Clarifications

INTERNATIONAL ARBITRATION CENTER
OF DANUBIA

Case No. Moot 5

Speculative Drilling, Co.

Claimant

v.

Deep Well Drilling, Inc.

Respondent

PROCEDURAL ORDER No. 2

CLARIFICATIONS

 

As provided in Procedural Order No. 1 dated 3 October 1997, the parties to this arbitration were given an opportunity to engage in a limited fact finding procedure by submitting questions to the Secretary of the Tribunal by 24 October 1997. The questions that were submitted have at times been re-phrased. The answers have been consolidated in three groups. The first group contains questions relevant to matters other than the relationship between Speculative and Deep Well. The second group contains questions relevant to their relationship. The third group contains questions about the legal rules in force.

I.

1. Is drilling rig #23 a fixed or floating structure?

It is a fixed structure.

2. Are fields Active #1 and Active #2 on land or on water?

They are on land.

3. Is the rig to be transported by land or by water?

It is to be transported by land.

4. Are the Farmers & Merchants Bank of Mediterraneo, the General Credit Bank of Equatoriana and the Equatoriana Industrial Credit Bank attached to the S.W.I.F.T. system?

They are all members of S.W.I.F.T. and the banking messages involved in this case passed over that system. It is stipulated, however, that the S.W.I.F.T. Rules are not relevant to the dispute in this case.

5. Was the calendar used in Equatoriana and Mediterraneo the one in use in Europe?

Yes.

6. Did the banks operate on Saturdays and Sundays?

No.

7. What penalties and other consequences would Speculative be subject to under the terms of the draft concession agreement with the Government of Polarity referred to in Statement of Claim, paragraphs 2 and 3, if Speculative does not fulfill its obligations under the concession?

The agreement provides that if Speculative does not commence commercial drilling by 1 December 1998 it would have to pay the equivalent of 100,000 Polarity francs per day for the first 30 days, 200,000 Polarity francs per day for the next 30 days and 300,000 Polarity francs per day for the next 60 days. (One Polarity franc was equal to one Equatoriana dollar.) If commercial production had not commenced by the end of 120 days, Speculative would lose the concession.

8. What is the profit that Speculative expects to make on the concession, if it is granted?

Speculative expects that it will take two years from the date the concession is granted before revenue will cover expenses. Over the 30 years that Active No.2 is expected to be in production, Speculative expects to earn over one billion (one thousand million) Equatoriana dollars.

9. Did Speculative enter into negotiations with any other party relating to purchasing of drilling equipment previous to or during the negotiations with Deep Well, i.e., prior to 9 May 1997?

No. It was still a significant period of time prior to the time Speculative would need a drilling rig for commercial production. Rig #23 was the only rig that would be available in the country of Polarity, and negotiations for an additional rig currently located outside Polarity was not as yet considered to be necessary. Furthermore, given the uncertainty as to whether Polarity would grant the concession, Speculative was reluctant to undertake excessive commitments for which it might have no need.

II.

10. Have Deep Well and Speculative had prior business dealings?

They are in the same business and have had casual business contacts in the past. There has never before been negotiations for the sale of a drilling rig.

11. Were there statements or representations during the negotiations between Deep Well and Speculative prior to the letter of 13 May 1997 that might indicate that Deep Well committed itself to sell rig #23 to Speculative?

No, there were not. It was clear that both Deep Well and Speculative were desirous of concluding a sale of the rig. Speculative anticipated a need for rigs about the time Deep Well would no longer have a use for rig #23. It would be expensive for Deep Well, or a purchaser of rig #23, to transport it from Polarity to another place where the rig might be needed. It would be expensive for Speculative to transport a rig from another place to Polarity. However, the date when the rig might be turned over to Speculative was still some time in the future. Deep Well did not yet feel pressure to sell the rig and Speculative was just beginning to feel pressure to arrange for any rigs that it might need.

At the end of the meeting of 9 May 1997 everything seemed to be settled between them, except in regard to the price. They had both stated the price they believed to be appropriate, i.e., E$30,000,000 and E$28,000,000. The atmosphere was such that they both expected that there would be eventual agreement on a price. However, it was unclear at the end of the meeting as to what the next step would be. After the meeting Deep Well decided that the next step would be for it to send the letter of 13 May 1997.

12. How was the Deep Well letter of 13 May 1997 sent and when was it received by Speculative?

It was sent by ordinary mail and it arrived on 16 May 1997.

13. How was the Speculative letter of 21 May 1997 sent and when was it received by Deep Well?

It was sent by ordinary mail and it arrived on 26 May 1997.

14. How was the Deep Well letter of 3 June 1997 sent?

It was sent by telefax.

15. Did Speculative do anything towards performance of the contract prior to sending the telefax on 5 June 1997 accepting the offer?

No.

16. When did Speculative authorize the Farmers and Merchants Bank of Mediterraneo to transfer the E$3,000,000 down payment to the Equatoriana Industrial Credit Bank for the account of Deep Well?

The payment order was given to the Farmers and Merchants Bank of Mediterraneo on 11 June 1997 at 10:45 a.m.

17. When did Deep Well learn that the down payment of E$3,000,000 had been credited to its account?

Deep Well was able to verify the status of its account at any time by an on-line connection and it normally did so three or four times a day. It verified its account 17 June 1997 at 11:15 a.m. and the E$3,000,000 credit was noted. It was 12:30 p.m. before the internal consultations had been completed and the instruction to the Equatoriana Industrial Credit Bank to return the credit was given.

18. Did Speculative have, or could it have had, any knowledge about the cut-off time of the Equatoriana Industrial Credit Bank?

Speculative knew that many banks have a cut-off time for the receipt of payment orders to debit or credit for value of the day of receipt, since it knew that banks in Mediterraneo had such cut-off times. It had no specific knowledge that the Equatoriana Industrial Credit Bank had a cut-off time, or what that time might have been.

In Equatoriana banks are free to establish their own cut-off time, so long as it is no earlier than 12:00, mid-day. The actual cut-off times established by different banks range from 12:00 to 16:00. The cut-off time for the Equatoriana Industrial Credit Bank was 13:00.

In Equatoriana a payment order received after the cut-off time is considered to have been received on the next banking day.

19. Was the guarantee of E$33,000,000 required by Paragraph 2 of the contract subject to any set of rules adopted by the International Chamber of Commerce?

The entire contractual obligation between Deep Well and Speculative in respect of the guarantee is set forth in Paragraph 2 of the contract. The guarantee itself did not refer to any ICC or other set of rules.

20. Was Speculative aware that the guarantee would take more than 10 days to be issued?

No. It gave no particular instructions to the Farmers and Merchants Bank of Mediterraneo in respect of the time in which the guarantee should be opened since its experience in the past had been that such guarantees were normally opened within three to four business days from the day it gave its instruction.

21. When did the General Credit Bank of Equatoriana receive instructions from the Farmers and Merchants Bank of Mediterraneo to issue the bank guarantee?

The instructions were received during the night of 9-10 June 1997. On 12 June the department of the bank that handles these matters sent a message to the Farmers and Merchants Bank stating that, in view of the fact that they were not correspondent banks, before it was willing to issue the guarantee, arrangements would have to be made giving it greater assurances that Farmers and Merchants Bank as the instructing party would be able to reimburse it. Adequate reimbursement arrangements were not established between the two banks until 17 June. The guarantee was issued on 18 June and the Farmers and Merchants Bank was notified the same day that the guarantee had been opened.

The Farmers and Merchants Bank did not notify Speculative of the delay in the opening of the guarantee. The first that Speculative knew of the delay was 20 June 1997 when it was notified by Farmers and Merchants Bank that the guarantee had been opened on 18 June 1997.

22. Were there first class banks in Equatoriana other than the General Credit Bank of Equatoriana that issue bank guarantees?

Yes, there were two other banks that regularly issued bank guarantees. The Farmers and Merchants Bank of Mediterraneo was not a correspondent bank of any of them.

The Equatoriana Industrial Credit Bank, where Deep Well conducted its banking business, was not one of the banks that issued bank guarantees.

23. The order of the Commercial Court of Mediterraneo states that the bank guarantee of E$20,000,000 that was required before it would issue the order had been issued on September 1, 1997. Is that correct?

The Court was in error. On 9 July 1997 Speculative requested Farmers and Merchants Bank of Mediterraneo to cause the guarantee to be issued. The same day Farmers and Merchants instructed the Bank of Commerce of Equatoriana to issue the guarantee. The guarantee was issued on 10 July 1997 and the Court was so informed on 11 July 1997.

Two further errors have been noted in the order of the Court, neither of which is of material importance in the arbitration. At the end of the third full paragraph, the arbitration clause was stated to be in clause 7 of the draft contract. It was in clause 9. At the end of the order, the last time the word "PETITIONER" appeared, it should have read "RESPONDENT".

24. When does the bank guarantee of E$20,000,000 issued to secure any losses that Deep Well might suffer as a result of the order of the Commercial Court of Mediterraneo expire?

The guarantee provides that a demand for payment would have to be made by 30 May 1997. The demand for payment would have to be accompanied by a signed statement of an officer of Deep Well that

Deep Well Drilling, Inc. has suffered a loss of E$_______ by reason of the order of the Commercial Court of Mediterraneo dated 15 July 1997 prohibiting Deep Well Drilling, Inc. from selling rig #23 prior to resolution of the dispute between Speculative Drilling, Co. and Deep Well Drilling, Inc. by the arbitral tribunal provided for in the draft contract dated 13 May 1997 or until 14 April 1998, whichever comes first.

25. What does "free to deliver" mean in the contract between Deep Well and Oceania Oil Ltd referred to in the Statement of Defense, paragraph 16?

Presumably it meant that Deep Well was in a factual and legal position to deliver the rig to Oceania.

26. If Deep Well is not free to deliver the rig to Oceania, is it subject to damages?

No, Deep Well's obligation to Oceania is conditional. The consequence to it of not being free to deliver the rig would be that it would not receive the E$40,000,000 that Oceania is obligated to pay for the rig.

27. What are the interest rates in each relevant country that govern interbank loans, commercial loans and any other financial transactions that might be useful to the tribunal in determining damages?

Those rates are not yet available. If the tribunal finds that there is a contract in existence but does not issue the requested orders, it will have further hearings to determine the remedies it will order.

III.

28. Have the parties given the Arbitral Tribunal the right to decide as "amiable compositeur"?

The full extent of the arbitral agreement is found in clause 9 of the draft contract (Claimant's Exhibit 2) as accepted by the parties and ordered to be implemented in the order of the Commercial Court of Mediterraneo (Claimant’s Exhibit 7).

29. Is Polarity a party to the New York Convention?

Yes.

30. Have either Equatoriana or Mediterraneo made any of the declarations permitted in Part IV of the CISG?

No.

31. Can the courts of Danubia, Equatoriana, Mediterraneo and Polarity issue orders of specific performance?

In all four countries the courts can, and do, issue orders of specific performance. In Danubia and Mediterraneo an order to an obligor to perform its obligation is said to be the "natural remedy", while in Equatoriana and Polarity such an order is said to be "special". In practical terms, an order to deliver goods is almost never given in any of the four countries if the buyer could purchase substitute goods that would be adequate to satisfy its needs. Orders to deliver goods that are the subject of a sales contract are given in all four countries if the goods are unique or if the buyer could not purchase substitute goods. In Mediterraneo orders of specific performance have been issued where the possible damages were so large the defending party could not be expected to be able to pay them. In Danubia orders for specific performance can be issued if the contemplated damages would be incapable of calculation. Beyond these very broad generalities, it would be difficult to give the state of the law in the four countries.

Since arbitral awards are not normally disclosed unless there is litigation to set them aside or to enforce them, the practice in arbitral tribunals in the four countries is not known.

32. Are offers, once dispatched, freely revocable according to the domestic law of Equatoriana, Mediterraneo and Polarity?

In Equatoriana and Polarity an offer is revocable until it is accepted, unless the offer is made by a merchant in a writing that specifically states that it will remain open for a definite period of time. In Mediterraneo a merchant may not withdraw an offer during any period of time that is stated in the offer for acceptance or, if no period of time for acceptance is stated, for a reasonable period of time, unless the offer is in writing and specifically states that it is revocable until it is accepted.

33. Have Equatoriana, or Mediterraneo adopted the UNCITRAL Model Law on International Credit Transfers?

Both countries adopted the Model Law in 1994, but neither adopted any of the additional provisions suggested by UNCITRAL in the footnotes to the Model Law. Neither country has any other legislative texts relevant to credit transfers, except that cut-off times are allowed.

There are neither legislative texts indicating when payment has been made from originator to beneficiary nor judicial decisions on this question, primarily because in both countries domestic non-cash payments are exclusively made by the use of checks and, for the past several years, credit or debit cards.

34. What rules applicable to bank guarantees exist in Equatoriana and Mediterraneo?

As is true in most, if not all, countries, there are no legislative rules in respect of bank guarantees in Equatoriana or Mediterraneo. There have been several judicial decisions in both countries in regard to whether demands for payment were appropriate or whether a court should issue an order to a bank guarantor not to pay a particular guarantee because of alleged fraud or similar circumstances. There have been no published judicial decisions concerned with the circumstances in which a guarantee was, or was not, issued.

(signed)__________________
President of the Tribunal

November 3, 1997__________