A study of the legal problems of state contracts

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Section 2- The intangibility clause

In the intangibility clause, the foreign petroleum company will seek to negotiate at the moment of the signing of the contract to insert some kind of clauses like no amendment to the agreement concerned investment may be made without the mutual consent of the contracting parties. It means that here in the framework of a petroleum contract signed between a state and a foreign private investor (a foreign petroleum company), the Government can not unilaterally modify or halt the petroleum contract without mutual consent of the contracting parties. In a nutshell, intangibility clause prohibits a State to unilaterally change the contract, in other words, the state commits itself not to exercise its sovereign powers to change the terms of the concession agreement³⁸.

³⁷ Réf. Anglo-Iranian Oil Co. Case, ICJ Pleadings, 1952, p.86 ; Article 22.1 of the Petroleum Agreement of 4 February 1973 between the Sultan of Oman and the Sun Group

³⁸ 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)

Section 3- Arbitration clause (compromise clause) and international arbitration Clause (The choice of arbitration)

1-Arbitral clause (compromise clause)

The purpose of an arbitration clause included in a state contract or more particularly in a petroleum contract at the moment of its signing between a state (or government) and a private foreign petroleum company is just only to avoid or to help the petroleum contract escape a possible dispute to the competence of the courts of the host state of the investment. An arbitration clause included in a petroleum contract for example let us know that any dispute concerning the implementation or the application or again the interpretation of the contract is settled by arbitration and not by the courts of the host country. This kind of practice is intended to protect the foreign private party or foreign private company. To include an arbitration clause in this kind of contract requires a certain vigilance because the contracting parties must:

1-define disputes that they want to submit to arbitration. It's clear that in a contract between a State and a foreign private company, when inserting an arbitration clause, the contracting parties usually wish that any disputes which may arise between them regarding this contract shall be settled by arbitration in the absence of out-of-court or amicable settlement;

2-To make provisions for the terms of composition of the arbitration tribunal. This clause may, however, if the settlement permits, express some preferences of the contracting parties regarding the number of arbitrators, the terms governing the choice of arbitrators when it organizes an ad hoc arbitration, how to designate the arbitrators, their nationality, etc. ;

3-To base the arbitration's headquarter. We want to give a few details in the case that the "headquarter" of the arbitration which we refer here, does not necessarily or mainly means the place, geographically speaking, where the arbitration operations(meetings, the hearing or examinations of witnesses...) will take place. This place is often dictated by the material chance circumstances and by the conventions, or even the whim, of arbitrators and the contracting parties. It can be multiple, or even virtual, in the case of arbitration «on line». By basing the arbitration's headquarter in any country or any city, the contracting parties choose above all the legal environment of arbitration;

4 - Choose the language of the arbitration because in this kind of clause, and above all when the State contract or the petroleum contract is in an international order, we have to provide from the drafting of the arbitration clause the language in which the arbitration proceedings will be led, in order to avoid any difficulty in this subject once the dispute is born. The contracting parties may also authorize the use of several languages or stipulate that documents written in some languages will not have to be translated. However, the contracting parties to the contract may improve the arbitration clause as regards, for example, to the

procedural rules to be applied by the arbitrators, the provisional or protective measures, and the possible recourse to a proceeding.

2-International arbitration Clause (The choice of arbitration)

Talking about the arbitration clause requires even so to know what arbitration is. Generally speaking, arbitration can be seen as a fundamentally different approach of management and settlement of disputes³⁹. In the arbitration, the different contracting parties concerned must appoint one or more independent arbitrators to resolve the conflict and to pronounce an arbitral sentence (compulsory decision).

International arbitration clause serves a dual function in the petroleum contracts

One can resort to international arbitration for example when the court system is overwhelmed by unnecessary procedures. It is often used when the dispute can not be settled through negotiation. It will be settled by a neutral court far from the legal system of the host State. You understand that in front of such a situation, arbitration is the best option. A successful arbitration requires first the experienced experts in the rules and legal procedures. They must take into account cultural considerations of each party in the settlement of international disputes. It means that a arbitrator should know, for example:

- to draft an arbitration agreement

- to draft arbitration clauses in the framework of contracts

- to make the choice of an arbitrator, the place of arbitration and the system

- to master the reinforcement of arbitration awards.

Among these four elements which I have just quoted concerning what must know an arbitrator, there is one element that draws our attention: «to draft arbitration clauses in the framework of contracts». Well, since we are dealing with this thesis in the framework of state contracts and more particularly in the field of petroleum contracts, it would be important to know that the arbitration clause serves a dual function:

*The definition of the scope of arbitration and the procedures by which the arbitration will be conducted

*The possibility of the establishment of the jurisdiction of arbitrators to hear the matter before him

The insertion of the arbitration clause in a petroleum contract helps also to establish a court of arbitrators who will have as role to hear the facts of dispute before the international arbitration. The types of ad hoc international arbitration and the arbitration clause should provide in detail as we can notice it here:

- The clauses or provisions relating to the scope of arbitration; - The method by which a party may invoke arbitration;

- The method used to choose an arbitrator;

- The substantive (real) and procedural laws that will be implemented;

³⁹ Law firm Kamal Abou Zahr; http://www.kaz-law.info/french/expertise.htm

- The procedure to be applied if a party refuses to participate;

- The method by which the arbitrators pronounce sentence;

- And finally, the duration of time in which the parties must comply with the verdict of the arbitration.

Chapter III- Settlement of disputes: applicable law, arbitration clauses and the jurisdictions of the arbitral tribunal in case of violation of Petroleum contract.