## Facts

- A 1958 Iranian oil concession agreement granted a foreign company the right to explore for, and if successful jointly exploit, petroleum in Iran under a staged exploration–exploitation structure.
- During the exploration period, the foreign company was to have “full exclusive and effective management and control,” subject to consultation and reporting to the Iranian state oil company (NIOC).
- The concession rights were assigned to Sapphire International Petroleums Ltd., which undertook early exploration work (including surveys) within contractual time limits.
- Disputes arose over whether NIOC could require consent for each exploration operation; NIOC insisted on extensive approval authority and treated the foreign company’s consultation and reporting as insufficient.
- NIOC’s stance caused delays and obstruction, and NIOC ultimately treated the concession as terminated or otherwise prevented continued performance.
- The contract’s arbitration clause provided for party-appointed arbitrators and an umpire, with a mechanism for appointment of a sole arbitrator by the President of the Swiss Federal Supreme Court if a party failed to appoint.
- NIOC refused to appoint an arbitrator, challenged the assignment as to the arbitration clause, and largely declined to participate in the arbitration after a sole arbitrator (Judge Pierre Cavin) was appointed in Switzerland.

## Issues

1. Whether the sole arbitrator was validly appointed and had jurisdiction despite NIOC’s failure to appoint an arbitrator and subsequent non-participation.
2. In the absence of an express choice-of-law clause, whether the concession was governed by Iranian law, the law of the arbitral seat, or general principles of law.
3. Whether NIOC’s conduct constituted a fundamental breach of the concession, including breach of good faith and contractual cooperation duties.
4. What measure of damages was appropriate, including recovery of expenditures and compensation for lost profits or loss of opportunity to discover and exploit النفط.

## Decision

- The arbitrator held he had jurisdiction because the contractual conditions for appointment of a sole arbitrator were satisfied by NIOC’s failure to appoint within the agreed period.
- The arbitrator treated the appointing authority’s decision as binding for purposes of the arbitration and proceeded despite NIOC’s default, provided notice and an opportunity to be heard were afforded.
- The arbitrator applied general principles of law as the substantive governing law of the concession, distinguishing those principles from a purely equitable decision.
- On the merits, the arbitrator found NIOC responsible for a fundamental breach by obstructing performance and effectively terminating or frustrating the concession contrary to contractual commitments.
- The arbitrator awarded damages covering both incurred costs and compensation for loss of chance/lost profits related to the foreclosed opportunity to discover and exploit petroleum, and awarded interest from an appropriate starting date.

## Legal Principles

- A party’s failure to participate in arbitration, after proper notice, does not prevent the tribunal from deciding the dispute on the merits.
- Where the arbitration agreement’s appointment mechanism is triggered by a party’s failure to appoint, a duly appointed sole arbitrator may proceed with jurisdiction.
- In certain state–foreign investor concession disputes lacking a choice-of-law clause, general principles of law may govern as a body of legal rules distinct from unfettered equity and not confined to a single domestic legal system.
- Pacta sunt servanda and good faith performance require cooperation consistent with the contract’s allocation of managerial control and agreed operational structure; unilateral frustration or termination can constitute a fundamental breach.
- Full reparation may include both damnum emergens (actual expenditures) and lucrum cessans (lost profits), including compensation for a provable loss of chance, supported by expert evidence and probabilistic valuation; interest may be awarded to complete compensation.

## Conclusion

The arbitral award sustained jurisdiction despite non-appearance, applied general principles of law to a state concession, held NIOC liable for fundamental breach grounded in good faith and pacta sunt servanda, and granted monetary relief including both incurred costs and lost-opportunity damages with interest.


Sapphire Int’l Petroleums Ltd. v. Nat’l Iranian Oil Co., 35 Int’l L. Rep. 136 (Arb. Award 1963)