Petition — Revere Copper & Brass Inc. v. Overseas Private Investment Corp.

Supreme Court brief1980

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Bupieme Court, U& |

FILED 7

AFR 8 1980

79-1572

In THE

Supreme Court of the Runited £

Ocroser Term, 1979

~ ICHAEL RUDAK, JR., CLERK

REvERE CoprpER AND Brass INCORPORATED,

Petitioner,

Overseas Private INVESTMENT CORPORATION,

Respondent.

ei ————

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

a aateeeaen an ee

a ee eee

WuuiusM FE. Hecarty

80 Pine Street

New York, New York 10005

(212) 825-0100

Counsel for Petitioner

Of Counsel:

CanitL Gorpon & REINDEL

Micuaet P. Trerney

GrorGE WaILAND

Cuarues A, GruMAN

and

Ricrarp A. Maxroop, Q.C.

April 8, 1980

TABLE OF CONTENTS

PAGE

Opinions Below ..... 1

Jurisdiction .... 2

Questions Presented ............. 2

eee POW nasa acieiihsinsiciiesis ct siecle 2

Statement of the Case ...... 3

Reasons for Granting the Writ ............ 19

RE TERE IEE US ISIE ol RUMP AO SURAT EATS (5 24

APPENDIX—

Opinion of the Court of Appeals 0.00.0... eee la

Opinion of the District Court 220000... 8a

ON TI ii ac eclttia ae 12a

Table of Contents of General Terms and Condi-

tions of OPIC’s Insurance Policy .........0.0............. 18a

Arbitration Award ............. sihik-oucshsicbiiteuheaiiec desu 26a

Appendix to Award Setting Forth Provisions of

OPIC’s Insurance Policy Relevant to Compensa-

SOI icaiciinsids eatin ccididddack Rinne eeslias cpbaiitinlnteae 132a

TaBLE OF AUTHORITIES

Cases: PAGE

Amicizia Societa Navigazione v. Chilean Nitrate &

Iodine Sales Corp., 274 F.2d 805 (2d Cir. 1960) ...... 17,18

Bird v. St. Paul Fire & Marine Ins. Co., 224 N.Y. 47,

BS TI Pi a ascitic cnssenbuabicgunoysinibocetion eins Zin

Campbell v. Farmers Insurance Exch., 260 Cal.App.

Sa: 406: GT Cal Rotr. 176 (1966) .2:....2o nn. 17,172

Continental Casualty Co. v. Beelar, 405 ¥.2d 377 (D.C.

a cc pauiblavesnuenainoverhnabason 12

Filor, Bullard & Smyth v. Insurance Co. of North

America, 605 F.2d 598 (2d Cir. 1978) .......................- 22, 23

First National Bank v. United States Fidelity & Guar-

anty Co., 416 F.2d 52 (5th Cir. 1969) .......................... 23

German Alliance Ins. Co. v. Lewis, 233 U.S. 389 (1914) 22

Gulf States Tel. Co. v. Local 1692, International

Brotherhood of Electrical Workers, 416 F.2d 198

I i at he eat ects ccecemedaboabaonnie 15n

Hanes Corp. v. Millard, 531 F.2d 585 (D.C. Cir.

Se ra a ee er he 13, 14

Hayes v. Home Life Ins. Co., 168 F.2d 152 (D.C. Cir.

I illo h biases aaseachasies seetinnitiedennndly soatiaibavones dint 12

Hurd v. Dodge, 334 U.S. 24 (1948) -............ce-eeeeeeeeeees 13n, 14n

Interinsurance Exch. Auto Club v. Vailes, 219 Cal.App.

2a 830, 38 Cal.Rptr. 533 (1963) -............--..2...-c.erccoseees 17

1/S Stavborg v. National Metal Converters, Inc., 500

i i er TI ssc he scinecceneicvacenanapacctse 21n

lil

PAGE

Kissinger v. Reporters Committee for the Freedom of

the Press, 48 U.S.L.W. 4223 (U.S. March 3, 1980) .... 21n

London Assurance Corp. v. Thompson, 170 N.Y. 94, 62

I A ioc. dialled alters nit eoigapn iba neniasilijenssalenh 23

Pan American World Airways, Inc. v. Aetna Casualty

¢é Surety Co., 505 F.2d 989 (2d Cir. 1974) ....9n, 10n, 22, 23

Ore & Chemical Corp. v. Eagle Star Ins. Co., 489 F.2d

455 (2d Cir. 1978) ........ PREETI WO LITO SI PTE NS 2in

Prima Pawmt Corp. v. Flood & Conklin Mfg. Co., 388

Re ET ED accoreitacttensannechaltoatisncnaigbconins duetiabn 13, 15,'19

Ross v. Royal Globe Ins. Co., 612 F.2d 379 (8th Cir.

BOD incabises cece AEP SO AERO ey CORI D ORR PEN a MOH 23n

Scherk vy. Alberto-Culver Co., 417 U.S. 506 (1974)

14, 18, 19

SEC v. National Securities, Inc., 393 U.S. 453 (1969) .... 21

Stevens v. Fidelity € Casualty Co., 58 Cal.2d 862, 377

gf BE | RRR EMR amon ee in tae ert oF ae 17

Stroehmann v. National Infe Ins. Co., 300 U.S. 435

Union Employers Division of Printing Industry, Inc. v.

Columbia Typographical Union No. 101, 353 F.Supp.

1348 (D.D.C. 1973), aff'd w/o opinion, 492 F.2d 669

BARE A.) SEG MAR SRG Sen Ur aoe ARN mI ESEORY ON 15n

United Steelworkers of America v. American Mamufac-

turing Co., 363 U.S. 564 (1960) oon. ee eeeeeec eens 16, 19

United Steelworkers of America v. Enterprise Wheel

& Car Corp., 363 U.S. 593 (1960) 0... 16, 16n, 18, 19

PAGE

United Steelworkers of America v. Warrior & Gulf

Navigation Co., 363 U.S. 574 (1960) -.............. 15, 16, 19, 20

Washington-Baltimore Newspaper Guild, Local 35 v.

Washington Post Co., 442 F.2d 1234 (D.C. Cir.

fs EE IRE ee PETRI ENNIS ERROR TOE TELAT ESAT IN 15n

Congressional Documents:

S. 373, 96th Cong., Ist Sess. (1979) ................00ceeccccaee 20

H.R. 2699, 96th Cong., Ist Sess. (1979) 2.020022 20

Treaties, Statutes and Regulations:

Convention on the Recognition and Enforcement of

Foreign Arbitral Awards [1970], 21 U.S.T. 2517,

SAG Ps I ia eddies ndsraiiec ka cineiietnceiccibucencopmansiparanedl 14

Federal Arbitration Act

i ks Sc, Reine eenaaes meee: 2, 4, 11, 19

eS TO | Sea es oem maree cone pect SE

apes ee RO oe 2

FAS TE ee, PTE wie scsctrcieeeeteae sciengtec sen eae 2,10, 11

De Aree I ne Scie cel picid cscs 2,10, 11

iy, ME TED pteindosiscecmseclitenncr adearokiechbeutcpeseccea 2, 14n

PK SOE: CEO) at 14

Foreign Assistance Act of 1969

Se US Gi SBIGE. CIOTE) oven tiienictioian 4,17

22 U.S.C. §2199(d) (1976) owe 11

Labor-Management Relations Act, 1947

§ 203(d), 29 U.S.C. §173(d) (1976) ...... 2, 11, 16, 16n, 19

$301, 29 US.C. $185 (1976)... 2, 11, 16n

Internal Revenue Code

§ 482, 26 U.S.C. § 482 (1976) 2. 2, 8, °. 10

PAGE

Internal Revenue Service Regulations

SO gh TRG Ft PAA aa LE a RNY 9, 10

2B USC. 6 IS0M1) (I9TB) icin eee ees 2

ee As RE CRIT evr nil laccan skseesciopdbaciesss 11

Be BI Ty MID ROTO ciaicg en es bide hd tatisss exp ertsabuadinteant 11

OR 7 ad ss EER OR PRP NSL SANNA Aer Ga 11

nn ees 11

35 Fed: Reg. 43 (Jan. 3,.1970) nn... cscccecceeec cscs keccebeeeee 6

Teats and Law Reviews:

G. Gilmore & C. Black, The Law of Admiralty (1957).. 21n

R. Pound, The Spirit of the Common Law (1921) ...... 22n

Dunau, Three Problems in Labor Arbitration, 55 Va.L.

BOOS ET CRUE oddone 15n

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IN THE

Supreme Court of the Anited States

Ocroser Term, 1979

Revere Copper AND Brass INCORPORATED,

Petitioner,

Overseas Private InvestMENT CoRPORATION,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Petitioner Revere Copper and Brass Incorporated

(“Revere”) respectfully prays that a writ of certiorari

issue to review the judgment and opinion of the United

States Court of Appeals for the District of Columbia Cir-

cuit in Revere Copper and Brass Incorporated v. Overseas

Private Investment Corporation, No. 79-1159 (D.C. Cir.).

Opinions Below

The opinion of the court of appeals (set forth beginning

at page la of the Appendix to this Petition) is not yet re-

ported. The opinion of the United States District Court for

the District of Columbia (set forth beginning at page 8a

of the Appendix) is not reported.

Jurisdiction

The judgment of the court of appeals was entered on Feb-

ruary 26, 1980. This petition is filed within 90 days of that

date. The jurisdiction of this Court is invoked under 28

U.S.C. § 1254(1) (1976).

Questions Presented

1. Does the Federal Arbitration Act require a United

States district court to enforce an award which, in contra-

vention of public policy, permits an insurer to sell an

ambiguous insurance policy and then use the ambiguity as

a defense against the insured?

2. Does the federal policy of the Labor-Management

Relations Act, 1947, which favors arbitration of disputes

between labor and management, extend to review under

the Federal Arbitration Act of an award in a dispute be-

tween insured and insurer so that it may be used to over-

ride the rule of public policy which requires that an am-

biguity in an insurance policy be construed in favor of the

insured and against the insurer?

Statutory Provisions

Sections 1, 2, 9, 10, 11 and 13 of the Federal Arbitra-

tion Act (the “Arbitration Act”), 9 U.S.C. §§1, 2, 9, 10,

11 and 13 (1976), §§ 203(d) and 301 of the Labor Manage-

ment Relations Act, 1947 (the “Labor Act”), 29 U.S.C.

§§ 173(d), 185 (1976), and § 482 of the Internal Revenue

Code, 26 U.S.C. § 482 (1976) (to which reference was made

in the insurance policy) are set forth beginning at page

12a of the Appendix.

. Statement of the Case

Revere purchased insurance from respondent Overseas

Private Investment Corporation (“OPIC”) covering the

major por‘ion of Revere’s $100,000,000 investment in Ja-

maica against the risk of expropriation. In this proceeding

under the Arbitration Act, the district court sustained an

award which determined that Revere had suffered a total

loss by reason of expropriation by the Government of Ja-

maica on June 30, 1974, when Revere’s insured equity in-

vestment was $64,131,100, but which awarded Revere only

$1,131,144 as compensation. The court of appeals affirmed.

The award resolved an ambiguity in the insurance

policy in favor of the insurer and thereby cost the in-

sured $63,000,000. On its face, the award was contrary

to public policy. In insurance, an ambiguous policy pro-

vision must be construed in favor of the insured—a rule

not of convenience or a technicality of legalists, but rather

a rule based upon the sound public policy that insurers

should not be permitted to sell on clear clauses of liability

and defend on obscure negations of liability. The power

of the courts is at. all times exercised subject to the re-

strictions and limitations of the public policy of the

United States.

The district court and the court of appeals believed that

their review under the Arbitration Act of this arbitration

award made in an insurance dispute was governed by the

federal policy expressed in the Labor Act favoring arbi-

tration of labor disputes—a policy which recognizes that

in the labor-management relationship arbitration is the

substitute for industrial strife and that the collective bar-

gaining agreement is a generalized code to be applied by

the arbitrator to cover a myriad of cases which the drafts-

men of the agreement cannot wholly anticipate. In con-

trast, the Arbitration Act, which exempts labor disputes

from its coverage, 9 U.S.C. § 1 (1976), simply makes arbi-

tration agreements enforceable like other contracts, but not

more so; it places them on the same footing as other con-

tracts. They aud the awards made pursuant to them are

subject to considerations of public policy. The Arbitration

Act does not require a district court to enforce as its judg-

ment a commercial arbitration award which is contrary to

public policy. The confusion by the courts below of two

very different statutes and policies led them to sustain an

award contrary to public policy.

The substance of the decision below is that the Arbitra-

tion Act does not permit the disturbance of any non-corrupt

arbitration award. Unless corrected, it impairs the credi-

bility of the political risk insurance program of the Govern-

ment insurer under which approximately $9,000,000,000 of

insurance is in force and which requires arbitration of

disputes between insured and insurer. It weakens public

confidence in the process expressly provided by the Arbitra-

tion Act for vacating awards made in excess of the arbi-

trators’ powers and negates the acceptability of arbitra-

tion as a mechanism for the resolution of commercial dis-

putes. It does a serious disservice to arbitration as an

alternative to litigation in the overburdened courts.

The insurance—OPIC, an agency of the United States

Government, 22 U.S.C. § 2191 (1976), was created “[t]o

mobilize and facilitate the participation of United States

private capital and skills in the economic and social devel-

opment of less developed friendly countries and areas

. .” (tbid.) To induce such investment by American

companies, OPIC provides insurance against the risk of

expropriation and other political risks. It charges sub-

stantial premiums and is self-sustaining. According to its

1978 Annual] Report, OPIC’s net income for the year was

$60,000,000 and its imsurance reserve was $283,000,000.

OPIC is reinsured at Lloyd’s and that reinsurance appar-

ently protects OPIC for the first $18,000,000 of Revere’s

claim.

In the latter 1960’s and early 1970’s, Revere constructed

the sequence of integrated facilities necessary to produce

primary aluminum. Revere built a 112,000-ton per year

aluminum reduction plant in Alabama. Bauxite, largely

lacking in this country, was available in Jamaica, W. I.,

but the Government of Jamaica, the owner of all bauxite

on the island, conditioned the right to mine bauxite upon

Revere’s construction in Jamaica of a plant to refine the

bauxite into alumina, the intermediate feed stock for

aluminum. At a cost of some $100,000,000 invested or

loaned by Revere, Revere Jamaica Alumina, Ltd. ( “RJA”),

Revere’s wholly-owned subsidiary, constructed a bauxite

mining and alumina refining complex in Jamaica to supply

alumina to the Alabama aluminum reduction plant. (“‘om-

mercial production of alumina by the Jamaican plant be-

gan in December 1972.

Revere took such measures as were available to it to

safeguard its investment in Jamaica avainst political risk.

RJA entered into a 25-year investment agreement with

the Government of Jamaica which contained basic assur-

ances for the protection of RJA’s property and operations.

Relying upon the inducement for private investment in

countries such as Jamaica provided by OPIC’s political

risk insurance, Revere purchased from OPIC, for an

annual premium of approximately $600,000, insurance

covering Revere’s equity investment in RJA against the

risk of expropriation by the Government of J amaica, in-

cluding the risk that the Government might repudiate its

investment agreement with RJA.

OPIC was the only American source of political risk

insurance. Its standard form insurance policy was a take-

it-or-leave-it proposition for prospective insureds. The

policy was issued in September 1970 by the Agency for

International Development on behalf of OPIC, 35 Fed.Reg.

43 (Jan. 3, 1970). The table of contents of the 37 printed

pages of the General Terms and Conditions is set forth

beginning at page 18a of the Appendix. The provisions of

the OPIC insurance policy relevant to the issues of com-

pensation are set out in an appendix to the arbitration

award (83a, 132a-134a).

In the first half of 1974, the Government of Jamaica,

led by Prime Minister Michael Manley who had come to

power in 1972, took various actions which under OPIC’s

policy constituted the insured peril of expropriatory action.

Revere made claim upon OPIC. When OPIC did not

honor Revere’s claim, Revere submitted the resulting dis-

pute to arbitration in Washington, D. C., as Revere was

required to do by OPIC’s form policy.

The award—Revere filed its demand for arbitration with

the American Arbitration Association on December 20, 1976.

The award of the three arbitrators was filed on August

25, 1978. The award, which is in five parts, is*set forth

beginning at page 26a of the Appendix.

Two of the three arbitrators (G.W. Haight, Esq. and

Carroll R. Wetzel, Esq.) held that as of June 30, 1974 the

Government of Jamaica had repudiated its investment

agreement with RJA, which had 20 years to run and

upon which Revere had relied in investing in or loaning

$100,000,000 to RJA (42a), and that the repudiation was

expropriatory action insured against by OPIC (83a, 108a).

The third arbitrator (Hon. Francis Bergan) dissented

from this holding (109a); he said nothing concerning the

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different question of the amount of compensation due

Revere under OPIC’s policy.

The majority further held that the expropriatory action

was of the kind that constituted a total loss entitling Revere

under the policy to compensation in the full amount of its

insured equity investment at the date of expropriation (86a)

against assignment by Revere to OPIC of the stock certifi-

cates evidencing Revere’s insured investment in RJA. The

majority found that at June 30, 1974, the date of expropria-

tion, the amount of Revere’s insured equity investment in

RJA, determined in accordance with generally accepted

accounting principles, which the policy established as the

governing criteria for the computation of loss and compen-

sation (134a), was $64,131,100 (102a).

At the conclusion of the hearings, OPIC had submitted a

letter to the arbitrators setting forth the adjustments it

argued should be made in the amount of Revere’s insured

investment. Two alternative examples were given of OPIC’s

calculations of amounts of compensation due Revere at the

date of expropriation. OPIC’s examples were $37,289,000

or $38,401,000.

The arbitral majority awarded Revere only $1,131,144 as

compensation for the total loss of its insured investment

(108a). They made three adjustments totalling $62,999,856

in the $64,131,000 amount of Revere’s investment (87a-

102a). They relied upon a sentence in OPIC’s insurance

policy which is ambiguous both intrinsically and because it

contradicts the compensation provisions of the contract.

They did so despite their admission that there was “force”

to Revere’s contention that the sentence was “essentially

meaningless” (85a, 86a).

The relevant provisions of OPIC’s policy were made part

of the award (88a, 132a-134a). The compensation provi-

sions of OPIC’s policy are §§ 15.01, 17.01, 18.01 and 18.03*

(133a-134a) and “Net Investment” which is particularly

defined in § 1.28 (132a) as “the amount of the Investment

contributed for equity Securities [here $77,182,600 invested

in cash by Revere for common stock of RJA] .. . adjusted

for ... such equity Securities’ ratable share of net retained

earnings and losses (including but aot limited to realized

capital gains or losses .. .) of the Foreign Enterprise

[RJA] .. .’—the amount which appeared on RJA’s bal-

ance sheet as “stockholder’s equity” and which at June

30, 1974 was $64,131,000. Alternative compensation mea-

surements such as market value or replacement value were

excluded by OPIC’s balance sheet definition of Net Invest-

ment, Section 18.01 provides that compensation for a total

loss “shall be the Net Investment determined as of the

Date of Expropriation .. .” (133a).

The arbitral majority relied, however, on a sentence in

§ 2.09 of the contract reading: “The amount of the Net In-

vestment ... shall be deemed to include the standards of

accounting required by Section 482 of the Internal Revenue

Code ... and by any regulations issued ... to amend [sic],

interpret or implement said section . . .” (133a). There is

no cross reference to this sentence in the definition of Net

Investment quoted above or in the other compensation pro-

* Section 18.03 provides that loss “shall be determined in ac-

cordance with accounting and valuation principles generally ac-

cepted in the United States of America and consistently applied”

(134a). The reference to “valuation” is only pertinent to the loss

of an Investment made in kind. Revere’s original Investment of

$77,182,600 was made in cash.

The first and second sentences of § 2.09 (132a) also require

that the Investor’s books of account “covering the amount of the

Net Investment” be maintained “in accordance with accounting

principles generally accepted in the United States” and that the

financial statements of the Foreign Enterprise be “prepared in

accordance with accounting principles generally accepted in the

United States”.

visions of OPIC’s policy. Section 482 (17a, 134a) gives the

Secretary of the Treasury discretionary authority, which

has been delegated to the Internal Revenue Service, to make

adjustments in gross income, deductions, credits or allow-

ances as between commonly controlled taxpayers so as to

establish “true taxable income”, 26 C.F.R. § 1.482-1(b) (1).

In addition to arguing that the sentence was essentially

meaningless—{ 482 of the Code is discretionary, does not

set forth standards of accounting and, of course, may not

be amended by administrative regulation—Revere proffered

two constructions of the sentence which were related to the

tax adjustments which § 482 authorizes the Internal Rev-

enue Service to make and which permitted a reconciliation,

rather than created a conflict, with the compensation pro-

visions of OPIC’s policy: ivet Investment is to be adjusted

either (i) for the balance sheet effect of tax adjustments

actually made by the Service under § 482 in the consolidated

tax returns of Revere and its subsidiaries, or (ii) for the

balance sheet effect of § 482 tax adjustments which the Ser-

vice might reasonably be expected to make. The effect here

- of the former construction upon Net Investment would have

been zero, while the effect of the latter might have been a

$1,785,000 reduction in Revere’s insured Net Investment.

The arbitral majority, however, derived from the sen-

tence in § 2.09 of OPIC’s insurance policy and the 27-page

regulation under § 482, 26 C.F.R. § 1.482 (1978), an “arm’s

length standard” (86a-87a)* and on the basis of that stan-

dard made balance sheet adjustments in Net Investment

which could not result from the tax adjustments permitted

*If OPIC intended to provide for an “arm’s length standard”

and the consequences to the insured which according to the arbi-

tral majority resulted from that standard, it could, beginning with

those three words, have said so. Pan American World Airways,

Inc. v. Aetna Casuaity & Surety Co., 505 F.2d 989, 999-1004 (2d

Cir. 1974).

by § 482. Disregarding the constructions of the ambiguity

of OPIC’s policy which were favorable to Revere, the in-

sured, the majority employed the construction most favor-

able to OPIC, the insurer.

By reason of expropriatory action occurring 19 months

after RJA’s plant began commercial operation, Revere’s

insured investment was totally lost. Yet Revere was award-

ed compensation under OPIC’s insurance policy of less

than 2% of Revere’s insured investment measured by gen-

erally accepted accounting principles, less than 3% of the

amounts of OPIC’s compensation examples and less than

50% of the $2.375 million in insurance premiums Revere

had paid OPIC during the three years and nine months

OPIC’s insurance had been in force.

The public policy which determines the outcome of any

dispute between insured and insurer when the insurance

policy is ambiguous governs when an arbitration award is

challenged in the district court as it does when an action

on the insurance policy is brought in the district court. This

is particularly so when the Government insurer was the sole

practicable source of the insurance, when the insurer pro-

vided the insurance as part of a Governmental effort to

induce private American investment in less developed coun-

tries as a complement to the Government’s own political

policy and when the award is the product of an arbitration

compelled by the Government insurer’s form insurance

policy.

The district court decision—Revere moved in the district

court for an order, pursuant to §11 of the Arbitration Act

(14a), correcting the amount of compensation by eliminat-

ing the three adjustments which the arbitral majority had

made in the amount of Revere’s insured investment or for

an order, pursuant to § 10 of the Arbitration Act (13a-14a),

vacating the award as to the amount of compensation. The

AE aN ele

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district court had jurisdiction pursuant to 28 U.S.C.

§§1331(a), 1332, 1337 and 1349, 9 U.S.C. §§1, 10 and

11 and 22 U.S.C. § 2199(d). The district court (Richey,

D. J.) dismissed the proceeding by denying Revere’s mo-

tion in a memorandum order (8a-lla).

Revere’s argument that, in addition to their disregard

of public policy, the arbitral majority had exceeded their

powers by rewriting OPIC’s policy—as an example, by

reducing Revere’s insured investment by $46.3 million for

an estimated “unrealized” loss although the policy defini-

tion of Net Investment (quoted at p. 8, supra) permits

adjustments only for “realized” gains or losses—was said

by the district court, without mention of the subject of

Revere’s argument, to “amount to no more than the con-

tention that the arbitrator misconstrued the contract”

(10a).

Revere argued that an award which is contrary to public

policy may not be enforced by a United States district

court under the Arbitration Act. OPIC argued for a nar-

row formulation, developed in review of awards made

under collective bargaining agreements and reflecting the

policy stated in § 203(d) of the Labor Act and the enforce-

ment authority given the district courts in $301 of the

Labor Act, that an award may only be disturbed if it

“compels the violation of law or conduct contrary to ac-

cepted public policy”. The district court ascribed (10a) to

Revere that which was OPIC’s argument, accepted its

correctness (lla) and then concluded that “the award of

$1 million” would not have the “result” which supposedly

Revere had argued was forbidden (ibid.).

The district court suggested that there had been “no

showing” that the OPiC insurance policy is ambiguous

“other than a passing reference by the majority of the

arbitrators to the ‘force’ of an alternative interpretation”

(lla). But the district court’s own paraphrase—an “alter-

native interpretation”’—conceded the recognition by the

arbitral majority of the ambiguity of OPIC’s policy. More

particularly, what the district court characterized as an

“alternative interpretation”, to which the arbitral majority

had ascribed “force”, was in fact Revere’s argument that

the sentence in the OPIC contract upon which the arbitral

majority relied was “essentially meaningless” (85a-86a)

and thus at the least ambiguous.

The court of appeals decision—The per curiam decision

of the court of appeals (Lumbard, 8.C.J., Tamm and Mikva,

C.JJ.) affirmed the district court judgment (7a).

1. The court quoted (3a) the description in Continental

Casualty Co. v. Beelar, 405 F.2d 377, 378 (1968), of the

rule of contra proferentem as a “rule of construction”. It

did not refer to its own statement in Hayes v. Home Life

Ins. Co., 168 F.2d 152 (D.C. Cir. 1948) :

“The rule that a real ambiguity in an insurance

policy is to be construed against the company is not

a rule of convenience or a mere technicality of legal-

ists, It is based upon sound public policy. .. . If the

companies were permitted to write clear clauses of

liability at one point and obscure negations of liability

at another, and to maintain successfully the prevalence

of the latter over the former, the temptation to sell

on one clause and defend on the other would be dan-

gerous.” (168 F.2d at 154-55).

Nor did it refer to this Court’s statement in Stroehmann

v. National Life Ins, Co., 300 U.S. 435 (1937):

“The rule is settled that in case of ambiguity that

construction of the policy will be adopted which is most

favorable to the insured. The language employed is

that of the company and it is consistent with both rea-

son and justice that any fair dispute as to the meaning

of its own words should be resolved against it.” (300

U.S. at 439).

2. The court stated (3a), as had the district court (11a),

that there is a “strong federal policy in favor of voluntary

commercial arbitration” (3a, 5a). For the existence of

this policy, it quoted from the preamble to the Arbitration

Act, which states only that its purpose is “[t]o make valid

and enforceable written provisions or agreements for arbi-

tration”, and a statement from Hanes Corp. v. Millard,

531 F.2d 585, 597 (D.C. Cir. 1976), which referred to a

“strong federal policy” (3a).

The Congressional purpose was, however, made clear by

this Court in Prima Paint Corp. v. Flood & Conklin Mfg.

Co., 388 U.S. 395 (1967) :

“As the ‘saving clause’ in § 2 [of the Arbitration Act]

indicates, the purpose of Congress in 1925 was to make

arbitration agreements as enforceable as other con-

tracts, but not more so.” (388 U.S. at 40: n.12, em-

phasis supplied)

Section 2 provides that an arbitration provision is “valid,:

irrevocable, and enforceable, save upon such grounds as

exist at law or in equity for the revocation of any con-

tract.” Public policy is, of course, such a ground.*

*“The power of the feaeral courts to enforce the terms of pri-

vate agreements is at all times exercised subject to the restric-

tions and limitations of the public policy of the United States

as manifested in the Constitution, treaties, federal statutes and

applicable legal precedents. Where the enforcement of private

agreements would be violative of that public policy, it is the

obligation of courts to refrain from such exertions of judicial

The court did not refer to this Court’s statement in

Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974):

“The ... Arbitration Act ..., reversing centuries

of judicial hostility to arbitration agreements, was

designed to allow parties to avoid ‘the costliness and

delays of litigation,’ and to place arbitration agree-

ments ‘upon the same footing as other contracts...”

(417 U.S. at 510-11, emphasis supplied, citations and

footnote omitted)

This statement was quoted in Hanes Corp. (531 F.2d at

597), upon which the court of appeals relied. Both Scherk

and Hanes involved international contracts providing for

arbitration abroad. In both cases, the parties were ordered

to proceed with the agreed-upon arbitration from which a

foreign award would necessarily result. United States dis-

trict courts are explicitly authorized to deny enforcement

to a foreign award which is contrary to domestic public

policy. Convention on the Recognition and Enforcement of

Foreign Arbitral Awards [1970] 3 U.S.T. 2517, T.LA.S.

No. 6997; Chapter 2 of the Arbitration Act, 9 U.S.C. § 201

et seq.; Scherk, 417 U.S. at 519 n.4. An explicit limitation

upon a treaty undertaking is understandable, but no Con-

gressman would have thought it necessary to make explicit

in the original Arbitration Act the public policy limitation

upon the authority of the district courts which is so plain

in domestic law. In any case, under § 10 an award may be

set aside “[w]here the arbitrators exceeded their powers”

and arbitrators do not have the power, any more than

judges, to make decisions contrary to public policy.

power.” Hurd v. Dodge, 334 U.S. 24, 34-35 (1948) (footnotes

omitted). :

An award which is contrary to public policy may not be judi-

cially enforced since the judgment of the district court entered

under §13 of the Arbitration Act would itself be contrary to

public policy.

‘Wigdiiicnadnce

3. The court of appeals recognized here (4a) “the rule

that enforcement of arbitration awards is subject to public

policy considerations.” The court, however, repeated

(4a) the formulc:ion employed by the district court that

only if an award “compels the vio’ations of law or conduct

contrary to accepted public policy” may it be set aside.*

The court disagreed (4a n.1) with Revere’s contontion

that arbitration of commercial disputes under the Arbi-

tration Act are not subject to the federal policy favor-

ing the resolution of labor disputes by consensual arbi-

tration.

The court did not accept that under the Arbitration Act

an arbitration agreement is as enforceable as other con-

tracts, “but not more so”. Prima Paint, 388 U.S. at 404

n.12, The court did not take into account this Court’s state-

ments in United Steelworkers of America v. Warrior & Gulf

Navigation Co., 363 U.S. 574 (1960), that in the labor con-

text “arbitration is the substitute for industrial strife”,

that “arbitration of labor disputes has quite different func-

tions from arbitration under ordinary commercial agree-

ments” and that the collective bargaining agreement is

“more than a contract’, rather it is “a generalized code

to cover a myriad of cases which the draftsmen cannot

* This formulation by the district court in Union Employers

Division of Printing Industry, Inc. v. Columbia Typographical

Union No. 101, 353 F.Supp. 1348, 1349 (D.D.C. 1973), aff'd w/o

opinion, 492 F.2d 669 (D.C.Cir.,1974), was the quotation of a

dictum in Washington-Baltimore Newspaper Guild, Local 35 v.

Washington Post Co., 442 F.2d 1234, 1239 (D.C.Cir. 1971), where

an award under a collective bargaining agreement was challenged

but not on any ground of public policy. This dictum was in turn

derived from Gulf States Tel. Co. v. Local 1692, International

Brotherhood of Electrical Workers, 416 F.2d 198, 201 (5th Cir.

1969), where the award required the reinstatement of a discharged

employee and thus “conduct” on the part of the employer. The

court there sustained the award, deriving its formulation from

Dunau, Three Problems in Labor Arbitration, 55 Va.L.Rev. 427

(1969) (416 F.2d at 201 n.6).

wholly anticipate” (363 U.S. at 578). These attributes of

labor arbitration are entirely at variance with commer-

cial arbitration.

This Court stated in United Steelworkers of America v.

Enterprise Wheel & Car Corp., 363 U.S. 593, 596 (1960),

which was not referred to by the court of appeals, that

there is a “federal policy in favor of settling labor dis-

putes by arbitration ... [which] would be undermined if

courts had the final say on the merits of the awards.” *

This Court pointed out in United Steelworkers of America

v. American Manufacturing Co., 363 U.S. 564, 566 (1960),

also not referred to by the court of appeals, that this fed-

eral policy is expressed in § 203(d) of the Labor Act.**

Section 203(d) has no counterpart in the Arbitration Act.

In commercial arbitration, the agreement to arbitrate and

to accept the award as binding is no more sacrosanct than

any other contract term.

4. The court cited (5a) the opinion of an intermediate

appellate court of California in an arbitration under an

uninsured motorist clause concerning the difference that

court saw “between the enforcement of a void contract and

* The court of appeals quoted the phrase in Enterprise Wheel

concerning the “undermining” of the federal policy of settling

labor disputes by arbitration, but did so without quotation marks

or citation, other than to a student note, and with the substitution

6 — commercial arbitration” for “settling labor disputes”

a-6a). °

** Section 203(d) provides:

“Final adjustment by a method agreed upon by the parties is

declared to be the desirable method for settlement of griev-

ance disputes arising over the application or interpretation

of an existing collective bargaining agreement ....”

Section 301 gives the district courts jurisdiction of suits for viola-

tion of contracts between employers and labor organizations, and

thus provides a mechanism for the enforcement of arbitration

clauses in collective bargaining agreements and resulting awards

which are outside the operation of the Arbitration Act.

the mere misunderstanding or misapplication of rules of

law... .” Interinsurance Exch. Auto Club v. Vailes, 219

Cal.App.2d 830, 33 Cal.Rptr. 533, 538 (1963). In a later

decision the same court held that “where the error ap-

pears on the face of the award and causes substantial in-

justice, the award may be vacated”, Campbell v. Farmers

Insurance Exch., 260 Cal.App.2d 105, 67 Cal.Rptr. 175, 179

(1968), but the court of appeals said here that the later de-

cision was “inapposite” since, so the court said, the award

here is not erroneous on its face (5a n.2).* The court did

not mention the statement of the highest court of California

that in insurance disputes the rule of contra proferentem

“does not serve as a mere tie-breaker; it rests upon funda-

mental considerations of policy.” Stevens v. Fidelity &

Casualty Co., 58 Cal.2d 862, 871, 377 P.2d 284, 290 (1962).

5. The court pointed (6a) to the fact that the Foreign

Assistance Act of 1969, 22 U.S.C. §2197(i), sanctioned

arbitration. But the Congressional grant to a Government

agency of authority to arbitrate does not carry with it

implicit Congressional approval of arbitration awards

which are contrary to public policy.

6. The court also cited (6a) a dictum in Amicizia Societa

Navigazione v. Chilean Nitrate & Iodine Sales Corp., 274

F.2d 805 (2d Cir. 1960), that misapplication of the principle

that ambiguous language is to be construed against the

author “... ‘does not rise to the stature of a “manifest

disregard” of law.’” But Amicizia involved a charter party,

*If the court meant that examination of evidence before the

arbitrators was necessary to Revere’s position, it was wrong. The

award itself and the pertinent provisions of OPIC’s policy made

part of the award suffice. If the court meant that in its view the

award was correct on its face, a one sentence footnote, the thrust

of which was to criticize Revere for citing the Campbell decision,

was a singularly oblique way of saying so.

not an insurance policy, and the challenge to the award

was that the arbitrators had improperly relied upon, rather

than disregarded the principle.

7. The court spoke of the policy which it asserted as one

which favors “voluntary” commercial arbitration (3a, 5a)

as a “mutually agreeable” alternative to litigation (7a n.3).

It did not “find credence in Revere’s claim that it was

compelled to accept the arbitration provision in its con-

tract with OPIC” (7a). Apparently the court’s disbelief

was based upon the facts that, when OPIC denied its claim,

Revere commenced the arbitration as OPIC’s policy re-

quired and that Revere sought an order correcting or

vacating the award in part. OPIC was the only source of

expropriation insurance, and the 37 printed pages of its

policy formed a single block. That fact alone may not have

constituted “coercion”, Scherk, 417 U.S. at 519 n.14, but

for Revere to proceed under the arbitration clause of the

OPIC policy was neither “voluntary” nor “mutually ac-

ceptable”. An invalid severable part of an award may, of

course, be vacated and an award may be corrected; OPIC

did not challenge the award as to liability.

8. Finally, the court, citing Enterprise Wheel (compare

p. 15 n.*, supra), stated (7a) that a “cursory reading”

of the award “indicates” that it “draws its essence” (363

U.S. at 597) from the OPIC insurance policy. Whether the

court meant anything other than that the subject of the

award was Revere’s investment, the actions of the Govern-

ment of Jamaica and OPIC’s insurance against expropria-

tory action and what consideration the court gave to the

award are unclear.

—

Ct ht NOE SH

le ett,

Reasons for Granting the Writ

The court of appeals commingled the Labor Act and the

Arbitration Act. It did so although labor disputes are

expressly excluded from the coverage of the Arbitration

Act by §1 and although there is no Congressional purpose

favoring arbitration of commercial disputes in contrast to

that expressly stated in § 203(d) of the Labor Act.

The court of appeals asserted that the principles which

govern review of awards in labor arbitration are, and

should be, those governing review of awards in commercial

disputes. Its assertion conflicts with the teaching of the

Steelworkers trilogy and Prima Paint and Scherk that com-

mercial arbitration and labor arbitration and the statutes

governing them are very different. The court’s confusion

of the two statutes and the different policies which they

express—the neutral provision of an alternative to litiga-

tion of commercial disputes, on the one hand, and the en-

couragement of consensual arbitration for the resolution

of labor disputes, on the other—resuited in the sustaining

of an award which on its face violates fundamental public

policy.

The questions presented address the proper interpreta-

tion of the Arbitration Act and of the Labor Act as well

since the lower courts used a policy formulation derived

from it to override the public policy applicable to insurance

disputes. They are questions of public importance and of

importance to the parties.

For Revere, their importance is measured by $62,999,856.

For OPIC, their importance is measured by the same

amount and in terms of the credibility of its political risk

insurance program, under which some $9,000,000,000 of

insurance is in force, and the perceived fairness of the

arbitration process upon which it has insisted in its stan-

dard form insurance policy. Resolution of these questions

adversely to OPIC would in a larger sense be to its benefit.

Beyond these measurements of importance is the signifi-

cance of these questions to the possibility of utilizing arbi-

tration as a means of lessening the burden upon the courts

of the present flood of litigation. The adoption of arbitra-

tion as the system for the resolution of, at the least, smaller

disputes requires public and legislative confidence that arbi-

trators will be responsive in some degree to some system

of what might be called law. Arbitrators and arbitration do

not enjoy the confidence enjoyed by the courts. The bills

pending in Congress, S. 373, 96th Cong., 1st Sess. (1979) ;

H.R. 2699, 96th Cong., Ist Sess. (1979), which provide for

compulsory arbitration for the resolution of specified civil

disputes include provisions for judicial trial de novo at the

request of any party.

In labor arbitration, the arbiter is selected by manage-

ment and by the union to serve for a period of time. He is

expected to decide the “myriad of cases which the drafts-

men [of the collective bargaining agreement] cannot wholly

anticipate.” Warrior é Gulf, 363 U.S. at 578. He will decide

mary grievances, some for one side, some for the other. His

continued tenure when the collective bargaining agreement

is renewed will depend upon the perception which each side

has of his even-handedness and, more important, the suc- |

eess he has had in minimizing labor-management friction

and work stoppages.

Arbitration of commercial disputes is very different. The

dispute is singular, not one of a series. There is no expecta-

tion that loss of one arbitration may be counterbalanced, as

in labor arbitration, by success in the next one. The arbi-

trators are selected ad hoc. The parties do not ask for infal-

libility, but they do expect that the dispute will be resolved

with regard the terms of the agreement between them and

with some relation to the legal principles with which lay

businessmen are familiar.* When the result radically dis-

appoints these expectations, confidence in the process is

destroyed.

This is not to say that arbitrators may not err. It is

rather that beyond the specialized industries, e.g., ship-

ping,** and special contexts, e.g., international contracts,

where the particular practices or necessities of the industry

or context have made it customary, arbitration of civil dis-

putes will not be accepted if arbitrators are viewed as en-

tirely free to make arbitrary decisions from which no relief

may be had.

The courts—here the court of appeals and the district

court, but they are far from being alone—have, we submit,

succumbed to the “glib generalizations and unthinking ab-

stractions” against which this Court warned in a different

context in SEC v. National Securities, Inc., 393 U.S. 453,

465 (1969). There is a federal policy which favors labor

arbitration, while the federal policy with respect to com-

* The “ ‘objectively reasonable expectations’ of businessmen” de-

termine the outcome of commercial insurance disputes in the courts.

Ore & Chemical Corp. v. Eagle Star Ins. Co., 489 F.2d 455, 456 (2d

Cir. 1973) ; Bird v. St. Paul Fire & Marine Ins. Co., 224 N.Y. 47,

51, 120 N.E. 86, 87 (1918) (Cardozo, J.).

In commercial insurance, resolution of disputes concerning those

expectations—the intent of the parties—depends upon “[a] com-

mon-sense of appraisement of every day forms of speech and modes

of thought... .” Bird, 224 N.Y. at 51, 120 N.E. at 87. This

Court looks to the “usual meaning” of words. Kissinger v. Report-

ers Committee for the Freedom of the Press, 48 U.S.L.W. 4223

(U.S. March 3, 1980) (Congressional intent).

** In a charter party “a single short (and often, to the un-

initiate, obscure) expression may refer to a whole set of compli-

cated practices perfectly familiar to those who deal regularly in

such matters .... In such a field, it is not surprising that

arbitration . . . has largely taken the place of litigation.” J/S

Stavborg v. National Metal Converters, Inc., 500 F.2d 424, 427

(2d Cir. 1974) (quoting G. Gilmore & C. Black, The Law of

Admiralty (1957)).

mercial arbitration is neutral. This was not a labor arbi-

tration; it was a commercial arbitration, more particularly

an insurance arbitration.* “[W]e have taken the law of

insurance practically out of the category of contract

..”** Insurance is “essentially different from ordi-

nary commercial transactions, and . . . according to the

sense of the world from the earliest times—certainly the

sense of the modern world—is of the greatest public con-

cern.” German Alliance Ins. Co. v. Lewis, 233 U.S. 389,

414-15 (1914).

In this area of important national interest and concern,

the application of the rule of contra proferentem fulfills

the critical regulatory function of making insurers re-

sponsible if they produce and market ambiguous policies

of insurance. If the rule can be disregarded, some other

and less salutary means would have to be devised to regu-

late and control the production and marketing of insurance

policies.***

In the relationship between insured and insurer, as con-

trasted with other contractual relationships, the rule of

contra proferentem “defines the scope of coverage as much

as if it were a clause in the... polic[y]. It is part of the

understanding of the parties.” Pan American World Air-

ways, Inc. v.-Aetna Casualty & Surety Co., 505 F.2d 989,

1003 (2d Cir. 1974); Filor, Bullard & Smyth v. Insurance

* Disputes between insured and insurer are seldom the subject

of arbitration. The language of OPIC’s policy requiring arbitra-

tion is, however, subject to no regulatory control.

** R. Pound, The Spirit of the Common Law 29 (1921).

*** In the insurance context the rule of contra proferentum per-

forms the function performed in the products liability context

by the legal doctrines which encourage manufacturer responsibility

and provide consumer protection.

Co. of North America, 605 F.2d 598 (2d Cir. 1978).* The

rule does not depend upon the insured’s lack of economic

strength or sophistication, but rather upon the insured’s

practical inability in the circumstances to negotiate the

contract terms. The rule has been applied in favor of a

New York Stock Exchange member firm, Filor, Bullard &

Smyth, 605 F.2d at 602, 605, a major airline, Pan Ameri-

can World Airways, 505 F.2d at 1002-03, a national bank,

First National Bank v. United States Fidelity & Guaranty

Co., 416 F.2d 52, 56 (Sth Cir. 1969), and one insurance

company in dispute with another insurance company, Lon-

don Assurance Corp. v. Thompson, 170 N.Y. 94, 62 N.E.

1066 (1902).

For this Court to hear and determine the questions pre-

sented by this Petition would not expose the courts to un-

warranted attempts to obtain review of arbitration awards.

The grounds of review permitted by the Arbitration Act

are narrow and will remain so. The questions presented

are questions of statutory interpretation.

In doing justice for Revere, this Court would tell the .

lower courts plainly that commercial arbitration is dif-

ferent from labor arbitration and that the Arbitration Act

does not require unthinking enforcement of every non-

corrupt award. This Court will have strengthened confi-

dence in the arbitration process without encouraging at-

tacks upon particular results of arbitration.

* See also Ross v. Royal Globe Ins. Co., 612 F.2d 379, 381 (8th

Cir. 1980) (recognizing contra proferentem in insurance disputes

as “a benchmark principle’).

CONCLUSION

The writ prayed for should issue,

Respectfully submitted,

WruiumM FE. Heearry

80 Pine Street

New York, New York 10005

(212) 825-0100

Counsel for Petitioner

Of Counsel:

CanitL Gorpon & REINDEL

MricHaru P. Trerney

GrorcE WAILAND

Cuartes A, GruMAN

and

Ricuarp A. Manroop, Q.C.

April 8, 1980

APPENDIX A

Opinion of the Court of Appeals

UNITED STATES COURT OF APPEALS

For THE District or CoLtumsBia Crrovuir

No. 79-1159

ReveERE Copper AND Brass INCORPORATED,

Appellant,

OversEas Private INVESTMENT CORPORATION,

Appellee.

Appeal from the United States District Court

for the District of Columbia

(Mise. No. 78-0296)

Argued October 25, 1979

Decided February 26,1980 “™ Judgment entered this date

Wiliam E. Hegarty for appellant.

Michael B. Sheppard, with whom E. Donald Elliott was

on the brief, for appellee.

Before J. Epwarp Lumsarp,* U.S. Senior Circuit Judge

for the Second Circuit, and Tamm and Mrxva, Circuit

Judges.

ns sO

* Sitting by designation pursuant to 28 U.S.C. § 294(d) (1976).

Opinion of the Court of Appeals

Opinion Per Curiam.

Per Curram: Appellant, Revere Copper and Brass In-

corporated (Revere), seeks reversal of the district court’s

denial of Revere’s motion to correct or vacate in part an

arbitration award, The origin of the arbitration award

in question is an insurance contract under which the ap-

pellee, Overseas Private Investment Corporation (OPIC),

an agency of the United States, insured Revere against

losses incurred by expropriation of Revere’s investment

in its wholly-owned subsidiary’s aluminum mining and

refinery complex in Jamaica. Section 10.01 of the contract

provides that any disputes thereon “shall be settled bv

arbitration ... [and] ... [t]he award rendered by the

arbitrator shall be final and binding upon the parties... .”

Following a change in administration of the Jamaican

government, Revere made claim upon OPIC for compen-

sation, alleging that actions by the new government con-

stituted an expropriation of Revere’s property. When

OPIC denied the claim, Revere submitted the dispute to

arbitration. The arbitrators determined that there was

expropriatory action but awarded Revere $1,131,144, in-

stead of the $64,131,000 that Revere had claimed.

Revere then filed its motion in the district court, seek-

ing to correct or vacate the portions of the arbitrators’

award in which the amount of the award was determined.

Judge Charles R. Richey concluded that “Revere’s claims

amount to no more than the contention that the arbitrators

misconstrued the contract. .. . [which] ‘is not open to judi-

cial review.’ Bernhardt v. Polygraphic Co. of America,

Inc., 350 U.S. 198, 203 n.4 (1956).” Revere Copper & Brass,

Inc, v. Overseas Private Investment Corp., No. 78-0296,

Order at 2-3 (D.D.C. Dec. 8, 1978), reprinted in Joint Ap-

cet aici Rian Ns

Rae isinettt tii Sines Be Sha a

Opinion of the Court of Appeals

pendix (J.A.) at 447a, 448a-49a. Judge Richey rejected

Revere’s claim that the award must be set aside for public

policy reasons because it violates the rule of contra pro-

ferentem. Id. at 3, reprinted in J.A. at 449a. Contra

proferentem is “the rule of construction that ambiguities

in insurance contracts are resolved favorably to the in-

sured.” Continental Casualty Co. v. Beelar, 132 U.S. App.

D.C. 1, 2, 405 F.2d 377, 378 (1968). The rule developed in

recognition that insurance policies are usually written by

the insurer, and the insurer ought not be allowed to benefit

from any ambiguities in the language which it chose. 13

J. APPLEMAN, Insurance Law & Practice § 7401 (rev. ed.

1976). After questioning whether any ambiguity in the

Revere-OPIC insurance contract had been shown, Judge

Richey declared that “[p]ublic policy is involved in this

case, but not in the manner the petitioner [Revere] con-

tends. There is a strong public policy behind judicial

enforcement of binding arbitration clauses.” Order at 3,

reprinted in J.A. at 449a. From this ruling Revere appeals.

We affirm. )

Revere’s motion in the district court was made pursuant

to sections 10 and 11 of the Federal Arbitration Act, 9

U.S.C. §§ 10-11 (1976). The Act was originally passed in

1925. Pub. L. No. 68-401, 43 Stat. 883. As stated in the

Act’s preamble, Congress: intended it to be “An Act To

make valid and enforceable written provisions or agree-

ments for arbitration of disputes arising out of contracts,

maritime transactions, or commerce among the States or

Territories or with foreign nations.” Id. In the ensuing

years, “[t]he federal courts have recognized a strong fed-

eral policy in favor of voluntary commercial arbitration,

as embodied in the [Act]....” Hanes Corp. v. Millard, 174

U.S. App. D.C. 253, 265, 531 F.2d 585, 597 (1976). The goal

Opinion of the Court of Appeals

of Congress in passing the Act was to establish an alter-

native to the complications of litigation. See Wilko v. Swan,

346 U.S. 427, 431 (1953) (citing House and Senate reports).

As a result, judicial review of an arbitration award has

been narrowly limited. Amicizia Societa Navegazione v.

Chilean Nitrate & Iodine Sales Corp., 274 F.2d 805, 808

(2d Cir.), cert. denied, 363 U.S. 843 (1960). This court has

acknowledged its restricted function in that capacity. See

Washington-Baltimore Newspaper Guild, Local 35 v. Wash-

ington Post Co., 143 U.S. App. D.C. 210, 215, 442 F.2d 1234,

1239 (1971).

Seekimg to avoid the restrictions upon our review of the

award in question, Revere points to the rule that enforce-

ment of arbitration awards is subject to public policy con-

siderations. Revere misperceives the nature of the public

policy exception to the enforcement of arbitration awards.

It is not available for every party who manages to find

some generally accepted principle which is transgressed by

the award. Rather, the award must be so misconceived that

it “compels the violation of law or conduct contrary to ac-

cepted public policy.” Union Employers Division of Print-

ing Industry, Inc. v. Columbia Typographical Union No.

101, 353 F.Supp. 1348, 1349 (D.D.C. 1973), aff’d mem., 160

U.S. App. D.C. 403, 492 F.2d 669 (1974).1 A proper de-

scription of the limits of the public policy exception is pro-

1 We do not agree with Revere’s contention that the formulation

of the role of public policy in the judicial review of arbitration

awards set forth in the Union Employers ease is limited to the

labor context. A looser standard in other settings would upset the

basie goal sought by Congress in enacting the Federal Arbitration

Act. Allowing undue challenges to arbitration awards would defeat

the finality and speedy dispute resolution expected of the arbitra-

tion procedure. Cf. Washington-Baltimore Newspaper Guild, Local

35 v. Washington Post Co., 143 U.S. App. D.C. 210, 214, 442 F.2d

1234, 1238 (1971).

Opinion of the Court of Appeals

vided in Interinsurance Exchange of Automobile Club »v.

Bailes, 219 Cal. App. 2d 830, 33 Cal. Rptr. 533, 538 (1963) :

While, in one sense, all rules of adjective and substan-

tive law set forth the “public policy” of the state, there

is a vast difference between the enforcement of a void

contract and the mere misunderstanding or misappli-

cation of rules of law involved in the application to a

particular dispute of a [valid] contract ....

There being no question as to the validity of the insurance

contract between Revere and OPIC, or the legitimacy of

the parties’ bargained-for performances, the public policy

exception is inapplicable here.?

Revere argues that arbitration clauses are entitled to

varying degrees of enforcement depending upon the sub-

ject matter of the contract in question. The Federal Ar-

bitration Act provides no basis for this view. Section 9

of the Act expressly provides for the confirmation of arbi-

tration awards which arise out of the kind of binding

arbitration clause which is present in Revere’s contract

with OPIC. See 9 U.S.C. §9 (1976). If indeed there are

particular considerations that lead parties to different

types of contracts to favor or disfavor arbitration, that

is for the parties to determine when they decide whether

to include an arbitration clause in their contract. It has

nothing to do with the judicial enforcement of arbitration

clauses pursuant to the Federal Arbitration Act. The

strong federal policy in favor of voluntary commercial

arbitration would be undermined if the courts had the

final say on the merits of the award. See Note, Judicial

* Since the award here is not erroneous on its face, Revere’s cita-

tion of Campbell v. Farmers Insurance Exchange, 260 Cal. App. 2d

105. 67 Cal. Rptr. 175 (1968), is inapposite.

Opinion of the Court of Appeals

Review of Arbitration Awards on the Merits, 63 Harv.

L. Rev. 681 (1950).

If Congress wanted to exempt insurance contracts from

the purview of the Federal Arbitration Act in the manner

suggested by Revere, Congress could do so. In fact, the

cases cited by Revere to demonstrate that arbitration of

disputes between customer and broker is disfavored,

Wilko v. Swan, 346 U.S. 427 (1953) and Ames v. Merrill

Lynch, Pierce, Fenner & Smith, Inc., 567 F.2d 1174 (2d

Cir. 1977), stand for the proposition that Congress can

abrogate an arbitration procedure previously contracted

for. Congress has done no such thing in the —

area. On the contrary, in the Foreign Assistance Act of

1969, Congress expressly sanctioned the use of arbitration

in OPIC’s insurance and guaranty programs. See 22

U.S.C. §2197(i) (1976). As Judge Fuchsberg cogently

stated in a case relied upon by Revere, “The notion that

courts may. freely assume the role of arbiters of public

policy is a very much exaggerated one. Most especially,

they should avoid doing so in the face of a statutory

scheme which bespeaks its own policy considerations ... .”

Susquehanna Valley Central School Dist. v. Susquehanna

Valley Teachers’ Ass’n, 37 N.Y.2d 614, 339 N.E.2d 132,

134 (1975) (concurring opinion).

We see no reason for holding that the failure of arbi-

trators to apply the rule of contra proferentem is suf-

ficient cause for upsetting the award. In Amicizia Societa

Navegazione v. Chilean Nitrate & Iodine Sales Corp., 274

F.2d 805 (2d Cir. 1960), the court was faced with a chal-

lenge to “arbitrators’ reliance upon the principle that am-

biguous language is to be construed against the autho-.”

Id. at 808. The court resolved the issue in declaring that

“the misapplication . . . of such rules of contract interpre-

Opinion of the Court of Appeals

tation does not rise to the stature of a ‘manifest disregard’

of law.” Id.

Our disposition makes it clear that we do not find

credence in Revere’s claim that it was compelled to accept

the arbitration provision in its contract with OPIC. This

allegation appears to have surfaced after the arbitration

award was announced.’ Revere is willing, on the other

hand, to let stand the arbitrators’ majority decision in

Revere’s favor that the Jamaican government expro-

priated Revere’s property. Such an after-the-fact, pick-

and-choose approach to an arbitration award is hardly con-

sonant with the underlying concept of arbitration or with

Revere’s claim that it was forced to agree to arbitration in

the first place.

As for Revere’s argument that the arbitrators “rewrote”

the contract in excess of their authority, a cursory reading

of the arbitration award indicates that it “draws its es-

sence” from the Revere-OPIC contract. United Steelwork-

ers of America v. Enterprise Wheel & Car Corp., 363 US.

593, 597 (1960).

We are satisfied that the arbitration award should be

sustained. The judgment of the district court, therefore, is

Affirmed.

’ Revere was the party that requested arbitration of the dispute.

Revere’s displeasure with the results is understandable, but the very

purpose of the Federal Arbitration Act—to offer parties a mutually

agreeable alternative to lengthy and costly litigation—would be

defeated if this court upset the arbitrators’ decision.

APPENDIX B

Opinion of the District Court

UNITED STATES DISTRICT COURT

For tHe District or COLUMBIA

Filed Dee, 8, 1978, James F. Davey, Clerk

Mise, No. 78-0296

Revere Copper AND Brass INCORPORATED,

Petitioner,

Oversgas Private INVESTMENT CORPORATION,

Respondent.

ORDER

Presently before the Court is a motion by petitioner

Revere Copper and Brass Incorporated [hereinafter re-

ferred to as “Revere”] to correct, pursuant to 9 U.S.C.

11 (1976), and vacate, pursuant to 9 U.S.C. 10 (1976), por-

tions of an award made in arbitration proceedings between

Revere and respondent Overseas Private Investment Cor-

poration [hereinafter referred to as “OPIC”] and cap-

tioned In the Matter of: Revere Copper and Brass, Incor-

porated, and Overseas Private Investment Corporation,

Case No. 16 10 0137 76.

Revere invested in Jamaica by establishing a wholly-

owned subsidiary called Revere Jamaica Alumina, Ltd.

[hereinafter referred to as “RJA”] which operated a

bauxite and alumina processing complex. In 1970, Revere

Opinion of the District Court

obtained expropriation insurance from OPIC to protect its

investment in Jamaica from political risk. Section 10.01

of the insurance contract between Revere and OPIC pro-

vided that all disputes between the parties were to be re-

solved by arbitration and “[t]he award rendered by the

arbitrator shall be final and binding upon the parties.”

In August 1975, RJA shut down. Revere filed a claim

with OPIC alleging that actions of the Jamaican Govern-

ment—principally the imposition of a tax in June 1974—

constituted expropriation within the meaning of the insur-

ance contract. OPIC denied Revere’s claim and initiated

arbitration under the auspices of the American Arbitration

Association. Three neutral arbitrators were selected to

decide whether OPIC was liable to Revere and, if so, the

amount of the liability.

One arbitrator felt that OPIC was not liable to Revere

at all, while the majority of arbitrators found that Revere

was entitled to receive compensation of $1,131,144. Revere

is dissatisfied with the amount of the award, and has filed

this action, arguing that the majority of the arbitrators

exceeded their powers by: (1) making three adjustments

which disregarded express terms of the insurance contract ;

(2) writing into the contract a term it does not contain; (3)

giving to that term a meaning which it does not have; and

(4) choosing a construction of the contract most favorable

to the insurer and least favorable to the insured. Accord-

ing to the petitioner, these improper actions resulted in the

writing down of the amount of Revere’s equity investment,

the amount recoverable under the contract, from $64,131,000

to $1,131,144.

The scope of review of an arbitrator’s decision is ex-

tremely limited:

10a

Opinion of the District Court

It is well-settled in this Circuit that an arbitration

award will not be vacated

[E]ven though the arbitrator may have made, in the

eyes of judges, errors of fact and law unless it “com-

pels the violation of law or conduct contrary to ac-

cepted public policy.”

Union Employers Division, Etc. v. Columbia Typographical

Union No. 101, 353 F. Supp. 1348, 1349 (D.D.C. 1973)

(Richey, J.), aff'd, 492 F.2d 669 (D.C. Cir. 1974), quoting

Washington-Baltimore Newspaper Guild, Local 35 v.

Washington Post Co., 442 F.2d 1234, 1239 (D.C. Cir. 1971).

Revere does not claim that the award is tainted by par-

tiality, bias, corruption, or unfair proceedings, nor does

Revere contend that the issues decided by the arbitrators

were not within the scope of the submission. Instead,

Revere’s claims amount to no more than the contention that

the arbitrators misconstrued the contract. However, the

courts cannot correct misconstructions: ‘Whether the arbi-

trators misconstrued a contract is not open to judicial re-

view.” Bernhardt v. Polygraphic Co. of America, Inc., 350

U.S. 198, 203 n.4 (1956).

In order to avoid this rule, Revere has made a convoluted

argument that it has satisfied the rule that the arbitrator’s

award be set aside if it “compels the violation of law or

conduct contrary to accepted public policy.” Union Em-

ployers Division, Etc., supra. Revere’s argument that the

arbitrators’ award violated public policy runs as follows:

The arbitrators failed to apply the rule of contra proferen-

tem, which requires that ambiguities in insurance contracts

be resolved in favor of the insured; contra proferentem is

lla

Opinion of the District Court

required by public policy; therefore, the arbitrators’ failure

to apply that rule violates public policy.

First, it is not at all clear that this rule of construction

has been violated. There has been no showing that the

contract was ambiguous other than a passing reference by

the majority of arbitrators to the “force” of an alternative

interpretation. Moreover, the rule in Union Employers

Division requires that the arbitrators’ decision must “com-

pel the violation of law or conduct contrary to accepted

public policy.” (Emphasis added.) There has been no show-

ing that the award of over $1 million would have any such

result. Revere has failed to convince the Court that any

error has occurred, and certainly the Court can find no

error of the magnitude required by Union Employers Divt-

ov0Nn,

Public policy is involved in this case, but not in the man-

ner the petitioner contends. There is a strong public policy

behind judicial enforcement of binding arbitration clauses.

Accordingly, it is, by the Court, this 8 day of C.R.R. Decem-

ber, 1978,

Orperep, that the petitioner’s motion be, and the same

hereby is, denied.

/s/ Cuarues R. RicHry

Charles R. Richey

United States District Judge

12a

APPENDIX C

Statutory Provisions

Federal Arbitration Act,

9 U.S.C. §§ 1, 2, 9, 10, 11 and 13 (1976)

§ 1. “Maritime transactions” and “commerce” defined ;

exceptions to operation of title

“Maritime transactions”, as herein defined, means charter

parties, bills of lading of water carriers, agreements relat-

ing to wharfage, supplies furnished vessels or repairs to

vessels, collisions, or any other matters in foreign commerce

which, if the subject of controversy, would be embraced

within admiralty jurisdiction; “commerce”, as herein de-

fined, means commerce among the several States or with

foreign nations, or in any Territory of the United States

or in the District of Columbia, or between any such Terri-

tory and another, or between any such Territory and any

State or foreign nation, or between the District of Columbia

and any State or Territory or foreign nation, but nothing

herein contained shall apply to contracts of employment of

seamen, railroad employees, or any other class of workers

engaged in foreign or interstate commerce.

§ 2. Validity, irrevocability, and enforcement of agreements

to arbitrate

A written provision in any maritime transaction or a

contract evidencing a transaction involving commerce to

settle by arbitration a controversy thereafter arising out

of such contract or transaction, or the refusal to perform

the whole or any part thereof, or an agreement in writing

to submit to arbitration an existing controversy arising

out of such a contract, transaction, or refusal, shall be

valid, irrevocable, and enforceable, save upon such grounds

as exist at law or in equity for the revocation of any

contract.

13a

Statutory Provisions

§9. Award of arbitrators; confirmation; jurisdiction;

procedure

If the parties in their agreement have agreed that a

judgment of the court shall be entered upon the award

made pursuant to the arbitration, and shall specify the

court, then at any time within one year after the award is

made any party to the arbitration may apply to the court

so specified for an order confirming the award, and there-

upon the court must grant such an order unless the award

is vacated, modified, or corrected as prescribed in sections

10 and 11 of this title. If no court is specified in the agree-

ment of the parties, then such application may be made to

the United States court in and for the district within which

such award was made. Notice of the application shall be

served upon the adverse party, and thereupon the court

shall have jurisdiction of such party as though he had ap-

peared generally in the proceeding. If the adverse party

is a resident of the district within which the award was

made, such service shall be made upon the adverse party or

his attorney as prescribed by law for service of notice of

motion in an action in the same court. If the adverse party

shall be a non-resident, then the notice of the application

shall be served by the marshal of any district within which

the adverse party may be found in like manner as other

process of the court.

§ 10. Same; vacation; grounds; rehearing

In either of the following cases the United States court

in and for the district wherein the award was made may

make an order vacating the award upon the application of

any party to the arbitration—

(a) Where the award was procured by corruption, fraud,

or undue means.

14a

Statutory Provisions

(b) Where there was evident partiality or corruption

in the arbitrators, or either of them.

refusing to postpone the hearing, upon sufficient cause

shown, or in refusing to hear evidence pertinent and mate-

rial to the controversy; or of any other misbehavior by

which the rights of any party have been prejudiced.

(d) Where the arbitrators exceeded their powers, or so

imperfectly executed them that a mutual, final, and definite

award upon the subject matter submitted was not made.

(e) Where an award is vacated and the time within which

the agreement required the award to be made has not ex-

pired the court may, in its discretion, direct a rehearing by

the arbitrators.

§11. Same; modification or correction; grounds; order

In either of the following cases the United States court

in and for the district wherein the award was made may

make an order modifying or correcting the award upon

the application of any party to the arbitration—

(a) Where there was an evident material miscalculation

of figures or an evident material mistake in the description

of any person, thing, or property referred to in the award.

(b) Where the arbitrators have awarded upon a matter

not submitted to them, unless it is a matter not affecting

the merits of the decision upon the matter submitted.

affecting the merits of the controversy.

The order may modify and correct the award, so as to

effect the intent thereof and promote justice between the

parties.

grievance disputes arising over the application or inter-

15a

Statutory Provisions

§ 13. Papers filed with order on motions; judgment; docket-

ing; force and effect; enforcement

The party moving for an order confirming, modifying, or

correcting an award shall, at the time such order is filed

with the clerk for the entry of judgment thereon, also file

the following papers with the clerk:

€

(a) The agreement; the selection or appointment, if any,

of an additional arbitrator or umpire; and each written

extension of the time, if any, within which to make the

award.

(b) The award.

application to confirm, modify, or correct the award, and a

copy of each order of the court upon such an application.

The judgment shall be docketed as if it was rendered in

an action.

The judgment so entered shall have the same force and

effect, in all respects, as, and be subject to all the provisions

of law relating to, a judgment in an action; and it may be

enforced as if it had been rendered in an action in the

court in which it is entered.

Labor Management Relations Act, 1947

29 U.S.C. §§ 173(d) and 185 (1976)

§ 173. Functions of Service

(d) Use of conciliation and mediation services as last

resort

Final adjustment by a method agreed upon by the parties

is declared to be the desirable method for settlement of

16a

Statutory Provisions

pretation of an existing collective-bargaining agreement.

The Service is directed to make its conciliation and media-

tion services available in the settlement of such grievance

disputes only as a last resort and in exceptional cases.

§ 185. Suits by and against labor organizations

(a) Venue, amount, and citizenship

Suits for violation of contracts between an employer and

a labor organization representing employees in an industry

affecting commerce as defined in this chapter, or between

any such labor organizations, may be brought in any dis-

trict court of the United States having jurisdiction of the

parties, without respect to the amount in controversy or

without regard to the citizenship of the parties.

(b) Responsibility for acts of agent; entity for purposes

of suit; enforcement of money judgments

Any labor organization which represents employees in an

industry affecting commerce as defined in this chapter and

any employer whose activities affect commerce as defined

in this chapter shall be bound by the acts of its agents. Any

such labor organization may sue or be sued as an entity and

in behalf of the employees whom it represents in the courts

of the United States. Any money judgment against a labor

organization in a district court of the United States shall

be enforceable only against the organization as an entity

and against its assets, and shall not be enforceable against

any individual member or his assets.

For the purposes of actions and proceedings by or

against labor organizations in the district courts of the

United States, district courts shall be deemed to have juris-

diction of a labor organization (1) in the district in which

17a

Statutory Provisions

such organization maintains its principal office, or (2) in

any district in which its duly authorized officers or agents

are engaged in representing or acting for employee mem-

bers.

(d) Service of process

The service of summons, subpena, or other legal process

of any court of the United States upon an officer or agent

of a labor organization, in his capacity as such, shall con-

stitute service upon the labor organization.

(e) Determination of question of agency

For the purposes of this section, in determining whether

any person is acting as an “agent” of another person so as

to make such other person responsible for his acts, the

question of whether the specific acts performed were actu-

ally authorized or subsequently ratified shall not be con-

trolling.

Internal Revenue Code, 26 U.S.C. § 482 (1976)

§ 482. Allocation of income and deductions among tax-

payers

In any case of two or more organizations, trades, or busi-

nesses (whether or not incorporated, whether or not or-

ganized in the United States, and whether or not affiliated)

owned or controlled directly or indirectly by the same in-

terests, the Secretary may distribute, apportion, or allocate

gross income, deductions, credits, or allowances between or

among such organizations, trades, or businesses, if he deter-

mines that such distribution, apportionment, or allocation

is necessary in order to prevent evasion of taxes or clearly

to reflect the income of any of such organizations, trades, or

businesses,

18a 19a

OPIC Insurance Policy

APPENDIX D

OPIC Insurance Policy

GENERAL TERMS AND CONDITIONS

FESO CaN ee ConTENTS

PAGE

TITLE

PART I—GENERAL

221 K GT 11-65 Articte 1—Governine Terms aNnp DerInitIoNns

Revised (Combined) 1.01. Governing Terms and Definitions

1.02. Act

1.03. Actual Cash Value ....

Agency for International Development 1.04. AID ....

1.04A. Combined Coverage B and C ..............

1.05. Contract of Guaranty

1.06. Contract Period ......

GENERAL TERMS AND CONDITIONS 1.07. Covered Property ........

(for Coverage A and Combined Coverages B and (©) pee ssa pe cagemeEte er

which with 1.10. Date of Application ....................

SprciaL TeRMs AND CONDITIONS 1.11. Date of Damage ........

; 1.12. Date of Expropriation ................

: constitute a 1.13. Date of Investment .........

1.14. Date of This Contract -.....000000000000....

1.15. Expropriatory Action ..........

1.16. Fee for This Contract ............00.0000..00.....

CONTRACT OF GUARANTY 1.17, Foreign Enterprise

1.18. Free and Clear : a

1.19. General Terms and Conditions ............

of the Foreign Assistance Act of 1961, as amended 1.20. Government of the Project Country ..

For Investment Guaranties Under Section 221(b)

1.21. Guaranty Period ...

1.22. Investment ERE eb

1.23. Investment Earnings

ee 1,24. Investor .... ve

DBNININAIMAAAAAKEKHE HR RHO WDNDNODDNDDNSDY HH

1.25.

1.26.

1.27.

1.28.

1.29.

1.30.

1.31.

1.32.

1.33.

1.34.

1.35.

1.36.

1.37.

ARTICLE

2.01.

2.02.

2.03.

2.04.

2.05.

2.06.

2.07.

2.08.

2.09.

2.10.

2.11.

2.12.

2.13.

2.14.

20a

OPIC Insurance Policy

TITLE PAGE

Investor’s Share ................----c---secccsecceeessnsseeee 8

Local Currency ..........-----:-:-:--:-s-cscseseeessceeeneennees 8

Maximum Amount of Guaranty .................--- 8

Net Investment ..................-.-.--.--c-ccs-nsrecseeseoeenere 9

Other Compensation ..........-...-----+--+-+-s-esseese-eeee9 9

Project ....-.-..------c-seecscecnesecnseseseseoeosecsnepensenenenesnens 9

Project Country ..........-----------s-se-ceessesesesesnsnsenees 10

NO TORI oi icssccnenecntewsonensesecssosabonopetidetes 10

Reference Rate of Exchange .................-...-.--- 10

Return of Capital ................--.--.-0.....s0ssesssceseee 11

eens RRS RTT aes Bee ean CORN CCE OO 11

Special Terms and Conditions ...................-.--- 11

Standby Amount ..........-.2..—~.-.-ccnecenneosesreceeserese 12

9_InvestTor’s REPRESENTATIONS AND COVENANTS

ee eee Soa eT On eee 12

Prior Arrangements .................---.-s:s-sssssseseee 12

| 1) 5 es ee 13

Other Avveneoments *.........-.............-..........-- 13

ARIINIII - oiiiespu asc sotassrscnrecmsoresonnnwepingntienenn 13

EMRE TRG S25 COREA See OR eee DEO 13

iia Ne lc ncadsammeyeionwoness 14

PMO COTO Sinan ns cons cnencpen erent 14

Books and Records of Investor and Foreign

ia sesh os ccoit ec setenensnentesesncin 14

Accountant’s Certificates -................-..-..--.+-.-- 15

Investment and Project Execution ................ 15

Presents fae 222... se 16

Prosecuting Claims ........:....—..2...............- 16

Secnrity for Refunds or Adjustments ........ 16

21a

OPIC Insurance Policy

TITLE PAGE

ARTICLE 3—MISREPRESENTATION AND BREACH OF

CovENANT

aE Lea EO LITLE 17

Ee eRe a ee 17

Ty. SUMUIIT T sacccciccscccscstbesi ees 19

3.04. Refunds of Compensation —..0.000.00..00002...-..- .19

3.05. Limit of Liability and Election of Remedies 20

ArtTICLE 4—F'unps AVAILABLE FOR PAYMENT OF

GUARANTY

ATE. © FFE REE I CRIES ooesccenne cg cnesttteersviniectectcercect 20

ArticLe 5—TERMINATION AND ELECTION BY INVESTOR

A <I 20

5.02. Election of Amounts of Coverage ................ 20

ARTICLE 6—MopIFICcATION

I = ea rt ncn bani saiesibhaiaidihdiipiinslasaan 21

ARTICLE 7—NOTICES

WG: 1 RI iio nike ccinianhsakseicoanepnibiniaptiiad canbe’ 21

Este SRO BN aia sakes cipeenh a lapeinershaninabicncinatiiens 21

ArtTicLe 8—AUTHORITY OF REPRESENTATIVES

8.01. Authorized Representatives -...............20...-. 22

ARTICLE 9—D1ISCLAIMER

I; a 22

22a

OPIC Insurance Policy

TITLE PAGE

ArtTicLe 10—ARBITRATION

10.01. Arbitration 29

PART II—INCONVERTIBILITY (COVERAGE A)

ArticLe 11—Guaranty

11.01. Elements of Guaranty 22

Articur 12—Locan Currency ELicIBLe ror TRANSFER

12.01. Eligibility for Transfer 23

Articte 13—Rare or ExcHance ror TRANSFERS

13.01. Transfer Rate .....

ArTIcLE 14—APppLicATION FOR TRANSFER

14.01. Discretionary Notice ...

14.02. Form of Application to AID

14.03. Draft to AID

14.04. Prior Conversion

14.05. Processing Time

14.06. Consultation

14.07. Return of Draft .

RKRKRKERS

PART III—EXPROPRIATION (COVERAGE B)

ArticLe 15—GuARANTY _

15.01. Elements of Guaranty ....2n..........eecececeeeeneees 26

23a

OPIC Insurance. Policy

TITLE PAGE

ARTICLE 16—ApDDITIONAL CovENANTS APPLICABLE TO

CovERAGE B

16.01. Compulsory Notice .........2.......-ccscsscecsceeceeeeeees 26

16.02. Assignment to AID—Total Loss .................... 26

16.03. Assignment to AID—Under Section 1.15(e) 27

ARTICLE 17—AMounrtv oF COMPENSATION

Oe ie ly Re POSES LIRA Ae AY REE RO ROR EOD 28

Articte 18—ComputTaTIon or Loss By REASON OF THE

EXXPROPRIATORY ACTION

pS: SR,” Sg)” SREY TRipreeens Cow NU tata Vee pea ele 29

18.02. Loss Under Section 1.15(e) -.....2....2....2..:ccs-00 29

18.08. Accounting Principles . 2... .2.......ciccccicceccesccssse 29

ArTICLE 19—APPLICATION FOR COMPENSATION

19.01. Form of Application to AID ......................... 30

SOIR: IN easiest ce scedcncseriancesccccowieunstininas 30

TOE... Fe ee iad te aa hi ete ahah 31

19.04. Perfecting Assignment ...........0....22.......-::20000-0 31

PART IV—WAR, REVOLUTION AND INSUR-

RECTION (COVERAGE C)

ArtTICcLE 20—GuARANTY

20.01. Elements of Guaranty _.......0...0220222200202-e0-0000- 31

Ses: MRE ss idescevic suc pecds vnchctisecdcdnsadadasdpeladiepacte 32

24a 25a

OPIC Insurance Policy | OPIC Insurance Policy

TITLE PAGE [Sections 1.22, 1.28, 2.09, 15.01, 17.01, 18.01, 18.03 of the

Arrroue 21—Apprrionan Covenants APPLICABLE TO OPIC Insurance Policy are annexed as an Appendix to the

Covzrace CO Arbitration Award. See pages 132a-134a infra. ]

91.01. Compulsory Notice ...........------------s-e-sctesseeenees 32

91.02. Assignment to AID ..........--.-------------ecesceeseetetees 32

21.03. Use of Compensation ...........-------:--s-sseeseseeste0 32

91.04. Preserving Assets ..........-------+--+-+-+-+- RATE ACGe 32

Articte 22—AmountT oF COMPENSATION

Oe eT ny on incnsacenspnobsicmcdetneranuananivnnennnacesines a

OR oe ace cantnnsbnnsnavonsvonsoniomnctomnonnsuneaseys 33

99.03. Adjustment ............--------c-c-csceeeeeeseeeeeseseeenennenensens 33

Arrticte 23—CompuraTion or THE Amount OF DAMAGE

NE ise ciecsbonsinsincononnnbnadinnintormenneniiins 34

93.02. Appraisal ..............-.-.--0:---s-sesscssscsnssssscssensnesesnseee 34

93.03. Presumed Damage ..............-----:-----+-+- 35

Arricte 24—APpPpLICATION FOR COMPENSATION

94.01. Form of Application to AID ................--..-.---- 35

24.02. Supporting Material .............---.----------0-:----s+000 36

24.03. Processing Time ................-.--.:c--c-csecseesceeseceeees 36

DAE, WU RRRI iia canna hola ei eeeeercnejeasennoce 36

24.05. Perfecting Assignment ................----.-.---+eceeeesees 36

PART V—COMBINED COVERAGE B AND C

ArTIcLE 25—INTERPRETATION

95.01. Rights and Obligations .......... ‘s 37

26a

APPENDIX E

Award

AMERICAN ARBITRATION ASSOCIATION

” Case No. 16 10-0137 76

In the Matter of:

Revere Coprer AND Brass, INCORPORATED

and

OvERSEAS Private INVESTMENT CoRPORATION

AwarD

This Award is in five Parts:

Part One, Liability Issues;

Part Two, Compensation Issues;

Part Three, Revere Claims for

Reimbursement and Interest;

Part Four, Amount of Award; and

Part Five, Minority Opinion.

Part ONE

Liability Issues

Statement of Facts

This proceeding is an arbitration under the Commercial

Arbitration Rules of the American Arbitration Association

27a

Award

between Revere Copper and Brass Incorporated, a Mary-

land corporation, (Revere) and Overseas Private Invest-

ment Corporation (OPIC) arising out of Contract of Guar-

anty No. 7230 between the U. S. Government’s Agency for

International Development (AID) and Revere, dated Sep-

tember 15, 1970. OPIC has succeeded AID as party to this

Contract.*

The OPIC Contract relates to an investment made by

Revere in its wholly-owned subsidiary, Revere Jamaica

Alumina, Limited, a Maryland corporation, (RJA) for the

purpose of financing RJA’s construction and operation of

“a bauxite mining operation, a plant to convert the bauxite

to alumina and related facilities ...” in Jamaica, West

Indies.

Revere’s Claim is for compensation under Coverage B of

the OPIC Contract (“Expropriation”) and reimbursement

of expense. The basic issue for determination is whether

Revere or its subsidiary RJA sustained losses which re-

sulted from “Expropriatory Action” as that term is defined

in relevant provisions of Section 1.15 of the General Terms

and Conditions of the OPIC Contract, as follows:

“1.15. Expropriatory Action. The term ‘Expropria-

tory Action’ means any action which is taken, author-

ized, ratified or condoned by the Government of the

Project Country, commencing during the Guaranty

Period, with or without compensation therefor, and

which for a period of one year directly results in pre-

venting:

* * * * *

*This Contract will be hereinafter referred to as “the OPIC

Contract” or simply “the Contract”. It takes the form of Special

Terms and Conditions signed by the parties and designated “221

KST 11-65 Revised (Combined)” and General Terms and Condi-

tions, designated “221 KGT 11-65 Revised (Combined)”.

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“(b) the Investor from effectively exercising its fun-

damental rights with respect to the Foreign Enterprise

either as shareholder or as creditor, as the case may

be, acquired as a result of the Investment; provided,

however, that rights acquired solely as a result of any

undertaking or agreement with the Government of the

Project Country shall not be considered fundamental

rights merely because they are acquired from such un-

dertaking or agreement; or

“(¢) the Investor from disposing of the Securities

or any rights accruing therefrom; or

“(d) the Foreign Enterprise from exercising effec-

tive control over the use or disposition of e substantial

portion of its property or from constructing the Proj-

ect or operating the same ;”

Excluded is any action resulting from:

“(1) any law, decree, regulation, or administrative

action of the Government of the Project Country which

is not by its express terms for the purpose of national-

ization, confiscation, or expropriation (including but

not limited to intervention, condemnation, or other tak-

ing), is reasonably related to constitutionally sanc-

tioned governmental objectives, is not arbitrary, is

based upon a reasonable classification of entities to

which it applies and does not violate generally accepted

international law principles ;”

Section 1.15 concludes:

“The abrogation, impairment, repudiation or breach

by the Government of the Project Country of any un-

dertaking, agreement or contract relating to the Proj-

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ect shall be considered an Expropriatory Action only

if it constitutes Expropriatory Action in accordance

with the criteria set forth in this section.”

(a) Agreement of March 10, 1967

Revere’s investment was made pursuant to an Agree-

ment between the Government of Jamaica (hereinafter

sometimes referred to as “the Government” or as “GOJ’’)

and RJA, dated March 10, 1967 (sometimes referred to as

“the Agreement”). This was preceded by a Heads of Agree-

ment, dated January 26, 1967. The Agreement recited that

the Government had “suggested” to RJA “that it construct

an alumina plant in Jamaica”; that RJA, “having full con-

fidence in the people of Jamaica and in the stability of their

democratic form of government”, was “willing to do so”;

that “the contribution to be made by ... (RJA) to the

economy of Jamaica” was such that it was “entitled to have

its capital investments in Jamaica, actual and potential,

secured by reasonable safeguards on a long term basis some

of which are hereby placed on record”; and that it was

“desirable that they should be encouraged to commence

operations in Jamaica and expand the same... ”.

The Agreement provided that it should remain in force

for 25 years from the earlier of the date of the commence-

ment of commercial production of alumina from the plant

‘to be constructed by RJA or from a date 214 years from

the date of the Agreement; that RJA have the option to

substitute the terms of any arrangement or agreement be-

tween GOJ and any other person relating to bauxite or

alumina (C1.3); that GOJ would use its best endeavours

to secure the enactment of legislation to give effect to the

Agreement, including amendment of the Bauxite and

Alumina Industries (Encouragement) Law (C1l.4); that

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income tax liability and royalties should be determined as

provided in Clauses 6, 7, 8 and 9 of the Agreement; that

no tonnage tax, customs duty, excise duty or other similar

impost shall be payable in respect of designated imported

articles (C110) ; that land taxes be governed by Clause 11;

that no further taxes, burdens, levies etc. will be imposed

except as stated (Cl.12); that the Agreement would remain

in force 25 years for the purposes of taxation and roy-

alties (C1.13) ; that GOJ consent to and assist RJA as nec-

essary to obtain AID guarantees (Cl.14); that GOJ sell

to RJA lands reclaimed from the sea (C1l.15); that GOJ

provide mining licenses ete. (Cl.16) ; that RJA make every

reasonable effort to use Jamaican personnel, but be per-

mitted to import technical and administrative personnel,

contractors, ete. (Cl.17); that save as expressly provided

‘no obligation will be placed” on RJA and nothing will

be done which will derogate from its right to own, operate,

possess, use and realise the . . . property held in connec-

tion with the project” etc. (Cl.20); that bauxite reserves

be made available (Cls.22 and 23); that mining leases be

provided (C1.24) ; that RJA have approved status and other

benefits for exchange control purposes (Cl.26); and that

RJA construct an alumina plant “by stages’, the first stage

to provide a capacity of at least 220,000 short tons of

alumina per year and to be completed within three years,

subject to extension for a further year, additional capacity

to provide a total capacity of 660,000 short tons per year

within ten years (Cls.27 and 28).

In anticipation of the Agreement, Revere had acquired

licenses to prospect for bauxite in Jamaica. On April 10,

1967, these were converted to Special Mining Lease No. 60

issued under the Mining Law and Regulations. This leased

certain areas to RJA for a period of 25 years, subject to

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renewal for a further 25 years, and gave RJA the right

to mine commercial bauxite sufficient to enable it to pro-

duce 21.83 million short tons of alumina, and certain addi-

tional quantities, all as provided in the Agreement to which

the Lease referred.

Pursuant to the Agreement, RJA built a 220,000 ton

per day alumina plant at Magotty in the Parish of St.

Elizabeth. Operations commenced in June 1971; commer-

cial production was obtained in December 1972. Invest-

ment in plant facilities and other fixed assets at December

31, 1974 was approximately $97,600,000; net book value

was then $89,200,000. According to the Revere Claim, the

total of equity investment and advances to RJA aggre-

grated approximately $113,400,000.

Although annual capacity was never increased beyond

220,000 tons, negotiations were commenced in 1973 with a

consortium of Japanese companies for construction of the

next stage provided for in the Agreement and a letter of

intent was signed on May 8, 1974. Neither this nor a

subsequent project with the Government was ever consum-

mated.

(b) Polttical Developments in Jamaica

Following Jamaica’s independence in 1962, Sir Alexander

Bustamente, leader of the Jamaican Labor Party, was

Prime Minister until 1967, when he was succeeded by Hugh

Shearer of the same Party. In the 1972 election, the Bus-

tamente Party lost to the People’s National Party, and

the leader of the latter, Michael Manley, became Prime

Minister.

Soon after his election, Manley, who is still Prime Min-

ister, initiated a review of the bauxite and alumina industry.

In October 1972, he told the United Nations General As-

sembly:

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“The time has come to reconstruct the basis on which

the gains arising from the exploitation of ... . re-

sources are shared between those .... who provide the

capital and technical know-how for the process of ex-

ploitation .... and those .... who own the resources

and provide essential infra-structure and the labor

force.”

He later recorded that throughout 1973 “we were setting

the stage at home and abroad for the response which we

were to make in 1974”. A national Bauxite Commission

having been established in 1972, “an intensive investiga-

tion of the aluminum industry” proceeded in 1973 and led

to a policy with four objectives:

(1) a drastic increase in revenues from bauxite mining

and alumina production;

(2) recovery of bauxite ore leased to the mining com-

panies ;

(3) reacquisition of all lands owned by such com-

panies; and

(4) national majority ownership and control of the

bauxite industry.

The first of these objectives was achieved in June

1974 legislation, notwithstanding contractual prohibitions

against increasing taxes and royalties. In a speech the

Prime Minister made in August 1974, he said his govern-

ment had transformed the aluminum industry’s contribution

to national revenue from $25 million to nearly $200 million

dollars, adding that this had been accomplished through

the “exercise of our rights as a sovereign and independent

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state” and “by declaring what can and what cannot take

place in this country”.

It was clear that the Government was determined to

proceed with the remaining objectives. As early as 1970,

the Prime Minister had written that “the key” to economic

independence for developing countries “must be in joint

ownership”. This was confirmed in his address to the

Special Session of the United Nations General Assembly

in April 1974 on the proposed Charter of Economic Rights

and Duties of States, where he said that Jamaica called

“ypon the world community to formally resolve the re-

structuring of the world economic order, aimed at dis-

mantling the old patterns of relationships” which had been,

he said, “the instrument frustrating the development of the

poor nations... .”. On May 15, 1974, a Government Press

Release quoted the Prime Minister as saying:

“The renegotiation of contracts with the aluminum com-

panies is not only a necessity and the right of a sov-

ereign nation, but an obligation to the people. These

considerations outweigh the sanctity of contractual -

agreements.”

On January 3, 1974, in a speech to the Jamaica Teachers

Association, in which he addressed the critical energy

situation, he had said that the fuel problem “could not

be handled in a conventional manner”. Contracts for prod-

ucts like sugar, bananas and bauxite had been signed when

oil was $2.00 per barrel and not the current $14.00. “All

of the fundamental equations have changed”, he said, “and

such contracts have been abrogated by history as the fac-

tors that made them relevant no longer exist”. He added:

“The Government of Jamaica cannot be bound by them

any longer. For Jamaica to survive we must nego-

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tiate new contracts and new benefits for our things

sold abroad.”

(ec) Contract Renegotiation Proposals in March 1974

It was in this framework that the Prime Minister in-

vited the heads of the six aluminum companies to meet him

in Jamaica on March 15, 1974.

At the meeting the Prime Minister pointed out that re-

casting the arrangements with the aluminum industry had

been an announced policy of his party since 1970 and of

his Government since it assumed power in 1972. He wished

to assure the companies, however, as he had assured Prime

Minister Trudeau and Secretary Kissinger, that negotia-

tions would take nlace within the limits of international

law and practice. The Government did not intend nation-

alization or anything like it. What was needed was greater

revenue, improved balance of payments, more rapid ex-

ploitation of reserves and increased refining capacity. On

the political side, times had changed since his father had

made the existing arrangements with the industry. Nation-

alization was not the answer, but “a real working relation-

ship” with the industry was. His ultimate objective was

51% ownership by the Jamaican people: the Government

itself would get out of the business.

The mildness of this session was in contrast with the

peremptory nature of the written demands served on the

companies on the same day. These appeared to be non-

negotiable, although the chief negotiator Matalon insisted

in testimony to the Panel that all points were in fact nego-

tiable. Each set of “proposals”, as they were termed, was

divided into two parts: revenue proposals and local par-

ticipation in the industry. The various sets were all simi-

lar but not identical. In the case of those served on Revere,

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the revenue proposals stated that a “production levy will

be introduced effective and payable 1st January 1974”.

This would be $14 (Jamaica) per long dry ton of bauxite

mined and processed into alumina in Jamaica. Royalties

would be replaced by a flat rate of J$1 per long dry ton of

bauxite processed locally. Depletion allowances “will dis-

continue effective 1st January 1974. OPIC premiums will

not be allowed as a deductible expense”. “The Government

reserves the right” to disregard contractual provisions

calling for most favoured company treatment. All foreign

exchange “must be sold” to an authorized depository. All

overseas payments “must be made” from a Jamaica bank

account and subject to Exchange Control approval.

In the case of “Local Participation” it was stated to be

the Government’s policy:

“to secure maximum national ownership of and effective

national control over the bauxite and alumina enter-

prises operating in Jamaica.”

All surface rights were to be purchased from RJA. As

regards bauxite mining, it was stated that the Government

“had decided to revoke all existing mining leases and

licenses”. It was then stated that the Government “will

immediately enter into” a contract to provide bauxite sup-

plies for 20 years and to issue five year mining licenses.

Majority local equity participation would be negotiated.

In a subsequently negotiated Heads of Agreement of

December 20, 1974, Revere agreed to some of the Govern-

ment proposals, but these Heads were expressly subject,

inter alia, to approval by Parliament of such legislation as

might be required, to approvals by Revere’s Board, RJA

and “lending institutions”, and to mutual agreement of

the terms necessary to carry out the Heads. No definitive

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arrangement was ever concluded, as RJA was unable to

obtain participation by a Japanese Consortium with which

it had been negotiating, and for economic reasons RJA

was forced to shut down its plant in August 1975. In re-

turn for RJA’s agreement to obtain a feasibility study for

an expansion of 601,000 short tons of alumina capacity,

the Government agreed in the Heads to a “subvention”

from the Levy of $5 (U.S.) per long dry ton of bauxite for

the calendar year 1974. The study was completed and the

levy reduced accordingly.

(d) The Bauxite Levy

Although intense negotiations took place between the

companies and the Government during March, April and

May, 1974, it was soon evident that the nature of the levy

and, to a high degree, the amount, were not negotiable.

No agreement having been reached by May 15, the Prime

Minister then submitted the Government’s proposals to

Parliament and on June 8, 1974 the Bauxite (Production

Levy) Act, 1974, was enacted. This imposed a tax on

bauxite at a rate to be determined from time to time, the

initial rate being 7.5 per cent. This rate was to be applied

to “the average realized price .. . for primary aluminum”

to be designated annually by Ministerial orders and the

result divided by 4.3 to relate to the bauxite equivalent.

Initially, the rate for 1974 was $11.16 per ton of bauxite.

This was increased in 1975 to $12.65, in 1976 to $15.62, and

in 1977 to $17.86. The Act was “deemed to have come into

operation on the Ist of January, 1974” and provided that

nothing in “any law, enactment or agreement... shall be

construed as derogating from this Act or any obligations

arising thereunder, or give rise to any cause of action in

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respect of any act done in accordance with this Act or

regulations thereunder”.

Section 4 of the Act prescribed minimum quarterly quan-

tities of bauxite which each producer was deemed to have

produced during that quarter and provided that each such

producer should provisionally pay to the Collector General

the sum of money arrived at by multiplying such minimum

quantity by the basic rate set out in the First Schedule.

The impact of the Levy could, therefore, be severe if pro-

duction fell substantially below the prescribed minimum

or ceased entirely. In the case of Revere the minimum

quarterly amount of 111,250 tons was close to its then

current rate of production. If Revere had operated at a

lower rate or the Levy had been imposed notwithstanding

the later shutdown, the effect would have added substan-

tially to the burden. The Supreme Court of Jamaica held,

however, that the Levy was not applicable during any

calendar year when Revere produced no bauxite, as the

imposition was upon bauxite extracted or won and not

upon the producer. For that reason Revere made no pay-

ment for any period after December 31, 1975. For the

period from January 1, 1974 to December 31, 1975, Revere

paid $9,494,000.

The Act provided that the Minister was not only to de-

termine each year the “average realized price ... for

primary aluminum for the last preceding year” but was

also empowered by Section 5 to issue orders changing the

current rate and the minimum quantities, every such order

to be subject to affirmative resolution of the House of Rep-

resentatives. The Minister was also empowered to waive,

remit or refund any levy in whole or in part and subject

to such conditions as he might impose.

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(e) Amendment of the Mining Act

On June 17, 1974 the Mining Law was amended by the

Legislature so as to add a new Section 45C and to amend

Section 95 with respect to making regulations. The former

empowered the Minister by order to require the holder of

a mining lease to extract minimum quantities as might be »

prescribed and to provide that any such requirement

“shall, while such requirement remains in force, be

deemed to be a condition subject to which any holder

of a mining lease or special mining lease to whom the

requirement relates holds such mining lease or special

mining lease.”

The latter empowered the Minister, notwithstanding “any-

thing in any law, enactment or agreement” to make regu-

lations giving effect to provisions of the Mining Law and

accordingly provided that

“nothing in any such law, enactment or agreement shall

be construed as derogating from regulations made un-

der this Law or any obligations arising under such

regulations or give rise to any cause of action in

respect of any act done in accordance with this Law

or regulations made thereunder.”

Pursuant to this Act the Minister of Mining and Natural

Resources issued Regulations on June 21, 1974, increasing

the rate of royalty payable under bauxite leases to 50 cents

per ton, retroactive to January 1, 1974. From April 1,

1982, the rates of royalty on bauxite processed into alumina

in Jamaica would be adjusted upward or downward in

direct proportion to any increases or reductions of the

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New York published price for aluminum ingot above or

below 24.5 cents per pound.

On July 29, 1974, the Minister issued an Order under

the Mining Law, in exercise vf the authority granted by

Section 45C, that

“Each holder of a mining lease or a special mining

lease named in the... . Schedule hereto shall, during

each quarterly period, extract or win not less than the

number of tons of bauxite or laterite specified in re-

spect of such holder... .”

The amount specified for RJA was 111,250 tons. This .

Order was revoked on September 19, 1974. No explana-

tion has been given to us for this revocation.

(f) Shutdown of the RJA Plant—Claim Against OPIC

Revere reported a loss for the first quarter of 1975 of

26 cents a share as compared with a profit of 60 cents a

share in 1974, In the case of the RJA operations, losses

were reported to the Government of $1.5 to $2 million

dollars in each of the first four months of 1975. In May

notice was given that RJA had decided to shut down the

plant “as a result of economic necessity”. Despite strenu-

ous efforis by the Government to find some way of avoid-

ing a shutdown, including relief from the Bauxite Levy

for the balance of 1975, operations at the plant ceased on

August 19, 1975. Subsequent efforts to dispose of the prop-

erty to the Government or to work out an expansion that

might make its operations profitable failed. The plant has

remained closed since August 1975, and throughout this

proceeding.

On January 13, 1976, RJA instituted legal proceedings

against the Government in the Supreme Court of Jamaica

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for a determination that the Bauxite Levy was a breach

of the Agreement and for an injunction against its impo-

sition. The Court denied the claim of breach, but held that

the Levy could not be imposed when RJA was not pro-

ducing bauxite. The judgment is on appeal.

On April 14, 1976, Revere submitted to OPIC its Appli-

cation for Compensation, alleging that Expropriatory Ac-

tion had been taken by the Government within the definition

of that term in Section 1.15 of the OPIC Contract. On

December 21, 1976 this arbitration proceeding was insti-

tuted.

A preliminary hearing was held on June 21, 1977. There-

after approximately four weeks of hearings on liability

issues were held during which ten witnesses were heard

and extensive arguments of counsel were received. The

stenographic record on such issues consists of about 4,400

pages and more than 600 exhibits were submitted.

Inability Issues Presented by the Revere Claim

Revere claims that three subsections, (b) (ce) and (d),

of Section 1.15 of the OPIC Contract are applicable. We

accept OPIC’s contention that, if Revere has a claim at

all, it falls under (d). This requires us to determine

whether any action of ‘he Government of Jamaica directly

resulted in preventing RJA for a period of one year “from

exercising effective control over the use or disposition of

a substantial portion of its property or from constructing

the Project or operating the same”.

On this point Revere contends that a series of govern-

mental acts during the first six months of 1974, including

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the revenue and mining law measures adopted in June of

that year, effectively abrogated the 1967 Agreement be-

tween the Government and RJA, thereby ending the con-

tractual security provided by that Agreement, and that this

brings its claim under subsection (d).

Revere further contends that the exclusions of paragraph

(1) of Section 1.15 do not apply because the actions of the

Government violated generally accepted principles of in-

ternational law and that the final paragraph of Section

1.15 is inapplicable because the actions of the Government

fall within subsection (d).

OPIC contends to the contrary on all points. The Ja-

maican Government, it says, has neither taken nor deprived

Revere of control over Revere’s investment or project. The

argument continues that the Bauxite Levy did not prevent

RJA from exercising effective control; it did not deprive

RJA of a substantial portion of its property because the

Levy could be passed through to the ultimate consumer;

as for the breach of contract argument, this is not a basis

for determining Expropriatory Action under the OPIC

Contract; and there was anyway no breach here, as the

1967 Agreement was clearly governed by Jamaican law

and the Supreme Court of Jamaica rejected RJA’s claim

of breach on the ground that the prohibitions against in-

creased taxes and royalties were void ab initio.

On the facts, we recognize that RJA is still in possession

of its plant and other properties and that it shut down

its plant in 1975 for economic reasons and not because the

Government had physically intervened in the affairs of

RJA so as to prevent it from using or disposing of its

property. We also accept OPIC’s contention that a mere

breach of contract does not trigger the compensation pro-

visions of the OPIC Contract and that, if a breach is relied

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upon as a ground for applying Section 1.15(d), the action

taken by the Government must directly prevent the exer-

cise of effective control.

We do net agree with OPIC, however, that the abroga-

tion argument is “nonsense”. From a careful analysis of

the facts, we are convinced that the Government of Jamaica

intended to abrogate the 1967 Agreement and that it effec-

tively did so notwithstanding continued references to por-

tions of the Agreement and efforts by both parties to

negotiate new terms. We do not agree that the decision of

the Supreme Court of Jamaica that Clause 12 was not

binding on the Government of Jamaica determines the ques-

tion of breach for the purposes of the OPIC Contract.

Our reasons for concluding that the 1967 Agreement on the

basis. of which Revere made its $97 million investment in

Jamaica is or was governed by principles of international

law as well as by the law of Jamaica are elaborated below.

A majority of this Panel have concluded that the actions

taken by the Government of Jamaica, having effectively

put an end to the 1967 Agreement, directly prevented RJA

from exercising effective control over the use or disposi-

tion of its property.

It seems to the majority convenient to deal first with this

question of abrogation; for if this did not occur and the

Agreement remained intact, it would not be necessary to

consider whether abrogation produced the effects required

by Section 1.15(d). Whether the June 1974 legislation was

a breach of the 1967 Agreement in turn depends on whether

Jamaican law alone was applicable; for if it was, the deci-

sion of the Supreme Court effectively ruled out this ground

for contending that there was a breach. While other actions

of the Government compounded the effects of the June 1974

legislation and in our view evidenced repudiation, the Baux-

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ite Levy, the increase in royalty and the amendment of

the Mining law constituted the major breach and demon-

strated the Government’s disregard of its commitments. If

these actions were exempt from the limitations of the 1967

Agreement on the ground of parliamentary privilege, it is

difficult to understand how any other actions by the Gov-

ernment with respect to the Agreement would not also be

exempt.

In the majority view, the law of Jamaica is not the only

law to be considered by this Tribunal. Although the Agree-

ment was silent as to the applicable law, we accept Jamaican

law for all ordinary purposes of the Agreement, but we

do not consider that its applicability for some purposes

precludes the application of principles of public interna-

tional law which govern the responsibility of States for

injuries to aliens. We regard these principles as partic-

ularly applicable where the question is, as here, whether

actions taken by a government contrary to and damaging

to the economic interests of aliens are in conflict with un-

dertakings and assurances given in good faith to such aliens

as an inducement to their making the investments affected

by the action.

A traditional international law approach has been to leave

questions of breach of contract to the municipal law gov-

erning the contract (See Amerasinghe, State Responsibility

for Injuries to Aliens (1967), at 66 to 99). In recent years,

however, a series of decisions by Arbitration Tribunals,

applying the views of outstanding international jurists,

has developed an exception to this narrow approach where

contracts fall within a category known as long term eco-

nomic development agreements, In such cases, the question

of breach is not left to the determination of municipal

courts applying municipal law. The reason for this is that

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such contracts, while not made between governments and

therefore wholly international, are basically international

in that they are entered into as part of a contemporary

international process of economic development, particularly

in the less developed countries. The very reason for their

existence is that the private parties entering into such

agreements and committing large amounts of capital over

a long period of time require contractual guarantees for

their security; governments of developing countries in turn

are willing to provide such guarantees in order to promote

much needed economic development. Moreover, while the

agreements are entered into between governments and pri-

vate parties, the governments of such parties are very

much interested in such agreements and in promoting their

conclusion. In this instance the government of the investor

provided its own guarantee for the investment in addition

to the contractual guarantee furnished by the foreign gov-

ernment.

A majority of the Panel has concluded that the 1967

Agreement falls within this category of a long term eco-

nomic development agreement and that principles of public

international law apply to it insofar as the government

party is concerned and therefore that the question of breach

by such party cannot be determined solely by municipal law.

Whatever the position may be under municipal law, it

would be contrary to well established principles of inter-

national law to leave the question of State responsibility to

the alien party to the determination by that State as to

what it lawfully could or could not be (See Amerasinghe,

op. cit., at 100 to 103). We do not question the decision of

the Supreme Court of Jamaica, although there are indica-

tions in other English cases that the Amphitrite doctrine

should be given a limited rather than a broad application.

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Parliamentary supremacy and State sovereignty cannot,

however, be the decisive criteria where the contract in-

volved is international in nature and falls within the cate-

gory of a long term economic development agreement. It is

this developing area of international law that we shall first

examine.

(a) Applicability of International Law Principles

A pioneer effort to establish the international illegality

of a contract breach by a government which had guaranteed

a long term concession agreement was made by the United

Kingdom in its appeal to the international Court of Justice

in the Anglo-Iranian Oil Company Case (1.C.J. Pleadings,

1952, pp. 64 to 280). In its Memorial to the Court, the

United Kingdom Government said:

“The Government of the United Kingdom does not

dissent from the proposition that a State is entitled

to nationalize and, generally, to expropriate conces-

sions guaranteed to foreigners to the same extent as

other property owned by foreigners. The exercise of

that right, with regard to concessions and other prop-

erty rights, is, however, subject to limitations clearly

established by international practice and resting on

well-recognized principles of international law. These

limitations include, in particular, the principle that a

State is not entitled to nationalize a concession if, by

. & provision in the contract of concession, it has

expressly divested itself of the right to do so...”.

(Pleadings, at 85)

In that case the Iranian Government had agreed that the

concession “shall not be annulled by the Government and

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the terms therein contained shall not be altered either by

general or special legislation in the future, or by adminis-

trative measures or any other acts whatever of the execu-

tive authorities”. That provision, the British Government

argued, was inserted with the specific object of making it

legally impossible for the Government of Iran to put an

end to the concession by “some such measure of nationali-

zation”.

There was no such provision in the RJA/GOJ Agree-

ment of March 10, 1967, but the Government of Jamaica

did in that Agreement expressly agree in Clauses 12 and 13

that:

“12. No further taxes ... burdens, levies ... will be

imposed on bauxite, bauxite reserves, or bauxite

operations... ”.

“13. For the purposes of taxation and royalties the

provisions of this Agreement shall remain in

force until the expiry of twenty five years... ”.

It is difficult to see the difference in principle between

one disabling clause and another so far as the legality of

an abrogation is concerned. In both cases the argument is

made that a State cannot fetter its future legislative action.

In both the legislature acts contrary to the contractual

limitation, annulling it and overriding it. In both the mu-

nicipal law supports the action taken by the executive and

the legislature. In both the question is raised whether on

an international or transnational level the express under-

taking of the State can be lawfully repudiated.

It was also argued in the dispute between the Govern-

ment of Saudi Arabia and the Arabian American Oil Com-

pany, 27 Int’l Law Rep’ts 117 (1958) that the exercise of

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sovereign power contrary to a government’s contractual

commitments could not be curtailed by resort to principles

of international law. In that case the Concession Contract

to which the Oil Company (Aramco) was a party did not

specify what law was applicable to it. Nor did it provide

for arbitration. After the Government decided to grant .

exclusive transportation rights to another party and

Aramco protested that this would be a violation of its con-

tract, the Government and Aramco agreed to refer the

matter to an arbitral tribunal to be established in Switzer-

land. This agreement instructed the tribunal to decide the

question in accordance with Saudi Arabian law “insofar

as matters within the jurisdiction of Saudi Arabia are con-

cerned”, but “in accordance with the law declared by the

Arbitration Tribunal to be applicable insofar as matters

beyond the jurisdiction of Saudi Arabia are concerned”

(id., at 158, 154).

Although the Government there contended that, in the

exercise of its sovereign regulatory powers, it had the

power and the right to determine how oil should be trans-

ported from its territory, the tribunal found it “necessary

to resort to the general principles of law and to apply them

in order to interpret, and even to supplement, the respec-

tive rights and obligations of the Parties” (id. at 168). The

law of Saudi Arabia, it said, “must, in case of need, be

interpreted or supplemented by the general principles of

law, by the custom and practice in the oil business, and by

notions of pure jurisprudence. ...” (id., at 169); and that

“interpretation of the Agreement should not be based” on

Saudi Arabian law alone but should be “governed by prin-

ciples of logic and common sense” (id., at 172). It reached

this conclusion after applying “objective criteria” and find-

ing that “The Aramco Concession Agreement signed by the

Government of Saudi Arabia and an American corporation

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has, because of its Parties and its ramifications, an inter-

national character” (id., at 166).

It was this concept of the international contract that was

later adopted and developed by Professor Dupuy in the

arbitration between Texaco Overseas Petroleum Company

nad California Asiatic Oil Company and The Government

of the Libyan Arab Republic, decided on the merits on 19

January 1977, 17 Int’l. Legal Materials 1 (Jan, 1978).*

Although the case is distinguishable from the present one

in that the contract called for arbitration outside the coun-

try and was to be governed by principles of Libyan law

common to principles of international law and, lacking con-

formity, by general principles of law (and OPIC adds a

further distinction between a “concession” and a “contract

of guaranty” which is discussed below), nevertheless the

arbitrator’s analysis of the international nature of long

term economic development contracts is pertinent. In his

view it was

“incontestable that these contracts were international

contracts, both in the economic sense because they in-

volved the interests of international trade and in the

strict legal sense because they included factors con-

necting them to different States, an international con-

tract having been recently defined as being ‘that con-

tract whose elements are not all located in the same

territory’. ...” (TOPCO/Libya Award, at 20).

Traditionally, contracts between States and foreign pri-

vate parties had been regarded as necessarily governed by

* This is an English translation of the original French text of

the Award on the Merits. It is hereinafter referred to as the

“TOPCO/Iibya Award”. References herein are to pages in the

printed booklet distributed by Revere at the hearings (Cl.Ex.300).

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some municipal law (Serbian and Brazilian Loans Case,

[1929] P.C.I.J., Ser. A, No. 20, at 41). More recently,

however, according to Professor Dupuy, “juridical analy-

sis has been much refined in this field”, Contractual prac-

tice, he says,

“.. tends more and more to ‘delocalize’ the contract

or, if one prefers, to sever its automatic connections

to some municipal law: so much so that today when

the municipal law of a given State, and particularly

the municipal law of the contracting State, governs the

contract, it is by virtue of the agreement between the

parties and no longer by a privileged and so to speak

mechanical application of the municipal law...”

(TOPCO/LIibya Award, at 24).

In his view, contracts have been “internationalized”

either by reference in them to the settlement of disputes by

“oeneral principles of law” or by the character of the con-

tract itself. In this latter respect he refers to such char-

acteristics of these agreements as their broad subject mat-

ter, their introduction into developing countries of invest-

ments and technical assistance, their importance in the

development of the country concerned, their long duration

implying “close cooperation between the State and the

contracting party” and “requiring permanent installations

as well as the acceptance of exclusive responsibilities by

the investor”, and the close association of the foreign con-

tractor “with the realization of the economic and social

progress of the host country”. Because of the required

cooperation between the contracting party and the State

“and the magnitude of the investments to which it agreed”,

the contractual nature of the legal relation “is intended to

bring about an equilibrium between the goal of the general

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interest sought by such relation and the profitability which

is necessary for the pursuit of the task entrusted to the

private enterprise”. Thus, the effect of the contract is to

ensure to the private party

“a certain stability which is justified by the considerable

investment which it makes in the country concerned.

The investor must in particular be protected against

legislative uncertainties, that is to say, the risks of the

municipal law of the host country being modified, or

against any government measures which would lead

to an abrogation or recission of the contract. Hence,

the insertion . . . of so-called stabilization clauses:

these clauses tend to remove all or part of the agree-

ment from the internal law and to provide for its cor-

relative submission to sui generis rules as stated in the

Aramco Award, or to a system which is properly an

international law system.” (id., at 31 to 36) 3

We find this analysis persuasive as regards the question

of internationalization of the Agreement between RJA and

the Government of Jamaica. Thus, we note that the par-

ties were of different nationalities: the Government of

Jamaica, on the one hand, and a Maryland corporation

of the United States, on the other. The Company was to

construct an alumina plant in Jamaica at the suggestion

of the Government.* Private capital was to be raised out-

side Jamaica and invested there. According to the pre-

* After worldwide investigations Revere had determined to ob-

tain bauxite in Jamaica if possible, but the policy of the Jamaican

Government at that time was to urge, if not to require, the conver-

sion of bauxite into alumina in Jamaica rather than permit the

direct export of bauxite, thus, it was hoped, contributing signifi-

eantly to the economic development of the country.

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amble, this contribution of about 125 million dollars to the

economy of Jamaica entitled RJA

“ .. to have its capital investments in Jamaica, actual

and potential, secured by reasonable safeguards on a

long term basis some of which are hereby placed on

record... ”.

The capital was raised in the United States, on a long

term basis. Revere made a public issue to its stockholders

in December 1967 of $55,059,300 of 544% Convertible Sub-

ordinated Debentures due 1992, the Prospectus describing

the Jamaica bauxite mining and alumina plant project as

part of a $168,000,000 primary aluminum project involv-

ing an issue also of $97,000,000 of Industrial Development

Revenue ‘Bonds’ for the construction of a 112,400 ton

aluminum reduction plant near Scottsboro, Alabama. This

complex of bauxite mining and alumina production in

Jamaica, designed to produce 220,000 short tons of alumina

per annum, and aluminum ingot production in Alabama

was thus truly an international production operation. The

raw material processed into alumina in Jamaica moved

from there to the United States where it was reduced to

aluminum ingot. After being rolled and fabricated into

sheets, strips, tubes and forgings, a wide range of house-

hold and industrial products were then sold in the United

States and abroad.

All of the elements which were found by the TOPCO/

Libya Award to characterize “economic development agree-

ments” are thus found in the RJA/GOJ Agreement of

March 10, 1967. Its subject matter was broad: a major

alumina plant in stages, first of at least 220,000 tons to

be expanded to 660,000 over ten years from the commence-

ment of commercial production; commercial bauxite was

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to be made available “to the extent necessary to support

the total expanded capacity of the major alumina plant

over a period of not less than forty (40) years, that is,

reserves of commercial bauxite sufficient to produce 21.88

million short tons of alumina” etc.; mining leases were to

be issued over certain lands for a term of 25 years, with

a right of renewal for a further 25 years; RJA brought

to Jamaica technical assistance and training and assumed

a real importance in the development of the country; roads,

housing and other facilities were built; and the project

became closely associated with the economic and social

progress of Jamaica. The Agreement was of long dura-

tion: “until the expiry of twenty-five years” from the

earlier of the date of commencement of commercial pro-

duction of alumina or a date two and one-half years from

the date of the Agreement. Finally, the aim was to bring

about an equilibrium between the general interests of the

Government, on the one hand, and the protection of RJA,

on the other; hence, the elaborate provisions relating to

stability of financial requirements, with particular refer-

ence to taxes, allowances, exchange controls, import duties,

etc,

Internationalization also resulted from the fact that

Revere’s investment in the Jamaica Project was insured

by OPIC under the Foreign Assistance Act of 1961, as

amended, and pursuant to the U. S. Government’s long

term program for economic assistance to less developed

countries. As the Handbook of the A.I.D. Specific Risk

Guaranty Program in effect in October 1966 (shortly prior

to Rever’s Heads of Agreement with GOJ in January 1967)

stated in its introduction:

“The Specific Risk Investment Guaranty Program

. is designed to encourage private United States

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capital and know-how to participate in furthering the

economic development and increasing the productive

capacities of underdeveloped countries.

“By furnishing coverage against the principal polit-

ical risks that accompany investments in less developed

countries at modest cost, the specific risk guaranty pro-

gram attempts to increase the participation by United

States private enterprise in the growth of the econ-

omies of these countries. Increased private investment

in these countries augments the production of wealth,

expands employment, creates new markets, increases

standards of living, and gives new skills to people in

areas where such action is badly needed.

“The United States Government recognizes the vital

role which U. S. business can play in assisting other

countries develop towards self-sufficiency. This pro-

gram is designed to encourage the transfer to less

developed countries of the capital and techniques that

helped this country to grow and thus assist the objec-

tives of the United States foreign aid program.”

This Handbook also recorded Guaranty Agreements be-

tween the United States and more than 75 developing coun-

tries pursuant to this program. Jamaica was one of these

countries. The Agreement between it and the United States

provided, inter alia: , :

“1, The Government of the United States of Amer-

ica and the Government of Jamaica shall, upon the

request of either Government, consult concerning in-

vestments in Jamaica which the Government of the

United States of America may guaranty.

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“2. The Government of the United States of America

shall not guaranty an investment in Jamaica unless the

Government of Jamaica approves the activity to which

the investment relates and recognizes that the Govern-

ment of the United States of America may guaranty

such investment.

“3. If an investor transfers to the Government of

the United States of America, pursuant to an invest-

ment guaranty, (a) lawful currency, including credits

thereof, of Jamaica, (b) any claims from the business

activities of the investor to payment under*the invest-

ment guaranty, or (c) all or part of the interest of

the investor in any property (real or personal, tangible

, or intangible) within Jamaica, the Government of Ja-

maica shall recognize such transfer as valid and effec-

tive.”

As required by paragraph 2 above, the Government of

Jamaica on 28th January 1969 approved the RJA invest-

ment for the purposes of the AID Investment Guaranty

Program, The result of this was clearly to internationalize

the Revere investment in Jamaica, particularly as all rights

acquired by OPIC upon paying a claim, such as the Revere

claim, becomes rights of the U. S. Government under the

above quoted paragraph 3.

Having thus concluded that the Agreement of March 10,

1967, was an international contract, we decide that the law

applicable to it was not solely the domestic law of Jamaica

but that principles of international law are applicable, par-

ticularly as regards the “so-called stabilization clauses”

referred to by Professor Dupuy. In the case of the RJA

Agreement, Clauses 12 (no further taxes) and 20 (security

of investment) are of particular relevance in this respect.

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In addition to prohibiting any derogation from RJA’s

“right to own, operate, possess, use and realise” its plant

and other property, the latter pecifically provided that

“no obligation will be placed on the Company”. These

clauses were clearly designed to further the general policy

of the Government to encourage the investment of capital

from abroad and to secure it against changes in govern-

mental policies and attitudes toward foreign investors.

In this connection, it is pertinent to note the observations

made by Professor Fatouros in his book Government Guar-

antees to Foreign Investors to which OPIC refer in another

connection :

“In some cases .. . investors may be willing to take the

risk of a future worsening of investment conditions,

especially when they are reasonably confident of their

ability to defend effectively their own interests or when

the expected profits are high enough to warrant taking

the risk. ... But in other cases, and in particular with

respect to those industries whose establishment is

sought by capital-importing states ..., some assur-

ance as to the future is needed, The investor must be

made to believe that there is little or no possibility

that an unfavorable legal situation will be created at

a later date.... In the case of most underdeveloped

countries today, however, it is impossible to predict

with confidence that conditions of stability and security

will exist during the period of dynamic change ahead.

Thus arises the need for legal guarantees to be given

by the State or states concerned to foreign investors...

Foreign investors have to be assured that they will re-

ceive, both today and in the future, a definite legal

treatment, specified in the relevant legal instruments,

and that consequently they need not fear any major

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changes in local legal or political conditions that would

be unfavorable to their interests.” (p.63)

Having thus concluded that the Agreement of March 10,

1967 was an internationalized contract and, therefore, that

international law principles are applicable, we consider

next what principles govern the question of abrogation.

(b) Applicable Principles of International Law

In 1962 the United Nations General Assembly adopted

Resolution 1803 (XVII) relating to “Permanent Sover-

eignty Over Natural Resources” which provided

“Foreign investment agreements freely entered into by,

or between, States shall be observed in good faith.” (57

Am. J. Int’l. L. 710, 712 (1963)).

This is a basic principle of international law notwithstand-

ing subsequent efforts in the United Nations to limit its

applicability. The TOPCO/Itbya Award deals with these

efforts at some length. At page 71 of the Award, Professor

Dupuy says:

“While Resolution 1803 (XVII) appears to a large

extent as the expression of a real general will, this is

not at all the case with respect to the other Resolutions

mentioned above .... In particular, as regards the

Charter of Economic Rights and Duties of States, sev-

eral factors contribute to denying legal value to those

provisions of the document which are of interest in

the instant case.” ~~

After reviewing distinguishing features, the Award con-

cludes that the later concepts cannot be regarded as more

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than a de lege ferenda formulation, which even appears

contra legem in the eyes of many developed countries:

“One should conclude that a sovereign State which na-

tionalizes cannot disregard the commitments under-

taken by the contracting State: to decide otherwise

would in fact recognize that all contractual commit-

ments undertaken by a State have been undertaken

under a purely permissive condition on its part and

are, therefore, lacking of any legal force and any bind-

ing effect ... such a solution would gravely harm the

credibility of States since it would mean that contracts

signed by them did not bind them; it would introduce

in such contracts a fundamental imbalance because in

these contracts only one party ... would be bound. In

law, such an outcome would go directly against the

most elementary principle of good faith and for this

reason it cannot be accepted.” (TOPCO/Libya Award,

at 73, 74)

These observations are relevant in this case. The argu-

ment is made by OPIC that Revere knew or should have

known that the Government undertakings in Clause 12 were

not binding on the Government of Jamaica and could not

have been binding under the law governing the Agreement.

Chief Justice Smith said in his Judgment:

“T have not the slightest doubt that... the view of the

government’s representatives regarding Clause 12 was

made clear to, at least, the plaintiff company’s Jamaican

lawyers. It is extremely unlikely that the lawyers did

not communicate this view to their clients.”

But even if Revere was aware of the Government’s posi-

tion with respect to Clause 12, does this mean that the pro-

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visions of that Clause were not binding as a matter of inter-

national law? The answer to this important question re-

quires an examination of the history of the Government’s

position on the matter of limiting its taxing powers with

respect to the aluminum companies.

As ear.y as 1957, or ten years before Revere entered

Jamaica, the Government negotiated a “package deal” with

Reynolds and Kaiser on the matter of tax stability. This

arrangement was to last for 25 years and included a for-

mula for determining the rate of profit assessable for in-

come tax purposes, a ceiling for all taxes of 45% of profits,

rates of royalty, and a provision that

“No further taxes will be imposed on bauxite, bauxite

reserves, or bauxite operations, or any assets used in

bauxite operations or dividends on bauxite operations.”

The emphasis was on increasing the Government’s share

of profits by way of income tax. It was then recognized

that “it was not in Jamaica’s interest to create a situation

in which it could be said that we have broken an agreement

about income tax by imposing a royalty .. . out of line with

the royalties that prevail throughout the world”. The new

25 year arrangement accordingly focused on increased in-

come taxation for Jamaica. One of the predominant con-

siderations was “to maintain the probability that the

companies would continue to enlarge their operations in

Jamaica and would look to Jamaica as the principal source

of supply”.

Both Reynolds and Kaiser were told, however, that “the

Government did not consider a 25-year income tax ar-

rangement as’ a sensible arrangement”. Circumstances

might change to make this unrealistic. In that event “it

would be natural to expect that Government would ap-

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proach the companies with a view to reopening the matter”.

Indeed, the companies were told that “. . . it would be the

duty of Government to denounce any long-term agreement

of this character which had become unrealistic and which

was having the result of depriving the country of a share

in the profits to which it was entitled”.

The Report of the 1957 negotiations records that, in re-

sponse to the companies’ insistence that the Government

enter into “a binding agreement that no other taxes would

be imposed on their mining operations”, they were told

that “no Government could bind a future Government not

to exercise its legislative powers and that legislation itself

could put an end to any agreement of that sort”. The com-

panies, it was reported, “quite naturally insisted that they

would derive protection from an agreement which the

Government would be expected to observe”. Although “the

Chief Minister pointed out over and over that he could

make no agreement which would propose to bind the future

legislative action of the Government”, it was acknowledged

that the provisions in question would “have to be regarded

as a matter of good faith and a civilised government would

not be likely to repudiate this undertaking”. The conclu-

sion of this part of the Report says:

“The assurances in the Agreement, therefore, are to

be regarded as binding in good faith on the Govern-

ment but not in any way an unrealistic promise to the

company, namely, that no future legislation can be

passed affecting them.”

When asked by Kaiser to incorporate the agreement in

legislation, the Minister said “he saw no virtue in...

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(this) request . . . because this gave the Company no

greater protection inasmuch as such a law could subse-

quently be repealed by the Government, present or future”.

Thus, the companies were told that the agreement was

“binding in good faith” but the legislature was free to

change it at will.

Counsel for Reynolds said that he would “not agree

that it is impossible for a Government to contract in re-

spect of the future exercise of executive authority” or that

it was “impossible to make any contract which the Legis-

lature of Jamaica could not nullify by a Statute”. Counsel

went on to say:

“.. what we are aiming at is a contract; so that if the

Legislature did propose to pass a Statute nullifying

the contract, they would have to-do so in the face of

the fact that by so doing, they were acting in bad faith

and breaking a bargain.”

It seems to us that both parties understood the situation.

Chief Justice Smith in finding Clause 12 “invalid” and con-

ferring “no valid contractual right” nevertheless said:

“On the available evidence, the parties to the 1967

Agreement regarded it as a legally binding contract up

to the enactment of the Acts of 1974. It is inconsistent

with that conduct to plead now a lack of intention to

create legal relations in order to upset the Agreement.”

The international law rule that a government is bound

by its contracts with foreign parties notwithstanding the

power of its legislature under municipal law to alter the

contract has been repeatedly asserted in important inter-’

national arbitrations and elsewhere. Thus, in the Shufeldt

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case (United States v. Guatemala, II U.N.R.I.A.A. 1079,

Sir Herbert Sisnett, 1930) the Sole Arbitrator said with

reference to a decree of the Legislative Assembly of Gua-

temala directing the Executive to take possession of lands

covered by a chicle concession :

“|. it is perfectly competent for the government of

Guatemala to enact any decree they like and for any

reasons they see fit, and such reasons are of no concern

to this Tribunal. But this Tribunal is only concerned

where such a decree based even on the best of grounds

works injustice to an alien subject, in which case the

Government ought to make compensation for the in-

jury inflicted and cannot invoke any municipal law to

justify their refusal to do so,” (id., at 1095)

There is a close parallel between the Shufeldt case and

the one involved here. Guatemala claimed that the contract

was ultra vires, null and void, and vested no rights in the

claimant because the power to approve or disapprove gov-

ernment contracts was assigned to the Legislature by the

Constitution. While the Arbitrator found that the con-

tract had been laid before the legislature in a Memorial of

the Minister of Agriculture and not disapproved, the Gov-

ernment of Guatemala insisted that the Memorial contained

no mention of the contract and that it had never been ap-

proved as required by the Constitution. Six years after

Shufeldt claimed to have acquired his rights, the Assembly

disapproved the contract and the Government argued that

this established nullity ab initio, It also took the position

that any claim of breach should be decided by arbitration

in Guatemala and under no circumstances referred to the

courts or to diplomatic channels. The subsequent arbitra-

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tion before the Chief Justice of Honduras was established

by agreement between the two governments concerned.

In the case before Swiss arbitrator Judge Cavin in

Sapphire International Petroleum Lted. v. National Iraman

Oil Company, 35 Int’l. Law Rep’ts. 136 (1967), as in the

Revere case, the contract did not provide for the applicable

law, but only that the parties undertook to carry out its

provisions “in accordance with the principles of good faith

and good will”. In the present case the Jamaican Govern-

ment’s statements relating to the tax arrangements with

the aluminum companies were that they were “to be re-

garded as binding in good faith on the Government”.

The Arbitrator in Sapphire concluded that the contract

before him had “a quasi-international character” and was

not subject to’ the law of any/ country or any particular

legal system. In his view “general principles of law based

upon the practice common to civilised countries” were ap-

plicable. Having found that the National Iranian Oil Com-

pany in this case had “deliberately refused to carry out

certain of its obligations” and that this failure was a breach

of contract, he said

“... It is a fundamental principle of law, which is con-

stantly being proclaimed by international courts, that

contractual undertakings must be respected. The rule

pacta sunt servanda is the basis of every contractual

relationship.” (35 Int’l. Law Rep’ts., at 181)

In the TOPCO/Inbya Award, Professor Dupuy also dealt

with the relationship between nationalization measures

under municipal law and State obligations under contracts

subject to international law. With reference to the latter,

he says:

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“ ., the State has placed itself within the international

legal order in order to guarantee vis-a-vis its foreign

contracting party a certain legal and economic status

over a certain period of time. In consideration for

this commitment, the partner is under an obligation to

make a certain amount of investments in the country

concerned and to explore and exploit at its own risks

the petroleum resources which have been conceded to

it.

“Thus, the decision of a State to take nationalizing

measures constitutes the exercise of an internal legal

jurisdiction but carries international consequences

when such measures affect international legal relation-

ships in which the nationalizing State is involved”

(TOPCO/Inbya Award, at 50).

Further, after quoting from U. N. Resolution 1803

(XVII), he says:

“The result is that a State cannot invoke its sover-

eignty to disregard commitments freely undertaken

through the exercise of this same sovereignty and can-

not, through measures belonging to its internal order,

make null and void the rights of the contracting party

which has performed its various obligations under the

contract.” (id., at 54)

The position was clearly stated in the Third Report on

State Responsibility submitted by the International Law

Commission to the General Assembly of the United Nations

in 1973, as follows:

“ . . the fact that some particular conduct conforms

to the provisions of national law or is even expressly

6”

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prescribed by those provisions does not make it pos-

sible to deny its internationally wrongful character

when it constitutes a breach of an obligation estab-

lished by international law. As has been clearly stated,

‘The principle that a State cannot plead the provisions

(or deficiencies) of its constitution, as a ground for

the non-observance of its international obligations...

is indeed one of the great principles of international

law, informing the whole system and applying to every

branch of it’....” (II Yr. Bk. Int'l L. Comm. 1971, at

193, 277 ; See also 1973 Report to the General Assembly,

A/9010/Rev. 1, II Yr. Bk. 1973, at 163, 188)

The situation in Jamaica with respect to the aluminum

companies in 1957, 1966 and 1967, was the almost classic

one of a government seeking to obtain substantial long term

commitments from foreign investors for the economic de-

velopment of its natural resources and for that purpose

providing substantial inducements in the way of tax and

other assurances for limited periods of time. If the sover-

eign power. of a State cannot be fettered in this manner

by entering into binding contracts, the State would be de-

prived of the power by such contracts to meet essential

needs, Inevitably, in order to meet the aspirations of its

people, the Government may for certain periods of time

impose limits on the sovereign powers of the State, just as

it does when it embarks on international financing by issu-

ing long term government bonds on foreign markets. Under

international law the commitments made in favor of foreign

nationals are binding notwithstanding the power of Par-

liament and other governmental organs under the domestic

Constitution to override or nullify such commitments, Any

other position would mean in this case that Jamaica could

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not in the exercise of its sovereign powers obtain foreign

private capital to develop its resources or attract foreign

industries. To suggest that for the purposes of obtaining

foreign private capital the Government could only issue

contracts that were non-binding would be meaningless. As

the contracts were made in the sense that the commitments

were set out in unqualified legal form, international law

will give effect to them. For the purposes of this proceed-

ing they must be regarded as binding.

Parenthetically, we repeat what we pointed out earlier

as to the stated policy of the Foreign Assistance Act of

1961 that authorizes AID-OPIC insurance contracts,

namely to support the principles of increased economic co-

operation and trade among countries. Our view as to the

meaning of the insurance contracts fosters such policy.

On this phase of the case we have concluded that, so far

as international law is concerned, the Government of

Jamaica was bound by its commitments under the provi-

sions of the 1967 Agreement, including its commitments

under Clause 12.

Breaches of the Agreement?

In view of the above, little more need be said on this,

subject.

The magnitude of the Bauxite Levy was admittedly sub-

stantial. For the two years, 1974 and 1975, Revere paid

$9,494,000. By OPIC’s analysis this was equivalent to a

gross production tax, for 1974, at the rate of about 20%,

which would have been about 34% if Revere had not re-

ceived a substantial subvention in exchange for incurring

the expense of a feasibility study as to a proposed expan-

sion of the plant. For 1975, OPIC estimates the rate at

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35.9% on the actual production and at a hypothetical rate

of about 30% if the plant had not shut down in August and

had produced in 1975 the tonnage that was produced in

1974,

The effect of the Levy on the aluminum companies in

general and on Revere in particular is clouded by the extent

to which it may have been passed through to consumers

by price increases. There was no legal impediment against

a pass through except to the extent that price controls in

the United States may have prevented it during the brief

period when controls were in effect. All costs, particularly

oil and labor, were rising rapidly and so were prices after

controls were removed. In our view of the case we are not

obliged to make any precise findings on this subject and we

could not do so with confidence in any event on the record

before us as to the period when Revere was in operation.

In any event, we agree with OPIC that the Levy was not

confiscatory and that it did not prevent RJA “from exercis-

ing effective control over the use or disposition of a sub-

stantial portion of its property”. In our view, however,

the important question is whether the Levy constituted a

breach of the 1967 Agreement.

The Supreme Court of Jamaica in the action brought

there by RJA held that under Jamaican law the 1967 Agree-

ment “did not create any rights in RJA as against future

taxes and that, therefore, the enactment of the bauxite pro-

duction levy was not a breach of RJA’s 1967 Agreement”.

We emphatically do not suggest that Chief Justice Smith

did not properly state and apply Jamaican law or that RJA

was not accorded full “due process” in the Jamaican court.

Chief Justice Smith did not address himself to the ques-

tion whether the Government was bound in international

law to observe the good faith commitments made by it in

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contracts with foreign nationals. When he ruled that the

provisions of Clause 12 were “void ab initio” because

Ministers could not fetter the sovereign power of Parlia-

ment to legislate with respect to taxation, he applied prin-

ciples of domestic Jaw and not principles of international

law.

If the parties had intended to preserve the Government’s

legislative freedom without the consequences under inter-

national law of violating its commitments, they could have

done so in the Agreements entered into with the aluminum

companies in 1957, 1966 and 1967. They did not do so.

The 1957 commitments were allowed to stand unaltered for

seventeen years, to be renewed and amplified in 1966 and

1967, and the latter to remain in effect for eight and seven

years respectively.

In 1974 to 1976 the Government again negotisted con-

tracts with the aluminum companies and again undertook

commitments with respect to taxation as well as other

important aspects of the relationships. In every case the

agreements provide for the international arbitration of

disputes arising out of certain fundamental provisions.

Arbitration is to take place in Bermuda and arbitrators

are to be appointed, where a party fails to make an ap-

pointment, by the President of the Law Society of London,

England.

We think the reality is that, at least in the case of Revere

in 1967, the parties, each for their respective reasons, did

not come to grips with the fundamental problem that was

resolved in the 1974-1976 negotiations. They left it for

some future resolution if the event should transpire. Now

the event has transpired and we must decide it.

Admittedly Parliament could at any time legislate with

respect to taxes and thus override contracts with private

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parties. It could not, however, deprive such parties of com-

pensation, if the circumstances justified the payment of

compensation under international law principles. In our

view, such circumstances existed in this case.

We find that the commitments made by the Government

were internationally binding, although they may not, as

in the Shufeldt case, have prevented the legislature, acting

under its Constitutional powers, from enacti»g legislation

contrary to their provisions. Action contrary to them, how-

ever, constituted a breach.

(a) Did the Government Repudiate Its Obligations

Under the Agreement?

Revere argues that the Prime Minister’s declarations and.

other acts by the Government constituted a repudiation of

the Agreement as a whole. To the contrary, OPIC says

there were many instances where the continued existence

of the Agreement was recognized. These included the

Heads of Agreement of December 20, 1974, which provided

for an amendment of the “existing Agreement” and various

statements in the course of negotiations. RJA, they also

say, still has all the rights needed for mining bauxite and

producing alumina.

In Section 274 of Tentative Draft No. 9 of the American

Law Institute Restatement of the Law Second—Contracts

(1974), headed “When a Statement or an Act is a Repudia-

tion”, the term “repudiation” is said to be:

“(a) a statement by the obligor to the obligee indicat-

ing that he will commit a breach that would of

itself give the obligee a claim for damages for total

breach under §268, or

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“(b) a voluntary affirmative act which renders him un-

able or apparently unable to perform without a

breach.”

In the comment to (b), it is said that the language “must

be sufficiently positive to be reasonably interpreted to mean

that the party will not or cannot perform”. It is also said:

“Language that is accompanied by a breach by non-

performance may amount to a repudiation even though

standing alone, it would not be sufficiently positive.”

(TD No. 9, at 4)

The law of England and the United States is largely sim-

ilar on this point (4 CORBIN on Contracts §959, etc.)

Numerous official statements during the first half of 1974

made clear the Government’s intentions and determination

to replace the existing contracts with new arrangements.

These, coupled with the legislative Acts of June 1974, ap-

pear to us to meet the requirements of repudiation.

Thus, on January 3, 1974, the Prime Minister publicly

announced that “the Government of Jamaica cannot be

bound” by its agreements with the aluminum companies

“any longer’. On March 15, 1974 negotiating proposals

were submitted, some of which were stated as negotiating

proposals, but many were put in terms of contract changes

that had been or were being made. For example, the rev-

enue proposals stated:

“.. special arrangements relating to income tax rates

under previous Agreements will cease”; “A produc-

tion levy will be introduced effective and payable 1st

January 1974”; “The present royalty rates will be re-

placed ... effective and payable from 1st January

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1974”; depletion allowances “will discontinue effective

1st January 1974”; ... the Government will not grant

any exemption from the payment of withholding

taxes”; “The production levy and the royalties will be

subject to review at the end of two years . . . and there-

after every two years”; OPIC premia “will not be

allowed as a deductible expense” ; Government reserves

the right to grant to other Companies terms and con-

ditions different from those granted to your Com-

pany”; ... all of the foreign exchange proceeds .. .

must be sold to an authorized depositary; .. . All over-

seas payments must be made from a Jamaican Bank

account and must be subject to the approval of the

Bank of Jamaica in accordance with the Exchange

Control Law”; exports of bauxite and alumina will be

regulated (emphasis added).

It was also stated to be the Government’s policy “to se-

cure maximum national ownership of and effective na-

tional control over the bauxite and alumina enterprises

operating in Jamaica” and “to purchase all of the surface

rights held by your Company”; “Government has decided

to revoke all existing mining leases and licenses”; “Gov-

ernment wishes to negotiate majority local equity partici-

pation in your Company”. The option given to the Com-

pany to enjoy terms granted to other companies was to be

ended.

Proposals by the companies to increase revenues to the

Government to meet its financial requirements were re-

jected. In his Statement to the House of Representatives

of May 15, 1974, proposing the Bauxite Levy, the Prime

Minister dismissed these proposals as simply an attempt

“to esti

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