Original version by Irmgard Marboe April 2007; reviewed by Irmgard Marboe November 2024.

A.  Introduction

1  This arbitral award under the auspices of the International Centre for Settlement of Investment Disputes (ICSID) deals with a number of important issues of international investment law (Investment Disputes; Investments, Bilateral Treaties; Investments, International Protection). The Amco Asia Corporation and others v Republic of Indonesia case (‘Amco v Indonesia Case’) concerned the taking over of a hotel and a shop and office complex by the foreign investor’s business partner in Indonesia, assisted by military and police armed forces. Subsequently, Indonesian administrative organs revoked the foreign investor’s investment licence because of alleged breaches of its obligations. Legal proceedings before municipal courts confirmed the legality of the acts of the Indonesian authorities on the whole. The investor initiated ICSID arbitration on the basis of an arbitration clause included in the investment licence (International Investment Arbitration). The Amco v Indonesia Case raised a number of important issues of investment law and arbitration, including the applicable law in ICSID arbitration, principles of international law regarding expropriation, state responsibility for injuries to aliens, denial of justice, the legal nature of investment licences as well as the question of damages in case of their breach (Compensation; Property, Right to, International Protection; Applicable Law; Expropriation and Nationalization).

2  The award rendered by the first arbitral tribunal, Amco Asia Corporation v Republic of Indonesia (Award of 20 November 1984) (‘Amco I’), was partially annulled by an ad hoc Annulment Committee (‘Ad hoc Committee’) pursuant to Article 52 Convention on the Settlement of Investment Disputes between States and Nationals of other States (1965) (‘ICSID Convention’) (Annulment: International Centre for Settlement of Investment Disputes (ICSID); Ad Hoc Committees: International Centre for Settlement of Investment Disputes (ICSID); Judicial and Arbitral Decisions, Validity and Nullity). This was the second annulment within the ICSID dispute settlement system after the annulment of the award in the case Klöckner Industrie-Anlagen GmbH and others v United Republic of Cameroon and Société Camerounaise des Engrais (1985). The Amco v Indonesia Case was finally decided by a second arbitral tribunal (Amco Asia Corporation v Republic of Indonesia (Resubmitted Case: Award of 31 May 1990) (‘Amco II’)). The application for annulment of this second award failed.

B.  Summary of Facts and Contentions

3  The Amco Asia Corporation (‘Amco Asia’), a company incorporated in the US state of Delaware, had concluded a lease and management agreement relating to the development of a hotel and office block on a site in Indonesia owned by the Indonesian company PT Wisma Kartika (‘PT Wisma’) in 1968. All the shares in PT Wisma were owned by Inkopad, a welfare co-operative of the Indonesian Army. PT Wisma granted Amco Asia a lease for both structures and agreed on a profit-sharing agreement.

4  On the basis of the 1967 Indonesian foreign investment law Amco Asia was granted permission to carry out the respective businesses and to establish PT Amco Indonesia (‘PT Amco’), a legal entity under Indonesian law with its domicile in Indonesia. All Amco Asia’s rights under the 1968 lease and management agreement were transferred to PT Amco. PT Amco concluded two sub-lease agreements for the operation of the hotel complex.

5  Between November 1979 and March 1980 a number of disagreements arose between PT Amco and PT Wisma primarily concerning the profits of the hotel for 1978 and 1979 and the amounts due to them on the basis of the 1978 profit sharing agreement. PT Wisma informed PT Amco that unless the sums claimed by it were paid by 30 March 1980, it would consider PT Amco in default, so that the co-operation contract would be null and void and the management of the hotel would be taken over by PT Wisma as the owner.

6  When the deadline passed without the claims being settled, PT Wisma took over the control of the hotel, with the assistance of members of the Indonesian armed forces on 31 March 1980. Moreover, PT Wisma reported to the Indonesian Capital Investment Co-ordinating Board alleged irregularities with the Amco Group’s investment in Indonesia. In July 1980, the approval of the capital investment business in the name of PT Amco was revoked. The revocation was based in particular on the determination that PT Amco had entered into sub-lease agreements, had not invested equity capital to the extent required, and had not complied with its tax obligations.

7  Amco Asia and others instituted ICSID arbitration proceedings against the Republic of Indonesia and based their claims on the taking over of the hotel and the premature revocation of the investment licence. The Republic of Indonesia denied the seizure of the hotel and contended that the revocation of PT Amco’s investment licence had been lawful because of various violations of its obligations.

C.  The First Arbitral Award of 1984

8  Amco I analysed the claimant’s two claims separately: first the issue of expropriation and then the issue of the lawfulness of the withdrawal of the investment licence.

9  The tribunal emphasized that expropriation exists not only when a state takes private property but is also committed by a state ‘withdrawing the protection of its courts from the owner expropriated, and tacitly allowing a de facto possessor to remain in possession of the thing seized’ (Amco I para. 158). It stressed that the taking had not occurred on behalf of or on the instigation of the Republic of Indonesia and that the acts of PT Wisma were not attributable to the respondent. It held, however, that:

10  As to the second claim, the tribunal in Amco I characterized the combination of the application and the approval of the licence ‘not as a contract properly speaking, identical to a private law contract, but as a bilateral relationship creating obligations for both parties’ (at para. 191). In its view, ‘the consequences of an unjustified revocation would be the same as those resulting from the breach of a contract’ (ibid.). It came to the conclusion that neither the sub-lease agreements nor the amount of invested foreign capital which did not exactly reach the sum promised in the application for the licence were reasons substantial enough to annul the licence. This was especially so because PT Amco had not been warned in advance and had not been given the chance to remedy the alleged breaches. The tribunal in Amco I came to the conclusion that the revocation of the licence without due process and without reasons sufficiently substantial amounted to a violation of Indonesian law as well as of international law. Therefore, according to the tribunal, the respondent was liable for the damage resulting from the state organs’ actions.

11  With respect to the calculation of the amount to be awarded, the tribunal in Amco I was of the opinion that the infringement by the state of its obligation to protect the foreign investor—by giving assistance to the taking of the hotel—and by revoking the licence amounted to the equivalent of an infringement of a contractual obligation. It thus followed the contract law principles of calculation of damages. It pointed out that ‘in Indonesian law, like in all systems of civil law, damages are to compensate the whole prejudice, whose two classical components are the loss suffered (damnum emergens) and the expected profits which are lost (lucrum cessans)’ (Amco I para. 266).

12  Finally, the tribunal in Amco I pointed out that the only prejudice in this case to be taken into account was the loss of the right to operate the hotel. It held that the loss of such a ‘going concern’ would most appropriately be valued by establishing the net present value of the business, based on a reasonable projection of the foreseeable net cash flow during the period to be considered.

D.  The Decision on Annulment of 1988

13  The Republic of Indonesia filed an application for the annulment of the first award under Article 52 ICSID Convention. It submitted that the tribunal in Amco I had manifestly exceeded its powers and had failed to state the reasons upon which the award was based in various aspects.

14  The ad hoc Committee, which had to decide on the application for annulment, dismissed the majority of the grounds put forward by Indonesia, but it concurred with the allegation that the revocation of the investment licence was justified on substantive grounds. The ad hoc Committee came to the conclusion that PT Amco had, indeed, failed to invest the required amounts of foreign capital in conformity with the provisions of the foreign investment law. According to the ad hoc Committee, the tribunal in Amco I had erred in two material aspects in this respect: First, it had not seized the critical importance of PT Amco’s duty to register its claimed investment with the Bank of Indonesia. Second, it had failed to apply the provisions of the Indonesian foreign investment law which limited qualified foreign investment to investment of equity capital. The ad hoc Committee found that, by failing to apply the relevant provisions of Indonesian law, the tribunal in Amco I had manifestly exceeded its powers.

15  Moreover, the wrong calculation of equity investment by including a loan in the amount of US$1,000,000 qualified as a failure to state the reasons on which the first award was based. The conclusion of the tribunal in Amco I that the revocation of the licence was not justified was therefore annulled by the ad hoc Committee.

16  This conclusion, however, did not affect the award’s finding on the illegality of the action by the army and police personnel. The ad hoc Committee underlined the claimant’s entitlement to damages on this ground. However, it was unable to separate the amount of damages due for the action by army and police personnel from the award on damages as a whole, so that it annulled the award’s findings on the amount of damages in their entirety.

E.  The Second Arbitral Award of 1990

17  In the resubmitted case, Amco II, the tribunal first decided in a separate decision on jurisdiction on the scope and extent of the second arbitration by identifying the parts of the first award that had been annulled and those which had become res iudicata. The latter included the tribunal’s finding that the procedure of the licence revocation was unlawful. On this basis and considering the contention of the parties, the tribunal in Amco II analysed whether and to what extent the respondent was responsible for paying damages. According to the tribunal, this would be the case if respondent’s behaviour amounted to a denial of justice. With regard to international precedents, especially to the judgment of the International Court of Justice (ICJ) in the Elettronica Sicula Case, it pointed out that not every procedural irregularity constituted a denial of justice and that a distinction must be drawn between unlawfulness in municipal law and arbitrariness under international law (International Law and Domestic (Municipal) Law). According to the tribunal, the handling of PT Wima’s complaint which led to the approval by the President of the Republic of Indonesia of the proposal for revocation constituted a denial of justice. The circumstances surrounding the decision tainted the proceedings in a manner that rendered it unlawful as a matter of both Indonesian and international law, even if substantive grounds might have existed for such a decision.

18  The tribunal in Amco II addressed the issue of damages from two different angles: First, it evaluated the damage caused by the army and police intervention by a lump sum. Second, with regard to the damage caused by the revocation of the licence, the tribunal entered into a detailed analysis of the relevant principles of compensation in Indonesian and international law. It concluded that the denial of justice effectively deprived PT Amco of its contract rights and that non-speculative profits under that contract were recoverable. Quoting the judgment of the Permanent Court of International Justice (PCIJ) in the Factory at Chorzów Case (German Interests in Polish Upper Silesia Cases) and other international precedents, the tribunal came to the conclusion that the amount of damages needed was an amount sufficient to put PT Amco in the position it would have been in had it received the benefits of the profit-sharing agreement until its end in 1999.

F.  Conclusion

19  Both the tribunals in Amco I and II as well as the ad hoc Committee were of the opinion that the acts of the Indonesian authorities, including those of the armed forces, had given rise to state responsibility. In light of the similar outcomes of the two arbitral awards it seems unfortunate that the wrong application of details in municipal investment law was sufficient for the Committee to find that Amco I had manifestly exceeded its powers leading to the annulment of the first award. Although the Committee had emphasized that it would not scrutinize the interpretation or application of the law by Amco I, it has been criticized for having in fact re-examined the merits of the case and for not having distinguished properly between annulment and appeal. Subsequent Committees have developed a more cautious approach and limited their intervention to serious and important cases (Wena v Egypt Case; Vivendi (Compañia de Aguas del Aconquija) v Argentina Case).

20  From an academic point of view, however, the second arbitral award is a substantial contribution to the law of international investment protection. For example, it contains a comprehensive summary of the status of customary international law on denial of justice. It thereby replaced Amco I’s very broad understanding of the term ‘expropriation’ which made it almost indistinguishable from the obligation to provide ‘full protection and security’, due diligence and breach of contract. Furthermore, Amco II conducted a valuable analysis of the principles to be followed with regard to the calculation of damages. It correctly made a distinction between the fair market value as the standard of compensation in the case of a lawful expropriation and the principle of full reparation in the case of a violation of a legal obligation, be it contractual or international. Also, the application of present value calculations in an arbitral award can be regarded as a milestone in international arbitral jurisprudence.