this could have an effect I shall state later, but not the effect of testifying to
it being a positive condition of the validity of the agreement that such action must be
taken.
(c) Shortly after the December 1973 Letter—that is to say in February 1974—a
“final draft” of the July 1973 Agreement was drawn up, incorporating changes already
agreed, and certain new ones; and on several occasions later in the year further changes
were made to give effect to additional Government demands (see Section IV paragraph
29 of the Award). On none of these occasions did Aminoil use the opportunity for the
purpose of pointing out that the payments they were, or would be, making, were
subject to a condition that would nullify their acceptance if the condition remained
unfulfilled. Again, it is easy to see why, but not possible to regard such a condition as
having nevertheless been implied.
(d) Article 6 of the Supplemental Concession Agreement of 1961 had provided that
no moneys paid to Kuwait “under this Agreement” should, except if there had been an
accounting error, “be returnable in any circumstances whatever”. It was a question, in
the course of the proceedings, whether the words “under this Agreement”
 66 ILR 518 619

in the 1961 Agreement, also operated in respect of payments made under the 1973
Agreements. For present purposes it may be assumed that they did not. Nevertheless
the existence (well known to both sides) of this provision [148] in the 1961
Agreement which was still in full force, except as subsequently amended, makes it
unlikely that, in December 1973, any real credence could have been given to the
possibility that there might be an eventual refund of moneys paid by Aminoil—at
least in the sense of attributing to such payments the character of amounts transferred
subject to a condition of repayment in certain circumstances.
12. None of this applies to the quite different question, not of Aminoil's right to
recover payments already made, but of whether they were under any obligation to
continue to pay, once it had become evident that the quid pro quo, the contractual
consideration, specified in the “understanding” clauses of the December 1973 Letter,
was not going to be forthcoming. This affects the question of the Government's right to
receive the payments which Aminoil de facto ceased to pay in or after Jnuary 1977, and
thence up to the date of the take-over in September of that year. It must have been
clear, well before this period, and after the lapse of several years since the date of the
December Letter, either that the Government did not intend to take the steps
contemplated by that Letter, or that the delay in doing so was such as to come to the
same thing in practice. This failure of consideration would, in my view, have entitled
the Company to give notice to terminate the Agreement, or at least all payments
obligations under it, or to declare an intention to cease payment. None of this did the
Company do. However, since this is not the place for a dissertation on the law relating
to the termination of contracts, I will refer to the summary statement contained in the
23
[149] footnote below, the resultant of which is that, before a right could arise to treat
the 1973 Agreements, or the obligation to make payments under them, as being
terminated or suspended, notice to that effect had to be given to the Government,—
and this was never done. Once more, it is evident why—but the fact remains.

23.
Except on grounds specifically provided for in the contract itself, it does not lie within the legal entitlement of
either party to a contract to terminate it unilaterally, since allegations of fundamental breach or failure of
consideration can never—initially and in principle—be more than allegations, because, as a matter of law, it can
never lie within the power of one party, acting alone, to make a final determination of such a matter. In short, a party
cannot cause a fundamental breach or failure of consideration to occur merely by stating that in its view such is the
case. The upshot is that to have even a preliminary effect, such an allegation must be the subject of a notice given to
the other party purporting to terminate the contract on grounds stated. Such a notice often has the result of bringing
the contract to an end de facto,—but not de iure unless the other party accepts the notice. Failing that, there is a
dispute as to whether the grounds given are sufficient, and whether the termination is justified—a dispute that
ultimately can only be settled by the decision of a competent tribunal of some kind.
620

13. I am obliged therefore, though with regret,24 to conclude that Aminoil remained
bound, and liable for the payments still due at the date of the takeover for the period
January—September 1977.

[150] Article 9 of the 1961 Concession Agreement, and the Abu Dhabi “Formula”
14. About this matter, I need say very little. Basically I entirely agree with the view
put forward by Aminoil concerning the interpretation of Article 9 of 1961, the text of
which will be found in paragraphs (xxxiv) and 15 of the Award,—namely that, in the
absence of bad faith or other laches on either side, the failure of the Parties to reach
agreement created a situation of “no change” in which matters (including existing rights
and obligations) simply went on as before—unaffected. Strictly, this is not altered by
the fact that the disagreement bore, not on the principle of applying the Abu Dhabi
Formula in one way or another, but on the method of its application,—because, of
course, that was the whole problem: if the Parties could not agree on that, then they
could not agree—period,—and matters must continue as they were.
15. Such was the strictly legal position I believe. Nevertheless, in the particular
circumstances of this case, I find it very hard (although some of the reasoning might not
have been mine) to dissent from the conclusion reached in the Award, which is based
on the view that, the principle of something being due on Abu Dhabi account having
been conceded,—which could of course only take the form of increased payments to
the Government, and correspondingly diminished profits for Aminoil (though these
must not fall below a “reasonable rate of return”)—the Tribunal was competent to
assess what these payments ought to be, on the basis of what, in the words of Article 9,
“would be equitable to the Parties”, taking account of the various factors specified in
the Article; and given that this course had been requested by one of them and, after an
initial objection, and some hesi- [151] tations, more or less tacitly accepted by the
other.
16. Whatever may be thought of such a provision as Article 9, in the abstract, the
Company did agree to it as far back as 1961 when it was not under any particular
pressure from the Government, and had since then agreed to or conceded various
changes in the concessionary situation for which the so-called “adaptation clause”,
Article 9, furnished the basic vehicle,—while in connection with the Abu Dhabi
“Formula” there could be no doubt that, in the words of the Article,

24.
With regret, because in my view Aminoil were sufferers from a situation that was not of their making and over
which they had no real control. They had few bargaining counters except temporary ones of diminishing value, while
all the trump cards were actually or potentially in Government hands. The Parties were never even on that minimum
of comparable footing that can alone lead to freely negotiated satisfactory agreements.
 66 ILR 518 621

“increase in benefits to Governments in the Middle-East” had “come generally to be

received by them”, as a “result of changes in the terms” of existing or new concessions,
and that the “formula” itself has led to such changes in other concessions. This was
conceded by the Company.
17. Given this situation, I must admit that it would only be on the basis of a
somewhat extreme, very rigid, and not wholly incontestable view of the law, that the
conclusion should be reached that a failure to agree about figures (for that is what it
really was) must ring down the final curtain on Article 9, so far as Abu Dhabi is
concerned—if an alternative course, such as that followed by the Tribunal in the
Award, is available. That the Government ought to have invoked one of the arbitration
clauses of the Concession Agreements, instead of, as it ultimately did, acting
unilaterally, does not, I think, affect the substance of this question.
18. I come to this conclusion with regret for the same sort of reasons as those stated
in footnote 24 above. There was never any “equality of arms” between Aminoil and the
Government. On several occasions the Company made what it seems to me were
reasonable offers on Abu Dhabi account, but none of these were accepted by the
Government, which required [152] payments that, in the Company's view, would have
made its undertaking hardly worth while going on with. It is a sorry story, but I must
leave it at that.

The “stabilization clauses” of the Concession Agreements: Article 17 of 1948 and, via 7(g) of
1961, new Article 11 of 1948
19. It may be argued that if the view which I take about the effect of the stabilization
clauses is correct, it should logically lead—after one or two corners are turned—to a
right for Aminoil to recover the whole of the discounted net profits they would have
received if their Concession had continued for its full term until 2008. However, quite
apart from the fact that these figures are based on the 1961 arrangements, rather than
on those of 1973 which the Tribunal has found to be binding (and see paragraph 154
(a) of the Award)—other factors and elements have to be taken into account, as well as
questions of realism,—so that my disagreement is not over the final figure of the
Award, with which I concur, but over the principle of the interpretation of the
stabilization clauses,—and here again, I am willing to concede the possibility (though,
as will be seen, it is not in fact my view) that Aminoil's case had features that might take
it out of the application of the normally accepted principles of interpretation.
20. Although the texts of the stabilization Clauses will be found in
paragraphs (xxiv), (xxxiii) and 88 of the Award, it will be convenient to
reproduce them here. As stated in the Award, Article 11 of the 1948
622

Concession (as amended by Article 7(g) of the Supplemental Concession of 1961)—

after indicating in a first paragraph (A) certain events (not [153] here relevant) in which
the Ruler of Kuwait would be entitled to terminate the Concession, went on in a
second paragraph (B) to state
(B) Save as aforesaid this Agreement shall not be terminated before the expiration of the
period specified in Article 1 thereof except by surrender as provided in Article 12 or if the
Company shall be in default under the arbitration provisions of Article 18.
More important still, Article 17 of the 1948 Concession provided that
The Shaikh shall not by general or special legislation or by administrative measures or by
25
any other act whatever annul this Agreement except as provided in Article 11. No alteration
shall be made in the terms of this Agreement by either the Shaikh or the Company except in
the event of the Shaikh and the Company jointly agreeing that it is desirable in the interest of
both parties to make certain alterations, deletions or additions to this Agreement.
Furthermore, in case there could be any doubt as to whether such a provision as
Article 17 of 1948 was freely accepted by the Ruler, not only was the Supplemental
Agreement of 1961 concluded after the attainment of full sovereign independence by
Kuwait,—not only did its Article 7(g) introduce a new and explicit stabilization clause
(amending Article 11 of 1948, as set out above),—but in addition, the [154]
concluding provision of the 1961 Agreement in terms kept in force all unamended
provisions of 1948, expressly stating that
This [1961] Agreement shall be construed as an amendment and supplement to the
principal Agreement [i.e. the 1948 Concession] and all provisions of the principal Agreement
shall continue in full force and effect except in so far as they are inconsistent with or modified
by this [1961] Agreement—(stress added).
Thus Article 17 remained in force, and at no time, right up to the takeover in 1977,
or until the present proceedings, was its validity, or that of Article 11, called in question
by the Government.
21. The Award however holds that, despite their unambiguous language, these
provisions did not operate to prevent an eventual nationalization by unilateral
legislative act—or at least, that whatever the original position, they had ceased to do
so by the date of the takeover in 1977—(this is probably the vital point in the
reasoning). I must therefore consider the grounds given for this view. Over-
simplifying a little for the sake of brevity, but not, I hope unfairly, the view taken in

25.
Article 11(A), whether in its 1948 or 1961 form, was never invoked, and it was not suggested on either side in
the course of the proceedings that the cases it specifies have the slightest relevance in the present concession.
 66 ILR 518 623

the Award seems to rest on five or six main propositions. They can be summarized as
follows:—
(1) A prohibition on the termination of a contract, where it takes the form of a
nationalization on grounds of public interest (whether real or purported26), must be
provided for expressly, and cannot be left to be inferred from a general prohi- [155]
bition on termination, even one expressed in such explicit and comprehensive language
as that of the stabilization clauses of Aminoil's Concession.
(2) The danger that the stabilization clauses were really intended to protect the
Company against was that of a confiscatory termination and take-over. If this was not
confiscatory, it would not be contrary to these clauses.
(3) A termination and take-over accompanied by, or by an offer of, monetary
compensation is not confiscatory.
(4) Since the Government in the present case made such an offer, and set up a
Ministerial Committee to deal with the matter, which it eventually agreed to refer to
arbitration, no confiscatory element inconsistent with the stabilization clauses is
involved.
(5) Even if the above propositions could not be sustained, the character of the
Concession had changed so much by 1977 that the stabilization clauses no longer
retained their original absolute character.
(6) A variation of (5) really: Aminoil's case was, or had become, one of “special
circumstances” justifying departure from normal rules.
22. I regret that I cannot subscribe to any of these propositions—at least in the sense
in which they are intended to be understood here—although the last two (basically
different ways of saying the same thing) are arguable, and not without plausibility.
Before going further, however, I ought to make two [156] points clear:
(a) My view of the stabilization clauses does not in the least imply that in time of war
or other crisis or national emergency, they could stand in the way of such exceptional
measures as might then be needed. But in the case in hand, no emergency of any kind is
involved.
(b) Nor are my views in any way directed against the right to nationalize, as such. But
that is not the real question here. The question here is not that of the right to
nationalize—“period”—i.e. in abstracto—but of the right to nationalize in the face of a
contractual undertaking not to do so, if that exists; or more accurately, in terms of the
present case, to nationalize where this involves terminating a concession before its time in
spite of a provision to the contrary. The Award (paragraph 96) deals with this point—a
little obliquely perhaps—by saying that although the stabilization clauses cannot prevent a

26.
By which I mean broadly, for present purposes, a nationalization that is not arbitrary, capricious, basically
punitive, or otherwise discriminatory.
624

nationalization as such, they are not thereby voided of effect or rendered objectless: they
still prohibit confiscatory measures, and in the case of nationalization require it to be
accompanied by (adequate27) compensation. However, this is really only a different way
of putting propositions (2) and (3) supra: and I will now give my views on these and the
other three propositions listed in paragraph 21.

As to proposition (1)
23. I know of no general legal principle—(there [157] may be special rules for
particular cases)—which would require something to be expressly stated rather than left
to be implied from representative language clearly covering it according to normal
canons of interpretation; or rather, and more correctly, which would prohibit
something from being inferred from such language merely because it was not expressly
stated.

As to proposition (2)
24. There is absolutely nothing in the stabilization clauses to warrant the view that
they were intended to be confined in the manner suggested—i.e. to the case of
confiscatory measures only. These clauses are not really concerned with confiscation at all,
in the direct sense. What they are concerned with is any measure terminating the
Concession before its time. In that respect, it would be difficult to imagine language (or
draft it) that would more effectively combine the notions of the comprehensive and the
specific: “… shall not by general or special legislation or by administrative measures or
by any other act whatever annul this Agreement …” (stress added). The existence of the
casus foederis is so clear that it would not even be necessary to invoke the phrase I have
underlined—“or by any other act whatever”,—for Kuwait Decree Law No. 124,
operating the take-over, was unquestionably either a piece of “special legislation” or an
“administrative measure”, or partook of both. Moreover, the Decree Law was essentially
an act of termination of the Concession—for it was entitled “Decree Law No. 124
Terminating the Agreement between the Kuwait Government and Aminoil”, and its
Article 1 provided that
The concession granted to the American Independent Oil Company in accordance with
the aforementioned Agreement dated 28 June 1948 [the 1948 Concession] [158] shall be
terminated.
Whatever other aspects the Decree Law had therefore, there can be no doubt as to its status (in
terms of Article 17) as a “legislative” or “administrative” measure “annulling” the Concession. Ensuing

27.
In my opinion, compensation in this context implies adequacy, or it is not compensation. Strictly, there
should be no need to specify that it must be adequate. This still leaves plenty of room for controversy as to what is
adequate.
 66 ILR 518 625

explanations contained in the Decree Law itself, or in accompanying or subsequent

instrument or statements, as to why it was considered necessary to take this step and
transfer Aminoil's undertaking into State ownership, cannot alter this position.
25. In my opinion, so far was it from being the case that the Parties in 1948 had not
got the eventuality of an ultimate nationalization in mind, that I feel confident that, at
least on Aminoil's side, it was precisely one of the principal contingencies foreseen as
possible. The language of Article 17, though general, smacks strongly of it. Historically
also, it fits; but I give my reasons for thinking so in the footnote below,28 rather than
hold up the further discussion.

[159] As to propositions (3) and (4)

26. It is an illusion to suppose that monetary compensation alone, even on a
generous scale, necessarily removes the confiscatory element from a take-over,
whether called nationalization or something else. It is like paying compensation to a
man who has lost his leg. Unfortunately it does not restore the leg. When a Company
such as Aminoil procures the insertion in its Concession of a clause like Article 17, its
aim is not to obtain money if the Article is breached, but to guarantee if possible that
it is not breached. What the Company wants is to be able to go on operating its
Concession for the agreed term, not to be compensated for having to cease doing so
against its will.29 In being deprived of the right to go on, all sorts of factors enter in
that are not simply financial. In this respect, businesses are very like human

28.
By what historical process did provisions such as Article 17 come to be inserted in agreements between States
and foreign commercial or industrial entities? In contracts between private parties they would have been thought
quite superfluous. If the contract provided that it was made for a certain period, then it would follow automatically
that it could not be terminated unilaterally by either party during, or before the end of, that period, except for
reasons specifically provided for elsewhere in the contract. To “spell-out” all this at length would have been thought
exaggerated and really somewhat invidious. Again, even in contracts between States and foreign corporate entities,
the same view would normally have been taken at any time up to about the date of the first world war. But between
the two Wars things began to change. Particularly in Latin-America, there were increasing cases in which the local
government, having granted a concession to a foreign corporate entity for the construction and running of railways,
tramways etc., or to extract and process mineral products, would wait until the undertaking had got past its
“teething” troubles and had become a “going concern”, and would then step in and take it over. The appellation of
“nationalization” was not then much in vogue, but the effect was the same, namely that the State compulsorily
acquired the undertaking, either itself to operate it, or to hand it over to a corporation of local nationality.
It was specifically in the light of those occurrences that stabilization clauses began to be introduced into
concessionary contracts, particularly by American Companies in view of their Latin-American experiences, and for
the express purpose of ensuring that Concessions would run their full term, except where the case was one for which
the Concession itself gave a right of earlier termination.
29.
In addition, in the present case, a clearly discriminatory element enters in, inasmuch as the parallel
nationalization of the Kuwait Oil Company (KOC) was carried out in agreement with that Company, on terms
consented to by it—see Award, Section II, paragraph (li). No such option was offered to Aminoil.
626

beings, [160] who do not relish being compulsorily retired and relegated to the side-
lines with all the loss of raison-d'être that this is liable to involve, even though it may be
accompanied by a “golden handshake”. Nationalization, or any other form of take-over,
is necessarily confiscatory in the sense that, irrespective of the wishes of the legal owner,
it dispossesses him of his property and transfers it elsewhere. Nationalizations may be
lawful or unlawful, but the test can never be whether they are confiscatory or not;
because by virtue of their inherent character, they always are.

As to propositions (5) and (6)

27. Here the Award bases itself on an interesting and substantial argument. It is not a
plea of rebus sic stantibus—namely that a fundamental change of circumstances has
invalidated or rendered void the original contract or contractual obligation. The
argument is that the contract itself, and the contractual obligation, has changed over the
years by reason of the conduct of the Parties relative to it. As a result of this process, the
stabilization clauses—even on the assumption that they originally prohibited
nationalization prior to the expiry of the prescribed term—had, by 1977, lost their
former absolute character, and had ceased to do so.
28. The validity of such an argument must necessarily depend on showing that the
process of change concerned was brought about by mutual consent: otherwise the
argument is merely circuitous and self-serving. The relevant paragraphs of the Award
show that changes did indeed occur, and what the process of this was. But even
ignoring the question of how far Aminoil's consents were voluntary, rather than due to
the force of circumstances, the argument seems [161] to me to break down in one
crucial respect: whatever changes were consented to by the Company, and whatever the
quality of that consent, they were changes that were to take place within the framework
of a continuing Concession—not of one that was to come, and did come, to an end
without any such consent, but by the sole will of the other Party. It was change, not
termination that Aminoil agreed to. The most that can be said is that by making
offers—as they did at certain stages (but these were not accepted by the
Government)—to renounce the normal and traditional concessionary benefits, namely
the right to retain all the profits remaining after what was owing to the State had been
paid,—and by proposing to reduce the Concession to something more like a contract
of service, the Company recognized that (given the demands of the Government) the
Concession was not sustainable on its original basis. So they agreed to changes,—but
they did not agree to any change that would enable the Government to terminate it
unilaterally. At one stage (see Award, paragraphs 60 to 66) the Company
 66 ILR 518 627

seems to have had recourse to the ultimate expedient of offering to renounce the
Concession entirely—subject of course to agreement about compensation. The offer
was not accepted by the Government,—but even had it been, the case would have been
one of an agreed termination, on the basis of agreed compensation—not of a unilateral
termination on the Government's terms (and here footnote 29 above is also relevant).
29. In short, whatever diminution of force the Concession suffered, it was not a
diminution of force that touched the stabilization clauses. Thus, to put the matter in
terms of proposition (6) above, however much Aminoil's case had become one of
special circumstances justifying some departure from the normal rules, they were not
circumstances affecting the continued force of the stabilization clauses of [162] the
Concession.
30. In consequence, and while I naturally hesitate to differ from a view so skilfully
constructed and persuasive as that contained in the Award, good faith and my
professional conscience compel me to conclude that although the nationalization of
Aminoil's undertaking may otherwise have been perfectly lawful, considered simply in
its aspect of being an act of the State, it was nevertheless irreconcilable with the
stabilization clauses of a Concession that was still in force at the moment of the take-
over.

[Report: Unpublished.]