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The Israeli-Soviet Oil Arbitration

Published online by Cambridge University Press:  28 March 2017

Martin Domke
Martin Domke*
Affiliation:
American Arbitration Association
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Extract

The Israeli-Soviet oil arbitration in Moscow has evoked world-wide criticism for not being up to the standards of a fair and impartial proceeding. Not only do the results of the award, dated July 3, 1958, appear to be unsatisfactory, but the award also does not sufficiently deal with the legal questions submitted to the tribunal. The latter thereby missed the opportunity of contributing to the development of an important legal aspect of international transactions, namely, the application of the force majeure clause. This note will be primarily concerned with that point, as well as with some international law aspects arising out of the arbitration.

Type
Research Article
Information
American Journal of International Law , Volume 53 , Issue 4 , October 1959 , pp. 787 - 806
Copyright
Copyright © American Society of International Law 1959

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References

1 For references to articles in leading newspapers, see Martin Domke, “Arbitration of State Trading Eelations,” 24 Law and Contemporary Problems 317, 323, note 54, and 324, note 57 (1959).

2 Blom-Cooper, L. J., “Arbitration in Moscow,” 25 Solicitor 325 (London, 1958)Google Scholar; David M. Sassoon, “The Soviet-Israel Oil Arbitration,” Journal of Business Law, 1959, p. 132 (London), and editorial, ibid. 116.

3 Cf. Samuel Pisar, ‘ ‘ The Communist System of Foreign-Trade Adjudication,'’ 72 Harvard Law Beview 1409, 1442, note 98 (1959): “The award is disappointingly summary in its scope and analysis.“

4 At a meeting of the American Foreign Law Association in New York on Jan. 29, 1959, the facts and legal issues of the Israeli-Soviet oil arbitration were presented by Martin Domke and Stephen M. Schwebel, followed by a discussion in which Harold J. Berman and John N. Hazard participated.

5 For a recent survey of force majeure clauses, see Sidney Jay Sheinberg, ‘ ‘ The Force Majeure Clause, a Tool for Mitigating the Effect of the Determinable Fee Concept of the Modern Oil and Gas Lease,” 6 V. C. L. A. Law Review 269, 294-297 (1959).

6 The arbitration clause reads as follows: ‘ ‘ Any disputes which may arise out of the fulfillment of the present contract or in connection with it are to be settled by the Foreign Trade Arbitration Commission of the U.S.S.B. Chamber of Commerce in Moscow in conformity with the rules of said Commission. The decisions of said Commission are to be final and binding upon both parties.'’ On the use of arbitration clauses in foreign trade contracts with Communist countries, of. Othmar Mayenfisch, La Clause Attributive de Juridiction et la Clause Arbitrale dans les Contrats de Vente à Caractère International (Thèse, Fribourg, Switzerland, 1957), Ch. II , sec. 5: L'arbitrage pour le commerce extérieure dans les Etats d'obédience communiste, p. 83, and also Handbook of National and International Institutions Active in the Field of International Commercial Arbitration, Economic Commission for Europe, Committee on the Development of Trade, Ad Hoc Working Group on Arbitration, Trade/W[orking] P[arty] 1/15. REV. 1, of Dec. 3, 1958, p. 93.

7 Contrary to American practice in commercial arbitration, the award has to be in written form “accompanied by the motives” on which it is based, Art. 26(2) of the amended Rules of Procedure of Jan. 21, 1949, U.N. Economic Commission for Asia and the Far East, Conference on Trade Promotion, Doc. Trade/61, of Oct. 10, 1951, p. 5. For a translation of the full text of the award, see p. 800 below. The award also provided for payment by the Israeli company of the full arbitration costs of $12,000, one-half of one percent of the amount of about $2,400,000. Sec. 10 of the Decree of the Central Executive Committee and the Council of People's Commissars of the U.N S.S.B. on the U.N.S.S.E. Chamber of Commerce Foreign Trade Arbitration Commission of June 17, 1932 (Statute Book of the TJ.8.S.B., 1932, No. 48, Art. 31—English translation in the Document mentioned above, p. 4), provides that the fee “shall not exceed’ one per cent of the sum in dispute.” It may be noted that the costs in the United States, e.g., under the Rules of the American Arbitration Association, would have amounted to about half of the sum, namely $6,250, under the fee schedule of Sec. 42 of the Rules, providing for only one-tenth of one percent for amounts over $200,000.

8 Rule 22, which rule does not leave “the admissibility of evidence” to the arbitration board's discretion, as Pisar states, note 3 above, p. 1439.

9 The law of the seller's state is generally applied in English and American courts ‘ ‘ to the entirety of rights and duties flowing from the (f.o.b.) contract.” 3 Ernst Rabel, The Conflict of Laws 60 (1950). “In practice the interpretation of the legal incidents of c.i.f. and f.o.b. contracts in Soviet tribunals runs parallel to the more or less uniform interpretation given to such contracts in courts elsewhere.” Pisar, Samuel, “Soviet Conflict of Laws in International Commercial Transactions,” 70 Harvard Law Review 593, 628 (1957)Google Scholar, and for cases decided by the Foreign Trade Arbitration Commission, ibid. 636.

10 l47 F. Supp. 193, 208 (S.D.N.Y. 1956), aff'd 257 F.2d 765 (2d Cir. 1958), dis missing the claim on the ground that the conclusion of a final contract was not proven.

11 Such a “usual rule” may be found in the Revised American Foreign Trade Definitions; 1941 (adopted by the Chamber of Commerce of the United States of America, the National Council of American Importers and the National Foreign Trade Council and still in use by both exporters and importers, without further revision), whereby (II D4): ‘ ‘ seller must … render the buyer, at the buyer's request and expense, assistance in obtaining the documents issued in the country of origin, or of shipment, or of both, which the buyer may require either for purposes of exportation, or of importation at destination.“

12 At p. 208, note 14, with reference to further American cases, concerning the Amtorg Trading Corp., a Soviet Government-owned New York corporation. See also L. N. Jackson&Co. v. Royal Norwegian Government, 177 F.2d 694 (1949), certiorari denied, 339 IT. S. 914 (1950); Leo M. Drachsler, “Frustration of Contract: Comparative Law Aspects of Remedies in Cases of Supervening Illegality,” 3 New York Law Forum 50 (1957), and Hans Smit, “Frustration of Contract: A Comparative Attempt at Consolidation,” 58 Columbia Law Review 287 (1958). Cf. also note, “F.A.S. Clauses in American and Comparative Law,” 32 N.Y.TJ. Law Review 1247, 1258 (1957).

13 [1956] A.O. 588; Note, “Failure to Obtain Export License” (on the decision of the Court of Appeal, [1955] 1 All E. R. 666), by J. K. Grodecki, 18 Modern Law Review 405 (1955).

14 6 Corbin on Contracts § 1322, p. 256 (1951).

15 [1952] 2 All E.B. 497. For further references see Martin Domke, “Foreign Trade Restrictions and Arbitration,” 9 Arbitration Journal (n.s.) 89, 94, notes 28-32 (1954). For a recent case where seller (U. S. Government) had guaranteed that “permission to export the property [wire] has been granted by the Iraqi Government,” see Hyman- Michaels Company v. United States, 140 F. Supp. 784 (Ct. CI., 1956).

16 Cf. Schmitthoff , Clive N., The Export Trade 21 (3rd ed., London, 1958)Google Scholar; Silverstone, Paul H., “The Export Control Act of 1949: Extraterritorial Enforcement,” 107 U. Pa. Law Review 331, 360 (1959).Google Scholar

17 “Incoterms 1953” (International Rules for the Interpretation of Trade Terms) (Paris, 1953), p. 24, par. 3.

18 For similar issues arising out of the closure of the Suez Canal in 1956, see the conflicting decisions in Carapanayoti&Co., Ltd. v. E. T. Green, Ltd., [1958] 3 All E.B. 115, 53 A.J.I.L. 188 (1958) ; Tsakiroglou&Co., Ltd. v. Noblee Thorl G.m.b.H., [1959] 1 All E.B. 45, 53 A.J.I.L. 696 (1959); Notes in Journal of Business Law 1959, p. 88, and 22 Modern Law Review 81 (1959); and Griggs, J. G. B., Frustration in Relation to Contracts of Affreightment (Gothenburg, Sweden, 1959)Google Scholar.

19 “Unless otherwise provided by law or contract, the debtor shall be relieved from liability for non-performance, if he proves that impossibility of performance resulted from circumstances which he could not prevent, or that it came about owing to intentional design or negligence of the creditor.” Transl. in 2 Gsovski, Soviet Civil Law 107 (1948).

20 [1957] 2 All E. B. 484. The duty of parties to collaborate in obtaining licenses was also considered in Kyprianou v. Cyprus Textiles, (1958) 2 Lloyd's L. Rep. 60, Note, Journal of Business Law 1959, p. 59.

21 '’ English commercial law is often regarded by international business as a kind of jus gentium of international commerce to which resort can be had if it is undesirable or inappropriate to refer to a national system of law,” Schmitthoff, “Modern Trends in English Commercial Law,” Tidskrift av Juridiska Föreningen i Finland, 1957, p. 349, at 356.

22 Sassoon, note 2 above, p . 138.

23 This issue is related to the concept of ‘ ‘ exhaustion of local remedies ‘ ‘ when an effective relief appears to be impossible under the circumstances. Cf. Art. 19 of the Convention on the International Responsibility of States for Injuries to Aliens (Preliminary Draft with Explanatory Notes), Harvard Law School, May 1, 1959, p. 98.

24 The ‘ ‘ aggression'’ was stated as the reason for Soviet action in a note of the Soviet Government to the Israeli Government which was published in Izvestia on Feb. 6, 1957, and was introduced in the arbitration proceedings. The award refers to this situation in the objections of the seller (No.3) : “ t h e situation prevailing at the beginning of November 1956 and created by aggression against Egypt,” and in the reasons (No.6) : “ i n considering the factual conditions governing this case.” Cf. Also New York Times, Jan. 24, 1959: ‘ ‘ During the Suez crisis, Moscow cancelled its contract to deliver oil to Israel .“

25 M. M. Agarkov [President of the Chair of Civil Law of the Moscow State University], “ The Debtor's Discharge from Liability when Performance is Impossible,” 29 Journal of Comp. Leg. and Int. Law (3d ser.) Part III , p. 9 (1947).

26 ” In any event, impossibility of performance shall not relieve the debtor from liability: (a) where the subject of the obligation is defined by generic characteristics and delivery of property of the same kind has not become objectively impossible; (b) where persons charged by operation of law or by orders from the debtor, with performance of the obligation have, by intentional design or negligence caused the circumstance which rendered performance impossible or failed to avert it . “ Transl. In Gsovski, op. tit. 109.

27 '’ There was no need to mention Russia in this context for, the sale being a strict f.o.b. sale, it was the buyer's duty to provide the vessel, and the seller could never be liable for failure to do so.'’ Sassoon, note 2 above, p. 136, note 6.

28 Frédéric Eisemann, “Keine Haftung des FOB-Verkäufers fuer die Beschaffung der Ausfuhrgenehmigung nach sowjetischem Recht?” 15 Verkehr 9, 10 (Vienna, Austria, 1959).

29 North German Lloyd v. Guaranty Trust Company of New York, 244 TJ. S. 122 (1917).

30 Cf. annotation by de Winter on the decision of the Dutch Supreme Court (Hoge Raad), of Jan. 15, 1954, Nederlandsche Jurisprudentie 1954, No. 251, dealing with the lack of a Dutch foreign exchange license, in 1 Netherlands International Law Review 437 (1954): “ A plea based on force majeure can only exonerate a party in default from his liability to make compensation for damages when he was not able to foresee the situation of force majeure incurred and when he can not be deemed to bear the risk of its occurrence, or, in other words, that only in such cases the notion of force majeure can be applied.“

31 “An obligation shall terminate either in full or in part … (e) by impossibility of performance for which the debtor cannot be held liable.” Gsovski, op. cit. 110.

32 An editorial in the (London) Journal of Business Law, 1959, p. 117, which reproaches the Foreign Trade Arbitration Commission for not having closely examined the viewpoint of ultra vires action of the Ministry, said: “Apparently the Commission considered it as inconceivable that the manager of the sellers should question the administrative powers of the Ministry to issue the prohibition.“

33 Sassoon, note 2 above, p. 136. The argument that the seller had not informed the buyer of the prohibition by the Ministry but had only relied on the inability to obtain export licenses was refuted in the award (No. 7), that the telegram of Nov. 6, 1956, notified “that the agreement was voided which implied a ban against implementation of same.” This, however, appears not to be warranted by the express wording of the notification “cancelled” and not “prohibited.“

34 In a legal opinion by Professor Dr. Hans Doelle, Director of the Max Planck Institute for Foreign and Private International Law, Hamburg, of Dec. 13, 1957, it was further said (p. 5) : “ The denial or revocation of an export license in an individual case under the circumstances is not based on a general regulation executed equally against everybody but rather an act issued for reasons of opportunity in an individual case or in individual cases for the issuance of which an organ of state participating in the trade has no answer.“

35 Cf. the report of the Committee on International Law of the Association of the Bar of the City of New York: “ A Reconsideration of the Act of State Doctrine in the United States Courts,” adopted by the Annual Meeting of the Association on May 12, 1959.

36 The question of responsibility under international law of the Soviet Government for its prohibition of performance of a contractual right of an alien corporation was, of course, not a matter for the Commission. The dispute was between the two parties to the contract, and only those issues had to be considered by the Commission.

37 On the doctrine of the juridical person in Soviet law, see Berman, Harold J., “Commercial Contracts in Soviet Law,” 35 California Law Review 191, 196 (1947).Google Scholar

38 Hazard, John N., ‘ ‘ Soviet Government Corporations,'’ 41 Mich. Law Review, 850, 871 (1943)CrossRefGoogle Scholar. See, however, Hazard in The Public Corporation (ed. Wolfgang Friedmann) 559, questioning “whether the Soviet state corporations are independent legal personalities or, being part of the state, are only treated as such.“

39 Philip C. Jessup, A Modern Law of Nations 20 (1948).

40 Journal of Business Law, 1959, p. 116.

41 Cases cited in Pisar, note 9 above, pp. 543-544.

42 Art. 14 of the Soviet Constitution places foreign commerce under control and direction of the Union. See Harold J. Berman, “The Legal Framework of Trade between Planned and Market Economies: The Soviet-American Example,” an article adapted from the author's General Report to the UNESCO Conference on Legal Aspects of Trade between Planned and Free Economies, Rome, February, 1958, 24 Law and Contemporary Problems, No. 3 (Summer, 1959) ; also 1959 Proceedings, American Society of International Law 274. On the UNESCO conference, see Hazard, John N., “Commercial Discrimination and International Law,” 52 A.J.I.L. 495 (1958).Google Scholar

43 For reference, see Martin Domke, ‘ ‘ Piercing the Corporate Veil in the Law of Economic Warfare,” 1955 Wis. Law Review 77; Berger, Raoul, “ ‘Disregarding the Corporate Entity’ for Stockholders’ Benefit,” 55 Columbia Law Review 808 (1955).Google Scholar

44 Berman, note 42 above, note 34a.

45 Note, ‘ ‘ Immunity from Suit of Foreign Sovereign Instrumentalities and Obligations,” 50 Tale Law Journal 1088 (1954); Michael Brandon, , “Sovereign Immunity of Government-owned Corporations and Ships,” 39 Cornell Law Quarterly 425 (1954)Google Scholar; F. A. Mann, “The Immunity of Foreign Governments in Trade,” in Report of International Law Conference held at Niblett Hall, June, 1956, p. 29 (London, David Davies Memorial Institute of International Studies); Wedderburn, K. W., ‘ ‘ Sovereign Immunity of Foreign Public Corporations,” 6 Int. and Comp. Law Quarterly 301 (1957)Google Scholar; Comment, “Immunity of Foreign Government Instrumentalities,” 25 University of Chicago Law Review 176 (1957); Schmitthoff, Olive M., “The Claim of Sovereign Immunity in the Law of International Trade,” 7 Int. and Comp. Law Quarterly 452, 463 (1958).Google Scholar

46 Fensterwald, Bernard Jr., ‘ ‘ Sovereign Immunity and Soviet State Trading,'’ 63 Harvard Law Review 614, 627 (1950).Google Scholar

47 With the right of being represented also by “foreign citizens.” Rule 20.

48 304 N.Y. 519, 109 N.E.2d 606 (1952).

49 84 Entscheidungen des Schweizerischen Bundesgerichts, Pt. I, No. 7, p. 39 (1958), granting execution of an award rendered by the Arbitration Court of the Chamber of Commerce of Czechoslovakia. This 1958 decision of the highest Swiss tribunal overrules for all purposes the holding of the Zurich Superior Court of Nov. 11, 1954, in Stankoimport v. Swisstool, published in Mayenfisch, note 6 above, p. 87, which denied the enforcement of a Moscow award for lack of impartiality of the Soviet arbitrators. For a detailed discussion of the Amtorg and Linga cases, see Domke, note 1 above, p. 325, and Samuel Pisar, “Treatment of Communist Foreign Trade Arbitration in Western Courts,” in International Trade Arbitration: A Boad to World-Wide Cooperation 101 (ed. by Martin Domke, 1958), and note 3 above.

50 Domke, Martin, ‘ ‘ The United Nations Conference on International Commercial Arbitration,” 53 A.J.I.L. 414, 416 (1959).Google Scholar

51 Ibid. 420; of. also the Trade Agreement between the U.S.S.E. and Canada, of Feb. 29, 1956, Table of Bilateral Conventions Relating to the Enforcement of Arbitral Awards and the Organization of Commercial Arbitration Procedure (U.N. Pub. Sales No. 1957.11 E/Mim. 18), p. 3.

52 This may become all the more true in view of the Soviet Union drive for increased trade also with the United States; cf. the speech of First Deputy Premier Frol R. Kozlov at the opening of the Soviet exhibition in New York, New York Times, June 30, 1959, p. 16, col. 5.

53 In that arbitration clause, the dispute shall be settled by arbitration in New York City under the Rules of the American Arbitration Association. Each party shall appoint an arbitrator, but “neither of the parties shall be required to choose an arbitrator whose name shall appear on the panel of the American Arbitration Association . “ If the two arbitrators do not agree upon the selection of a third arbitrator within two months, the third arbitrator shall be appointed by the Executive Secretary of the General Agreement on Tariffs and Trade.

54 Here, in case a party fails to appoint its arbitrator within 14 days (from receipt of notification of arbitration), the President of the Chamber of Commerce of Stockholm shall appoint the arbitrator. In case of disagreement of both arbitrators on the selection of a chairman (within four weeks after the appointment of the second arbitrator),’ the same President shall appoint the chairman.

55 In the famous Lena Goldfields Arbitration, the agreement of April 30, 1925, provided also for a Swedish arbitration set-up in a detailed arbitration clause, reprinted in the Memorandum on Soviet Doctrine and Practice with respect to Arbitral Procedure, U.N. Doc. A/CN.4/36, of Nov. 21, 1950, p. 18. Cf. Nussbaum, Arthur, “The Arbitration between Lena Goldfields, Ltd. and the Soviet Government,” 36 Cornell Law Quarterly 31 (1950).Google Scholar

56 Pisar, note 3 above, p. 1433.

57 Note 34 above.

58 Berman, note 42 above, p. 20

* The translation from the Russian text has been adapted to conform to Anglo-American usage in international commercial arbitration.