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The Total S.A. Case: Meaning of “Investment” under the ILSA

Published online by Cambridge University Press:  27 February 2017

Rex J. Zedalis
Rex J. Zedalis*
Affiliation:
Comparative and International Law Center, University of Tulsa
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Extract

On March 7, 1995, Conoco oil company of Houston, Texas, announced that it had entered into a contract with Iran to have a Netherlands-based affiliate assist in the development of the Sirri Island oil field. In response, the Clinton administration issued Executive Order No. 12,957, prohibiting participation by U.S. entities in the development of Iranian petroleum resources. Eventually, Conoco withdrew from its contract, but in early May of 1995 the administration stepped up its pressure on Iran by issuing Executive Order No. 12,959, prohibiting U.S. entities from using foreign entities they owned or controlled to make investments in or conduct trade transactions with Iran. On July 13 of that year, the French oil company Total S.A. entered into an agreement with Iran to replace Conoco in developing the Sirri Island field, and over the next several months Iran struck nearly a dozen petroleum development agreements worth in excess of $50 million each with other foreign oil companies. Within a couple of months, both Houses of the U.S. Congress took up consideration of proposals to complicate Iran’s ability to develop its hydrocarbon resources. By the end of 1995, the proposals, which even extended to wholly foreign entities organized and operating outside the United States, had come to include Libya as well. Final passage of one of the proposals, specifically, H.R. 3107, took place in the Senate and the House in July 1996. It was signed into law as the Iran and Libya Sanctions Act (ILSA) on August 5.

Type
Current Developments
Information
American Journal of International Law , Volume 92 , Issue 3 , July 1998 , pp. 539 - 548
Copyright
Copyright © American Society of International Law 1998

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References

1 See Agis, Salpukas, Iran Signs Oil Deal With Conoco: First Since 1980 Break With U.S. , N.Y. Times, Mar. 7, 1995, at A1 Google Scholar.

2 See 60 Fed. Reg. 14,615 (Mar. 17, 1995).

3 See Douglas, Jehl, Oil Concern Ends Deal With Iran as President Acts , N.Y. Times, Mar. 15, 1995, at A1 Google Scholar (contract was contingent on approval of Conoco’s board, which insisted that the U.S. Government have no objections to proceeding).

4 See 60 Fed. Reg. 24,757 (May 9, 1995) (prohibiting U.S. goods, technology or services from being directly or indirectly supplied to Iran; and prohibiting U.S. persons from dealing in Iranian goods, or from approving, facilitating or financing any owned or controlled foreign entity’s engagement in conduct prohibited to U.S. persons). For regulations implementing Executive Order Nos. 12,957 and 12,959 in regard to Iran, see 31 C.F.R. §560, especially §560.204, .207, .209 (1997).

5 See Iranian Negotiations, N.Y. Times, Apr. 28, 1995, at D5 (announcement by Iran of negotiations with Total and Royal Dutch Shell to develop Sirri Island field abandoned by Conoco); Shell Decides Not to Develop Iran Oilfields, N.Y. Times, July 4, 1995, at 46 (Royal Dutch Shell withdraws, leaving only Total).

6 See H.R. Rep. NO. 104–523(1) (1996), reprinted in 1996 U.S.C.C.A.N. 1296, 1299.

7 On the Senate side, S. 1228, 104th Cong., was introduced by Senator Alfonse D’Amato on September 8, 1995. On the House side, the initial proposal was H.R. 2458, 104th Cong., introduced by Congressman Benjamin A. Gilman on October 12, 1995. D’Amato’s proposal was adopted by the Senate on December 20, 1995. Gilman’s initial proposal was replaced on March 19, 1996, by his H.R. 3107, 104th Cong. After deliberation and amendment, the House passed H.R. 3107 on June 19, 1996.

8 See S. 1228 (as passed by Senate), §11, 104th Cong.; H.R. 3107 (as passed by House), 104th Cong., titled “Iran and Libya Sanctions Act of 1996.”

9 See 142 Cong. Rec. S7917 (passage in Senate, July 16, 1996); 142 Cong. Rec. H8125–27, H8245 (passage in House and enrollment, July 23, 1996).

10 See Pub. L. No. 104–172, 110 Stat. 1541 (1996) [hereinafter ILSA]. It should be noted that, because the Senate acted first to adopt proposed legislation and then amended H.R. 3107, the bill that was ultimately adopted, the legislation signed into law by the President, is often referred to as the D’Amato Act.

11 Essentially, as regards Iran, it requires the President to impose sanctions, ranging from denial of Export- Import Bank privileges to limitations on rights of export and import, see id. §§5(a), 6(l)-(6), whenever the President determines that an investment has occurred that “significantly contributed to the enhancement of Iran’s ability to develop [its] petroleum resources,” id. It defines “develop” as including a variety of activities from exploration to transportation by pipeline, id. §14(4). Sanctions need not be imposed in certain exceptional cases, id. §5(f), or in the event that the President exercises the Act’s waiver authority, which is based on pursuit of the U.S. national interest, id. §9(c) (1). Authority also exists for choosing to handle the objectionable investment through multilateral means, but only when a country with jurisdiction over the offending party is willing to impose measures inhibiting the transaction with Iran, id. §4(c). Sanctions can also be delayed under the Act to allow the President to attempt to get another nation vested with jurisdiction to end an objectionable investment, id. §9(a).

12 See ILSA, supra note 10, §5.

13 See Youssef, M. Ibrahim, Energy Industry Lured by Vast Gulf Deposits , N.Y. Times, Sept. 30, 1997, at A9 Google Scholar.

14 See Roger, Cohen, France Scoffs at U.S. Protest over Iran Deal , N.Y. Times, Sept. 30, 1997, at A1 Google Scholar.

15 For early French objections, see Youssef, M. Ibrahim, French Oil Official Asks if U.S. Law Reaches Iran , N.Y. Times, Oct. 6, 1997, at A6 Google Scholar. For debate within the Clinton administration, see Gazprom Withdraws from Agreement with Ex-Im Bank Following Hill Criticism, 14 Int’l Trade Rep. (BNA) 2241 (Dec. 24, 1997); U.S., France to Hold New Talks on Iran Investment Deal, Official Says, 15 Int’l Trade Rep. (BNA) 18 (Jan. 18, 1998); EU, United States Remain Upbeat After Failing to Agree on Cuba, Iran-Libya, id. at 186 (Feb. 4, 1998); Bhushan, Bahree & Thomas, Kamm, Total Seeks More Pacts With Iran, Despite U.S. , Wall St. J., Mar. 17, 1998, at A13 Google Scholar.

16 See Craig, R. Whitney, New U.S. Envoy to Paris Ponders His Stormy Star , N.Y. Times, Oct. 1, 1997, at A3 Google Scholar (indicating that the Russian company Gazprom and the Malaysian state-owned company Petronas were participating with Total S.A.).

17 See, e.g., 14 Int’l Trade Rep. (BNA) 1735 (Oct. 8, 1997) (EU Trade Commissioner Sir Leon Brittan asking United States to acknowledge Total’s right to invest under international law).

18 For the ongoing dispute regarding Helms-Burton, see Andreas, F. Lowenfeld, Congress and Cuba: The Helms- Burton Act , 90 AJIL 419 (1996)Google Scholar; Brice, M. Clagett, Title III of the Helms-Burton Act Is Consistent with International Law , id. at 434 Google Scholar; Peter, Glossop, Recent US Trade Restriction Affecting Cuba, Iran and Libya—a View from Outside the US , 15 J. Energy & Nat. Resources L. 212 (1997)Google Scholar. For one perspective on the history of U.S. economic sanctions generally, see William Fox, United States and Economic Sanctions: One American Perspective, id. at 387. For the European response to both Helms-Burton and the ILSA, see Bruno, Cova, The European Response to U.S. Extraterritorial Legislation , 10 OIL & Gas L. & Tax’n Rev. 353 (1997)Google Scholar.

19 See ILSA, supra note 10, §14(9).

20 See id. §14(9)(A).

21 See H.R. Rep. No. 104–523(11) (1996), reprinted in 1996 U.S.C.C.A.N. 1311, 1322.

22 See id. at 1317 (“the Committee did not believe it was wise to include a requirement in the bill that the President sanction trade with Iran” and it would be difficult and unworkable to monitor “trade with Iran, especially in common goods like drill pipe and drill bits”).

23 See ILSA, supra note 10, §14(4).

24 See id. §5(a).

25 See supra note 21 and corresponding text.

26 See supra note 23 and corresponding text.

27 See supra note 20 and corresponding text.

28 See supra notes 23–24 and corresponding text.

29 See ILSA, supra note 10, §6(4).

30 See H.R. 3107 (Mar. 19, 1996), supra note 7, §13(10) (D)(i).

31 See id. §13(5).

32 See H.R. 3107, 104th Cong, (as adopted by the Ways and Means Coram,, June 14, 1996), §14(9), last sentence.

33 See H.R. Rep. No. 104–523(11), supra note 21.

34 See, e.g., id. at 1317 (describing “investment” under §5 of the Act as “not deal[ing] with financing or trade”; and the definition of “investment” under §14 as not subjecting “the entry into, performance of, or financing of contracts to sell or purchase goods, services, or technology” to the strictures of the legislation). On whether financing the natural resource development agreement itself is considered a covered “investment,” see part III of this commentary infra.

35 See infra note 43 and corresponding text.

36 See ILSA, supra note 10, §14(9), last sentence.

37 See supra notes 32–34 and corresponding text.

38 See Iran and Libya Sanctions: Hearings Before the Subcomm. on Trade of the House Comm. on Ways and Means, 104th Cong, at 7, 12, 26, 31–32 (1996) [hereinafter Hearings].

39 See 142 Cong. Rec. H6474, H6476 (1996). For consideration by the full Senate, which is not informative, see id. at S7908 (Kennedy and D’Amato amendment to H.R. 3107) and S7917.

40 See id. at H6474.

41 It should be observed, though, that during the debate on the House floor about the bill, Congressman Berman is reported to have asked Congressman Gilman to comment on the meaning of the §14(9) definition of “investment.” In response, Gilman simply indicated that it “is intended to underscore . . . [the absence] of a trade trigger.” See id. at H6476.

42 See ILSA, supra note 10, §14(9) (A).

43 See supra note 29, and text at notes 34–35 (indicating that the mention of financial institutions does not mean the Act contains a general prohibition on financing).

44 See H.R. Rep. NO. 104–523(1), supra note 6, at 1303 (International Relations Comm.); H.R. Rep. NO. 104- 523(11), supra note 21, at 1318 (Ways and Means Comm.).

45 See ILSA, supra note 10, §5(c)(2) (C), speaking of “controlled in fact,” which is left undefined.

46 See H.R. 3107 (Mar. 19,1996), supra note 7, §4(b) (4)–(6). Parents were liable if they had “actual knowledge or had reason to know” of objectionable investment activities. Wholly owned subsidiaries were fully liable for the investments of those who owned them. Other subsidiaries and affiliates were liable if, with knowledge or reason to know, they had “engaged in activities which were the basis of [a] determination” of investment.

47 For the objections to the original version on grounds of one entity’s being subject to punishment for conduct of an associated entity, see Hearings, supra note 38, at 7,13, 21, 30–31. The version of the bill reported by the Ways and Means Committee to the full House substituted what appears in subsections 5(c) (2) (B) and (C) for the objectionable language in the original bill. See H.R. 3107, supra note 32, §5(c)(2)(B) & (C).

48 See H.R. Rep. No. 104–523(11), supra note 21, at 1317 (indicating that “purchases or equity interests in a non-Iranian company subject to [§14 and sanctions]” is permissible, “unless the purchasing party is covered by Section 5(c)(2)(B) of the bill which deals with parent-subsidiary relationships”). The implication is that one cannot escape the limitations of the Act by using a subsidiary to accomplish investment the parent refrains from making. Sanctions can be imposed on the subsidiary and the parent if the parent had knowledge and is found to have “engaged in the activities” of investment.

49 See, e.g., EC—Measures Concerning Meat and Meat Products (Hormones), Complaint by the United States, WTO Doc. WT/DS26/R/USA (Aug. 18, 1997) (panel report); EC Plans to Ban U.S. Beef Exports Due to Hormone, Antibiotic Residues, 14 Int’l Trade Rep. (BNA) 2210 (Dec. 24, 1997); U.S., Europe at Loggerheads over Talks to End Bribery in International Transactions, id. at 1985 (Nov. 19, 1997); Rex, J. Zedalis, Internationalizing Prohibitions on Foreign Corrupt Practices: The OAS Convention and the OECD Revised Recommendation , J. World Trade, Dec. 1997, at 45 Google Scholar; Debate on Exceptions, Labor Issues Heats up at OECD Investment Talks, 14 Int’l Trade Rep. (BNA) 2218, 2219 (Dec. 24, 1997) (noting France leading charge at talks on multilateral agreement on investment to include exception to protect cultural industries, just as it had done during Uruguay Round WTO talks).

50 See A Soft Signal From Iran, Newsweek, Jan. 19, 1998, at 30; Elaine, Sciolino, Seeking to Open a Door to U.S., Iranian Proposes Cultural Ties , N.Y. Times, Jan. 8, 1998, at A1 Google Scholar.

51 See International Energy Agency, World Energy Outlook: 1996, at 57–58 (based on 1993 emission figures).

52 See id.