002 AWARD IN THE MATTER OF AN ARBITRTATION BETWEEN
KUWAIT AND AMINOIL (Peliño) FACTS:
March 24, 1982 | Prof. Paul Reuter | State Responsibility – Nationalization &
Compensation
PARTIES: The Government of Kuwait and the American Independent Oil
Company
SUMMARY: Aminoil was granted a 60-year concession by Kuwait to exploit
oil reserves in the Neutral Zone. The Concession Agreement contained a
stabilization clause that prevented Kuwait from unilaterally annulling the terms.
Eventually, Kuwait gained independence from UK and it entered into a
Supplemental Concession Agreement of profit sharing of 50/50. A Draft
Agreement was also entered into, but was never ratified, but then a letter was
said to have contained that the parties agreed to the agreement as if it was
ratified. Kuwait wanted to get more from the concession, so they wanted to
adopt a new kind of system, the Abu Dhabi Formula, agreed upon by OPEC
countries. Aminoil didn’t consent, while Kuwait was able to buy out all the other
oil concessions in Kuwait, leaving Aminoil as the only private operator. Kuwait
wanted to gain control and ownership over the oil resources. But they disagreed
as to how the government would indemnify Aminoil, so they brought the case to
the tribunal. Hence, this case. There are several issues in this case (see full
digest), but the main issue here is whether or not the Decree Law was a valid act
of nationalization. The Decree Law terminated the agreement between Kuwait
and Aminoil, and it would, in effect make all assets, interest, revert back to the
State (so magiging nationalizaed na siya and State will have full control and
ownership). The tribunal here said that it was a valid act of nationalization. This
was because although there was a stabilization clause in their agreement that
prevented from terminating the agreement except for certain grounds, there were
already other circumstances (like Kuwait being an independent state). The given
stabilization clause no longer possessed its formal absolute character, rather, the
clause impliedly prohibited nationalizations of confiscatory character, that is,
without proper indemnification, but did not rule out nationalization per se.
Therefore, nationalization was lawful provided that it did not possess any
confiscatory character.
DOCTRINE: The clause impliedly prohibited nationalizations of confiscatory
character, that is, without proper indemnification, but did not rule out
nationalization per se. Therefore, nationalization was lawful provided that it did
not possess any confiscatory character.
But I think na the main take-away is that if you’re going to take something, you
have to give comepensation or indemnification for it. And in line with state
responsibility, (similar to like just compensation), when you nationalize or like
take over, then the government should indemnify the party affected.
1. Aminoil is an American company incorporated in Delaware with the object
of exploring for, producing, refining, selling petroleum, natural gas, and
other hydrocarbons.
2. Aminoil was able to obtain an agreement with UK which was in special
relations with Kuwait and was able to be granted a Concession for the
exploration and exploitation of petroleum and natural gas in the Kuwait
“Neutral Zone”.
a. The location was between Kuwait and Saudi Arabia was uncertain and
the British authorities, since they had an agreement with both Kuwair
and Saudi, concluded a treaty wherein both these states had access and
shared in what was to be known as the “Divided Zone”.
3. The special relationship between Kuwait and UK came to an end since the
Constitution of Kuwait was promulgated.
4. The principal clauses of Aminoil’s Concession relevant to this case are the
following:
a. Art. 1: Period of agreement-60 days from date of signature.
b. Art. 2(c): The company shall conduct ops in a workmanlike manner and using appropriate
scientific methods and to close unproductive holes. In addition, would also keep the
Shaikh and his Foreign Representative informed generally as to the progress, but the info
would be confidential.
c. Art. 3: Immediate payment to the Ruler of $625k dollars, followed after 30 days by $7.25
million, and an annual royalty of $2.50 for every ton of Aminoil’s petroleum won and
saved, subject to a minimum annual royalty of $625k.
d. Art. 3(h): Gold Clause – Any obligation to pay a specified sum in USD shall be
discharged by the payment of a sum in USD equal to the official US Government
purchase price in force at the date of payment for such quantity of gold, of the standard
and fineness prevailing at the date of signature, as such specified sum would have been
sufficient to purchase at the date of signature of the agreement.
e. Art. 11: Ruler has the right to put an end to the Concession before the expiry of the 60
years in any of the ff. cases: (a) failure by Company to perform oblgiations in Art. 2
(geo/logical or physical exploration or drilling), (b) failure to make any payments due
based on Art. 3, (c) if the Company shall be in default under the provisions of arbitration
in Art. 18. (I personally think this is the stabilization clause)
f. Art. 13: All movable and immovable property of the Company in Kuwait and in the
Neutral Zone shall be handed over to the Shaikh, free of cost.
g. Art. 17: Shaikh shall not annul the agreement except as provided in Art. 11 No Alteration
shall also be made except if the Shaikh and the Company jointly agree.
5. 2 other oil companies were operating in Kuwait at about this time. Kuwait
Oil Company (KOC) was owned by British Petroleum and Gulf Oil Corp.
and had a concession and Arabian Oil Company was Japanese owned.
6. Eventually, the Agreement between the Ruler of Kuwait and the UK put an
end to the special relationship of the 2 countries since Kuwait became
independent.
7. Kuwait and Aminoil entered into negotiations for the revision of the
Concession which led to the signature of a Supplemental Agremeent.
a. It was supposed to modify the financial clauses of the Concession.
b. Aminoil was made liable for 50% in a certain year and then 57% tax in another year.
c. It also had the obligation to establish and announce or procure the establishment and
announcing of its posted prices.
d. In the new agreement, the Ruler had the right to terminate the Concession in case the
 company defaulted.
e. Another article was also incorporated, stating that if there are changes in the concessions
now in existence because of the terms of the concessions granted hereafter.
8. A third understanding was reached in the shape of a Confidential Letter,
continaing the details and arrangements for the special condititions of
Aminoil’s undertaking.
9. As previously mentioned, Kuwait had its own Consitution, and some of the
pertinent provisions are as follows:
a. Art. 18: that they were safeguarding private ownership.
b. Art. 21: All of the natural wealth and resources are properties of the state.
c. Art. 152: Any concession for the exploitation of natural resource shall be granted only by
law and for a determinate period.
10. Aminoil suffered financial losses, so the shares were bought by RJ
Reynolds Industries, Inc.
11. Negotiations with Kuwait and Aminoil took place regarding financial
aspects. A draft agreement was prepared but was never signed.
12. In Feb. 1971, the Tehran Agreement was concluded between the Gulf States
and a number of major oil companies. And the goal was to apply various
resolutions of the OPEC, providing for an increase in posted prices.
a. Dollar weakened so a new agreement was concluded (Geneva I
Agreement), providing for an increase in posted prices. And another
agreement, Geneva II Agreement, added 2 more currencies.
13. Kuwait and Aminoil entered into new negotiations regarding the application
of the Tehran and Geneva Agremeents.
a. Aminoil proposed that the relationship of Kuwait and Aminoil change,
in that Aminoil should be a contractor while the government becomes
owner of all the Kuwait assets in Aminoil.
b. But this was rejected by Kuwait, so they other negotiations, and the
revisions were embodied in a Draft Agreement. 1
c. Several other amendments were also introduced.2
14. The Draft Agremeent was never ratified. And the “October War” broke out
in the Middle East.
a. So the decision of OPEC members to take into their hands the fixing of
posted prices. And companies which would not agree, would have to
stop production.
b. Kuwait was pressuring Aminoil to pay.
15. A representative of Aminoil formally accepted the Agreement as drafted.
And it also paid $13 million for the retroactive effect of the financial
arrangements.
a. But the tax law was never passed in Kuwait nor even presented in the
parliament.
16. A final draft of the agreement was prepared.
a. Kuwait informed Aminoil of the increase in royalty rates and profit
1
Regarding applicable tax rates, rate of computation or “make-up payments”, expensing of royalties,
acceleration of payment of income tax and make-up payments, application to Aminoil of the Tehran and
Geneva Agreements.
2
Regarding Art. 2(c), gold clause was deleted, government wanted to enact a new tax law so that Aminoil
could claim double immunity in the US, arbitration clause was included.
payable to the Government.
b. This was all a unilateral decision of Kuwait.
c. Kuwait was implementing decisions taken by OPEC members.
d. But during this time, the posted prices quadrupled, so Aminoil was
supposed to pay a higher price to the government.
17. Eventually, Kuwait was able to gain control and also took over the other oil
companies, with the exception of Aminoil. So Aminoil was left as the sole
totally private operator in Kuwait.
18. Conservation Regulations were also adopted in Kuwait.
19. OPEC countries began discussing new financial terms to be imposed on the
companies in the form of taxation, like increase in royalty levels and posted
prices, known as the Abu Dhabi Formula.
20. Kuwait, in effect, wanted to enforce this to Aminoil, claiming that they
informed and advised them of the changes, but then Aminoil was denying
that they were informed of the new terms.
21. Kuwait and Aminoil negotiated as to the new terms.
a. First Phase: Aminoil submitted a written proposal, but they were not
able to agree on anything, and eventually the time set to reach an
agreement expired.
b. Second Phase: They had informal discussions, that the existing
Concession would be terminated and replaced by a renewable 10-year
service contract and that Kuwait would take over the assets of Aminoil,
free of charge and all financial claims pending would be abandoned.
c. Eventually, Kuwait issued a Decree Law terminating the Agreement
betweent Kuwait and Aminoil.
i. Concession granted to Aminoil would be terminated.
ii. All interests, assets, funds of Aminoil would revert to the State..
iii. Compensation Committee would be set up to determine fair
compensation due to Aminoil.
iv. An Executive Committee would make an inventory of the assets
that would be reverted to the State.
22. The take over was formally protested by Aminoil, but the press release of
Kuwait was that it has been their plan to take full ownership of oil resources
and place it under their management.
23. Aminoil informed Kuwait’s Ministry of Oil that they plan to initate
arbitration proceedings.
24. Hence, this case.
ISSUE/s:
1. What law is applicable in this case? The tribunal said that the Kuwaiti law
and the general principles of public international law are both allowed to be
used.
2. WON the 1973 Agreement and the Abu Dhabi Formula are valid. – YES,
Aminoil has to pay whatever is due.
3. WON the Decree Law was a valid act of nationalization. – YES, what is is
prohibited is a nationalization of confiscatory character.

RULING: WHEREFORE, the instant petition is PARTIALLY GRANTED. The
decision of the CA insofar as it affirmed MTRCB’s jurisdiction of MTRCB to
review is hereby AFFIRMED with the MODIFICATION that the suspension order
against GMA be declared NULL AND VOID.
RATIO:
On which law is applicable
1. Kuwait law is a highly evolved system as to which the government has been
at pains to stress that established public international law is necessarily a
part of the law of Kuwait.
a. The general principles of law are part of public international law.
2. Kuwait is a sovereign state entrusted with the interests of a national
community, the law of which constitutes an essential part of intra-
community relations within the State.
3. Basically, they can apply both Kuwaiti law and public international law.
They are not inconsistent with each other.
On the validity of the 1973 Agreement and the Abu Dhabi formula:
1. The 1973 Draft Agreement and the Abu Dhabi Formula were valid and
applicable to Aminoil’s Concession.
2. Aminoil owed to Kuwait what was due under the said agreement and
formula.
a. One of the allegations of Kuwait was that Aminoil did not pay the
amounts due based on the agreements.
On the issue of nationalization
1. The main issue regarding this is whether or not the Decree Law was a
valid act of nationalization.
a. The stabilization clause on the Concession Agreement, in essence,
prevented the Sheikh from unilaterally modifying or annulling the
concession, apart from certain grounds.
2. Tribunal said that the stabilization clause wasn’t a prohibition of
nationalization.
a. There was a change in circumstances considering that Kuwait
already became independent (note that they already terminated the
special relation with UK and they already had their Constitution).
b. Contractual limitations on the state’s right to nationalize are
juridically possible.
i. In the present case, the existence of such a stipulation would
have to be presumed as being covered by the stabilsation
clauses.
ii. A limitation on the sovereign rights of the State is all the less to
be presumed where the concessionaire is in any event
inpossession of important guarantees regarding its essential
interests in the shape of a legal right to eventual compensation.
c. So the stabilization clause no longer possessed its former absolute
character, rather, the clause prohibited nationalizations of
confiscatory character, meaning those without proper
indemnification.
3. If the tribunal holds that it can’t interpret the articles as absolutely
forbidding nationalization, it is nevertheless the fact that these
provisions are far from having lost all their value and efficacity on that
account since, by impliedly requiring that nationalization shall not have
any confiscatory character, they reinforce the necessity for a proper
indemnification as a condition of it.
On the indemnification
1. Kuwait: It owes no more to Aminoil than the net book value of the assets
transferred to the State.
2. Aminoil: Bring in all the revenues which it would have received up to the
expiry of the concessionary period, these revenues being quantified on the
basis of the 1961 Agreement by means of projections as to the amount of oil
produced, the cost of producing it, and the price of oil during the period.
3. Applicable general rules:
a. Tribunal considers that the determination of the amount of an award of
“appropriate” compensation is better carried out by means of an
enquiry into all the circumstances relevant to the particular concrete
case.
b. Even the Charter of the Economic Rights and Duties of States,
recommended taking into all the circumstances in order to determine
the amount of compensation—which does not in any way exclude a
substantial indemnity.
c. Compensation must be calculated on a basis such as to warrant the
upkeep of a flow of investment in the future.
d. Legitimate Expectations – there must necessarily be economic
calculations, weighing-up of rights and obligations, chances, risks,
constituting the contractual equilibrium.
4. Circumstances specific to Aminoil’s case:
a. For Aminoil they had 2 choices for methods:
i. Method based on the sum total of the anticipated profits, reckoned
to the natural termination of the Concession, but discounted at an
annual rate of interest in order to express that total in terms of its
“present value” on the day when the indemnification is due.
ii. Method whereby total anticipated profits are counted and
discounted in the same way over a limited period of years only, but
taking countervailing account of the value of the assets.
5. Tribunal agrees that both of the methods of Aminoil can be considered, but
it is better to employ a combination of methods.
a. But they also disagree with the assumption and calculations of Aminoil
on 2 points:
i. Tribunal can’t accept the projections as to the future of petroleum
industry based on the consultations of experts that the Company
 has relied upon. Since it has to be based on reasonable rates of
return.
b. Kuwait, on the other hand, claims that the only compensation Aminoil
was entitled to claim must be determined by precedents resulting from
a series of transnational negotiations and agreements about co
mpensation
i. But tribunal can’t use the basis of the government since: regarding
reasons of fact, the negotiations about compensation are complex
since they include a lot of things like bilateral agreements, etc and
not all contracts have been made public. It also claimed that in the
course of nationalizations of oil concessions that had occurred in
the Middle East, this method had acquired an international and
customary character.
6. The tribunal decided that it would be “just and reasonable” to take some
measure of account of all the elements of the undertaking:
a. Value of the undertaking itself (going concern)
b. Value of the totality of assets

Sir G. Fitzmaurice, Separate Opinion:

** I only included the important point in relation to the topic, which basically he just
said that just because you put in compensation it doesn’t mean na hindi na siya
confiscatory.
1. Concluded that Aminoil remound bound and liable for payments still due at
the date of the take-over for certain period.
2. Felt that Aminoil made reasonable offers regarding the Abu Dhabi account,
but Kuwait just didn’t accept it.
3. Regarding the stabilization clause, he said that the clauses aren’t really
concerned with confiscation, but actually terminating the Concession before
the time given.
a. It is illusory that monetary compensation alone removes the
confiscatory element from a take-over.
b. When a company procures insertion of such clause, the aim is not to
obtain the money if the article is breached, but to guarantee if possible
that it is not breached.