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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:

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Today more than ever throughout the world, everyone is aware, according to some petroleum specialists that this product would become rare or disappear probably by 2040s or 2050s. On the basis of the date of January 1, 20061, the oil reserves of our planet still had, probably, between 35 and 42 years of reserves. These world reserves of oil were presented as follow: Middle East 57.6%, North America 16.5%, Central and South America 8%, Africa 7.9% and 10% for other parts of the World. Let us note that this projection does not take into account possible technological advances. But according to specialists' in the sector, the reserves could actually be much more important. They are even likely to double thanks to unconventional resources. So what is it exactly? The heavy oil is essentially localized for example in Venezuela2 and in Canada. A type of crude oil more difficult and expensive to operate but which could multiply reserves of Canada and make it the second country in terms of oil reserves after Saudi Arabia. You see well that oil still has beautiful days in front of it.

So throughout our planet, several petroleum contracts were signed, are being signed and much more will be signed between several petroleum companies and the various states. The economic competition of leadership between the economic powers, is felt between the industrialized and emerging countries like China (which has become since 2003, the second crude oil consumer in the world, behind the United States and in front of Japan), India, Brazil and many others which are becoming major consumers of crude oil necessary to the rapid growth of their economies. Not only these cases, but discoveries of petroleum reserves becoming increasingly important in oil producing countries and non-oil producing countries, attract our attention. The fear and the end of "the era of the whole oil" which are announced with as consequences the depletion of large petroleum reserves in the world seem to create other situations. These situations today push several States and companies to multiply petroleum investments. These investments often lead to the juicy petroleum contracts, signed today during the peace periods, the war periods or postwar periods. This is the case of the

1 According to a report presented by a French journalist, Marie-Sophie Carpentier, in his «journal de l' economie» for TV5.

2 The fifth largest exporter of oil and holder of the first gas reserves in South America estimated at 4.15 billion m3. Venezuela is the Andean country, where 26 companies operate oil companies, including Total (France), British Gas (UK), Petrobras (Brazil), Exxon Mobil (USA) or Repsol (Spain)

most petroleum contracts signed in Iraq, Kuwait, Congo Brazzaville, Angola, Sudan, etc. Several industrialized countries, with high technology of Petroleum Research are multiplying their research in this domain in order to control the petroleum strategic areas in the world. The new emerging countries such as China is also noticed in several petroleum contracts signed in recent years by its petroleum companies with many oil-producing countries such as Iran, Saudi Arabia and some countries in Africa where its 1/3 of crude oil comes from Sudan, Algeria and the "oil emirates" of the gulf of Guinea: Nigeria, Angola, Equatorial Guinea, Sao Tome & Principe, Gabon and Congo Brazzaville. So petroleum contracts are signed between host States and foreign petroleum companies or between states, with many different agreements such bilateral or multilateral ones for the protection of private foreign investment.

But in front of all these agreements, several disputes with different origins always emerge between the petroleum multinational or transnational companies and the sovereign host States, owners of petroleum in their subsoil. Some states may even modify or deliberately violate the terms of certain clauses of petroleum contracts prior to their regime. Some may seek renegotiation or revision of the previous petroleum contracts (This is the case of Venezuela of Hugo Chavez, Russia of Vladimir Vladimirovich Putin, and so on.). Can we choose this option? Several lawyers are thinking about the legal regime of such contracts before and after its coming into force by the contracting parties, namely the applicable law and dispute settlement mechanisms in these conflicts between sovereign states, the only subjects of international law and foreign companies that do not have international legal personality required. Therefore arises at the international level, the issue of the protection of foreign investments at any time and in any circumstance in compliance or legality and in compliance with contractual commitments (national or international) undertaken between the contracting parties .

The protection of investments can be seen as the whole of principles and rules of national and international law, which have as object to prevent or repress any public attack made by a State against an international investment, in this case against a private foreign investor. In international practice, and more specifically in the field of economic relations and economic development agreements, contracts between a state, a subject of international law, and foreign private entity (companies, corporations or multinational), are signed. The main problem in such contracts called «State contracts» is that any foreign investor (the foreign private petroleum company) which contract 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 ourselves the question to know what really is 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 company will seek through the clause of choice of law, in the process of the formation of these state 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

clauses3, 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 also have 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.

The evolution of state contracts spark off sharp criticisms between different trend (doctrine, precedential, legislative) of the Third World countries (defending a position that the petroleum contracts must be governed by the domestic law of the host State of the investment), and the developed countries. We can refer to various cases law of the Permanent Court of International Justice4 (PCIJ), the predecessor of the International Court of Justice 5(I.C.J)

The origin of the phrase "state contract" is not new. it has a doctrinal origin whose paternity would be surely the British F.A Mann to have employed it for the first time in his study published in 19446 Even though it dealt with an issue of International loan7. however according to the French doctrine, the phrase was used in 1924, before the publication of the above mentioned article of Mann, also about international borrowing without guaranteeing in the legal literature that this first appearance acted on the concept State Contract. But, since this debate is in line within the scope of the international investments law, and even if the term State contract has emerged about another category of contracts to the international borrowings i.e. the borrowings of a State to creditors abroad8. We have to emphasize that it was precisely about investment contracts that the concept of State contract has expanded. It became familiar about investments, more specifically about the petroleum investments9.

3 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)

4 Affaire des « Emprunts serbes et brésiliens »du 12 juillet 1929

5 Affaire de l' « Anglo-Iranian Oil Co » du 22 juillet 1952, Rec.1952, p.93 ; affaire de la sentence « Aramco »DU 23 Août 1958,, p.272s.

6 Article entitled «The Law Governing State contracts», BYBIL, 1944.11

7 Ch. Leben « Retour sur la notion de contrat d'Etat et sur le droit applicable à celui-ci »in mélanges offerts à Hubert et Thierry. L'évolution du droit international, Paris, Pedone, 1998, p.249

8 It is about such contracts that F.-A. Mann, has used the term state contract, see, "The law governing state contracts», BYBIL, 1944, p. 11 resumed in F.-A. Mann, Studies in International Law, op. cit. p. 178-210. But, below, see the contribution of Mr. Kamto who located phrase «Contract State» at G Jèze, in a course at the Hague in 1925, also about public borrowing. See also G.R also Delaume, Des stipulations de droit applicable dans les accords de prêt et de développement économique et de leur rôle , RBDI, 1968, p. 336-364

9 See the different disputes emerged between the host states and the petroleum

The debate is therefore emphasized on the issue of legal regime of such contracts called petroleum contracts. They are the kind of contracts between a State, subject of international law and owner of the right of access to all its resources, namely all its petroleum, existing in its subsoil of the land, islands, internal waters, territorial sea, exclusive economic zone and continental shelf to the whole of it territory10, and a foreign private company (petroleum company) in the field of natural resources. Any State is sovereign in international law and therefore competent to exert full authority over its subsoil susceptible of containing resources and that any access to its petroleum by any petroleum company goes through the signing of a contract with the State itself as a subject of international law or public persons acting on their behalf (to the notable exception of the rights of access to the private sub-soil in the USA.). The state, in international law recognized sovereign, is not subject to a higher authority and therefore has no superior. This assertion of state sovereignty to be subject to international law according to the evolution of international law on the petroleum investment (petroleum contracts), have been challenged or have been call into question by the concept of state contract during the politico-legal storms of the Sixties and seventies. Even before the Second World War in the 1938s, the phenomenon of Soviet nationalization and above all Mexican nationalization had shaken the legal order of State contracts. After the Second World War, the emergence of new nations with the phenomenon of decolonization called into question the basis of such petroleum contracts qualified structurally unequal. The assertion of Sovereignty of natural resources, legally supported by the resolutions of the UN General Assembly, namely Article 626 (VII) to the States recognized the sovereign right, the right to freely exploit their wealth and natural resources. That's why, this trend became incompatible with the respect for the property rights of foreigners. The petroleum investments in this sector, were no longer protected, no longer considered as a norm of international law. The investments security was not guaranteed any more11.

To better understand the meaning of this thesis, we can ask ourselves one question which is, in what legal regime state contracts, more specifically petroleum contracts must be governed in order to protect them from the violations resulting from the host states of investment. This issue will lead us to analyze the most important points of these researches in the applicable law and the settlement of disputes of petroleum state contracts. This is the reason which justifies our studies on the legal problems of state contracts and more precisely petroleum contracts. Our research will have three parts: the First is about the State contracts and petroleum contracts. In this part, the main discussion will be about the content and the

concessionaries and the famous sentences of the 1950s and 1960s: Abu Dhabi, Qatar, Sapphire, Aramco; P. Weil, in the Problems relating to contracts between a state and an individual «Problèmes relatifs aux contrats passés entre un Etat et un particulier», RCADI, 1969,104; i-F. Lalive, Contrats entre Etats ou entreprises étatiques et personnes privées. Développements récents , RCADI, 1983-III, pp. 28-29.

10 All these resources are the property of this state under it sole management

11 L'Assemblé générale] Recommande à tous les États Membres, lorsqu'ils exerceront leur droit d'utiliser et d'exploiter librement leurs richesses chaque fois qu'ils le jugent souhaitable pour leur progrès et leur développement économique, de prendre dûment en considération, dans la mesure compatible avec leur souveraineté, la nécessité de maintenir le courant des capitaux dans des conditions de sécurité et dans une atmosphère de confiance mutuelle et de coopération économique entre les nations.

nature of state contracts and petroleum contracts' definition and different types of petroleum contracts, their formation, their content and their negotiations. The Second part is about the content, the nature and the potency of the special clauses contained in the state contracts and petroleum contracts. This part mainly focuses on certain special clauses, like the stabilization clause, the arbitration clauses, intangibility clause etc., which the contracting parties have to insert in the state contracts and petroleum contracts. The Third part is about the Settlement of disputes: we'll examine the applicable law, and the competent jurisdictions or arbitration tribunals in case of violation of Petroleum contract. In this part, we'll analyze if the petroleum contract can be governed by national or international law or by other special order of law. We'll examine if the violation of these contracts can be settled by domestic or international jurisdictions or by international arbitration.

Chapter I - State Contracts and Petroleum contracts Section 1- The definition of State contracts

Sovereign State Foreign Private


State Contract

Sign Contract

State contract, this is the expression that a lot of ink has been spilled over in the legal world. What is a state contract? Well, it's just a contract on the one hand, one of the parties and not two, to avoid of course a confusion to a contract between states, is a sovereign state, a subject of international law, and on the other hand, the private person which can be one or more private citizen (s) of another State, in particular company or multinational or transnational companies. We have to know that in our case, it's not about a contract between states even if the term "State" seems to take you into this idea of a contract between states. It's not also about a treaty between states because a state contract is different from other types or categories of international contracts. Even if this agreement is signed

between a State and a foreign private person in the territory of the host state of the investment and may in one way or another resemble to a government contract12, the State contract can not be confused with a government contract. We know that the phrase "state contract" was invented by the doctrine. It applies to contracts between a state and a private citizen or company of another State. It appeared to qualify the investment contracts in the field of exploration and production of natural resources, notably petroleum contracts resulting from petroleum investments13.

To understand this chapter, we will first examine the difference the state contract and other contracts different from other forms of contracts and secondly, the petroleum contracts. Although the state contracts are sometimes called international contracts, they are very different from other types of contracts:

1-State contract, different from the investment contracts

Although the state contracts became widespread much in the field of investment contracts, and more specifically in the field of petroleum investments, it is important to know that the investment contracts benefit a particular regime, that is to say - participate in the "economic development" of the host State. This is what one called elsewhere by «economic development agreements» from the 1960s and 1970s, obliging foreign companies to the construction of railways, roads, schools, hospitals, electricity, Building cultural sites, etc. These kinds of agreements are signed between States and Aliens. Under no circumstances and in a direct way we can say that all investment contracts concluded between a State and a foreign company are qualified State contracts14. The state contracts meet a number of specific criterions including: the existence of stabilization clauses of the contract, the terms of intangibility, arbitration clauses, the clauses of applicable law, the clauses of competence or arbitration, etc. If any kind of investment contract doesn't contain the specific criterions that we can find in the state contract (stabilization clause, intangibility clause, arbitration clause, etc...), this contract can not be called state contract because a State contract must be sign between the sovereign State and foreign private company and of course contain these different clauses aforementioned. An investment contract is also seen as a contract under which an institutional investor deposits a lump sum of money (as a pension fund) with an insurance company that guarantees the return of principal and a specific amount of interest at the end of the contract term also: such a contract considered as an investment «purchased a guaranteed investment contract».

12 The government contract is called «le contrat administratif» in France.

13 See disputes emerged between the host states and the petroleum concessionaries and the famous sentences of 1950s and 1960s: Cases Abu Dhabi, Qatar, Sapphire, Aramco as cited as P. Weil, in the Problems relating to contracts between a state and an individual «Problèmes relatifs aux contrats passés entre un Etat et un particulier», RCADI, 1969,104.

14 Such as precise Prof Charles Leben in his article "« l'évolution de la notion de contrat d'Etat-les Etats dans le contentieux économique international, l. Le contentieux arbitral »

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