International Studies Journal (ISJ)

International Studies Journal (ISJ)

Theories of Petroleum Contracts from Perspective of International Arbitration Verdicts

Document Type : Original Article from Result of Thesis

Authors
Yousef Behdadnia 1
Seyyed Yaser Ziaee 2
Ali Mashhadi 2
1 Department of International Laws, Qom Branch, Islamic Azad University, Qom, Iran
2 Associate Professor, Department of International and Public Law, Faculty of Law, Qom University, Qom, Iran
10.22034/isj.2023.360626.1901
Abstract
In the second half of the 21st century, stakeholders of the petroleum industry established international arbitration precedents, which gave birth to important verdicts and legal principles in international law. These precedents have played a key role in resolving disputes. According to the analytical and explanatory review of theories and verdicts of international arbitration regarding the rules of different countries through desk methods, online documents, and online references over time, it is concluded that arbitral verdicts have not only resolved the petroleum sector disputes but also effectively prevented their recurrence through meticulous cause analysis.

Highlights

Introduction

Regarding the problem statement, we can argue that arbitration theories pertaining to petroleum contracts and the verdicts issued by arbitration tribunals have been successful in allowing states to regulate the exploitation of petroleum resources and safeguard ownership rights. They have also approved of the right to terminate and rescind contracts in cases where national interests are jeopardized.

 

Methodology

Article 16 of the 2011 Petroleum Law provides the definition of a petroleum contract as “a bilateral or multilateral agreement between the Ministry of Petroleum or any of its major subsidiary companies such as operational units with one or more operational units and natural or legal entities inside or outside Iran, which are committed to performing all or part of the upstream or downstream operations or oil refining processes and generating petrochemical products based on the relevant statutory laws.” Many of these contracts are signed between subsidiary companies of the National Iranian Petroleum Company and non-governmental firms, which might be subject to different legal systems. Hence, international arbitrators are obliged to develop various theories corresponding to the nature of the contracts.

 

Theories Governing Petroleum Contracts

1. Internationalization of Contracts Theory

In the legal case of Texaco Overseas Petroleum Company vs. the Government of the Libyan Arab Republic, Professor René-Jean Dupuy stated, “Any contracts between countries that are not signed by the entities not abiding by the international law are based on the domestic law.” Hence, the issue at hand is to determine which set of laws should apply, which is known as the theory of conflicts of laws in private international law. The Permanent Court of Arbitration (PCA–CPA) acknowledges the absence of a third category between international law and domestic law. In the case of mixed legal relationships such as a contract between a country subject to international law and a private company subject to domestic law, the latter is followed for dispute resolution due to the private nature of the entity. This follows the legal system of the state, which is the same as the conflict of laws.

2. Permanent Sovereignty over Natural Resources

Sovereignty over natural resources is among the principles of international law. Permanent sovereignty not only applies within a territorial jurisdiction, but also covers natural and maritime resources and all economic activities related to their exploitation. The term “permanent” in Principle 12 of the Stockholm Declaration (on the Human Environment) of 1972 allows a country to withdraw from such agreements at any time, regardless of its commitments, as long as there is no discrimination. However, there is a conflict between this principle and the respect for international law, which is embodied in the principle of pacta sunt servanda. A criticism to this theory is that permanent sovereignty over natural resources is an indispensable indicator of the concept of collective territorial rights.

3. Lawless/Law-Bending Contracts Theory

The law governing a contract is derived from the conditions explicitly stated therein. In fact, it is the parties who create the contractual laws through their own wills. The laws mentioned within the contract are assumed to be the same and possess an independent nature that extends beyond national and international laws. Article 1134 of the French Civil Code refers to this concept as the vacuum theory. However, it is widely acknowledged among legal experts that legal protection beyond the contract itself is necessary in order to effectively enforce contracts. This allows both parties to derive legitimacy from those laws and regulate the forms and conditions of their contracts accordingly.

4. Theory of Contracts’ Adherence to International Laws beyond National Sovereignty

This theory assumes that the internationalization of contracts serves to exempt them from the control of the national law of a host country. The advocates of this view agree with the legal vacuum theory but do not accept it absolutely. They insist that internationalizing contracts should be beneficial to both parties rather than leaving the investments of foreign parties without guarantees and by only considering the interests of a host country. This theory emphasizes the interests of the investing countries, which are primarily the countries with strong economies and influence in international organizations. Weaker countries are also forced to accept this approach in concluding petroleum contracts.

5. Consolidation of National and International Laws Theory

This theory aims to consolidate/harmonize the national laws of a host country with globally accepted international laws. Ahmad Sadegh Al-Qashiri suggests that this perspective can be regarded as a specialized form of general lex mercatoria (mercantile law). Analyzing eighteen arbitration awards, Thomas C. Childs argues that petroleum arbitration precedents encompass a broad scope and give rise to customary laws that comprise legal principles acknowledged in the realm of petroleum and gas activities. The petroleum industry practices are regarded as sources of customary rules, and in instances where contractual obligations clash with customary rules, the latter do not apply to these contracts.

6. Conciliation and Mediation Arising from Commercial Law

The proponents of this theory insist on the use of globally recognized commercial laws, which transcend nationality and ethnicity, to resolve disputes in petroleum contracts, despite the lack of established and reliable laws. Additionally, it has been observed that petroleum and gas contracts are affected profoundly by the political and international relations of countries, making them one of the most politically charged commodities in the world. Due to their short-term and cost-effective nature as well as their maintenance of amicable and commercial relationships (win-win approach), dispute resolution techniques such as mediation and conciliation can serve as suitable alternatives to arbitration and judicial methods for settling petroleum disputes.

7. General Principles of Law Theory

Arbitrators may apply customary rules and behaviors of the global community, e.g., the principles of coexistence and peace, the principle of prohibition of threat/non-threat, and the principle of non-use of force. In his critique, McNair argues that, under Article 46 of the 1954 Agreement between Iran and the Consortium, the agreement is not governed by either Iranian law or international law. Therefore, in cases where the governing law is not clearly defined, the parties have recourse to general principles of law. As a result, the arbitrator compares similar legal systems to determine and apply the more appropriate principles or rules. The arbitrator then uses those rules in situations where a legal vacuum is perceived. Hence, customary rules alone cannot resolve disputes through settlement and mediation.

8. Administrative Contracts

Administrative contracts are established when administrative organizations and legal entities or individuals agree to carry out work for the public interest. The conditions of petroleum contracts are as follows: (1) one party is a state or a subsidiary organization; (2) they relate to the exploration, production, and exploitation of petroleum reserves; and (3) these contracts have a lengthy duration/long term. Therefore, states have the authority to modify all structures associated with the contracts. Furthermore, such contracts affect legal arguments, which are also influenced by the other party, which represents the public interest of a host country as well as its economic and political circumstances.

9. Customary Commercial Laws/Lex Mercatoria Theory

The Lex Mercatoria/Commercial Law was introduced in the 1960s. Berthold Goldman places these laws in the sphere of international commercial law, which is independent of national laws. However, some refer to them as a transnational legal system rooted in both national and international laws. Nonetheless, specific and well-defined customary commercial rules do not exist, leaving the decision-making power in the hands of arbitrators to issue verdicts based on personal discretion. Moreover, commercial customs and practices are always in favor of merchants.

 

Conclusion

The theory of sovereignty over natural resources is widely accepted in international arbitration. Scholars think it is impossible to sign Lawless/Law-bending Contracts. The theory of contracts’ adherence to international laws beyond national sovereignty has been criticized profoundly. There is no consensus among arbitrators on the consolidation of national and international laws and the transnational commercial law theory. In fact, the theory of conciliation and mediation is a suitable alternative to litigation in petroleum disputes due to its short-term and low-cost nature. Arbitrators apply the general principles of law theory when there is a legal vacuum. Arbitrators reject the notion of administrative contracts because in their case, the focal point is the consumer law. Regarding the customary commercial laws theory, we can argue that these laws do not exist in a well-defined and comprehensive manner.

Keywords
petroleum contracts
international arbitration precedents
international companies
international law
commercial law

Subjects

  1. A/RES/523(VI). (1952). Integrated economic development and commercial agreements A/2052,A/PV.360, 12 Jan., Without vote.
  2. A/RES/837(IX)C.3,12A/PV.512,14, (1954). Dec.,41-11-3, non-recordedA/2829, Amended by A/L.187Recommendations concerning international. respect for the right of peoples and nations to self-determination (1959).
  3. Akfi Ghaziani, M.H., & Akfi Ghaziani, M.V. (2020). Sources of international investment law; Supremacy of domestic laws. International Studies Journal, 18(1), 63-82. (In Persian)
  4. Aminoil v. Kuweit. (1982). 66 I.L.R., 518
  5. Amiri, M. Raisi, L., & Rai, M. (2019). Implementation of countries' obligations towards the right to a healthy environment (a case study of the Iranian Islamic model of progress document). International Studies Journal,17(3),135-155. (In Persian)
  6. Ansari, W. (2008). General Laws of Administrative Contracts. Tehran: Lawyer-Danesh-Nagar, 4th edition. (In Persian)
  7. Aqamosi Tehrani, R., & Nemati, M. (2018). Typology and Legal Pathology of Upstream Contracts of Naqt and Gas with regard to sovereignty and national security. Defense Economics Journal, 4(12), 73-47. (In Persian)
  8. Arbitration Tribunal (Sauser-Hall, Referee; Badawi/Hassan and Habachy Arbitrators) (1958). Published online 23 Augus. by Cambridge University Press.
  9. Ashrafzadeh, S.H. (2020). International Chamber of Commerce rules for using domestic and international business terms, Tehran: Business Studies and Research Institute. (In Persian)
  10. Baut, D.V. (No Date). Government contracts with aliens; Contemporary developments in the issue of compensation due to the termination or violation of these contracts, translated by Ali Ghasemi, Legal Journal of the International Services Office of the Islamic Republic of Iran, 12(16&17), 379-390/ (In Persian)
  11. Betin, )2022). Lex petrolea in international arbitration—a very English dissent. Journal of Journal of World Energy Law and Business.15. 295–317 doi: 10.1093/jwelb/jwac016
  12. Bishop, (1998). International Arbitration of Petroleum Disputes: 23 Yearbook of Commercial Arbitration the Development of Lex Petrolea. 1131-1209.
  13. Childs, T.C.C. (2011). Update on Lex Petrolea: The Continuing Development of Customary Law Relating to International Oil and Gas, Exploration and Production. Journal of World Energy Law and Business, 4(3), 214-259.
  14. Chiney Saz, M., & Asgharian, M. (2019). International arbitration procedure regarding the obligation to pay compensation in oil contracts with a view to Iran's new oil contracts. IPC Political and International Research Quarterly, 11(45), 409-442 (In Persian)
  15. Cohen, J. L. (2012). Globalization and Sovereignty. Rethinking Legality, Legitimacy, and Constitutionalism. New York: Cambridge University Press.
  16. Collection of Oil, Gas and Petrochemical Laws and Regulations. (2002). Law on Permitting the Exchange and Execution of Five Articles of Oil Contract. Legal Affairs of the National Iranian Oil Company and General Department of Public Relations of the Ministry of Petroleum. (In Persian)
  17. Daagoui Haris, K. (2016) Upstream oil contracts from the perspective of international law, Tehran: Ghanon Yar. (In Persian)
  18. Daintith, T. (2017). Against lex petrolea. Journal of World Energy Law and Business, 10(1). 1-13.
  19. Dupuy, R. (2000). One judgment and two criticisms. Translated by Morteza Kalantarian, Tehran: Aghah. (In Persian)
  20. Energy Charter Treaty (1994). Available at: http://www.energycharter.org/process/energy-chartertreaty
  21. Francois, R. (2000) Criticism of "Tapko" opinion under the title "Gods and Heroes" An arbitration opinion and two criticisms, translated by Morteza Kalantarian, knowledgeable. (In Persian)
  22. General Assembly resolution 1803 (XVII) of 14 December (1962). Permanent sovereignty over natural resources, General Assembly 17th
  23. Gerold, H. (1981). Commentary on the UNCITRAL Conciliation Rules, VI Yearbook of Commercial Arbitration, p. 173.
  24. Ghanavati, J., & Akbari, A. (2018). The importance of the arbitration institution and reflection on the legal conditions to refer to it in Iran's oil disputes. Iranian Energy Economics Research Journal, 9(33),19-1. (In Persian)
  25. Gümplová, (2014). Restraining permanent sovereignty over natural resources, Institute for Political Science. 53, 93-114, at: dx.doi.org/10.5565/rev/enrahonar
  26. Hakimian, A.M. (2018). The Theory of Flexible Investment Contracts in the Upstream Sector. Two Quarterly Journal of Economic Law. 20(15), 23-1. (In Persian)
  27. http://www.iccwbo.org/Products-and-Services/Arbitration- and ADR/ Mediation/ Introduction /Mediationand-ADR-statistics/
  28. https://www.encharter.org electronic database (In Persian)
  29. International Chamber of Commerce (ICC) releases Incoterms. (2020).
  30. International Law Reports, (1963). Cambridge University Press, (27), 117-233
  31. Islami, M. (2013). A critique on the theories of Petrolea Lex and Mercatorea Lex in international oil laws and contracts. International Law Journal, 31(50), 9-36. (In Persian)
  32. Jafari Langroudi, M. J. (2007). Law Terminology Book, Tehran: Ganj Danesh, 18th edition. (In Persian)
  33. Kabirabadi, Gh., Mohammadi, A., & Soltani, R. (2017). International law and Iranian Islamic development model, a case study of international oil and gas contracts. Two-chamber scientific-research paper on studies of Iranian Islamic development modelI, 6(11), 213-185. (In Persian)
  34. Kuwait versus the American Independent Oil Company (AMINOIL). (1982) I.L.M., 21(5). 976–1053.
  35. Lauterpacht, E. (1970). International Law Reports. Vol. 41, United Kingdom: Cambridge University Press.
  36. Lawrence Atsegbua. (1993). Principle of permanent sovereignty over natural resources and its contribution to modern petroleum development agreements. Journal of the Indian Law Institute, 35(1/2),115-126
  37. Mohbbi, M. (2016). International arbitration procedure regarding compensation(oil claims), legal magazine, publication of the Center for International Legal Affairs, Legal Deputy and Presidential Assembly Affairs,(35),70-9. (In Persian)
  38. Movahed, M.A. (2013), lessons from oil arbitrations. Tehran: workbook, Second edition. (In Persian)
  39. Phalsafee, H. (2019). International Law of Treaties. Tehran: New Publishing House, 6th edition. (In Persian)
  40. Qashiri, A., & Riyad, T. (1382). The law governing the new generation of oil contracts: a turn in the arbitration process. Translated by Mohsen Mohebi. Law Journal, International Legal Services Office Publication of the Islamic Republic of Iran, (29), 109-29 . (In Persian)
  41. Raina v. International Labour Organization. Administrative Tribunal of the International Labour Organization. (1958), 28 March.
  42. Resolution, 3281 .(1974)GA Res. (xxix), UN GAOR, 29th Sess. (31)
  43. Sangwani, L.C., & Ng'ambi, (2015) University Chicago International Law Review Permanent Sovereignty Over Natural Resources and the Sanctity of Contracts, From the Angle of Lucrum Cessans Sangwani, University of Zambia, School of Law, 12(2), 152-172.
  44. Schrijver, N. (2010). Development without Destruction, The UN and Global Resource Management, (United Nations Intellectual History Project Series) published Indiana University Press.
  45. Shiravi, A. (2016). Oil and Gas Laws, Tehran: Mizan, Third edition. (In Persian)
  46. Shiravi, A., Ebrahimi, S. N., & Asgharian, M. (2013). Exploration and development of Iran's oil fields through mutual sales contracts. International Legal Journal of Mizan Publishing, 51(40), 263-242. (In Persian)
  47. Texaco v. Libya, 53 ILR., (1977), 381.
  48. The lawsuit of the Saudi government in1958 against the Aramco company (1958).
  49. Ucheora, O. (2004). Resolution of Oil and Gas Disputes at ICSID, News form ICSID, 21(2), 1-16.
  50. UN General Assembly, right to exploit freely natural wealth and resources, 21 December (1952). A/RES/626, available at:https://www.refworld.org/docid/3b00f0853e.html
  51. Weston, B.H. (1981). The Charter of Economic Rights and Duties of States and the Deprivation of Foreign-Owned Wealth, The American Journal of International Law Cambridge University Press, 75(3), 437-475.