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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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Section 3- The formation of state contracts: case of petroleum contracts

To understand how a petroleum contract or a state contract is formed requires to understand what we mean by a contract. A contract is a legal document that states and explains a formal agreement between two different people or groups, or the agreement itself. If the French Civil Code (éd. Dalloz 2000), for example in its article 1101, defines a contract as follows: "The contract is an agreement by which one or more persons are under an obligation, to one or more others to give to or not to do something" but in our case here, I would advise you to not to see in the state contract or petroleum contract (specifically in the area of natural resources), as a kind of agreement between two or more individuals. We are discussing our thesis in the framework of International Investment Law and, we guess that, it would be better to know that the petroleum contract can be signed only between sovereign state worthy of the name, and one or more foreign private petroleum companies. However, if we want this contract being formed and deserves the name of petroleum contract, which is basically a state contract, it would be preferable to identify the legal status of each contractor. This is what will help us to determine the applicable legal regime (which will be discussed in chapters to come)

and clauses that can be included in the petroleum contract without forgetting to specify the various stages of negotiation of this contract.

1-Legal status of the contracting parties

Study this section in this way will lead us to identify the statutes of contractors or co-contractors. We know that in the petroleum contracts, there are two types of contractors: State and foreign private company. Let us start first with the first contractor: the state.

1-The State

We would not like the notion of the state being seen in the narrow sense of the word and in the concrete terms as the French glossary of legal terms22, as: «the whole of Political bodies, of leaders, those who ho govern, in opposition to those who are governed, (for example, when we say that the state is pervasive, it should be reformed, etc.)». We also know that the state is an entity and is represented by the institutions or otherwise speaking, it's a part of a large country with its own government, such as in The Republic of Congo, China, Canada, France, Germany, Australia or the US, etc. But in the subsection of this thesis, the State of which I am referring can be seen here only in the legal sense. The State is the only legal entity under international law as is its other partners, international legal persons namely other states and public international organizations, and is holder of the rights of access to natural resources contained in its subsoil's or seabed's territory. Here is this beautiful detail concerning the definition of the State that I invite you to read very carefully: "... State, owner of the rights of access to natural resources, especially petroleum resources, contained in its subsoil, its islands, its territorial waters and its seabed, its internal waters, its exclusive economic zone and its mainland " even if some notable exceptions can be observed in the USA, where the problem of respect of the right of land ownership is the burning issue. You should know that in this country, the landowner may be either an individual or a federal agency. We can't neglect this problem today in worldwide market of petroleum laws.

The foreign private company which wants to exploit the petroleum resources of any kind of country must sign the contract with the State or the landowner (case of USA) of mineral resources. It would be to a form of bicephalous or dual ownership regime: on the one hand, the one which the majority of states apply and where the rights are acquired by the state contracts favoring the State as the only owner of natural resources (hydrocarbon) contained in its subsoil and its seabed; and on the other hand, the one of the USA where the law on hydrocarbons contained in the subsoil depend to the will or the decision of the owner. That's the reason that we will examine both cases in the edifying way.

1.1- The State: subject of international law and owner of the rights of access to the hydrocarbon resources contained in its territory.

The State which must sign a petroleum contract and which I refer here is the government of a state in a strict sense of the term, without underlining into its political or administrative

22 Le lexique des termes juridiques, 12è édition, 1999, Dalloz Campus, Paris, France: « ensemble des organes politiques, des gouvernants, par opposition aux gouvernés (par exemple quand on dit que l'Etat est envahissant, qu'il faut le reformer, etc.) »

subdivisions (state members of a Federal Government for instance, provinces, municipalities, public or private institutions, public companies, etc.). Here the petroleum contract is negotiated, signed and executed or applied by two co-contractors which don't have the same legal status. It is the government of a state which must sign this contract that will be worthy of being called petroleum Contract. Here is the formula which will help you to better understand what we call by a petroleum contract in the sense of State contract: Government of a sovereign State + a foreign petroleum private company or corporation) = petroleum contract.

Since the international investment law in the natural resources sector is studied in the context of international economic law, some lawyers may be tempted to define the Contracting State in the economic sense. We know that in the framework of domestic law and more particularly in administrative law, the state can be seen as a public administration or public authorities; we also know that in this way, the state can behave as an individual and apply economic activities and trade in the same way as a private company. This way of acting sometimes allows it to be called "state contractor or commercial" and to be subject to public or private law according the nature of the contract and contractors with its nationals. But in our case in this subpart, if we have to lead our discussion within the framework of petroleum investments and more particularly in the International Investment Law, the State as such by signing this contract with a foreign private investor behaves as a host state of the investment. I would ask you, constantly, to see in that state contractor and at the same time the host state of investment as the government of a sovereign state, owner of natural resources such as petroleum contained in its subsoil. This is the only sovereign state that has jurisdiction to grant a foreign company the rights or the offer of access to its petroleum resources (crude oil) in its subsoil through a license. It's this state, with the status of public authorities, which has the absolute monopoly. It's this state which must also administratively speaking control the conditions for putting national resource at the foreign petroleum industry disposal. This is moreover the practice that we can find in the most states of the world, the rights on the natural resources contained in the subsoil of its territory (petroleum and others) belong to the State, regardless of the ownership of rights on the surface of the land23.

In spite of this insistence on the notion of the Contracting State which can be viewed as the government of the state, it sometimes happens that we can be in front of another situation of the concept concerning the notion of the Contracting State of the State contract. The State can charge some of its bodies or its companies to sign petroleum contracts. As you can note it in this case, there is the blessing or the agreement of the Government to act on its behalf. As far as we are concern and rigorously speaking, I'd like to advise you not to confuse, legally speaking, the state itself to a body (agency or institution) of State. You must not also confuse

23 In the Netherlands, the owner of the Land owns the resources in place, but the state has the monopoly over the granting of rights to explore, drill and lay out; in Germany, land resources belong to anyone but the state has a monopoly on the granting of concessions, to which are attached exclusive rights. See B. TAVERN, «An Introduction to the Regulation of the Petroleum Industry» (1994), p. 11-12.

a state in case it would have co-contractors as the body of state (a government-owned firm or Parapublic Company or a company of State) and a foreign private company. The case law on this point has never been unanimous for the assimilation of contracts signed by government agencies and private foreign companies as "state contracts." Case law in several cases has never been united on this assimilation. That's the case of:

-Case law "Sapphire" of March 15, 196324;

-Case law «NIOC», Arbitral Award of the Court of District of the Hague on April 15, 196525

Thus, in front of the behaviors of the decisions of arbitral awards of Sapphire and NIOC cases law, the Court of Appeal of The Hague will take a decision going against theirs;

-Case law NIOC of June 28, 1968, in that decision, the Court of Appeal of the Hague cancelled the above mentioned case law (April 15, 1965) of the Court of District of the Hague and considered the NIOC as a private legal entity who has acted jure gestionis26. This decision simply wanted to tell us that there is certainly a legal difference between a state contract in the sense that it would have as a contracting party the State itself and an contract between a government agency and a private Foreign company27.

However, the change of the status can intervene in exceptional cases when the State does not become other than the regulator or the guide of the economic activities within the framework of the current trend of free market economy or neoliberal economy with its waves of privatization of state-owned firm (or a public company). In front of this situation, we can note that the State sometimes loses its status as the Contracting State of State Contracts (these kinds of contract are also called by contracts for economic development). But there are some strategic domains such as the petroleum one (that we are explaining you) or international loans, the production or the supply of arms that remain in the list of contracts that only the State (or the official Government) can conclude with foreign private investors28. Far from wasting our time or getting lost in many examples of the various forms of state contracts, you have to understand that what interests us so much here are the petroleum contracts.

24 See. award Sapphire International Petroleum Ltd. v. National Iranian Oil Company, on March 15, 1963, in Répertoire de la jurisprudence arbitrale internationale, vol. III, 1945-1988, p. 284

25 NIOC =National Iranian Oil Company. See. International Legal Materials, 1966, p. 477. In this sentence, the Court also recognized, as the Sapphire sentence had recognized it, with the NIOC the quality of a body of the Iranian State

26 International Legal Material, 1970, p. 152

27 This terminology incontestably more exact was used by J.-F. Lalive in its study: Un récent arbitrage suisse entre un organisme d'Etat et une société privée étrangère , Annuaire suisse de droit international, 1962, pp. 273 et s

28 Maurice Kamto, in his article entitled: " la notion de contrat d'Etat: une contribution au débat - les Etats dans le contentieux économiques international, I. Le contentieux arbitral.

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