Sapphire International Petroleums Ltd. v National Iranian Oil Company

Year of the award: 1963
Forum/Rules: Ad Hoc Tribunal
Applicable law: General principles of law

Arbitrator:
Mr Pierre Cavin

Executive summary

In 1958, the National Iranian Oil Company (NIOC) and Sapphire Petroleums Ltd (Sapphire), a Canadian company, entered into a contract to expand the production and exportation of Iranian oil. The parties set up the Iranian Canada Oil Company (IRCAN) to carry out the terms of the contract on behalf of the parties.

Sapphire International, Sapphire's subsidiary to which the Sapphire assigned the contract shortly after its conclusion, started works in the concession area and subsequently claimed the reimbursement of it expenses through IRCAN, as agreed in the contract. However, NIOC refused to reimburse the expenses arguing that Sapphire International had not consulted NIOC before carrying out its operations. As a result, Sapphire International did not start drilling in the concession area as planned, and NIOC subsequently repudiated the contract on the basis that Sapphire International had not fulfilled its drilling obligations.

In September 1960, Sapphire initiated arbitration proceedings pursuant to the contract, claiming the breach of contract and requesting compensation for expenses (incurred before and after the conclusion of the contract), loss of profit and the refund the US$350,000 indemnity, provided by Sapphire as a guarantee at the time of the contract conclusion, later cashed by NIOC.

The Tribunal found that NIOC was in breach of contract and was liable to pay damages to Sapphire International. The arbitrator held that the object of damages was to put the party to whom they were awarded in the position they would have been if the contract had been performed. He ruled that the plaintiff should be given full compensation on the basis of 'damnum emergens' and 'lucrum cessans'. He ordered compensation for the expenses incurred by the plaintiff after the conclusion of the contract, and the refund of the indemnity. However, the claim for expenses incurred before the conclusion of the contract was denied on the basis that this would have put the plaintiff in the position it would have been had it not concluded the agreement.

The arbitrator found that the claimant was entitled to an award for loss of profits due to a loss of opportunity to make profit. He held that even where the amount of profit could not be determined precisely, showing sufficient probability of making a profit was enough to show entitlement to compensation. The arbitrator resorted to the principle of 'ex aequo et bono' (in this context, judicial discretion) to determine the amount of the compensation for the loss of opportunity on the basis of available evidence. The defendant was also ordered to pay the amount of indemnity as well as compound interest at the rate of 5% and plaintiff's costs.