This is the full text version of the Problem - to view Problem page by page click here

Fifth Annual
WILLEM C. VIS
INTERNATIONAL COMMERCIAL ARBITRATION MOOT




Juridicum
and
International Arbitral Centre
Federal Economic Chamber
Vienna, Austria
April 4-9, 1998





THE PROBLEM




Organized by:

Institute of International Commercial Law
Pace University School of Law
78 North Broadway
White Plains, NY 10603
USA




Case No. Moot 5

Speculative Drilling, Co.
Claimant

v.

Deep Well Drilling, Inc.
Respondent

NOTICE OF ARBITRATION
AND
STATEMENT OF CLAIM




NOTICE OF ARBITRATION

(UNCITRAL Arbitration Rules, Article 3)

  1. Speculative Drilling, Co. (hereafter referred to as SPECULATIVE) is engaged in the business of exploring for oil. It carries out those activities in a number of countries. It is incorporated in the country of Mediterraneo and has its principal place of business at 123 Water Street, Petroleum City, Mediterraneo.
  2. Deep Well Drilling, Inc. (hereafter referred to as DEEP WELL) is also engaged in the business of exploring for oil. It also carries out those activities in a number of countries. It is incorporated in the country of Equatoriana and has its principal place of business at 1 Deep Well Place, Industrial City, Equatoriana.
  3. Both companies are currently active in the country of Polarity. For the past ten years DEEP WELL has been developing a field known as "Active #1". SPECULATIVE has been exploring in a new field known as "Active #2".
  4. On 13 May 1997 DEEP WELL offered to sell to SPECULATIVE its drilling rig number 23 for 30,000,000 Equatoriana dollars (E$30,000,000). (Claimant's Exhibits Nos. 1 and 2) Article 9 of the draft contract proposed by DEEP WELL contained an arbitration clause calling for ad hoc arbitration of disputes under the UNCITRAL Arbitration Rules. Any such arbitrations were to be administered by the International Arbitration Center of Danubia. SPECULATIVE accepted the offer by telefax dated 5 June 1997, and the contract was concluded at that time. (Claimant's Exhibit No. 5) For reasons to be discussed further in this arbitration DEEP WELL disagreed that SPECULATIVE had accepted the offer and on 6 June 1997 it asserted that it had withdrawn the offer by its letter of 3 June 1997. (Claimant's Exhibits Nos. 4 and 6) Because DEEP WELL threatened to sell the drilling rig to a third party, on 28 June 1997 SPECULATIVE requested the Commercial Court of Mediterraneo to order DEEP WELL
  5. Although DEEP WELL insisted to the Commercial Court that no contract had been concluded, and therefore no arbitration agreement existed, it withdrew its resistance to an order of the Court referring the dispute to arbitration on the same terms as were contained in the draft contract of 13 May 1997. In respect of the SPECULATIVE request that DEEP WELL should not sell the rig to a third party pending resolution of the dispute between SPECULATIVE and DEEP WELL, the Commercial Court stated that it would issue the order, but that the order would extend only until 14 April 1998. In the view of the Court that would be sufficient time for the Arbitral Tribunal to be convened and to decide whether a contract had been concluded between SPECULATIVE and DEEP WELL. If the Tribunal found that a contract of sale had been concluded, it would be up to the Tribunal to decide whether a further order should extend the period during which DEEP WELL would be prohibited from selling the drilling rig to any third party
  6. The Commercial Court conditioned its order on the posting of security by SPECULATIVE in the form of a bank guarantee in the amount of E$20,000,000. The bank guarantee was issued by the Bank of Commerce of Equatoriana and the Commercial Court issued its order on 15 July 1997. (Claimant's Exhibit No. 7)
  7. By this Notice of Arbitration SPECULATIVE demands that the dispute be referred to arbitration in accord with the order of the Commercial Court of Mediterraneo dated 15 July 1997.
  8. SPECULATIVE requests that the Arbitral Tribunal
  9. SPECULATIVE appoints Dr. ____________________ as its arbitrator as provided in article 7 of the UNCITRAL Arbitration Rules.

(Signed)______________
For Speculative Drilling, Co.
Attorneys

6 August 1997
Date




STATEMENT OF CLAIM

(UNCITRAL Arbitration Rules, article 18)

I. The Facts

A. Negotiation of the Contract

  1. DEEP WELL has a concession from the Government of Polarity to develop a field designated as "Active #1". The field has been largely explored and little new oil is expected to be found. In the spring of 1997 DEEP WELL foresaw that by the autumn of 1998 it would no longer need the one remaining drilling rig that it was using in that field, namely rig #23.
  2. On 24 September 1996 SPECULATIVE signed a contract with the Government of Polarity whereby SPECULATIVE is to explore for oil and other hydrocarbons in a tract designated as "Active #2". The contract provides that by 15 September 1998 the Government of Polarity must decide whether to open Active #2 for commercial development. Since commercial development of the field would require the Government of Polarity to make significant capital investments, the Government's decision will rest in large measure on its expectation as to the quantity of oil and other hydrocarbons that can be extracted. The contract provides that if the field is to be opened for commercial development, the concession would be granted to SPECULATIVE on terms consistent with a draft agreement attached to the exploration contract.
  3. The draft concession agreement provides, among other matters, that SPECULATIVE would be required to begin drilling for commercial production by 1 December 1998. It further provides for substantial penalties if the drilling schedule is not maintained. Since the results of the early exploratory wells were promising, during the spring of 1997 SPECULATIVE began to take steps to assure itself that it would have sufficient drilling equipment available to exploit the field promptly if the concession were granted. It was in that light that SPECULATIVE approached DEEP WELL to inquire about purchasing drilling rig #23.
  4. Negotiations for the sale of rig #23 to SPECULATIVE were carried on from 15 March 1997 to 9 May 1997. Agreement was reached on all terms except the price. The offer sent by DEEP WELL to SPECULATIVE on 13 May 1997 contained all the terms that had been agreed in the negotiations. (Claimant's Exhibit 2) The offered price was E$30,000,000, which was the last offer that had been made by DEEP WELL in the negotiations on 9 May 1997. The letter that conveyed the offer stated "In the light of our extensive negotiations, we expect to hear from you by 10 June." (Claimant's Exhibit 1)
  5. SPECULATIVE replied on 21 May 1997, stating "The price of E$30,000,000 is the same price that we rejected in our meeting with you on 9 May 1997. It is just too much. A fairer price for the rig would be the E$28,000,000 that we have already offered you, and we would ask you again to consider it." (Claimant's Exhibit 3)
  6. On 28 May 1997, the existence of a large oil field was announced in the country of Oceania. The press release announcing the existence of the field indicated that the contours of the field were well established and that commercial drilling was expected to begin as soon as the necessary technical arrangements could be made. As a consequence of this announcement, the world-wide price of drilling rigs immediately rose about 15%. The price has fluctuated sharply and as of the date of this statement of claim the price is about 25% above the level immediately prior to 28 May 1997. It is more than usually difficult to estimate the market price for drilling rigs during the coming year.
  7. On 3 June 1997 DEEP WELL sent a telefax to SPECULATIVE that said "in the light of your rejection of our offer of 13 May 1997, we have decided to withdraw it. We would be willing to consider continuing our earlier negotiations, but you should be aware that the market for drilling rigs has tightened considerably in the last few days and the rig may not be available for sale for very long." (Claimant's Exhibit 4)
  8. SPECULATIVE replied by telefax on 5 June 1997 that it accepted the offer from DEEP WELL dated 13 May 1997. The telefax from SPECULATIVE made it clear that its letter of 21 May 1997 had not been a rejection of the DEEP WELL offer, but only an inquiry to see if DEEP WELL would not consider reducing the price in its offer. (Claimant's Exhibit 5)
  9. On 6 June 1997 DEEP WELL replied that the telefax from SPECULATIVE dated 5 June 1997 had arrived too late as DEEP WELL had already withdrawn the offer prior to that time. (Claimant's Exhibit 6)
  10. B. Time for Acceptance of the Offer of 13 May 1997

  11. As stated above, the letter from DEEP WELL of 13 May 1997, which conveyed the offer to sell the drilling rig in question stated that "we expect to hear from you by 10 June 10." As indicated above, SPECULATIVE accepted the offer by its telefax of 5 June 1997.
  12. C. Terms of the Contract and actions in regard to them

  13. The contract is set forth in Claimant's Exhibit 2. The terms that are relevant to this arbitration are explained below as well as the actions taken in regard to them.
  14. Price was payable in two amounts. E$3,000,000, was due to be paid to DEEP WELL within ten days of acceptance of the offer. The balance of E$27,000,000 is to be paid within five working days prior to delivery of the rig in September 1998. The first payment of E$3,000,000 was transferred by SPECULATIVE from its account at the Farmers and Merchants Bank of Mediterraneo to the Equatoriana Industrial Credit Bank. It was received by Equatoriana Industrial Credit Bank on 13 June at 14:00. That was after the cut-off time for the bank to credit customer accounts that day. 16 June was a legal holiday in Equatoriana. The payment was credited to the account of DEEP WELL on 17 June 1997 at 10:30 a.m. At 12:30 that day DEEP WELL informed the Bank that it refused to accept the credit. The Equatoriana Industrial Credit Bank re-transferred the E$3,000,000 to the Farmers and Merchants Bank of Mediterraneo for our account, where it was credited on 19 June 1997. SPECULATIVE instructed the Bank to hold the sum for the account of DEEP WELL. The funds remain at the Farmers and Merchants Bank of Mediterraneo at the disposal of DEEP WELL.
  15. SPECULATIVE was required to have a bank guarantee issued by a first class bank in Equatoriana in the sum of E$33,000,000 as a payment guarantee within ten days of acceptance of the offer . On 5 June 1997 SPECULATIVE requested the Farmers and Merchants Bank of Mediterraneo to instruct the General Credit Bank of Equatoriana to issue the required bank guarantee. The Farmers and Merchants Bank of Mediterraneo sent the instructions to the General Credit Bank of Equatoriana on 9 June 1997. The bank guarantee was issued by the General Credit Bank of Equatoriana on 18 June 1997.
  16. SPECULATIVE has the right until 30 September 1998 to decide whether or not to take the drilling rig. If it decides not to take the rig before 15 May 1998, it must pay DEEP WELL the sum of E$3,000,000. If it so decides between 16 May and 30 September 1998, it must pay DEEP WELL the sum of E$4,500,000. As noted above, SPECULATIVE expected the Government of Polarity to extend to it the concession for Active #2. The drilling rig was being purchased to drill in that tract. However, granting of the concession was not certain and, if the concession was not granted, SPECULATIVE would have no need of the rig in Polarity. Since the cost of transporting the rig to another location would be high, with the exact cost dependent on the place to which it would be transported, SPECULATIVE had insisted on the right not to take the rig until such time as the Government of Polarity had decided whether or not to grant the concession. The payment of 10% or 15%, as the case may be, of the agreed price to DEEP WELL was intended to cover the additional expenses DEEP WELL might have in selling the rig or transporting it to another location.
  17. If the drilling rig in question is re-sold by SPECULATIVE prior to 15 July 2000, SPECULATIVE must pay to DEEP WELL any profit that might be realized on the sale plus 10%. DEEP WELL insisted on this clause when it acquiesced to the request of SPECULATIVE that it have the right until 30 September 1998 to refuse to take the drilling rig. The provision was intended to eliminate any incentive SPECULATIVE might have to speculate on the price of drilling rigs prior to September 30, 1998.
  18. Arbitration clause calls for ad hoc arbitration under the UNCITRAL Arbitration Rules, with the arbitration to be administered by the International Arbitration Center of Danubia.
  19. Contract to be governed by the United Nations Convention on Contracts for the International Sale of Goods. Where the Convention does not govern an issue, the contract is to be governed by the general principles of international contracts.
  20. II. Legal Position

    A. Applicable law

  21. Paragraph 8 of the contract provides that the United Nations Convention on Contracts for the International Sale of Goods is the governing law of the contract and that any matters not governed by the Convention shall be governed by the general principles of law governing international contracts. Since Equatoriana and Mediterraneo are both parties to the United Nations Convention on Contracts for the International Sale of Goods, the Convention would apply in the absence of the clause.
  22. Danubia has adopted the UNCITRAL Model Law on International Commercial Arbitration. Equatoriana, Mediterraneo and Danubia are all parties to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
  23. B. Offer was irrevocable until 10 June 1997

  24. The letter by which DEEP WELL conveyed its offer on 13 May 1997 said "In the light of our extensive negotiations, we expect to hear from you by 10 June." (Claimant's Exhibit 1) Article 16(2) of the United Nations Convention on Contracts for the International Sale of Goods provides that "an offer cannot be revoked: (a) if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable;". This offer stated a fixed time for acceptance and, therefore, was irrevocable until the date specified, i.e., 10 June 1997.
  25. C. SPECULATIVE did not reject DEEP WELL's offer by its letter of 21 May 1997

  26. In its letter of 21 May 1997 SPECULATIVE said that "The price of E$30,000,000 is the same price that we rejected in our meeting with you on 9 May 1997. It is just too much. A fairer price for the rig would be the E$28,000,000 that we have already offered you, and we would ask you again to consider it." It is obvious from reading the letter that SPECULATIVE was stating that it had rejected the price of E$30,000,000 during the negotiations that were prior to the formal offer of 13 May 1997. It is also obvious that the letter did not reject the formal offer. Certainly SPECULATIVE was suggesting that DEEP WELL should reconsider the offer of E$28,000,000 that SPECULATIVE had made during the negotiations. However, to repeat, the letter was not a rejection of the offered price of E$30,000,000.
  27. D. SPECULATIVE accepted the offer by its telefax of 5 June 1997 and a contract was concluded at that time

  28. Article 18(2) CISG provides that "An acceptance of an offer becomes effective at the moment the indication of assent reaches the offeror." Article 23 provides that "a contract is concluded at the moment when an acceptance of an offer becomes effective in accordance with the provisions of this Convention." Since the acceptance contained in the telefax reached DEEP WELL on 5 June, five days before the end of the period of irrevocability, a contract was concluded for the sale of the drilling rig at that time.
  29. E. The Tribunal should order DEEP WELL to deliver the drilling rig to SPECULATIVE if SPECULATIVE should decide to take the rig in accord with article 5 of the contract

  30. Article 46(1) CISG provides that "The buyer may require performance by the seller of his obligations unless the buyer has resorted to a remedy which is inconsistent with this requirement." SPECULATIVE, the buyer, has not resorted to any remedy other than commencing this arbitration, and the associated action in the Commercial Court of Mediterraneo. If it receives the concession to develop tract Active #2, it will need the rig.
  31. F. The Tribunal has the authority to order DEEP WELL not to sell the drilling rig to any third party pending the decision as to whether SPECULATIVE will receive the concession

  32. Article 26 of the UNCITRAL Arbitration Rules provides that "the arbitral tribunal may take any interim measures it deems necessary in respect of the subject-matter of the dispute, including measures for the conservation of the goods forming the subject-matter in dispute... ." This power is confirmed by Article 17 of the UNCITRAL Model Law on International Commercial Arbitration, as adopted by Danubia. The appropriate manner of conserving the goods in this case would be to order DEEP WELL not to sell them to a third party.
  33. G. The Tribunal should exercise its authority and order DEEP WELL not to sell the drilling rig to any third party pending the decision as to whether SPECULATIVE will receive the concession

  34. It is particularly important in the context of this contract that the drilling rig remain available for DEEP WELL to deliver it to SPECULATIVE if SPECULATIVE should receive the concession to develop tract Active #2. Under the draft concession agreement, if the Government of Polarity should decide to grant the concession to SPECULATIVE, it would be obligated to begin drilling for commercial production by 1 December 1998. That would give it a period of only three months to begin drilling. In order to meet such a short deadline, SPECULATIVE must have drilling rigs available almost immediately. There are no sources of drilling rigs within Polarity, other than those in use in Active #1. Under normal circumstances it would take three to four months to procure and transport a drilling rig from outside the country to Polarity. It was for that reason that SPECULATIVE entered into the contract in question a full year in advance of the expected date for the granting of the concession. All of those factors that were in existence at the time of the negotiation and the extension of the offer of 13 May 1997 were in themselves sufficient to justify the Arbitral Tribunal in requiring DEEP WELL to live up to its obligations under the contract.
  35. The change in the market for drilling rigs after the announcement of the existence of the oil field in Oceania on 28 May 1997 renders it even more important that DEEP WELL live up to its obligations. If SPECULATIVE receives the concession but this drilling rig is not available to it, SPECULATIVE will be at a serious disadvantage. It will have to locate a substitute rig at that time and begin negotiations for its purchase. Since the eventual decision of the Government of Polarity is not known, and it is not possible to estimate the likelihood that it will be positive, it is not feasible for SPECULATIVE to begin that process at the present time. In order for an order of this Tribunal to be effective that DEEP WELL has the obligation to deliver the drilling rig to SPECULATIVE if, and to the extent, provided in the contract, it is also necessary that this Tribunal order DEEP WELL not to sell the rig to any third party in the meantime.
  36. Therefore, may it please this Tribunal

For Speculative Drilling, Inc.

(Signed)________________
Attorneys

6 August 1997
Date




Claimant's Exhibit 1

DEEP WELL DRILLING, Inc.
1 Deep Well Plaza
Industrial City

13 May 1997

Mr. Harvey Wells
General Manager
Speculative Drilling, Co.
123 Water Street
Petroleum City
Mediterraneo

Dear Mr. Wells:

During our negotiations we seem to have reached agreement on most terms in regard to the sale to Speculative of our drilling rig #23. We have incorporated those terms in the contract that is attached. As we stated in our last meeting, the price for the rig is E$30,000,000.

Although delivery of the rig will not take place for another year, we would like to bring this negotiation to a close. In the light of our extensive negotiations, we expect to hear from you by 10 June. That should give you sufficient time to make the necessary financial arrangements.

I would like to remind you that we would not be able to reserve the rig for you unless we receive receipt of the first payment of E$3,000,000 and the establishment of the bank guarantee at the latest by the time specified in the contract.

I look forward to receiving the signed contract so that we can go forward with this deal.

Sincerely,

(Signed)
George Drill
General Manager




CLAIMANT'S Exhibit 2

CONTRACT

This contract is between Deep Well Drilling, Inc., 1 Deep Well Plaza, Industrial City, Equatoriana (hereafter referred to as "Seller") and Speculative Drilling, Co., 123 Water Street, Petroleum City, Mediterraneo (hereafter referred to as "Buyer").

Seller agrees to sell and Buyer agrees to purchase one used drilling rig, referred to as Deep Well rig #23 for E$30,000,000.

Special Conditions

1. Payment. A first payment of E$3,000,000 will be made within ten (10) days of the conclusion of the contract. The balance of E$27,000,000 will be made at least five (5) working days prior to delivery of the rig pursuant to paragraph 5 of this contract.

2. Guarantee. Buyer will have a bank guarantee opened by a first class bank in Equatoriana in the total amount of E$33,000,000 in favor of Seller as a payment guarantee. The guarantee will be available to Seller on certification by Seller that payment has not been made as required by this contract. The bank guarantee will be opened within ten (10) days of the conclusion of the contract. It will remain open until 30 October 1998.

3. Seller's right to avoid the contract. If either payment is not made or the bank guarantee is not established in the manner and by the date provided in this contract, Seller shall have the right to avoid the contract.

4. Condition of the rig. The object of the sale is a drilling rig that is currently in use in tract Active #1 in the country of Polarity and will continue to be in use until the date of delivery. Buyer inspected the rig on 2 May 1997 in conjunction with personnel of Seller. The condition of the rig was agreed in a report dated 7 May 1997, signed by authorized personnel of both Buyer and Seller, a copy of which is attached to this contract as Appendix 1. On the date of delivery the rig will be in a condition at least equal to that indicated in Appendix 1, normal wear excepted.

5. Date and means of delivery. Buyer will take delivery of the rig at the drilling site in tract Active #1 on 30 September 1998. Seller will prepare the rig for transportation from that place.

6. Buyer's right to cancel delivery. Buyer may cancel this contract prior to the taking of delivery of the rig. In the event that Buyer exercises this right prior to 15 May 1998, it shall forfeit to seller the payment of E$3,000,000 made in accordance with paragraph 1of this contract. If Buyer exercises this right between 16 May and 30 September 1998, it shall pay to Seller the sum of E$1,500,000 in addition to forfeiture of the payment referred to above..

7. Buyer's forfeiture of profits on resale. If Buyer should re-sell rig #23 prior to 15 July 2000, it shall pay to Seller any surplus it may receive over E$30,000,000 plus ten percent (10%) of the selling price.

8. Choice of law. The contract is to be governed by the United Nations Convention on Contracts for the International Sale of Goods. Any matters not governed by the Convention shall be governed by the general principles of law governing international contracts.

9. Arbitration clause. Any dispute, controversy or claim arising out of or relating to this contract, or the breach, termination or invalidity thereof, shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules as at present in force.

- The appointing authority shall be the International Arbitration Center of Danubia,

- The place of arbitration shall be Vindobona, Danubia,

- The number of arbitrators shall be three,

- The language of the arbitration shall be English.


(signed)___________

George Drill
General Manager
Deep Well Drilling, Inc.

13 May 1997

_____________________

Harvey Wells
General Manager
Speculative Drilling, Co.

____________________________

(Appendix I not reproduced)




CLAIMANT'S Exhibit 3

Speculative Drilling, Co.
123 Water Street
Petroleum City
Mediterraneo

21 May 1997

Mr. George Drill
General Manager
Deep Well Drilling, Inc.
1 Deep Well Plaza
Industrial City
Equatoriana

Dear Mr. Drill:

Your letter of 13 May 1997 and the draft contract you enclosed for the sale of your drilling rig #23 were a major disappointment to us. The price of E$30,000,000 is the same price that we rejected in our meeting with you on 9 May 1997. It is just too much. A fairer price for the rig would be the E$28,000,000 that we have already offered you, and we would ask you again to consider it.

Awaiting your response, I remain

Sincerely,

(Signed)
Harvey Wells
General Manager




CLAIMANT'S Exhibit 4
Letter sent by telefax

DEEP WELL DRILLING, Inc.
1 Deep Well Plaza
Industrial City

3 June 1997

Mr. Harvey Wells
General Manager
Speculative Drilling, Co.
123 Water Street
Petroleum City
Mediterraneo

Dear Mr. Wells:

I refer to your letter of 21 May 1997 in respect of our drilling rig #23.

In the light of your rejection of our offer of 13 May 1997, we have decided to withdraw it. We would be willing to consider continuing our earlier negotiations, but you should be aware that the market for drilling rigs has tightened considerably in the last few days and the rig may not be available for sale for very long.

Sincerely,

(Signed)
George Drill
General Manager




CLAIMANT'S Exhibit 5
Letter sent by telefax on 5 June 1997

Speculative Drilling, Co.
123 Water Street
Petroleum City
Mediterraneo

5 June 1997

Mr. George Drill
General Manager
Deep Well Drilling, Inc.
1 Deep Well Plaza
Industrial City
Equatoriana

Dear Mr. Drill,

Your telefaxed letter of 3 June 1997 is surely a misunderstanding. Our letter of 21 May 1997 was not a rejection of the draft contract that you sent us in your letter of 13 May.

Under the conditions that prevailed when we sent you the letter we thought that your offer of E$30,000,000 was somewhat high, and we thought that on further reflection you might agree. We were, and are, interested in the rig and hereby accept your offer for it.

Sincerely,

(Signed)
Harvey Wells
General Manager.




CLAIMANT'S Exhibit 6

DEEP WELL DRILLING, Inc.
1 Deep Well Plaza
Industrial City

6 June 1997

Mr. Harvey Wells
General Manager
Speculative Drilling, Co.
123 Water Street
Petroleum City
Mediterraneo

Dear Mr. Wells:

We received your telefax of yesterday with some surprise. It was clear from our letter dated 3 June that we considered your letter of 21 May to be a rejection of our offer to sell you drilling rig number 23 for E30,000,000.

Since you have rejected our offer, we saw no alternative but to withdraw it. As we stated in our letter, we would be happy to continue negotiations with you. You must understand, however, that in the current market there is a shortage of drilling rigs and we cannot guarantee that the rig will not be sold soon and, I might note, at a higher price than we had offered it to you.

Please let me know if you would be interested in continuing the negotiations.

Sincerely,

(Signed)
George Drill
General Manager




Claimant's Exhibit 7

COMMERCIAL COURT
OF MEDITERRANEO
THIRD DIVISION

On 28 June 1997 PETITIONER, Speculative Drilling, Co., a company incorporated in Mediterraneo and having its main headquarters at 123 Water Street, Petroleum, Mediterraneo, petitioned this court to order RESPONDENT, Deep Well Drilling, Inc., a company incorporated in Equatoriana and having its main headquarters at 1 Deep Well Place, Industrial City, Equatoriana

RESPONDENT filed its answer in this Court on 5 July 1997. It acknowledged the jurisdiction of this Court. It denied the conclusion of the alleged contract, including the alleged arbitration clause. RESPONDENT requested this Court to deny the petition in its totality.

On 8 July 1997 PETITIONER and RESPONDENT appeared before this court by their attorneys. Following a hearing, RESPONDENT withdrew its request that this Court deny the petition in its totality. RESPONDENT agreed to an order of this Court that the dispute between PETITIONER and RESPONDENT as to whether PETITIONER by its telefaxed letter of 5 June 1997 effectively accepted the offer of 13 May 1997 for the purchase and sale of RESPONDENT's drilling rig #23 should be determined by arbitration in accordance with Clause 7 of the draft contract sent to PETITIONER on 13 May 1997.

In regard to PETITIONER's request for an order that RESPONDENT not sell the drilling rig to any third party pending resolution of the dispute, RESPONDENT argued that the request was unnecessary. If the arbitral tribunal found that a contract had been concluded, RESPONDENT would be liable for any damages that might have been caused to PETITIONER. Furthermore, RESPONDENT pointed out that the selling price of drilling rigs had become volatile since the announcement on 28 May 1997 of the existence of a large oil field. If the arbitral tribunal agreed that no contract had been concluded between PETITIONER and RESPONDENT, RESPONDENT was in danger of losing the possible profit that it might make on the sale of the rig during the period of the order. RESPONDENT argued that the potential hardship to it from not being permitted to sell the rig would increase significantly the longer the order was in force and as the date when it no longer would have any use for the rig in Polarity approached.

PETITIONER agreed that RESPONDENT should be adequately protected against the possible loss of profit that might ensue. It offered to post a guarantee in the form of a bank guarantee in the amount of E$20,000,000 issued by a suitable bank in Equatoriana in favor of RESPONDENT if 1) the arbitral tribunal should determine that no contract for the sale of drilling rig #23 had been concluded between PETITIONER and RESPONDENT, and 2) the arbitral tribunal determined that RESPONDENT had suffered a loss in profits from not being permitted to sell rig #23 during the period of this order. Thereupon, RESPONDENT withdrew its request that the order not be issued.

On September 1, 1997 this court was notified that the required bank guarantee in the amount of E$20,000,000 had been issued by the Bank of Commerce of Equatoriana.

Be it understood, this Court has jurisdiction over the parties and the dispute by virtue of the Code of Civil Procedure, article 16(c),

As to the merits, pursuant to the authority granted this Court by Code of Civil Procedure, Articles 2214 to 2223

(Signed)________________
Presiding Judge
Commercial Court
Third Division

15 July 1997


INTERNATIONAL ARBITRATION CENTER
OF DANUBIA

Case No. Moot 5

Speculative Drilling, Co.
Claimant

v.

Deep Well Drilling, Inc.
Respondent

STATEMENT OF DEFENSE

MAY IT PLEASE THE TRIBUNAL

I. The Facts

  1. (a) Deep Well Drilling, Inc. (hereafter referred to as DEEP WELL) is incorporated in the country of Equatoriana and has its principal place of business at 1 Deep Well Place, Industrial City, Equatoriana.
  2. (b) Speculative Drilling, Co. (hereafter referred to as SPECULATIVE) is incorporated in the country of Mediterraneo and has its principal place of business at 123 Water Street, Petroleum City, Mediterraneo.

  3. Both DEEP WELL and SPECULATIVE are engaged in the oil business. Since 1976 DEEP WELL has been developing a field in the country of Polarity known as Active #1. The field has been extensively developed and by the spring of 1997 we came to the conclusion that we would not need our one remaining drilling rig, known as rig #23, as of sometime late in 1998. About this time SPECULATIVE approached DEEP WELL with a view to purchasing our rig #23. It was exploring in a new field in Polarity known as Active #2, and it hoped to receive a concession to develop the field commercially. It desired to use the rig in that field.
  4. The negotiations lasted from 15 March to 9 May 1997. At the end of that time agreement had been reached on all of the terms except for the price. The negotiations had been difficult. SPECULATIVE wished to be free to cancel the contract if the Government of Polarity did not grant it the concession. The Government was not required to make its decision until 15 September 1998. Eventually, agreement was reached that SPECULATIVE would have the right to cancel the contract until 30 September 1998, but that it would have to pay a penalty for doing so, which would be 10% or 15% of the contract price, depending on the date.
  5. From the viewpoint of DEEP WELL the proposed contract remained problematical. DEEP WELL faced the possibility that SPECULATIVE would decide not to take the rig at about the time that DEEP WELL would no longer have a use for it. The penalty that SPECULATIVE would have to pay might not be sufficient to reimburse DEEP WELL for the cost of finding a new purchaser and transporting the rig from Polarity. Therefore, DEEP WELL was insistent on the price of E$30,000,000 at which it had offered to sell the rig.
  6. The offer in the form of a draft contract was transmitted to SPECULATIVE by letter of 13 May 1997. (Claimant's Exhibits 1 and 2) By its letter of 21 May 1997 SPECULATIVE rejected the offer and made a counter-offer of E$28,000.000. (Claimant's Exhibit 3) On 3 June 1997 DEEP WELL acknowledged the rejection of the offer and withdrew its offer of 13 May 1997. (Claimant's Exhibit 4) Subsequently, SPECULATIVE attempted to accept the offer of 13 May 1997 by its telefax of 5 June 1997 (Claimant's Exhibit 5), but DEEP WELL reaffirmed its withdrawal of the offer on 6 June 1997 (Claimant's Exhibit 6).
  7. Subsequent to SPECULATIVE's rejection of the offer of 13 May 1997 and the withdrawal of the offer by DEEP WELL, on 17 June 1997 SPECULATIVE attempted to make the first payment that would have been called for if the draft contract had been accepted. DEEP WELL rejected the payment. The following day, 18 June 1997, the General Credit Bank of Equatoriana opened a bank guarantee for E$33,000,000 naming DEEP WELL as beneficiary. The guarantee would also have been called for if the draft contract had been concluded, as claimed by SPECULATIVE.
  8. On 24 June 1997 DEEP WELL sent SPECULATIVE a letter reminding it that, if a contract of sale of rig #23 had been concluded by the SPECULATIVE telefax of 5 June 1997, payment of the E$3,000,000 and establishment of the bank guarantee would have been due ten days later, that is on 15 June 1997. The letter also reminded SPECULATIVE that under paragraph 3 of the draft contract DEEP WELL would have the right to avoid the contract. (Respondent's Exhibit 2)
  9. On 28 June 1997 SPECULATIVE petitioned the Commercial Court of Mediterraneo to order DEEP WELL
  10. Although DEEP WELL insisted that no contract had been formed, and that, therefore, there was no arbitration clause, it soon became obvious that the alternative would be litigation in the courts of Mediterraneo. Therefore, DEEP WELL decided to acquiesce in an order of the Commercial Court referring the dispute to arbitration on the same terms as those in the draft contract. DEEP WELL also acquiesced in an order of the Commercial Court that it should not sell the drilling rig to any third person for sufficient time for an Arbitral Tribunal to be appointed and for it to consider whether a contract for the sale of drilling rig #23 had been entered into. The order of the Court expires on 14 April 1998. DEEP WELL had indicated to the Court that it believed that that would be the latest at which it would be able to begin orderly procedures for sale of the rig for delivery at the time it will no longer be needed by DEEP WELL, which was expected to be late summer 1998. The Court also took account of the fact that the market for drilling rigs had become volatile as a result of the discovery of the new field in Oceania, and that delay in the time when DEEP WELL might be able to enter into a contract for sale of rig #23 might mean a significantly lower price than might otherwise have been realized. Therefore, it conditioned its order on the issue of a bank guarantee in the amount of E$20,000,000 in favor of DEEP WELL to cover such possible losses. The bank guarantee expires on 30 April 1998.
  11. Two events occurred subsequent to the issue of the order by the Commercial Court that are relevant to the disposition that the Tribunal may make of this case.
  12. II. The Law

    A. Terms of the Arbitration

  13. DEEP WELL has agreed to arbitrate on the basis of the arbitration clause in the draft contract of 13 May 1997. Therefore, it agrees that the arbitration should be conducted under the UNCITRAL Arbitration Rules and that the International Arbitration Center of Danubia should administer the arbitration. The arbitration will also be governed by the UNCITRAL Model Law on International Commercial Arbitration, which has been adopted by Danubia. DEEP WELL has participated in establishing the Arbitral Tribunal and is prepared to proceed in accordance with the agreed procedures.
  14. B. Applicable law

  15. Both Equatoriana and Mediterraneo had acceded to the United Nations Convention on Contracts for the International Sale of Goods prior to the negotiations between DEEP WELL and SPECULATIVE. Therefore, the Convention is the governing law. Although DEEP WELL would resist application of the principles of international commercial contracts on the basis of paragraph 8 of the draft contract, it would not object to their application by the Arbitral Tribunal if an issue were to arise that could not be settled by the proper application of the United Nations Convention on Contracts for the International Sale of Goods.
  16. C. The offer dated 13 May 1997 was revocable

  17. Article 16(2) of the United Nations Convention on Contracts for the International Sale of Goods provides that "an offer cannot be revoked: (a) if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable;". The letter of 13 May 1997 by which DEEP WELL extended the offer stated "In light of our extensive negotiations, we expect to hear from you by 10 June." This was the expression of an expectation and did not constitute a fixed time for acceptance of the offer. It was not the type of statement that would make the offer irrevocable. Therefore, DEEP WELL was free to withdraw the offer at any time, as it did in its letter of 3 June 1997.
  18. D. SPECULATIVE rejected the offer in its letter of 21 May 1997

  19. The SPECULATIVE letter of 21 May 1997 stated that the price of E$30,000,000 for the rig contained in the offer of 13 May 1997 "is just too much." SPECULATIVE went on in the letter to offer E$28,000,000 for the rig and said that "we would ask you again to consider it." Article 19 of the United Nations Convention on Contracts for the International Sale of Goods makes it clear that a reply to an offer that contains different terms relating, inter alia, to the price constitutes a rejection of the offer and a counter-offer. Article 17 states that "An offer, even if it is irrevocable, is terminated when a rejection reaches the offeror."
  20. E. Even if a contract was formed, the late payment of the E$3,000,000 and the late establishment of the bank guarantee authorized DEEP WELL to avoid the contract

  21. Paragraph 3 of the draft contract provided that "If either payment is not made or the bank guarantee is not established as provided in this contract, Seller shall have the right to avoid the contract." Paragraphs 1 and 2 provide that the first payment and the establishment of the bank guarantee are to take place "within ten (10) days of the conclusion of the contract." If SPECULATIVE were to be held to have accepted the offer on 5 June 1997 by its telefax, both the payment and the bank guarantee would have had to have been completed by 15 June 1997. However, they took place on 17 and 18 June 1997. Therefore, by the terms of the contract DEEP WELL had the right to avoid the contract, which it did by its letter of 24 June 1997. (Respondent's Exhibit 2)
  22. F. Even if the arbitral tribunal were to find that a contract exists between DEEP WELL and SPECULATIVE, it should not order DEEP WELL not to sell rig #23 to any third party

  23. The situation has changed markedly since DEEP WELL sent its offer to sell the rig on 13 May 1997 and since SPECULATIVE sent its telefax purporting to accept the offer on 5 June 1997.
  24. Therefore, may it please this Tribunal

For Deep Well Drilling, Inc

(Signed)______________
Attorneys

23 September 1997




Respondent's Exhibit 1

Press release of Press Conference
Prime Minister of Polarity,
15 September 1997

[Not reproduced, Relevant substance in
Respondent's Answer, paragraph 9]




Respondent's Exhibit 2

DEEP WELL DRILLING, Inc.
1 Deep Well Plaza
Industrial City

24 June 1997

Mr. Harvey Wells
General Manager
Speculative Drilling, Co.
123 Water Street
Petroleum City
Mediterraneo

Dear Mr. Wells:

I refer to our previous correspondence in regard to rig #23.

It is understandable why you continue to insist that a contract exists between our two firms for the sale of the rig. You should note, however, that if a contract had been concluded as a result of your telefax of 5 June 1997, payment of the E$3,000,000 and establishment of the bank guarantee would have been due ten days later, that is on 15 June 1997. The payment was not credited to our account until 17 June, and was refused by us as being too late, and the bank guarantee was not opened until 18 June.

As you know, paragraph 3 of the draft contract was very specific that we would have the right to avoid the contract if either the payment or the bank guarantee had not been accomplished by the date specified in the contract.

I regret that our relations have deteriorated to the extent they have.

Sincerely,

(Signed)
George Drill
General Manager




INTERNATIONAL ARBITRATION CENTER
OF DANUBIA

Case No. Moot 5

Speculative Drilling, Co.
Claimant

v.

Deep Well Drilling, Inc.
Respondent

PROCEDURAL ORDER No. 1

I wish to commend the parties for their cooperation in planning for this arbitration. There is agreement that the Tribunal must be ready to give at least a provisional award prior to the expiration of the order of the Commercial Court of Mediterraneo on 14 April 1998. Because of the various commitments of the members of this Tribunal and of counsel it has not been possible to fix a date for any oral hearing that may be necessary prior to 4 April 1998. Therefore, argument will be scheduled for 4 April 1998, lasting as long as may be necessary through 9 April 1998.

The facts in the dispute do not appear to be in conflict. Therefore, the facts as alleged by the two parties will be accepted as being correct until further notice. Furthermore, the facts appear to be sufficiently clear for the parties to present their case and for the Tribunal to reach an award. Nevertheless, it has been agreed that a limited period for further factual inquiry might be useful through the Secretary of the Tribunal. The parties may submit their questions to the Secretary of the Tribunal at Pace Law School up to and including Friday, 24 October 1997. Replies to these inquires will be distributed to counsel by November 3, 1997. If additional factual inquiries appear to be necessary after the exchange of memoranda and the oral hearing, the Tribunal will issue a further order at or following the hearing.

Since the Tribunal will have the opportunity to hold only one set of hearings prior to the expiration of the order of the Commercial Court of Mediterraneo, it has been decided that the memorandum to be submitted by counsel should discuss both

The hearing in April 1998 will also be devoted to both questions.

The memorandum for Claimant, Speculative Drilling, Co. will be due at the Secretariat of the Tribunal in Vienna, Austria on 9 December 1997 in 25 copies accompanied by a properly labeled diskette. The memorandum for Respondent, Deep Well Drilling, Inc. will be due at the Secretariat of the Tribunal in Vienna, Austria on 13 February 1998 in 25 copies with diskette.

(Signed)______________
President of the Tribunal

3 October 1997