BP EXPLORATION COMPANY (LIBYA) LIMITED v.

GOVERNMENT OF THE LIBYAN ARAB REPUBLIC

10 October 1973 | Lagergren, Sole Arbitrator

I. Historical background:

a. History of the case

The term of concession gives a number of concepts. It is used to be

relevant to both the privileges and rights approved by a government to
carry out the operation. It is difficult to define the word” concession”, in its
legal sense as it is mostly in relation to the phenomenon of foreign
participation, which deals with permits or licenses, especially exclusive
ones from the authority (Gao, 1994).

The history of the concession petroleum agreements began when

the international oil companies entered the Middle East, starting with the
famous D’Arcy concession granted on May 28, 1901 by the Persian
government (Iran) to an English man, William Knox D’Arcy (Gao, 1994).
The D’Arcy arrangement opened the era of concessions and was shortly
followed by a number of other Concession Agreements (Gao, 1994).

One of such known concession is the Deed of Concession,

designated as Concession 65 contracted to Mr. Nelson Bunker Hunt (the
“Hunt Concession”), a citizen of the United States, as granted by the
Petroleum Commission of the Government of Libya on 18 December 1957;
which was later acquired by BP Exploration Company (Libya) Limited
(BP) on 1960. Contained in the concession is a grant of an exclusive right
for 50 years to search for and extract petroleum in a designated area of
Libya, and to sell the oil thus produced.

b. Cause of action

Dispute between BP and the Government of the Libyan Arab

Republic aroused when the Libyan Government passed a law nationalizing
the activities of BP in connection to Concession 65 on 7 December 1971,
which was said to be in retaliation for certain actions done by the British
Government in the Gulf.
 BP’s contended, among others, that: the Libyan Nationalization Law
was a breach of the Concession; the brief was ineffective to terminate the
Concession; BP is entitled to be restored to the full enjoyment of its rights
under the Concession; BP is the owner of the share of any oil extracted
from the Concession area after and before the date of the nationalization;
and finally, BP is entitled to damages.

II. Facts of the case

On the basis of a contractual relationship with the Government of

the Libya (Respondent), BP Exploration Company (Libya) Limited
(Claimant) over a period of twelve years made substantial investments in
Libya and operated a major enterprise in that country for the extraction,
processing, and export of petroleum. The Claimant indirectly is and has at
all times been wholly owned by the British Petroleum Company Limited,
an English public company, between 48 and 49 per cent of whose ordinary
share capital is held by the British Government. Activities overseas are
carried on through local representatives appointed and supervised by and
subject to the directions of the board in London.

On 7 December 1971, the Respondent passed the BP Nationalization

Law which nationalized the operations of the Claimant in Concession 65.
The BP Nationalization Law claimed to restore to the State and then to
transfer to a new company, the Arabian Gulf Exploration Company,
ownership of all properties, rights, assets and shares relating to the above-
mentioned operations.

The BP Nationalization Law provided that the State should pay

compensation to the Claimant. The amount of compensation was to be
determined by a committee to be established by the Minister of Petroleum.
The decision of the committee was to be documented and final, to admit of
no appeal by any means, and to be communicated to the Minister of
Petroleum who was to notify the Claimant of it within thirty days of its
issue.

In the Claimant's submission, the BP Nationalization Law was a

measure of a unique character in that no similar step was taken against
any other concessionaire of the Government or against other concessions
owned by the Claimant. The BP Nationalization Law was rapidly
implemented. The Claimant's operations in Concession 65 were brought to
a complete halt: their staff was immediately excluded from its premises
and from its production and transportation facilities. These were then
taken over by the Arabian Gulf Exploration Company.

As regards compensation, no action was taken until 13 February

1972. Then, according to reports in the Libyan press on 14 February 1972, a
three-man committee was appointed. According to Article 7 of the BP
Nationalization Law, this committee should have reported within three
months from 14 February 1972, that is, by 14 May 1972, and the report
should have been notified to the Claimant by the Minister of Petroleum
within thirty days of that date, i.e. by 14 June 1972. The Claimant has
received no such notification.

The contractual arrangements among the Respondent, the Claimant

and Mr. Hunt call for specific analysis and consideration in certain
respects. The subject matter of the transaction between the Claimant and
Mr. Hunt was “Concession 65”. By the Deed of Assignment of 10
November 1960, Mr. Hunt assigned to the Claimant “an undivided one-
half (12) interest and title in and to the Concession …”

The Libyan Petroleum Law of 1955 provided in its Article l (which

has not since been amended) as follows:

1. All petroleum in Libya in its natural state in strata is the

property of the Libyan State.
2. No person shall explore or prospect for, mine or produce
petroleum in any part of Libya, unless authorized by a permit or
concession issued under this Law.

The Hunt Concession granted the holder the exclusive right for a
period of 50 years within a defined area, inter alia, to search for and
extract petroleum, to take it away by pipeline or otherwise and to use,
process, store, export and dispose of the same. For such purpose, the
holder had the right within the concession area to erect and maintain any
constructions, installations and works required for its activities and,
outside the concession area, to erect and operate transport, harbor and
terminal facilities.

The assignment clause in the Deed of Concession (Clause 25) did

foresee an assignment thereof “in whole or in part.” The principal object of
joint ownership, Concession 65, as granted by and defined in the Deed of
Concession, remained an integral, undivided whole.

The Claimant is asking the Tribunal to render a declaratory Award

dealing with certain specific questions, viz. to make the following
declarations:

(1) The Libyan Nationalization Law of 7 December 1971 and the

subsequent implementation thereof were each a breach of the
obligations of the Libyan Government owed to the Claimant under the
Concession Agreement and so remain;

(2) The said breaches were and are ineffective to terminate the
Concession Agreement, which remains in law valid and subsisting;

(3) The Claimant is entitled to elect, at any time so long as the

Respondent's breach continues, to treat the Concession Agreement as
at an end;

(4) The Claimant is entitled to be restored to the full enjoyment

of its rights under the Concession Agreement;

(5) The Claimant is the owner of its share of any crude oil
extracted from the area of the Concession Agreement after as well as
before 7 December 1971 and of all installations and other physical
assets, and the Libyan Government has no right to any such oil,
installations or physical assets, which it can enjoy or transfer to any
third party;

(6) Performance of the Claimant's obligations under the

Concession Agreement is suspended for so long as the Libyan
 Government remains in breach thereof; and The Claimant is entitled to
damages in respect of the interference by the Libyan Government with
the Claimant's enjoyment of its rights under the Concession
Agreement. If the Claimant does not exercise its rights under
Declaration (3) above, then it is entitled to damages accruing up to the
date of the final award herein. If the Claimant does exercise the rights
under Declaration (3) above, it is entitled to all damages arising from
the wrongful act of the Libyan Government.

(8) The Claimant further respectfully requests the Sole

Arbitrator to reserve for a subsequent stage of the proceedings the
assessment of the damages due under Declaration (7) above.

The Claimant also asks the Tribunal to give directions in

principle as to costs.

III. Issue

1. Nature of the Concession

The first issue is the nature of the BP Concession. The Claimant

submits that Concession No. 65 is a contractual instrument concluded
pursuant to legislation which contemplated a contractual relationship.” It
also maintains that the BP Concession constitutes a direct contractual link
between the Claimant and the Respondent. The Claimant places particular
reliance on Clause 16 of the BP Concession which, inter alia, provides:

The contractual rights expressly created by this concession

shall not be altered except by mutual consent of the parties.

2. Applicable Law

The second issue is what law applies to the relationship between the
Claimant and the Respondent. It will be recalled that paragraph 7 of Clause
28 of the BP Concession contains an express provision on the law
governing the concession. The Claimant argues that Libyan law has been
excluded as the sole governing law and that the law governing the BP
 Concession is public international law. Alternatively, the BP Concession
itself constitutes the sole source of law controlling the relationship
between the Parties. Orally, the Claimant submits that it does not place
emphasis on the word “sole”. In the further alternative the Claimant
submits that the legal position of the parties falls to be decided by
reference to “the general principles of law”.

3. The Effect of the Breach of Contract

The third issue is the legal effects of the nationalization by the

Respondent which in the Claimant's submission constitutes a breach of
contract. The basic proposition upon which the Claimant relies in this
respect is that where an agreement has been fundamentally violated by one
party, the breach does not of itself put an end to the agreement. Some
further act on the part of the innocent party is required. The party in
breach does not have the power to put an end to the relationship by his
own wrongful act. The Claimant argues that, as it has not exercised its
undoubted right to treat the BP Concession as at an end, it continues in full
force and effect. The Claimant submits, however, that it is not bound to
fulfill its own obligations while the Respondent remains in breach. The
Claimant argues further that the primary remedy to which it is entitled by
virtue of the continuing validity of the BP Concession is restoration of the
position as it was prior to the BP Nationalization Law. The Claimant also
submits that it follows from the continuity of the Claimant's rights under
the BP Concession to its share of oil extracted from the concession area
that it remains the owner and that the Respondent has no power (either
itself or through its agents) to transfer to third parties any valid title to
such oil.

In particular any dealing with such oil by the Libyan Government,

the Libyan National Oil Company or the Arab Gulf Exploration Company is
dealing with oil which does not belong to any of them. Such dealing is
unlawful and cannot serve as a basis for a claim to title to such oil
anywhere in the world by anyone other than the Claimant. The Claimant
submits that the Tribunal is competent to make a declaration in these
 terms as between the Parties, because the requested Declaration is limited
to a statement regarding the legal position existing under and in
connection with the BP Concession.

Lastly, the Claimant submits for the purposes of the present stage of
the proceedings that so long as the BP Concession remains in force, the
Claimant is entitled to damages for actual loss caused to it by the
Respondent's breaches of contract up to the date of the Tribunal's final
Award. If and when the Claimant exercises its right to treat the BP
Concession as terminated, it will be entitled not only to damages flowing
from the specific breaches of contract (damnum emergens) but also
damages for loss of the benefit of the contract as a whole (lucrum cessans).

IV. Decision

In connection to the requested declarations by the claimant, the

Tribunal decided as follows:

1. The BP Nationalization Law and the subsequent

implementation thereof were each a breach of the obligations
of the Respondent owed to the Claimant under the BP
Concession.
2. The BP Nationalization Law was effective to terminate the BP
Concession except in the sense that the BP Concession forms
the basis of the jurisdiction of the Tribunal and of the right of
the Claimant to claim damages from the Respondent before
the Tribunal.
3. The Claimant is refused to elect, at any time so long as the
Respondent's breach continues, to treat the Concession
Agreement as at an end.
4. The Claimant is cannot be restored to the full enjoyment of
its rights under the Concession Agreement.
5. The Claimant is the owner of its share of any crude oil
extracted from the area of the Concession Agreement after as
well as before 7 December 1971 and of all installations and
 other physical assets, and the Libyan Government has no
right to any such oil, installations or physical assets, which it
can enjoy or transfer to any third party is refused, insofar as
the requested Declaration refers to crude oil extracted after 7
December 1971. With this exception, the request is joined
with the claim to be considered in the subsequent stage of the
proceedings.
6. Performance of the Claimant's obligations under the
Concession Agreement is suspended for so long as the Libyan
Government remains in breach thereof is refused, as a
consequence of the decision on the requested Declaration
No. 2 that the BP Nationalization Law was effective to
terminate the BP Concession.
7. The Claimant is entitled to damages arising from the
wrongful act of the Respondent, to be assessed by this
Tribunal in subsequent proceedings.

V. Opinion

The Vienna Convention on the Law of Treaties of 1969 (the

"Convention") is viewed as a codification of the customary international law
on the subject of unilateral termination or breach of a treaty. While the
concept of "treaty" used in the Convention is restricted in its scope, certain of
the provisions of the Convention have analogous application to international
agreements in general which are governed by international law.

The main principle established in the Convention is the rule of pacta

sunt servanda in Article 26, which provides:

Every treaty in force is binding upon the parties to it and must

be performed by them in good faith.

The Convention further stipulates in Article 42 that the termination of

a treaty, its denunciation or the withdrawal of a party, may take place only as a
result of the application of the provisions of the treaty or the Convention. The
Convention, however, conspicuously lacks any rules on remedies. Therefore
customary international law and particularly the case law of international
tribunals, must answer the question of what remedies are available without
the benefit of guidance from the Convention. It is true that there is a fleeting
reference in Article 65, Paragraph 5, to a party "claiming performance of the
treaty or alleging its violation", but in the context this cannot be construed as a
considered incorporation of specific performance as a remedy. The main rule
in Article 65 of the Convention is instead that in the event of disputes as to the
validity or termination of a treaty, the parties shall seek a solution through the
means indicated in Article 33 of the Charter of the United Nations.

The sole provision in the Convention which has a direct bearing on the
issues dealt with here is that contained in Article 60, Paragraph 1, which
reads:

A material breach of a bilateral treaty by one of the parties

entitles the other to invoke the breach as a ground for
terminating the treaty or suspending its operation in whole or
in part.

The International Law Commission was of the unanimous opinion that

a breach of a treaty, regardless of how serious it is, does not ipso facto
terminate the treaty and that a State is not at liberty simply to state that a
breach of treaty has occurred and that the treaty as a consequence is
determined.

It would indeed appear singularly inconsistent to take a different

position on the effect of a breach of treaty as an opposite view would be
tantamount to denying the principle of pacta sunt servanda enshrined in
Article 26. However, Article 60, while implicitly resting on the proposition
that a treaty continues in effect despite its unilateral abrogation by one party,
falls short of providing that the innocent party is entitled in such a situation to
demand specific performance or, as the case may be, restitutio in integrum.
Public international law outside the Convention thus must be resorted to for
determining the remedies available to the innocent party besides its right
under Article 60 to suspend its own performance, or terminate the treaty on
account of the other party's repudiation of it. The latter rule in the context
 should be understood merely as authorizing—and requiring—a formal
declaration to the effect that performance under the treaty by the party not in
default will come to an end. It was precisely this limited aspect of the
provision which was subject to deliberations among the members of the
International Law Commission.

Sources:

Gao, Z. (1994). International Petroleum Contracts: Current Trends and New

Directions. London, United Kingdom: Graham & Tortman Ltd.