## Facts

- Kuwait granted American Independent Oil Co. (Aminoil) a 60-year oil concession in the Kuwait–Saudi Arabia Neutral (Divided) Zone in 1948, giving Aminoil rights to explore and produce petroleum in exchange for royalties and other payments.
- The concession was modified over time, including a 1973 agreement revising fiscal terms by reference to the “Abu Dhabi formula.”
- In 1977, Kuwait enacted Decree-Law No. 124 terminating the concession and nationalizing Aminoil’s local property and assets.
- The parties executed a 1979 arbitration agreement providing for an ad hoc tribunal seated in Paris, waiving most court recourse, and authorizing the tribunal to determine the governing substantive law in light of the parties’ status and the relationship’s transnational character.
- Aminoil sought compensation and damages connected to the nationalization and termination; Kuwait contested Aminoil’s legal theories and valuation.
- A three-member tribunal conducted written and oral proceedings and issued a final award on March 24, 1982; Kuwait paid the award by July 1, 1982.

## Issues

1. What procedural framework governed the arbitration, including the role of mandatory rules of the seat (Paris/French law)?
2. What substantive law governed the dispute: Kuwaiti law, public international law, or transnational principles selected by the tribunal?
3. Whether Kuwait lawfully nationalized and terminated the concession notwithstanding stabilization-type commitments in the concession and later modifications.
4. What compensation standard applied to the nationalization and how compensation should be valued (assets, going-concern value, lost profits, valuation date, inflation, and interest).

## Decision

- The tribunal held Kuwait had the sovereign right to nationalize the concession, subject to paying compensation.
- The tribunal rejected the view that stabilization features rendered the concession immune from nationalization; such provisions primarily affected compensation and expectations rather than barring the taking.
- On applicable law, the tribunal applied a composite regime combining Kuwaiti law and public international law, shaped by the arbitration agreement’s direction to consider the transnational character of the parties’ relationship.
- The tribunal adopted an “appropriate compensation” standard, awarding a lump sum that reflected the value of physical assets and a measured element of going-concern value, while rejecting extreme approaches based solely on book value or expansive lost-profit projections.
- The tribunal made adjustments for inflation and awarded interest, producing a global figure between the parties’ competing positions.

## Legal Principles

- A state may lawfully nationalize a foreign investor’s concession as an act of sovereignty, but remains bound to provide compensation consistent with applicable law.
- Stabilization clauses in state contracts can protect legitimate expectations and influence compensation analysis, but do not necessarily eliminate the state’s power to nationalize.
- Where parties authorize a tribunal to select governing law in a transnational arbitration, the tribunal may apply a composite of domestic law and public international law rather than treating either as exclusive.
- Compensation for nationalization may be determined through a fact-specific valuation that accounts for tangible assets, limited going-concern value, appropriate valuation timing, and economic adjustments (including inflation and interest).

## Conclusion

The tribunal confirmed Kuwait’s power to nationalize Aminoil’s concession while requiring “appropriate compensation” determined under a composite of Kuwaiti and international law, treating contractual stabilization protections as relevant mainly to valuation and the compensation owed rather than as a bar to nationalization.


State of Kuwait v. Am. Indep. Oil Co. (Aminoil), 21 I.L.M. 976 (Ad Hoc Arb. Trib. 1982)