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A study of the legal problems of state contracts

par Odilon Evrard NGOUNDOU
Institute of International Law of Wuhan University
Traductions: Original: fr Source:

précédent sommaire suivant

Section 2- Applicable law with respect to the violation of petroleum contracts

Before starting our discussion on these problems of legal regime namely the applicable law and the competent jurisdictions to hear the dispute, I would like first of all to remind you that we are dealing this issue in the sense of international economic law and more specifically in the International Investment Law. It would be important to know that we are tackling this problem in the sense when a legal dispute intervenes between a sovereign state and a foreign private natural person or legal entity, in this case a private foreign company. As explained in our aforementioned subsections, we will tackle this subject in the sense of concession contracts, or other kinds of petroleum contracts, the great areas of exploitation signed between a State, holder of natural resources(such as minerals, petroleum, wood, of agriculture, etc.) contained in the subsoil of its territory, and a private foreign petroleum company. But it is important to remember that what is important here is the domain of state contracts called "petroleum contract" and not state contract of wood or even of agriculture.

After having brought some answers about the causes of the violations of petroleum contracts, it would be now important to wonder which will be the applicable law in case of dispute since it is a contract between two entities which do not have the same legal personality (sovereign state or a legitimate government and a foreign private company). These particular contracts often pose problems relating to the legal regime. One often asks ourselves the question to know whether they are in international law or domestic law order. The applicable law, is that national law or international law? How can we resolve this kind of disputes, and what are the competent courts in this matter? To analyze all these issues, we will tackle first the issue of the applicable law, and then we will see how to resolve these kinds of disputes. In this part, we need to clearly distinguish the law applicable to this petroleum contract when there are not disputes and the applicable law during the settlement of disputes. Generally, in the petroleum contracts, the law governing the contract is different from the law in the settlement of disputes. This is what explains it well. With regard to applicable law,

44 Réf : See generally Rosalyn Higgins, The Taking of Property by the State: Recent Developments in International Law, 3 RECUEIL DES COURS DE L'ACADEMIE DE DROIT INTERNATIONAL (COLLECTED COURSES OF THE HAGUE ACADEMY OF INTERNATIONAL LAW, 2 59, 355-75 (1982).

Article 42(1) of the ICSID Convention otherwise called Washington convention of March 18, 1965 for example recognizes and provides that the arbitration tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable.

That's why we'll ask you to be careful on this part. If you remember well about what we said to the introduction of this thesis, when «any foreign investor (the foreign private oil company) who contracts with a State seeks legal formulas which will enable him to minimize potential risks that can result from the nature of its contracting party facing the vicissitudes of the evolution of international law, of legislative administrative arbitrariness, and we can also ask ourself the question to know what's really the legal nature of the State because there are some subdivisions in each state, which also lead to a lot of problems. That's why the foreign investor (Oil Company) will seek through the clause of choice of law, in the process of the formation of these petroleum contracts, to negotiate with the host state the insertion of some clauses which are intended to neutralize the domestic law. The aim of these kinds of practices is to avoid that the contract being governed by the law and the jurisdictions of the host state. It's possible by providing or choosing as choice-of-law clause either the national law of the host state by inserting the stabilization clause of law, arbitration clauses, and intangibility clauses45, or by the use of a national stabilized law (it's indeed the case of majority of several petroleum contracts), by a combination of the host state law with the principles of international law (in its various formula of course) or general principles of law or Pacta Sunt Servanda or the transnational law upheld by a big network of BITs (Bilateral Investment Treaties) and TMIs (Multilateral/regional instruments of Investment Treaties). We have also to take an account the arbitration clause (arbitration clause) which is in the process of formation of state contract. We would therefore be before a practice of arbitration "without privity" based on the one hand on a State offers arbitration contained in the domestic law, BITs or IMI [such as ICSID, NAFTA and the Energy Charter Treaty (ECT), on the other side on a request for arbitration by the foreign private party according to the recent evolution of International law». We will ask you to have a look in this table so that you understand what we will soon develop below.

45 See Prosper Weil, Les Clauses de Stabilisation ou d'Intangibilité Insérées dans les Accords
de Développement Economique, in MELANGES OFFERTS A CHARLES ROUSSEAU 301, 307- 08 (A. Pedone

éd., 1974)

In the framework of domestic law and settlement disputes process

As regards the applicable law, the host state with its national stabilized law could do :

the combination of the host state law with :

1- the Combination of host state law with the International Law Principles;

2- the Combination of host country law with the General Principles of law or the Principles of the Pacta Sunt Servanda; 3-the combination of Transnational law upheld by a big network of BITs and TMIs.

In the National Stabilized law

In the framework of International law

-International law, but which International law, because there are many kind of them? -Public International law?

-The UNCITRAL (United Nation Commission on International Trade Law) Arbitral tribunal.

Here, the host state arbitration could be based on :

1-On the one hand, the host state arbitration proposal contained in the domestic law, in the BITs (Bilateral Investment Treaties) or IMI (Multilateral Instrument of Foreign Investment) such the ICSID (International Center for the Settlement of Investment Disputes), the NAFTA (North American Free Trade Agreement), the ECT (the Energy Charter Treaty);

2- on the other hand, on the direct possibility of initiating proceedings to the international arbitration by foreign investor: «Arbitration Without Privity» practice.

II- The arbitral process and the courts of competent jurisdiction

Settlement disputes: Arbitration process and the courts of competent jurisdiction

1- Applicable Law: National or International Law? 1.1. National law or national stabilized law?

We can ask ourself the question to know why we start our questioning about the law of the host State of the investment or domestic law and not first in the framework of international law. Well, we have to know that these kinds of contracts, called «State contracts," signed between the host states of investment and private persons (private natural persons or private legal entities) in the field of economic relations are based usually into domestic law. This is the case of most petroleum contracts, since we are addressing this topic in the area of petroleum contracts. A petroleum contract is not an international treaty because a «treaty» according to the Vienna Convention Art .2 § 1(a). titled «Use of terms» means an international agreement concluded between States in written form and governed by

international law, whether embodied in a single instrument or in two or more related instruments and whatever its particular designation; defines itself as an international agreement. An international treaty is concluded between States because in the state contract otherwise called petroleum contract, the foreign private company has no international legal personality required to conclude a treaty. And even recognition (at least in part) of an international legal personality to the foreign private oil company would not be assured and stabilized, hence, a kind of state petroleum contract based on an unequal international legal personality of the contracting parties and, and in a nutshell, into domestic law. That's confirms, besides, that the legal basis of such contracts is based in domestic law. You have to understand that we do not want to refer here to the case law «CPJI sur les Emprunts Serbes et Brésiliens de 1929» where the Court had declared that "any contract that is not a contract between States as subjects international law is subject in a domestic law».

We know that this decision had been called into question by the doctrine and the case law of Topco Award «the developments that occurred in relation to the old case law of the Permanent Court of International Justice is that, while the contract could not be subjected by the international law because it could not be assimilated to a treaty between state, in a new conception, treaties are not the only ones governed by agreements this law. Although, they can not be confused with the treaties, agreements between states and private persons may, however, in certain circumstances, comes under a particular and new field of international law: the international law of contracts". Even the exceptional and partial implementation of certain international standards is simply a special will planned by the contractors in the context of dispute settlement, but we notice that the law applicable to such contracts remains domestic law. Here are some examples:

- Art. 20.1 of production sharing contract of January 7, 2004, relating to the applicable law and dispute resolution contract between the Republic of Congo (represented by the «the Minister of Hydrocarbons Mr. J.B. TATI-LOUTARD) and TOTAL E&P CONGO specify that when the Congolese state signs a petroleum contract with a foreign private company, "the contract will be governed by Congolese law. " However, Article 20.2 states that all disputes between both contracting parties shall be settled by international rules of the Convention of March 18, 1965: «All disputes arising from the Contract will be finally settled in accordance with the" Convention for the Settlement of investment between States and Nationals of Other States "on March 18, 1965»;

- This conception of domestic applicable law is also shared by the petroleum code of the Republic of Cameroon, Law No. 99/013 of 22 December 1999, in its Art.113 relating on stabilization, dispute settlement and the withdrawal of permits «The Holders of petroleum Contracts and authorizations are subject to the laws and regulations of the United Republic of Cameroon». It's Art. 115.1 also states that «all violations of the provisions of this Code and texts taken for its application are subject to Cameroonian courts».

-The same conception is shared by the Art.53.1 of June 28, 1995, Number 2350 of

Kazakhstan petroleum law46.

- In the petroleum code, of 1994, of the Islamic Republic of Mauritania relating on the typical production-sharing contract of hydrocarbons, proposed to the oil companies, its Art.27.1 and 27.2 relating to the applicable law and stabilization of the conditions specifies that:

*«27.1. This Agreement and the Petroleum Operations undertaken as part of the Contract shall be governed by the laws and regulations of the Islamic Republic of Mauritania;

*27.2. The Contractor will be submitted at any time with the laws and regulations of the Islamic Republic of Mauritania in force».

- Petroleum Mongolian Law of the People Republic, January 18, 1991 Ulaanbaatar) also shares the same conception in its:

*Art. 4.1 on State management of petroleum operations «Petroleum related operations within the territory of Mongolia shall be carried out only in accordance with the permissions issued by the Central Administrative Authority in charge of petroleum. [The provisions of this paragraph shall come into force on the day when the Licencing Law of Mongolia on Business Activities is enforced] (The article was re-edited by Law of November 30, 2001))» and

*Art.5 on Status of Foreign Contractors

«Unless the international treaties to which MPR is a party provide otherwise, foreign contractors shall be protected by and obliged to obey the laws of MPR and to fulfil their obligations under their contracts in the same manner as any legal person or citizen of the MPR»;

* Article 13. Arbitration Clause

1. Unless a petroleum contract provides otherwise, any property dispute arising out of or in the course of petroleum operations shall be settled by the MPR courts in accordance with the laws of the MPR.

2. Upon request of the parties concerned, any dispute related to a petroleum contract, such as modification of its terms or its cancellation may be settled in accordance with the UNCITRAL Arbitration Rules.

- the REPUBLIC OF IRAQ, DRAFTOIL AND GAS LAW, No...OF 15 FEBRUARY 2007) in its Art.39 D.1 related

to the resolution of disputes shares the same conception of national law to govern The petroleum contract signed with a foreign private oil company: "Art.39 D.1. «Art.39 D.1. In accordance with the Rules of Procedure for Arbitration Proceedings of Paris, Geneva or Cairo for the Settlement of Disputes between States and Nationals of other States and based on the Iraqi law».

46 Réf. Protection of the Oil and Gas Investor's Rights In Kazakhstan, by Kenneth E. Mack, Chadbourn & Parke LLP, 2006, I.E.L.T.R.; Protection of investor's rights under Kazakhstan law; Governing law on the contract: The foreign party cannot designate the law of another sovereign state (for instance, English law, New York law) to govern the subsurface contract with Kazakhstan as a method of escaping changes to Kazakhstan law that override the fiscal and the other administrative terms in the contract. The petroleum law provides that exploration and production contracts in Kazakhstan must be governed by Kazakhstan law. Art.53.1 Law of June 28, 1995, No.2350, «On Petroleum».

To better understand this situation, we must go to the source. Within the framework of international investments law or international investments, when a country as the Republic of the Congo, holder of the rights of access to natural resources, especially all the Petroleum existing in the subsoil of its land, islands, internal waters, territorial sea, exclusive economic zone and continental shelf is its property and under its sole management), wishes to create or restore an environment conducive to international investment i.e. develop policies, strategies, legislations capable to attract international investors or again the enactment of a whole of incentives, often in a solemn form of the code of investment, and this code is analyzed besides in international law as a unilateral act of publicity and for this purpose the act is regarded as a promise or an offer from the Congo-Brazzaville to nationals investors (natural or legal persons) and all investors from all over the world wishing to invest in its territory. The investment code will define the rules of treatment, guarantee and protection of domestic and foreign investors. This code creates legal obligations that the Congolese state must respect because any unilateral change of legislation or regulation of incitement of investment, or any violation of its obligations by itself lead to a legal conflict likely to be sued by the foreign investor, since the contract would be signed or when the law would be recognized to him (P. Juillard, RCADI). We understand here that when the host State of investment signs a contract with a foreign private oil company, the unilateral commitments made by the State in its investment code and its petroleum code creates its own limitations that applies to itself in its own national law, because the signing of an petroleum contract would certainly depend on the ability of a credible commitment from the owner of petroleum resources contained in their offshore or on shore area towards the private foreign petroleum industry. And in this case, the applicable law and the competent courts will be perhaps those of the host country of investment in accordance with the provisions of applicable law inserted in the contract by the contracting parties.

We are not going here to mention all countries that share the same conception of national or domestic law applicable in petroleum contracts because they are many. What is important is that everyone is now aware that the applicable law in the petroleum contracts is the domestic law or the law of the host state because no sovereign state in this world, in its own territory and particularly as regards the field of natural resources of offshore and on shore hydrocarbon, can not accept to see a contract signed in its territory be governed by the law of another country. This situation will lead us to understand the controversy regarding the sovereign authority of the States on foreign companies within their territory and their responsibility under the customary international law (CIL), sometimes referred to as "international common law," to protect the rights of such companies. That's the reason that justifies the concept of permanent sovereignty of States over their resources. In other words, one can also understand the situation in the sense that a foreign company that want to open activities in the host country of the investment is governed by the law of the country in which this company is because normally, a contract between a State and a foreign private person is governed by the law of the state where the contract is drawn up and executed47. It is important to know that

47 Réf. Oscar Schachter, Martinus Nijhoff Publisher, 1991, «International Law in Theory and in Practice», Chap. XIV Sovereign Rights and International Business:

certain States that have a "strong bargaining power" in particular, the states of the Middle East, North Africa, Latin America or Western Europe (UK and Norway) do not accept that international law be the law applicable to the petroleum contracts signed with private foreign companies. These states are fiercely opposed to any form of international regulation of state contracts that they only consider governed by the national law. It'll be the same for the applicable law and for the competent courts in the event of a dispute. According to these states, the agreements signed between oil companies and sovereign states are seen as simple contracts, governed and protected by the national laws of these states, because even in the event of conflicts arising from these agreements, the foreign oil company should first exhaust all internal remedies, and even after exhausting all these internal remedies, this does not mean that national law ceases to be applicable to the contract. We have to note that articles 50 and 51 of the Andean Code relating to the foreign investment in the 1970s in the majority of Latin America countries defended this view of the contractual relations between the State and foreign investors being governed and settled by national law and the national courts. This is what we call by «the Calvo Doctrine.» And to refresh your memory, let us remember what we said earlier about the Art.53.1 of June 28, 1995, Number 2350 of Kazakhstan petroleum law, that the private party i.e. «the foreign private oil company cannot designate the law of another sovereign state (for instance, English law, New York law) to govern the subsurface contract with Kazakhstan as a method of escaping changes to Kazakhstan law that override the fiscal and the other administrative terms in the contract. The petroleum law provides that exploration and production contracts in Kazakhstan must be governed by Kazakhstan law.» We find the same conception in the united nations' resolution 3281 (XXIX) of 1974 in this form: «Every state has and shall freely exercise full permanent sovereignty, including possession, use and disposal, over all its wealth, natural resources and economic activities. Art.2.1, Resolution 3281 (XXIX) de 1974 of the United Nations Charter of Economic Rights and Duties of States.»

It is true that in the majority of petroleum codes of several countries that we have just cited, we notice that the national law governed petroleum contracts. However, we can ask ourself the question to know what kind of national law it's really about because foreign private investors are often afraid that when disputes arise between the host State and the foreign private investor that national courts settle (the dispute) in the biased way. This is why we are witnessing here on the existence of a national stabilized law or the domestic stabilized law of state partner. This law aimed to attract foreign investors by stabilizing the national law in the field of petroleum investments. This expression is often in the majority of petroleum contracts as we had mentioned it. Why do we say that national law must be stabilized? Well, it's simply aim to take the petroleum contract out of the legal system of the host State i.e. that it expresses here the desire to give effect to the state's commitments. If negotiators of the private oil companies and the host state of investment want to give real sense to the state's commitments, and in which the non-compliance can be sanctioned before an arbitration

«Internationalized» Contracts Between States and Foreign Nationals. « Normally, a contract between a State and a private person is governed by the law of the State where it is made and performed ».

tribunal, they must have been contracted outside of the national legal system and only by the entity which can effectively stabilize such a promise, namely the State, the only subject of international law. And here we notice that national stabilized law is not any more stabilized law, it just becomes a body of rules incorporated into the contract and escape to the unilateral action of the host state. The contracts which include such commitments are not concluded within the legal state orders48. However, we ask ourself the question to know in which legal order will depend these kinds of petroleum contracts once they are concluded outside their legal order. Can we say that these contracts become contracts subjected to not any legal order? Do these petroleum contracts become contracts without law? And what can we say about the state which enters into a contract beyond its legal system order? Generally, we know that a State which enters into a contract outside of its legal order enter into a contract within the framework of the international legal order and in particular in the public international law order. There is, however, one problem: talk about a contract which is signed within the framework of public international law order would look like we are considering the petroleum contract as a treaty because a treaty is signed between sovereign states. But in state contracts, and more particularly in the petroleum contracts that we are talking about, the contracting parties shall be the host state of investment and foreign private company. And we know also that public international law excludes any possibility for individuals (or investors or foreign private companies) to sign a treaty as subjects of international law, i.e. it just means that a public international law excludes investors or foreign private companies to sign a contract as a direct addressee of rights and obligations stated in international instruments. We have to understand that public international law may only govern the States themselves. We must therefore turn to a national stabilized law and yet this stabilization can be designed in compliance with the rules and general principles of international law because we know that any national law should be interpreted and applied so as not to violate the obligations resulting from international law, especially from the imperative international law.

In the national stabilized law, some theories affirm that the host country will be able in fact to do the combination of state law with the principles of international law, with the general principles of law or Pacta Sunt Servanda and finally with the transnational law upheld by a big network of BITs and IMI. Also in the same national stabilized law, with regards to the mode of arbitration, we think that the host country of investment will adopt in one way or another the new practice of arbitration «without privity» based on the one hand on a state offer of arbitration contained in a domestic law, a bilateral or multilateral treaty (such ICSID NAFTA, ECT), and on the other hand, by the direct possibility of initiating proceedings to the international arbitration by foreign investor.

Next to state contracts or petroleum contracts is a new category of legal instruments, international contracts, allowing the co-contractors, for their willingness today agreed to submit any conflict to certain rules of international law. That's the reason that we can now

48 Charles Leben (Professeur à l'Université Panthéon-Assas (Paris II) Directeur de l'Institut des Hautes Etudes Internationales), dans son article intitulé «L'évolution de la notion de contrat d'état - Les états dans le contentieux économique international, I. Le contentieux arbitral ».

notice the increase of these contracts in the field of international investment agreements or in development agreements and some authors argue that these kinds of contracts is governed by private international law and international economic law49.

As regards the combination of law of the host country with the principles of international law, one must be able to know really the kind of international law, here are some examples of formulations that we find in some petroleum contracts:

* In a contract concluded by the Vietnam and Western society in 1994:

This contract is governed by the law of the Socialist Republic of Vietnam and by the generally accepted principles of international law in conjunction with international petroleum industry practices.

* In a 1986 oil agreement between Nepal and the Shell:

This Agreement shall be interpreted according the law of Nepal and such principles of International Law as may be applicable;

* In Eastern Europe and more particularly in Bulgaria, in a prospecting agreement for exploration and exploitation of petroleum in offshore zone, in 1991 between Bulgaria and various companies including Texaco for example, it states that:

This Agreement and any licence shall be governed by Bulgarian laws and international conventions to which Bulgaria is a party and generally accepted principles of International Law;

* In many petroleum and mining contracts, we can find that formulation. Here is an example of a contract between the private company Valco («Volta Aluminium Company Limited») with the Ghanaian government. This contract was renewed in 1985:

This Agreement shall be governed by and construed in accordance with the law of Ghana and such rules of International Law as may be applicable.

* In Pakistan, in a concession agreement between Texaco and Pakistan in 1990:

This Agreement shall be governed by and interpreted in accordance with and shall be given effect under the laws of Pakistan to the extent of such laws and interpretations are consistent with generally accepted standards of International Law including Principles as may have been applied by international tribunals.

All these formulations have led us to understand that we can not consider international law

49 Ref. Droit International Public, Jean COMBACAU et Serge SUR, 5e édition, Montchretien, annee 2001 ; Sentence Texaco-Calasiastic c. gvt. Lybien, du 19 Janvier 1977, rendue par R-J. Dupuy ; Commentaire de G..Cohen Jonathan, A.F.D.I. 1977, p.452-479 ; P. Weil : «Probleme relatifs aux contrats passés entre un Etat et un particulier »,R.C.A.D.I. 1969 (t.III), p.95-240, et « Droit International et Contrat d'Etat », Mel. Reuter. op,cit., p. 549-582.

as the only law applicable to petroleum contracts signed between sovereign states and private foreign oil companies because accept such a statement would be a big mistake in the current contractual practice because it is necessary to refer first to the national law. We refer here to Article 42-1 of the Convention establishing the International Centre for Settlement of Investment Disputes: an arbitration tribunal should first take into consideration national law and international law intervenes only in the case of the gap in the domestic law on the litigious matter. International law is applied secondary and therefore plays a corrective role.

1.2. Combination of host country law with the International Law Principles;

It is true that in order to give a strong sense of the commitments of the host state in view of this contract signed with a foreign private oil company, the state contractor must stabilize national law. However this stabilization can be done only by the combination of this national law with the principles of the international law. However, we ask ourself the question to know what kind of international law are we discussing since there are several kinds of international law. Is it of public international law? An international economic law? An International Investment Law? A transnational law? We just invite you to analyze therefore these subsections:

1.2.1 Public International Law?

The application of international law as the law applicable to petroleum contracts signed by the States with foreign private companies is accepted by the countries which have a lower bargaining power, particularly, the States of Black Africa, Eastern Europe, and Southeast Asia.

The application of certain rules of international law intervene in this kind of contracts within the framework of dispute settlement because in the period of non-conflict, the petroleum contracts remain subjected to the law of the host state of the petroleum investment while being stabilized in accordance with the clauses inserted in the contract by the contracting parties: it is what we call here the mechanism of denationalization50 of the contract51. This situation aims two important points. Its objective here is to, at least partially, let the contract out of the domestic law of the contracting State. The interest here is to put private persons (often transnational companies) at the shelter of the vicissitudes of the evolution of national law, of the administrative or legislative arbitrariness (Anglo Iranian Oil): such is the goal of the protection of the investments of the foreign private natural or legal

50 The denationalization is the fact of changing an industry from public to private ownership. In our case, it's just means that we avoid to let the contract signed between a host state and the foreign private oil company to be subjected to the internal law of host state. In this case, the contracting parties will be equal during the process of disputes settlement in front of arbitration tribunal.

51even if this theory has been strongly criticized by a certain number of Third World countries, C.I.J. affaire de l'Anglo-Iranian Oil Co, Arrêt du 22 Juillet 1952, Rec.1952,p.93 ; Sentence Aramco , 23 Août 1958,,p.272 s

persons in International Investment Law. So we are continuing to ask ourself the questions of whether we can develop the system of petroleum investments, materialized in the state petroleum contracts, within the framework of the logic of public international law. Let's examine this analysis:

When there is a state petroleum contracts between a sovereign state and a foreign private oil company, does this agreement creates rights and obligations under the terms international law? however, according to several analyses, the refusal of international law to recognize that private foreign companies or foreign private investors are the subject of international law within the framework of State contracts proves that only a sovereign state, any kind of sovereign state of course, has the right and is able to confer them, thanks to its domestic law, the power to create rights and obligations by their credible and stabilized commitments(or even sanctified) in the international law level. Even when we talk about the contractual credibility, it is necessary first to analyze the institutional environment, in particular the degree of subjection of contractors to their commitments. Foreign Oil companies promise, more surely, in the petroleum investment contracts in the host countries when they know that they can hope, in the event of a dispute during the fulfillment of the contract, to the reliable legal system, independent and whose decisions will be implemented effectively. Hence the interest in combining the domestic law of the host state with certain principles of international law. It appears clearly that it is a little bit difficult to say that petroleum investments can be subject to the logic of public international law because of the unequal status of both contracting parties. And here we notice that the state contracts are neither international law contracts, nor quasi-international contracts, but rather self-sufficing contract authorized by a national system: it is exactly the case of State petroleum contracts that we are talking about.

1.2.2. Combination of host country law with the General Principles of international law or of the Pacta Sunt Servanda?

To start with, I would like first to draw the attention of everyone here that the general principles of international law can not be the law that must govern the petroleum contract in any State because a petroleum contract is signed in the territory of the host state of the investment. These principles can only be applied on the petroleum contract by combining them with the national law of the host country of petroleum investment.

It is important to know that the general principles of law regulate relations or situations that come under international law. And we can notice that these principles slip away as soon as the issue falls within the field reserved for the normative competence of the state. The general principles of law, (as a third source of international law next to treaties and custom) are not a valid legal basis to place this kind of contract in the sphere of international law. In a nutshell, these principles play an additional role in national law. The general principles of international law often intervene only in the jurisdiction clauses i.e. only in the event of litigation and yet the real basis of state contract called international, I mean, the International state contract, can not be based on the arbitration clause or the clause electio juris because the arbitration is a practical instrument which doesn't need to retreat into the straightjacket of a legal order, and

which could do without the allegiance to any particular legal order. It is in that moment that international tribunals (if of course the petroleum contract contains an international arbitration clause) will be able to apply these general principles of international law and domestic law in what they have in common. In a thesis of Doctorate of international law52 written by Mrs. Lankarani, this woman demonstrates that the Pacta sunt servanda widely used by the maximalist current of the internationalization of state contracts, can be effective only if the parties are autonomous within the National legal order. Let us analyze this situation and why? because in the legal link that unites the state to the foreign investor, only the state is autonomous, whereas the foreign oil company is not because it doesn't have the power that enables it «to become master of its actions in the international legal order and to accept their consequences, even limited to the execution of the contract as it concluded». The imbalance is therefore at the level of their legal status: One is a subject of international law and the other is not.

As regards to the principles of Pacta Sunt Servenda, make analyses on this part require knowing first what the principles of Pacta Sunt Servenda are. The principles of Pacta Sunt Servenda are principles of general law or international law relating to the compliance with international conventions, treaties or even more generally contracts by the contracting parties which have concluded them. However, the petroleum state contract is not a convention or treaty because a state which would agree to make these commitments credible during the negotiations and after the coming into force of the contract by combining its national law with the principles of Pacta Sunt Servenda take the risk of considering its contracting party (the foreign oil company) as a «suitable person to take the commitments internationally speaking and to conclude a contract directly classified in the international legal order» like says Professor Pierre Noel53. This situation will result that both contracting parties, the sovereign state and private foreign oil company, have both the power to go to court before jurisdictional body of international law in an equal and direct way. This assumption is valid with the new practice of arbitration without privity.

But if we have to take an account the definition of Pacta Sunt Servenda as defined in the glossary of legal terms (12e édition 1999, Dalloz), we can define it as «a Latin idiom affirming the principle that treaties and, more generally contracts must be respected by the parties which concluded them», we will more take an interest in the following sentence «...and, more generally contracts must be respected by the parties which concluded them.» This means that the contracting parties must respect their commitments according to the various clauses inserted in the petroleum contract because the breach of contract by one of the

52 Droit International : Les contrats d'État à l'épreuve du droit international. LANKARANiEL-ZEIN, Leila. Coll. Droit international, Bruxelles, Éditions Bruylant, Éditions de

l'Université de Bruxelles, 2001, 572 p.

53 Institut d'économie et de politique de l'énergie. Unité mixte de recherche du Centre National de la Recherche Scientifique et de l'Université Pierre Mendès France[ (UFR DGES) IEPE, BP 47, 38040 Grenoble Cedex 09, Tel : 04 76 51 42 40 ; Fax : 04 76 51 45 272. E. mail : ;] dans son CAHIER DE RECHERCHE N° 20 intitulé «La constitutionnalisation du régime juridique international des investissement pétroliers et la (re)construction du marché mondial», Septembre 2000.

contracting parties would be seen as pure violation of state. Otherwise talking, the Pacta Sunt Servenda just means that pacts must be respected. We know that the applicable law will remain the law of the host country but stabilized and at the same time combined or not with the principles of international law in compliance with the applicable law clause and the competent court clause inserted in the contract.

1.2.3. Combination of host country law with the transnational law upheld by a big network of BITs and TMIs?

The question that we are asking ourselves here is to know what is the transnational law? What is the purpose of transnational law? Does the transnational law may govern petroleum contract at the date of signing of contract? Is there a transnational law?

The transnational law is a mixed law that covers neither the domestic law of the state or international law, nor even of private international law. It is a law of the borders which is built at least in the contact or intersection area of these different fields of law. If this transnational law rejects the application of international law, it may be due for reasons consisting to avoid that the private or foreign private investors (foreign oil company)be considered as a subject of international law or as a beneficiary of international law of contracts. According to Mr. Mayer, transnational law would be seen as «a mixed report which unites, by the fact of a contract or without a contract, a subject of international law and a private person.»

And we have the impression here that the rules governing this type of reports are «a legal third order» because between domestic law and international law, and therefore in a nutshell, located in an order of trans-territoriality. These kinds of reports are part of a legal system that is simply distinct and external to the domestic law or international legal order to which one attaches them. And we also have the feeling that the existence of such transnational legal order, which looks like a crossroads standards, contributes to the formation of a legal regime of state contracts, but also creating its own rules and controlled by specific authorities of settlement of dispute not belonging neither to domestic or the international legal order strictly speaking. It is the existence of this transnational legal order which gives meaning to the "law of state contracts" as a specific field of normativity and autonomous legal system even if it's still in development, said Maurice Kamto, in his book entitled: «La notion de contrat d'état: une contribution au débat - Les états dans le contentieux économique international, I. Le contentieux arbitral.» This legal order can be transnational only in comparison with the status of the contractors.

We must not ignore the fact that we are dealing this issue within the framework of international investment law and since it is about in this part of the combination of the law of the host state with the transnational law confirmed by a big network of BITs and IMI, we must focus our attention on the protection of investments or foreign investors. However talk about the protection of foreign investments already make known a kind of anxiety on the one hand proven by the foreign private investor before domestic courts or national laws of the host countries, and on the other hand by the sovereign state before international tribunals.

This is the reason that we need to put in place a law which will have its specific rules which will be called here by the transnational law, and yet the existence of transnational law or this specific legal order, as said Mr. Rigaux in the article written by Maurice Kamto above, it would need:

* rules of conduct observed by the contractors i.e. they have to be respected in their legal relations. These rules must not only comprise internal legal provisions and rules of international law but also of legal instruments produced by the authorities in charge of the settlement of the disputes;

* rules of decision applied by a judge, once that the judges would have identified the rules of the transnational law i.e. after discovering the rule of law directly applicable notably by the arbitrator, the judge may apply them. These rules must guarantee the respect by its subjects with the combination of the principle of Pacta sunt servanda, which is seen here as a fundamental norm of international or domestic contractual law;

* and mechanisms of constraint to ensure the effectiveness of the system i.e. here that transnational legal order must have mechanisms of constraint which are not necessarily similar to those of domestic law, but which are probably at least as effective - even more - than those that exist in the International legal order: seizure of financial assets and other movable or immovable property of the state. However, we can fear of diplomatic tensions between the host country of petroleum investment and the state of nationality of the foreign oil company for the diplomatic protection reasons. It is clear that the immunity of execution becoming more inapplicable nowadays with the recent evolution of the international law that the state sovereign immunity itself henceforth is limited. In that case, the law of «state petroleum contracts» would be governed by another standard than that requires each contractor to respect its contractual commitments.

At the time of the date of the signing of the petroleum contract between both contracting parties, we are doubtful that the parties choose as applicable law the transnational law, and more even also ask ourself the question to know what really transnational law is, and also unless the parties can decide on the specific rules that will govern this kind of contract. Does the transnational law really exist? Does the transnational law come from the law of conventions or treaties? Is there a treaty or a code of transnational law? We know that there is a national law in every sovereign state; we also know that there is an international law according to treaties or conventions that sovereign states can conclude between them, but what about the transnational law? Is there a codified transnational law? The absence of a codified transnational law in the world can not exclude the feeling of doubt relating to the existence even of its legal order. We can maybe find a palliative, because the rules of transnational law that we call "special rules" i.e. rules that are not neither of the host country, nor international law, nor even the private or public international law in a petroleum contract, can be important or can be confirmed by an extensive network of BITs and IMI that will assure that the commitments of the host State be credible in front of the private foreign investor. In other words, we can ask ourself the question to know how transnational law can be confirmed by an extensive network of BITs and IMI. Or, how can we stabilize a petroleum contract by combining of the law of the host state of petroleum investment with the transnational law, upheld by an extensive network of BITS and IMI?

To talk about BITs and IMI need to touch the problem of the protection of foreign investments. What is a BIT and what is an IMI? A Bilateral Investment Treaty (BIT) is an agreement establishing the terms and conditions for private investment by nationals and companies of one state in the state of the other. This type of investment is called Foreign Direct Investment (FDI). BITs are established through trade pacts. Most BITs grant investments made by an investor of one Contracting State in the territory of the other a number of guarantees, which typically include fair and equitable treatment, protection from expropriation, free transfer of means and full protection and security. The distinctive feature of many BITs is that they allow for an alternative dispute resolution mechanism, whereby an investor whose rights under the BIT have been violated could have recourse to international arbitration, often under the auspices of the ICSID (International Center for the Resolution of Investment Disputes), rather than suing the host State in its own courts. There are currently more that 2500 BITs in force, involving most countries in the world. Influential capital exporting states usually negotiate BITs on the basis of their own "model" texts (such as the US model BIT)54 The IMI would be seen as a Multilateral Agreements of Investments, otherwise talking, the IMI are international instruments relating to foreign direct investment (FDI). The TBI and IMR are agreements between states in which the oil companies are not direct parties. These companies are simply beneficiaries of the provisions aforesaid as the instruments of achievement of the object and purpose of these treaties (signed by state of origin) without inferring that they ipso jure become subjects of international law. The States are completely free to conclude free to conclude treaties on some matter that it is and to stipulate for others especially when this others do not have access to the process of creation of law in the international legal order. If companies could create, within the framework of their legal relations with states, international legal instruments, they would not feel the need to refer to law governing this kinds of relations between states, whether bilateral treaties for the promotion and investment protection or general international law. The presence of TBI and IMI are, to a large extent, the instruments of reduction of «political risk.» They reaffirm and remind signatory parties (i.e. the signatory states) to undertake themselves to provide to the (petroleum) investments an investor of one contracting State in the territory of the other a number of guarantees, which typically include «fair and equitable treatment», the highest and the most constant degree of "protection and security" from expropriation, free transfer of means and full protection and security; to not cause harm to them through «unreasonable or discriminatory» measures and, in any case, refrain from «all treatment lower than that required by the International law». More important, and more precise, is the specification of the terms of expropriation and nationalization of foreign investments. This practice is shared by the bilateral and multilateral instruments of investments. The concerned treaties are in fact the treaties which are covering the investments contracts in question.

Nowadays, we know that there are several kinds of these treaties in the world. And usually in those treaties, there are references to the international law within the framework of the «choice of law" in contracts between the state parties to these treaties and companies of one Contracting State in the territory of the other. We also know that the majority of these treaties


comprise stabilization clauses, intangibility clause, arbitration clauses or some arbitration offers to companies of one contracting State in the territory of the other when arise a dispute related to the fulfilling of state contract. The non-compliance with the commitments of the host State of petroleum investments or any violations of clauses inserted in the «state petroleum contract» would be seen as a breach of a contractual stipulation, and also of a conventional provision. These facts will enable the State of origin of the foreign oil company to require to the host contractor state the compliance with its treaty commitments: the principle of Pacta sunt servenda must be applied. That is also confirming besides the role of the legal function of the treaties of protection of the investments and the transnational arbitration. As regards to the arbitration, we will examine it in one of the following sub sections.

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