The Practice of Arbitration

Essays in Honour of Hans van Houtte

Patrick Wautelet, Thalia Kruger, Govert Coppens, Patrick Wautelet, Thalia Kruger, Govert Coppens

• Publisher: Hart Publishing
• Year: 2012
• ISBN:
  9781782250043
• Edition: 1
• Topic: Derecho
• Subtopic: Arbitraje, negociación y mediación en el derecho

This book offers a series of commentaries on noteworthy arbitral awards and court decisions on arbitration. All contributions focus on the practice of arbitration. Influential authors with proven arbitration experience share their insights on celebrated and less well-known cases, drawn from various countries, various arbitration institutions and including both commercial and investment arbitration. This collection of essays celebrates the work and scholarship of Hans van Houtte, who has been a professor of international commercial arbitration at the University of Leuven for more than 20 years. In addition to his widely -praised contribution to the theory of arbitration, Professor Van Houtte has built a long career in the practice of arbitration, presiding over a vast array of arbitral tribunals and holding appointments to international tribunals, most recently as president of the Iran-US Claims Tribunal. Hans van Houtte has always been concerned with the practical usefulness of scholarly writings, and this book respects this approach. This volume will prove essential for all arbitration practitioners and will also be of great interest also to academics and research students with an interest in international arbitration. This title is included in Bloomsbury Professional's International Arbitration online service.

II

The Arbitral Process

7

Force Majeure in International Contract Law

A Comment on National Oil Corporation v Sun Oil

KLAUS PETER BERGER¹ AND OLIVIA JOHANNA ERDELYI²

INTRODUCTION

In international contractual relationships, unforeseen circumstances frequently hamper the performance of contractual obligations. Long-term contracts, which extend over a longer period of time, sometimes comprising several decades, are even more vulnerable to the risk posed by changing circumstances. Very often, these circumstances put parties of a contract into the difficult position of having to decide whether their contract should be performed as initially agreed upon or whether the aggrieved party should be partially or fully exempt from his obligation. Due to the obvious conflict of interests inherent in such situations, the parties generally have a hard time resolving this conflict. In fact, disputes of this kind usually escalate to a point at which the parties see no other option than to pursue their perceived legal rights and economic interests by referring the matter to dispute resolution before international arbitral tribunals. It is only then that the parties realise that they did not pay enough attention to the careful wording of the relevant contract clauses during their contract negotiations.

This contribution aims to show the unpleasant consequences that unambiguous contract drafting may entail for the parties with respect to the application and interpretation of force majeure clauses in international long-term contracts by highlighting the problems that the arbitral tribunal encountered in ICC Case No 4462.³ It will further discuss the lessons that should be learnt from this case with respect to the drafting of force majeure clauses in international contracts.

THE ETERNAL CONFLICT: PACTA SUNT SERVANDA VERSUS GOOD FAITH

The starting point of every decision in such disputes is the eternal conflict between two fundamental and classical principles of contract law: the general principle of pacta sunt servanda (sanctity of contracts) and good faith. The former concept safeguards legal certainty, requiring that contracts are enforced pursuant to their originally agreed terms. Under the latter principle, however, a party’s non-performance may be excused if circumstances which were not foreseeable when the contract was concluded render the performance of a party so excessively onerous or even impossible that insisting on the originally agreed performance would be against good faith or even immoral.⁴ The ICC arbitral tribunal in ICC Award No 5953 has formulated this close connection between the principles of pacta sunt servanda and good faith as follows:

Another principle, albeit with a reduced degree of generality because it only concerns the execution of contracts, is formulated by the maxim ‘pacta sunt servanda.’ The respect for this rule requires parties to execute their contractual undertakings. However, the modalities of this execution are not indicated [by this general rule]. It is the . . . principle [of good faith] which provides this precision in a way that one can merge both principles into one when it comes to the performance of a contractual obligation: ‘pacta sunt servanda bona fide.’⁵

It is thus undisputed that exemptions from the fundamental principle of the sanctity of contracts are necessary and they exist in different forms in all legal systems as well as in international contract law.⁶ The defence of force majeure, on which this contribution focuses, is one internationally accepted exemption having the effect of releasing the obligor of his contractual obligations in the event that performance becomes impossible due to an external event beyond his control that was unforeseeable for him at the time of the conclusion of the contract.⁷

This problem is particularly significant in international contract law for several reasons. Given the substantial differences in the legal and political framework of the respective national jurisdictions, international business transactions involve an elevated number of risk factors in comparison to contracts merely having links to a sole jurisdiction. A further difficulty results from the fact that national law is often ill adapted to deal with problems arising out of international contracts. Even if this is not the case, international businessmen still have a general mistrust of foreign national rules and are reluctant to accept them. Parties to long-term contracts in particular are confronted with a further risk factor in comparison to one-off contracts, namely time itself. The longer their lifespan – often covering several decades – the greater the likelihood that external circumstances change and may render performance for one side impossible or at least totally unprofitable. Contractual risk management is hard to achieve in such scenarios because it is often impossible for the parties to foresee developments of the distant future.

Arbitral tribunals concerned with such disputes resulting from international contracts make their decisions taking into account three criteria, namely the will of the parties reflected by the force majeure clause of the relevant contract, the applicable substantive law, and internationally accepted general principles of law, such as force majeure among others, which are clearly defined in several international conventions and soft law codifications.⁸ The case law of the Iran-United States Claims Tribunal provides a perfect example of the use of general principles of laws by international arbitral tribunals because the Tribunal’s applications of the force majeure concept have rested entirely (implicitly or explicitly) on general principles and there has been little or no application of national law in this area.⁹

However, domestic laws and general principles of law cannot be seen in isolation. Their application is always embedded in the contextual framework of the contract itself. Ideally, the parties have included a force majeure clause into their contract which is drafted in a manner that clearly reflects the will of the contracting parties by unequivocally defining the scope and extent of the force majeure defence of the non-performing party. Experience suggests, however, that the parties often fail to provide a sufficiently clear wording, forcing the arbitral tribunal to explore all possible interpretations of the force majeure clause in question in order to determine its content and its relationship with comparable defences under the law applicable to the contract. In such a case, the primary source of information regarding the will of the parties is the ambiguous contract clause itself, to which the arbitral tribunal consequently first resorts. The applicable substantive law determined by the choice of the parties or by rules of conflict of laws contained in the arbitration law of the seat of the arbitration provides further indication should the contract clause be insufficient by itself. As far as general principles of law are concerned, arbitral tribunals have to consider them if the parties decide that their contract be governed by such principles. But even in the event of a choice of law clause providing for the application of a domestic law, arbitrators have an increasing tendency to take into account general principles of law to interpret the applicable domestic law in an internationally useful fashion¹⁰ or simply to make their award more persuasive.¹¹ The reason why general principles of law are able to provide support to arbitral awards lies in their transnational nature. They are elaborated based on a comparative analysis of different national legal notions reflecting the practical solutions embodied in them, while being free of the dogmatic specificities of domestic legal systems.¹² Consequently, recourse to such principles allows for a pragmatic approach in decision making focusing on the function of legal concepts rather than on their dogmatic origin.¹³ As Hans van Houtte has rightly stated:

The business community is not governed by a ‘rulebook’ but rather by principles. Parties to an international contract submit themselves to the legal principles of international trade and, at the same time, reserve the right to adapt these principles to the case at stake.¹⁴

Obviously, the parties can only resolve some of the difficulties encountered in international contractual relationships by drafting their contracts clearly and unambiguously. It is, however, equally important that both national and international contract law contain clear and well-defined rules regarding force majeure, furnishing arbitral tribunals with sufficient legal basis to decide international contractual disputes. Due to their acceptance by the international business community, general principles of law are particularly suitable to serve as such a legal basis. This is why it is crucial that the legal principle of force majeure contains clear and precise rules on which arbitral tribunals can rely, as opposed to vague concepts requiring extensive interpretation. Through their judgments and arbitral awards, courts and, in international contract law especially, arbitral tribunals significantly contribute to the development of these general legal principles. ICC Award No 4462 provides an example of the influence of arbitral case law on the evolution of a transnational principle of force majeure and also of the intricate problems which international arbitral tribunals are facing in reconciling the applicable domestic law, general principles of law and the wording of the relevant contract clause.

SUMMARY OF THE CASE

On 20 November 1980, the claimant, National Oil Corporation (NOC), a Libyan state enterprise, and the respondent, Libyan Sun Oil Company (Sun Oil), a company incorporated in the USA, concluded an Exploration and Production Sharing Agreement (EPSA). The EPSA obliged Sun Oil to undertake, finance and carry out an oil exploration programme in Libya, which was to be governed by and interpreted according to Libyan law, and contained an ICC arbitration clause. The agreement was concluded for a term of 20 years and contained the following provision:

Article 22 – Force Majeure

22.1. Excuse of Obligations

Any failure or delay on the part of a Party in the performance of its obligations or duties hereunder shall be excused to the extent attributable to force majeure. Force majeure shall include, without limitation: Acts of God, insurrection, riots, war, and any unforeseen circumstances and acts beyond the control of such Party.

22.2. Extension of Term; Termination

If operations are delayed, curtailed or prevented by force majeure, and the time for carrying out obligations under this Agreement is thereby affected . . .

On 9 December 1981, the US Government issued a Passport Order declaring US passports to be no longer valid for travelling to Libya. Under reference of this Passport Order, Sun Oil suspended performance and invoked the force majeure provision of the EPSA. It claimed that in light of the fact that all of its personnel consisted of US citizens, who were now unable to enter Libya, the further performance of the EPSA became impossible for it.

On 12 March 1982, the US Government adopted a regulation that limited exports to Libya. The regulation required Sun Oil to obtain a licence in order to continue its operations in Libya, but the company’s application for such a licence was denied. Sun Oil then invoked Article 22 EPSA, again stating that the export regulation constituted a further event of force majeure according to that provision.

NOC, however, refused to accept any of these events as constituting force majeure and initiated arbitration proceedings before the ICC on 19 July 1982. On 31 May 1985, the ICC Arbitral Tribunal rendered a first award on the issue of force majeure in favour of NOC, which was followed by a final award on 23 February 1987 also in favour of NOC.¹⁵

INTERPRETATION OF ARTICLE 22 EPSA BY THE ARBITRAL TRIBUNAL

The main difficulty for the arbitral tribunal in ICC Case No 4462 resulted from the fact that Article 22, the force majeure provision of the EPSA, differed from Article 360 Libyan Civil Code, a non-mandatory provision of the proper law of the contract dealing with force majeure. However, the wording of the force majeure clause was ambiguous, leading to the problem that while the mere fact that the parties inserted the clause in their agreement showed their intention to modify Article 360 Libyan Civil Code, the scope and extent of the intended modification remained unclear. Given that the actual content of Article 22 EPSA was moot between the parties, the arbitral tribunal had to construe it in light of the applicable substantive law, notably Article 360 Libyan Civil Code.

Absence of Definition of Force Majeure

The gravest mistake the parties made was that they failed to provide any definition, let alone a clear one, as to what circumstances constituted force majeure under the EPSA. On the contrary, Article 22 EPSA only indicated the situation in which force majeure may be invoked (‘failure or delay . . . in the performance of . . . obligations or duties’), the effects it has once being established (‘failure or delay . . . shall be excused to the extent attributable to force majeure‘If operations are delayed, curtailed or prevented by force majeure . . . and the time for carrying out obligations . . . is thereby affected’) and provided a non-exhaustive list of circumstances that constitute force majeure (‘Force majeure shall include, without limitation: . . . any unforeseen circumstances and acts beyond the control of such Party’). Comparing this wording with Article 360 Libyan Civil Code, one can see that Article 22 EPSA adopted some elements of the definition laid down in that provision in slightly modified form, making the force majeure clause even more obscure.

Article 360 Libyan Civil Code contains the following broad and general definition of force majeure:

An obligation is extinguished if the debtor establishes that his performance has become impossible by reason of causes beyond his control.

As interpreted by the Supreme Court of Libya, this provision provides for the obligor’s release of his contractual obligations if an event of force majeure is established. An event qualifies as force majeure...