BP v.

Libya, 53 ILR 279

FACTS: British Petroleum Exploration had a contract with the Libyan Government to extract, process
and export oil in an area called Concession 65 in the heart of the Sarir desert. However, in 1971, Libya
passed the BP Nationalization Law which restored ownership of all properties, rights, assets and shares
to the state and transferred them to the Arabian Gulf Exploration Company. Accordingly, the
nationalization was undertaken by Libya as a reaction to the British Government’s failure to react to
Iran’s occupation of three islands in the Gulf which were under British protection. The Libyan
government apparently blamed Britain for the loss of the islands. Under the nationalization law passed
by Libya, the State should pay compensation to BP Exploration which was to be determined by a
committee established by the Minister of Petroleum. However, due to delays in the determination of
the matter of compensation, the nationalization law already took effect without the issue being
resolved. As a result, BP Exploration’s were brought to a complete halt and their staff were immediately
excluded from the premises as Arabian Gulf Exploration Company took over Concession. Similar to the
Texaco case, the concession contract in this case also contained a governing law clause which says that
Libyan law would be applicable only to the extent that it coincides with international law.

ISSUES: 1. whether the injured party to a concession agreement has the right to deem the contract as
valid and enforceable even after the alleged wrongful exploration, and; 2. whether the injured party
may claim reparations in the form of specific performance or restitutio in interregnum.

RULING: Libya breached its obligation to BP Exploration by expropriating the latter’s properties.
However, BP Exploration was entitled only to damages and to specific performance and restitutio in
interregnum. According to the arbitrator, as a general rule under international law, the wrongful breach
of contract would entitle the injured party to terminate the contract at its

option. This means that until and unless such injured party elects to do so, the contract should be
deemed as valid and binding and it can compel the other party to continue performing its obligations
under it. However, this is not applicable, as in this case, where the other (expropriating party) is a
sovereign state. Thus, the right to deem the contract as continuing to be binding and the consequent
right to demand restitutio in interegnum is not available to BP exploration under international law. This
recognizes the almost plenary power of the home state to expropriate and that the home state cannot
be precluded under international law to expropriate when it wishes to. Thus, the home state may
expropriate when it desires to, and even if it does so in breach of contract, the home state cannot be
compelled to reinstate the operability of the contract (restitutio in interegnum), at most, it can only be
compelled to pay damages. In the end, the arbitrator did indeed order the Libyan government to pay
damages.

Note: The circumstances under which the expropriation took place in this case constitute one of the first
instances where an arbitral court classified state actions as (1) in breach of obligations, (2)
discriminatory, and (3) confiscatory. This is because the expropriation was apparently motivated by
extraneous political reasons and BP Exploration’s Concession 65 was singled out. The wrongfulness of
the expropriatory act is important to establish because this would determine the quantum of
compensation that would be awarded to the injured party.