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«case summary was prepared in the course of research for S Ripinsky with K Williams, Damages in International Investment Law (BIICL, 2008) Case ...»

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This case summary was prepared in the course of research for

S Ripinsky with K Williams, Damages in International Investment Law (BIICL, 2008)

Case summary

Amco Asia Corporation, Pan American Development

Limited, PT Amco Indonesia v Republic of Indonesia

(‘AMCO v Indonesia’)1

Year of the award: 1984-1990

Forum: ICSID

Applicable Law: Indonesian law, international law

First Arbitral Tribunal (1984 Award) Timeline of the dispute

Prof. Berthold Goldman – President 15 January 1981 – Request for Arbitration Mr. Edward Rubin 25 September 1983 – Decision on Prof. Isi Foighel Jurisdiction 20 November 1984 – 1st Arbitral Award Annulment Committee (1986 Decision) 16 May 1986 – Annulment of the 1st Prof. Ignaz Seidl-Hohenveldern – Arbitral Award Chairman 12 June 1987 – Request for Resubmission Dr. Florentino Feliciano 10 May 1988 – Decision on Jurisdiction 31 May 1990 – 2nd Arbitral Award Prof. Andrea Giardina 10 October 1990 – Decision on Second Arbitral Tribunal (1990 Award) Rectification of Award Ms. Rosalyn Higgins – President Mr. Marc Lalonde Per Magid All relevant decisions and awards are published in (1992) 89 ILR 368.

Table of contents I. Executive Summary

II. Factual Background and Claims of the Investor

III. Findings of the First Tribunal (1984)

A. Merits

B. Damages

1. Prejudice and causal link

2. Standard of compensation

3. Calculation of damages

4. Currency of compensation

5. Interest

IV. Decision on the Application for Annulment (1986)

V. Second Tribunal – Findings on Merits (1990)

A. Applicable Law

B. Conduct of Army and Police Personnel

C. The Revocation of PT Amco’s license

D. Unjust Enrichment

VI. Second Tribunal – Findings on Damages

A. Law Applicable to the Determination of Damages

B. Two Periods for Compensation

B. Damages Incurred as a Result of the Army and Police Intervention (1 April – 9 July 1980)

C. Damages Incurred as a Result of the License Revocation (10 July 1980 – 30 September 1999)

1. Mitigation of Damages

2. Foreseeability

3. Standard of compensation

4. Future profits

5. Relevant date for assessment

6. Causation

7. ‘Book value’ method – rejected

8. Valuation methods adopted

9. Lost profits for the period of 1980-89

10. Lost profits for the period of 1990-99

11. Results

12. Interest

13. Costs

VII. Implications / Initial Analysis

I. Executive Summary In 1968, Amco, an American Corporation, and PT Wisma, an Indonesian company operating under the guidance of the Indonesian government, entered into a Lease and Management Agreement whereby Amco was to invest in, and manage a hotel/office complex for the duration of 30 years, until 1999. In April 1980, after growing differences between the parties, PT Wisma forcibly took over management of the hotel. In July 1980, the Indonesian government revoked Amco’s license to engage in business ventures in Indonesia.

Amco initiated ICSID arbitration, claiming compensation for damages incurred due to the unlawful taking of the hotel and the termination of the license. In the First Arbitral Award of 1984, the Tribunal held that Indonesia’s actions were in breach of international law and awarded damages of US$ 3,200,000. However, that Award was annulled in 1986 on the grounds that the Tribunal had failed to state the reasons for its findings on several substantive issues.

Subsequently, Amco resubmitted the dispute to ICSID arbitration, with essentially the same claims. The Second Tribunal (1990 Award) found that both the takeover of the hotel as well as the revocation of the license had been internationally unlawful acts attributable to the Indonesian government. With regard to the question of relevant compensation, the Tribunal decided that to approximate as closely as possible in monetary terms to the principle of restitutio in integrum, the measure of damages should include compensation for the ‘general disturbance’ suffered by Amco due to the Hotel takeover, as well as for the profits lost by it as a result of license revocation.

The Tribunal awarded a discretionary lump sum of US$ 10,000 for the ‘general disturbance’ that had occurred in April-July 1980. As for profits lost by Amco from July 1980 onwards, the Tribunal distinguished between two time periods, the first one immediately following the revocation of the license until the year preceding the year of the Award (1980-89), and the second period starting with the year of the Award until the envisioned end of the Lease and Management Agreement (1990-99). To quantify lost profits for the first period, the Tribunal used data already available at the time of deliberations; for the second period, it applied the DCF analysis to determine the present value of future profits. In total, the Tribunal awarded damages in the amount of US$ 2,696,330 including 6% simple interest to the date of the Award.

II. Factual Background and Claims of the Investor In 1968, Amco Asia, a US corporation, and PT Wisma, an Indonesian company, entered into a Lease and Management Agreement in relation to a hotel and office block on a site in Jakarta owned by PT Wisma (‘Hotel’). PT Wisma was wholly owned by Inkopad, an entity operating under the guidance of the Indonesian government.

Under the 1968 Agreement, Amco Asia undertook to invest up to US$ 4 million in the construction and development of the Hotel and related property. PT Wisma undertook to grant Amco Asia a 19-year lease (which was extended in 1969 to a 30-year lease) on the building under a profit-sharing scheme.

In 1967 Indonesia enacted a law, under which tax concessions were made available to approved foreign investors, who had to operate through entities organized under Indonesian law. In May 1968 Amco Asia applied to the Indonesian Government under the 1967 law to establish an Indonesian company, PT Amco Indonesia (‘PT Amco’). This application contained inter alia an arbitration clause which established ICSID jurisdiction over possible future disputes. The application was approved and PT Amco was established in January 1969, whereupon all Amco’s rights under the 1968 Lease and Management Agreement were transferred to PT Amco.

In 1970, PT Amco made a sub-lease agreement with the Aeropacific Group, which maintained and operated the Hotel until 1978. Aeropacific continued and in early 1972 completed the construction of the 11-floor hotel with 331 rooms. However, in light of the subsequent legal skirmishing between PT Amco and the Aeropacific Group, Inkopad took over the management of the Hotel in 1978. After a few months, experiencing difficulties in administering the property without a professional manager, Inkopad authorized PT Wisma to enter with PT Amco into a ‘Profit Sharing Agreement for the Management of the Kartika Plaza Land and Building with all its contents’.

Under the Profit Sharing Agreement, PT Amco got the right of management of the entire complex, i.e. the hotel, the offices and shops. A new profit sharing formula was established: in the first six years (1978-1984), the net income of the property was to be shared 65% for PT Amco and 35% for PT Wisma. For the remaining period (1984-1999), the parties were to share the said income on a 50/50 basis. In 1979, PT Amco hired Ramada Group to manage the hotel.

In late 1979 – early 1980, disagreements arose between PT Amco and PT Wisma on a number of matters, particularly concerning the amounts due from PT Amco to PT Wisma under the Profit Sharing Agreement. PT Wisma threatened that if the amount requested was not paid by specified dates, it would take over the management of the Hotel as the owner. A small advance was made by PT Amco but it did not pay the full amount claimed.

On 31 March /1 April 1980 PT Wisma took over management of the Hotel, the Indonesian army and police personnel ensuring the successful seizure. Furthermore, following a request by the Chairman of the Capital Investment Coordinating Board (‘BKPM’), the President of Indonesia terminated PT Amco’s license to engage in business ventures in Indonesia. On 9 July 1980 BKPM formally revoked the license.

On 15 January 1981, Amco Asia, Pan American Development Limited (a Hong Kong Corporation holding a substantial amount of shares in Amco Asia) and PT Amco initiated ICSID arbitration against the Republic of Indonesia.2 The Tribunal established for purposes of that arbitration (‘the First Tribunal’) rendered an Award on the merits in 1984, which was annulled in 1986. In 1987, Amco resubmitted the

dispute to ICSID and brought essentially the same claims as in the first arbitration:

(para.23) When referred to collectively, the claimant companies will hereafter be designated as ‘Amco’.

● by reason of wrongful acts of the Indonesian army and police, it had suffered damage;

● in revoking its license, Amco had been given no proper warning and denied a fair hearing and that the revocation of the license was not substantively justified;

● Indonesia was unjustly enriched as a consequence of these unlawful acts.

AMCO claimed that wrongful conduct attributable to Indonesia resulted in damages of not less than US $15,000,000.

III. Findings of the First Tribunal (1984) A. Merits In accordance with Article 42(1) of the ICSID Convention, the Tribunal applied Indonesian law and applicable rules of international law. The Tribunal found that Indonesia had failed to protect PT Amco against the takeover of the Hotel on 1 April

1980. This constituted a breach of international law obligation to protect aliens against unlawful acts of its citizens. The Tribunal also held that the revocation of the PT Amco business license was done with violations of the principle of due process and that the revocation was unjustified substantively.

The Tribunal referred to Indonesian law and international law principle pacta sunt servanda and the doctrine of respect for acquired rights to rule that Indonesia was liable to compensate the claimants for the revocation of the investment license.

–  –  –

1. Prejudice and causal link

The Tribunal held that Indonesia had to compensate for the prejudice caused by:

• The intervention of army and police personnel (1 April 1980);

• Revocation of the license (9 July 1980).

The Tribunal first determined the nature and extent of the prejudice suffered by the Claimants as a result of these acts. The Tribunal held that the prejudice consisted of the deprivation of the Claimants of “the right to operate the Hotel”, or of the “loss of incorporeal, patrimonial and potentially profitable rights” for the duration of the Lease and Management Agreement (30 years, until 1999). (1984 Award, paras.252-253) The Tribunal established a causal link between the acts and the prejudice. It stated that the dispossession of 1 April “did not have any legal effect: it merely created a de facto situation, which was the actual deprivation of PT Amco of the management and operation of the hotel”. (1984 Award, para.257) This situation “continued” up until 9 July 1980, when the BKPM revoked the license. After the license revocation, PT Amco lost the legal right to operate businesses in Indonesia, which also entailed the loss of its legal right to operate the Hotel. (1984 Award, para.259) The Tribunal did not make a distinction between damages caused by the acts of the army and police and damages caused by the license revocation. It was a continuous loss caused by twp distinct episodes of wrongful conduct.

2. Standard of compensation The Tribunal awarded damages according to the principles applicable in cases of failure to comply with contractual obligations. The Tribunal deemed this method justified because, in its view, the two episodes of the State’s wrongful conduct amounted to the “equivalent of an infringement of a contractual obligation”. (1984 Award, para.265) Having discussed the principles governing damages for contractual liability, the Tribunal concluded that “the full compensation of prejudice, by awarding to the injured party the damnum emergens and lucrum cessans is a principle common to the main systems of municipal law, and therefore, a general principle of law which may be considered as a source of international law.” (1984 Award, para.267) To further support this conclusion, the tribunal referred to the Chorzow Factory case and a number of State-State arbitrations.

On this basis, the Tribunal held that its award of damages should “fully compensate the prejudice suffered by the Claimants.” The Tribunal determined that such full compensation should cover “only the direct and foreseeable prejudice.” (1984 Award, para.268) The Tribunal did not discuss the tests of directness and foreseeability in any detail.

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