INTERNATIONAL CENTRE FOR THE SETTLEMENT OF INVESTMENT DISPUTES ARBITRAL TRIBUNAL:
[November 21, 1984]
Synopsis of Facts**
This case concerns events surrounding the construction and subsequent management of a hotel in Jakarta, Indonesia.
In brief, an Indonesian company named P.T. Bluntas (Persarom Tarbatas Pembangunan den Pengurus Flat Bluntas) began construction of a hotel in 1964, but stopped in 1965 due to a lack of funds. By order of the Indonesian government, F.T. Bluntas, was reorganized under the new name of P.T. Wisma (Persarom Tarbatas Pembangunan dan Pengurusan Wisma "Kartika") and placed under the control of INKOPAD (Induk Koperasi Angatan Darat), a cooperative established under Indonesian law for the welfare of active and retired Indonesian Army personnel.
In 1968, P.T. Wisma found an American investor, AMCO, to complete the construction of the hotel and undertake its management afterward for a limited period of time under a "Lease and Management [profit-sharing] Agreement."
AMCO was successful in obtaining an investment license from the Indonesian government to perform the profit-sharing agreement, so it formed, as required, an Indonesian company, P.T. AMCO, to do so. The hotel construction was completed substantially as planned, but a dispute arose over AMCO's performance of the management portion of the Agreement.
The dispute could not be resolved between P.T. AMCO and P.T. Wisma, so finally, in 1980, P.T. Wisma sought to discontinue AMCO's involvement in the arrangement. According to testimony in the case, P.T. Wisma enlisted armed forces of the Indonesian government to takeover control and ownership of the hotel from the American company and persuaded the Indonesian government (specifically the Indonesian Foreign investment Board (Bodan Koordinasi Penannanam Modal), also known as BKPM) to revoke its investment license to P.T. AMCO. Both events, the management takeover of the hotel and the revocation of AMCO's investment license, were then sanctioned by an Indonesian Court in an action brought by P.T. Wisma, and the Court's decision was finally affirmed by the Indonesian Appellate Court.
On January 15, 1981, P.T. AMCO, AMCO and another, joint investor (PAN AMERICAN DEVELOPMENT, LIMITED, of Hong Kong) filed for arbitration against the Indonesian government with the Secretary General of the International Centre for Settlement of investment Disputes (ICSID), disputing the management takeover of the hotel, the revocation of their investment license, and the decision of the Indonesian Courts, and requesting that damages be awarded against the Indonesian government in the amount of $ 9 million plus interest, costs and fees.
ii) Secondly, the State is entitled to withdraw the approval of an investment application, where the applicant does not fulfill, once the approval was granted, the obligations the applicant offered to undertake.
In this respect, there is substantially no fundamental difference between the position of the State and that of a party to a synallagmatic contract. Indeed, a contracting party may, in almost all legal systems, terminate the contract where the other party does not perform its obligations.
244. The withdrawal of the investment authorization, decided without .due process being granted to the investor, and for reasons which did not justify it in substance, commits the liability of the Republic of Indonesia under Indonesian as well as under international law, that is to say under the two systems of law applicable in the instant case.
245. The three provisions of the Indonesian regulations apparently in forte at the date of the revocation, which provide directly for sanctions that can be decided against the investor, including the revocation of the investment's approval (namely: article 4 of Decree No 63/1969 article 6 of Decree No 54/77 and article 13 of B.K.P.M. Chairman's Decree N 01/1977) have been previously cited (see above, para. 193).
According to all these provisions, sanctions in general, and revocation in particular, can be decided only where the investor does not fulfil his own obligations, and in addition, according to article 13, par. 3 of B.K.P.M. Chairman's Decree No 01/1977, after at least one, and possibly three warnings have been given to the investor.
246. Now, in the instant case, no warnings were given, and more generally, due process was not granted to the investor, whereas the right to due process is undoubtedly granted and protected by Indonesian law, like by the laws of all modern countries. Furthermore, no material failures to the investor's obligations justified the revocation. Accordingly, in both respects, the revocation amounted to a violation of a fundamental principle and of relevant particular provisions of Indonesian law; be it only for this reason, it commited the state's liability, in the framework of its own legal system.
i) It has been shown above that even if the application-authorization combination can not be, strictly speaking, identified with a private law contract, it is nevertheless dose to this legal feature, since it is formed by a meeting of minds and wills engendering reciprocal obligations; indeed, the difference is that where public interest is at stake, the state might alter or withdraw the authorization, not, however, without compensating the recipient of the same for the prejudice the latter suffers.
As a result, where the revocation is not justified by public interest - nor, as in the instant case, by the alleged failures of the investor on which the decision is based - it consists in a violation of obligations undertaken by the state, readily comparable to a violation of contractual obligations. Therefore, the fundamental principle of pacta sunt servanda, embodied in the Indonesian Civil Code by article 1338 (contracts are the law of the parties), is to be applied; the consequence of said application is that the State's liability is commited in this respect as well.
ii) Moreover, if the assimilation of the application-authorization combination to a contract -(still under the reservation of public interest)- would be rejected, it should nonetheless be admitted that by deciding that the applicant is granted rights deriving from legal and regulatory provisions, and by then withdrawing said rights without due process nor substantial justification, the State has commited a wrong, for which it is liable, according, here again, to a fundamental principle embodied in article 1365 of the Indonesian Civil Code:
"Persons responsible for any act in violation of the law
"which results in a loss to another Party are obliged to
"replace Said loss".
248. The principle pacta sunt servanda is a principle of international law.
i) First, it is so because of it being a general principle of law in the meaning of article 38 of the Statutes of the International Court of Justice, since it is common to all legal systems in which the insti- 1034 tution of contract is known.
Indeed, the principle is basic to this institution. As a highly competent American scholar puts it; contract or agreement seeks to secure cooperation to achieve social purposes by the use of promises given in exchanges arrived at through bargain..." (E. A. Farnsworth, The Past of Promise: An Historical Introduction to Contract, 69 Columbia Law Review 576, at 578 (1969). Contract as a principle of ordering rests an the proposition that individuals and legal entities make, for their own accounts and on their own responsibility. significant decisions respecting resource utilization and allocation. The form of order which a society seeks to achieve by accepting the institution of contract thus depends upon the recognition that, in principle, pacta sunt servanda. It follows that the binding force of contractual duties for parties to a contract or agreement is recognized in every legal order that utilises the institution of contract.
Thus, for instance, the principle is embodied in civil law systems; it finds its classical expression in article 1134 of the French Civil Code:
"Agreements lawfully made take place of the law for those who
"have made them. They cannot be revoked except by mutual consent
"or on grounds allowed by law.
"They must be performed in good faith".
The principle is no less vigorous at common law. A remarkable affirmation of it was made by Jessel, M.R., in 1875 (Printing and Numerical Registering Co. v. Samp (1875) L.R. 19 Eq. 462, at 465:
".... if there is one thing which more than another public
"policy requires it is that men of full age and competent
"understanding shall have the utmost liberty of contracting, and
"that their contracts when entered into freely and voluntarily
"shall be held sacred and shall be enforced by Courts of Justice"
(See also, for american law: Stees v. Leonard, 20 Minn. 494, 503 (1874); A. Von Mehren and J. Gordley, The Civil Law System, 1106 (2d ed. 1977): "The common law treats any failure to perform a duty imposed by a contractual relationship as presumptively a breach of contract and then considers the question whether, under the circumstances, the failure to perform should be excused"; E.A. Farnsworth, Contracts 647 (1982), who speaks of "... the general rule that duties imposed by contract are absolute").
Not referring to examples taken in all legal systems, it is nonetheless worthwhile to note that pacta sunt servanda is also a principle of traditional islamic law (see, eg.: Saudi Arabia v. Arabian American Oil Company (Aramco), 27 ILR 117 (1958), at 163-164; Texaco Overseas Petroleum Company (TOPCO) and California Asiatic Oil Company v. The Government of Lybian Arab Republic (53 ILR 422, 1977 Award at 164).
ii) The principle of pacta sunt servanda was stated again in article 26 of the Vienna Convention on the law of treaties (May 23,1969).*
To be sure, the transposition of this principle to agreements between States and private enterprises is debated in contemporary doctrine. However, the Tribunal is bound to note that it was applied in leading international awards (see, eg. the Aramco and TOPCO awards, above mentioned,: adde: Sapphire International Oil Company v. National Iranian Oil Company, 35 ILR 136, at 181 (1968); Libyan American Oil Company v. Government of the Libyan Arab Republic, 62 ILR 41 (1977) at 170, 190).
iii) Now, as already said, the relationship between the parties to the instant case, engendered by the application to invest and the approval thereof is not identical to a private law contract, however close it may be to the same.
Be that as it may, it must be pointed out that the above mentioned international awards were made in cases where the dispute concerned contracts of concession. The nature of such contracts is itself debated and it has in particular been contended that the concession resulted from an unilateral act of the State, or at least that it was an administrative contract following the pattern offered by French law. Not wishing to enter into this debate, which would not be directly relevant in the instant case, the Tribunal wishes to underscore that this state of affairs did not prevent the international arbitral tribunals from deciding that the State was bound by the obligations undertaken in concession contracts, except when allowed by law to depart from them.
Moreover, even if the relationship here in dispute does not constitute, properly speaking, a concession contract, nor derives from such a contract, it remains that there is a significant resemblance between these 1035 two legal structures: indeed, when authorizing a company to invest, the State grants it rights to create and operate local economic enterprises. This a state also does by a concession contract.
iv) Accordingly, the basic concept which underlies pacta sunt servanda leads necessarily to the application, in the instant case, of the very contents of the same: the party who has undertaken obligations is bound to perform them, except for cases established by law, and this fundamental rule applies to States as well as to private entities or persons.
v) Moreover, independently from pacta sunt servanda and its logically and morally necessary extension in the present case, another principle of international law can be considered to be the basis of the Republic's international liability: it is the principle of respect of acquired rights (see, eg.: P.C.I.J., Judgment of May 25 th, 1926, German interests in Polish Upper Silesia (Merits), Series A, No 7 (1926) at 22 and 44; Aramco Award, cited above, at 168, 205; Starett Housing Corp. v. Iran* (1984), decision of the Iran-United States Claim Tribunal, Iranian Assets Lit. Rep. 7685 (1983); Award in the Shufeldt Claim, July 24, 1930, U.N. Reports of international arbitral awards, Vol. II, XXVII, at 1081, 1097).
Indeed, by receiving the authorization to invest, AMCO was bestowed with acquired rights (to realize the investment, to operate it with a reasonable expectation to make profit and to have the benefit of the incentives provided by law). These were transmitted to the Indonesian entity, P.T. AMCO, created in conformity with said authorization and with Indonesian Law, and then partially, upon authorization by the competent authority, to PAN AMERICAN.
These acquired rights could not be withdrawn by the Republic, except by observing the legal requisites of procedural conditions established by law, and for reasons admitted by the latter. In fact, the Republic did withdraw such rights, not observing the legal requisites of procedure, and for reasons which, according to law, did not justify the said withdrawal: The principle of respect of acquired rights was thus infringed, and the Republic has committed its international liability also in this respect.
249. Not to admit international liability in the circumstances of this case, would amount to disregard of the very aim of the ICSID Convention as solemnly expressed in the very first sentence of its Preamble:
"The Contracting States
"Considering the need for international cooperation for
"economic development and the role of private international
It is in order to take this need and role into account, by protecting host States as well as foreign investors that the Convention was concluded. To deny the host State's liability where the same infringes the obligations undertaken towards the investor - as well as to refuse, in other instances; the investor's liability where he infringes his own obligations -would move to empty the ICSID Convention of any meaning.
250. The Respondent's liability towards Claimants being thus established, the Tribunal will now examine the prejudice which resulted for the Claimants from the State's organs actions, and determine the amount of damages to be awarded in order to compensate said prejudice.
251. The Tribunal will first examine the nature and the extent of the prejudice suffered by the Claimants, and then establish the causal link between the illegal acts committed by the Respondent and said prejudice.
252. The events that occurred from April I, 1980 onwards, as described in Part I, Chapter II (Facts) above deprived the Claimants of the 1036 right to operate the Hotel Kartika Plaza, granted them by the approval of AMCO's application to invest, which referred to the Lease and Management Agreement previously concluded between AMCO ASIA CORPORATION and P. T. Wisma Kartika, or, as far as the taking of the hotel's possession an April I, 1980 is concerned, of the actual exercising of said right.
In addition, the revocation of the license deprived the Claimants from the right to possibly invest in Indonesian enterprises active in the field described in the application . . . . .
c) 262. The third cause of prejudice relied upon by Claimants are the Jakarta Court decisions themselves.
. . . . . .
However, as earlier stated, the Tribunal does not accept that these decisions of and by themselves can commit the State's international responsibility vis-à-vis the Claimants . . . . .
264. The Tribunal will now establish the legal bases of the calculation of damages to be awarded in order to compensate the prejudice, and then proceed to said calculation.
266. The principles governing damages for contractual liability hardly leave room for discussion.
In Indonesian law, like in all systems of civil law, damages are to compensate the whole prejudice, whose two classical components are the lass suffered (damnum emergens) and the expected profits which are lost (lucrum cessans).
Indeed, Article 1246 of the Indonesian Civil Code (Cl. Statement of Law Documents, Doc.R) provides as follows: "Cost, losses and interest which a claimant may claim shall consist of, in general, losses already suffered and profit which he would otherwise enjoy, subject to the exceptions and qualifications set forth below."
Such exceptions and qualifications concern mainly the contractual limitation of liability (which is of course not met in the instant case), and the requirement of directness and foreseeability of the prejudice, which will be taken into account in the calculation of the damages (see hereunder, para. 268, 269 ff.).
Likewise, article 1149 of the French Civil Code - which has been used as a model by many other civil law systems - reads as follows:
"the damages due to the creditor amount in general to the loss
"which he has sustained and the profit of which he has been
"deprived, except as provided in the exceptions and qualifications below".
In this respect, the Tribunal can only adhere to the enlightening explanations presented by Professor Bernard AUDIT in the legal opinion he delivered to counsel for respondent (Resp.Leg.App., Vol. VIIl, 2-2), at pages 6 to 10. Indeed, "the loss sustained must be ascertainable"; "a future loss can be ascertained"; "a loss of profits constitutes a remediable loss"; "the loss must be foreseeable".
The same basic principles are met in common law. The rule of English law is that "where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation with respect to damages, as if the contract had been performed" (Robinson v. Harman (1848) 1 Exch. 850, at 855; and in particular as to loss of profits Anson's Law of contract, 25th (Centenary) edition, by A.G. Guest, Oxford 1982, at 553). In the law of the United States, the Courts or arbitral tribunals attempt to put the injured party in as good a position as he would have been in if the contract had been performed (Restatment Second on Contracts § 344; Uniform Commercial Code § 1-106 (1)).
267. Thus, the full compensation of prejudice, by awarding to the injured party the damnum emergens and the lucrum cessans is a principle 1037 common to the main systems of municipal law, and therefore, a general principle of law which may be considered as a source of international law.
Moreover, the same principle has been applied, in cases of breach of contract by a State (and in particular, in cases of breach of a concession contract which are closely comparable to an unjustified revocation of a license to invest) by a number of authoritative international judicial decisions and awards.
One could say that the basic precedent in this respect is to be found in the decision Chorzow Factory (Germany v. Poland, 1928 P.C.I.J., ser. A; no 17) where the Permanent Court of International Justice stated as follows:
"The essential principle contained in the actual notion of
"an illegal act -- a principle which seems to be established
"by international practice and in particular by the decisions of
"arbitral tribunals -- is that reparation must, as far as
"possible, wipe out all the consequences of the illegal act and
"reestablish the situation which would, in all probability, have
"existed if that act had not been committed. Restitution in kind,
"or, if this is not possible, payment of a sum corresponding to
"the value which a restitution in kind would bear; the award,
"if need be, of damages for loss sustained which would not
"be covered by restitution in kind or payment in place of it -
"such are the principles which should serve to determine the
"amount of compensation due for an act contrary to international
Many international awards have taken the same position. before o after the P.C.I.J.'s decision in the Chorzow case (see, e.g.: Lena Goldfield 1930, 36 Cornell L.R. at 51; Shufeldt, cited above, para 248-v; Sapphire, 351.L.R. 136 at 185-186 (1963); Norwegian Shipowner's Claims, 1.R. Int'l Arb Awards 307 (1922), at 338; Lighthouses Arbitration (France v. Greece), 23 ILR 299 (1956) at 300 - 301).
268. Applying the same principles, the Tribunal will grant, in the instant case, damages calculated to fully compensate the prejudice suffered by the Claimants.
Before proceeding to this calculation, the Tribunal has to state that here again, according to principles and rules common to the main national legal systems and to international law, the damages to be awarded must cover only the direct and foreseeable prejudice. The requirement of directness is but a consequence of the requirement of a causal link between the failure and the prejudice; and the requirement of foreseeability is met practically everywhere (see eg.: for French Law, Civil Code, article 1150: "The debtor can only be liable for the damages which were forseseen or foreseeable at the time the contract was entered into, unless the contractual obligation was not performed due to his own fundamental act"; cf. Legal opinion of Professor Audit, Resp.-Leg.App.,
Vol. VIII, Z 2, at 8; for english law: Hadley v. Baxendale (1854) 9 Exch. 341; Anson's Law of Contract, 25 th ed., by A.G. Guest, at 555; for international law: D.P. O'Connell, International Law. 2nd ed, Vol. Two, at 117 ff, and the cases cited, footnote 24).
*Reproduced from the text provided to International Legal Materials by Coudert Brothers, attorneys for the claimants. In submitting the decision to I.L.M., they stated: "We believe that the Tribunals unanimous decision is the product of substantial study by eminent international jurists and that its publication will not only be of interest to the international bar but will serve to advance international law and order generally, and specifically the purposes of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States."
**The facts have been summarized, and the Award on the Merits has been excerpted, by Samuel Bettwy, I.L.M. Assistant Editor for the International Law Information System Project Elipses indicate omissions.
*See 8 I. L. M. 690 (1969).
*See 23 I.L.M. 1090 (1984).