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112. As a lex specialis in the relations between the two countries, the Treaty supersedes the lex generalis, namely customary international law. This does not mean, however, that the latter is irrelevant in the instant Case. On the contrary, the rules of customary law may be useful in order to fill in possible lacunae of the Treaty, to ascertain the meaning of undefined terms in its text or, more generally, to aid interpretation and implementation of its provisions.

113. It is worthwhile, in this context, to compare the provisions of Article IV, paragraph 2 of the Treaty with the customary rules of international law in the field of expropriation. A leading expression of these rules is the judgment of the Permanent Court of International Justice in the Case Concerning Certain German Interests in Polish Upper Silesia (Germany v. Poland), 1926 P.C.I J., Ser. A, No. 7, Judgment of 25 May 1926). As reflected in this case, the principles of international law generally accepted some sixty years ago in regard to the treatment of foreigners recognized very few exceptions to the principle of respect for vested rights. The Court listed among such exceptions only "expropriation for reasons of public utility, judicial liquidation and similar measures". Id. at 22. A very important evolution in the law has taken place since then, with the progressive recognition of the right of States to nationalize foreign property for a public purpose. This right is today unanimously accepted, even by States which reject the principle of permanent sovereignty over natural resources, considered by a majority of States as the legal foundation of such a right.

114. The importance of this evolution derives from the fact that nationalization is generally defined as the transfer of an economic activity from private ownership to the public sector. It is realized through expropriation of the assets of an enterprise or of its capital stock, with a view to maintaining such enterprise as a going concern 223 under State control. Modern nationalization often brings into State ownership a number of enterprises of the same kind and may even be applied to all enterprises in a particular industry. It may result, therefore, in a taking of private property of much greater magnitude than the traditional expropriation for reasons of public utility, and is also of a very different nature, since it is always linked to determined political choices. For these reasons, and because it applies to going concerns, taken as such, modern nationalization raises specific legal problems, notably in relation to the issue of compensation.

115. The provisions of Article IV, paragraph 2 of the Treaty must be read against this background, since the negotiation of the Treaty must be presumed to have taken place in this legal context. Although the provisions are phrased in a negative form and emphasize the principle of the respect due to foreign property, they nevertheless amount to a clear recognition of the right to nationalize. In stating that "[s]uch a property shall not be taken except for a public purpose", the Treaty implies that an expropriation which is justified by a public purpose may be lawful, which is precisely the rule of customary international law.

116. The other condition to a lawful expropriation provided for in the same paragraph is "the prompt payment of just compensation", an obligation which is also accepted as a general rule of customary international law as well. While a few recent resolutions of international bodies or conferences, including the General Assembly of the United Nations, have cast doubts on the existence of an international rule to this effect (see especially the Charter of the Economic Rights and Duties of States, G.A. Res. 3281 (XXIX) (12 December 1974)), other less controversial resolutions, such as G.A. Res. 1803 (XVII) (14 December 1962) on the Permanent Sovereignty over Natural Resources, confirm the existence of the rule. Furthermore, the rule is generally recognized and applied by international tribunals and reflected in the practice of States, notably in numerous conventions relating to the treatment of foreign property or to the settlement of disputes arising from nationalizations. A number of such awards and conventions were referred to by both Parties in their pleadings. The Treaty on this point is just another example of such a practice.

117. The rules of customary international law relating to the determination of the nature and amount of the compensation to, be paid, as well as of the conditions of its payment, are less well settled. They were, and still are, the object of heated controversies, the 224 outcome of which is rather confused. Terms such as "prompt, adequate and effective", "full", "just", "adequate", "adequate in taking account of all pertinent circumstances", "equitable", and so on, are currently used in order to qualify the compensation due, and are construed with broadly divergent meanings. The parties to the Treaty agreed on a common position on this problem by the choice of the term "just compensation" and by listing, in the last sentence of Article IV, paragraph 2, what should be included under this term. The wording of the sentence, however, does not solve the problem of the method to be used in order to determine the value of the property or interest in property which was expropriated.

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210. As noted above, the Claimant asserts the right "to receive just compensation that is the full equivalent of the property or rights expropriated or repudiated, that is, compensation that will place [it] in as good an economic position as [it] was in before the expropriation or repudiation occurred". It is clear from these words that the Claimant seeks restitutio in integrum, as previously defined, and the method of valuation which it advocates has been devised in conformity with this premise. This method rests on the assumption that the full value of a property is the market value, which means, in the case of "an ongoing business with future earning power", the going concern value, since, in such a case, "going concern value and market value are the same".

211. The Claimant further explains that "the value of an income-producing asset will depend primarily upon the net cash flow it is expected to generate in the future, 'discounted' (reduced) to a 'present value' (value as of the valuation date) at a percentage rate that fully accounts both for the time value of money arid for all relevant risks". It adds that "the monetary 'full equivalent' of an ongoing business must at least be an amount sufficient to enable the expropriated owner to purchase a comparable ongoing business". This last statement, by the way, is perhaps not fully consistent with the preceding one, since it evokes the idea of replacement value, otherwise rejected by the Claimant.

212. On the basis of these principles, the Claimant considers that the proper methodology to be used in the instant case is the "Discounted Cash Flow" ("DCF") method. Such a method takes into account the fact that the value of any income-producing asset depends on two factors:

(1) the amount and timing of the revenue that is expected over the remaining life of the asset, less the costs required to operate and to maintain the asset (generally referred to as the 'future net cash flow' of the asset), and

(2) the rate at which the projected net cash flow should be 'discounted' to produce the `present value' of the cash flow.

213. The first step in valuing an asset pursuant to the DCF method must be to project from the valuation date onward the most likely revenues and expenses of the ongoing concern, year by year. The revenues less the expenses will give the future net cash flow. The 254 second step will be to discount the projected net cash flow to its "present value" as of the valuation date. To this end it will be necessary to determine the proper discount rate, taking into account the probable risks, inflation and the real rate of interest. The factor of inflation, however, can be discarded in consistently using a currency of constant purchasing power, as was the case in the calculations made by the Claimant and its expert, in "real" terms (i.e. in 1979 U.S. dollars). The proper discount rate, then, allegedly equals the annual rate of return available in the market on assets of comparable risk. Therefore, according to the Claimant, it can be said that "the market value of an asset and its present value determined by the DCF method are one and the same thing". The Claimant concludes that the value arrived at by the DCF method is not speculative "because the risk that the actual cash flow will be less that the projected cash flow is fully taken into account in the market-determined discount rate".

214. The Claimant contends that such a valuation "determines the price at which going-concern business assets are bought and sold". In the instant Case, the Claimant calculated the future net cash flow to be generated by Khemco at $564,795,680 in 1979 dollars and the proper discount rate to be applied at 6.5 percent. The present value of Khemco, therefore, would be $360,076,230 as of 1 August 1979, and Amoco's 50 percent share of this value would be $183,232,986.

215. In response to these contentions the Respondents affirm that the DCF method is not appropriate in the instant Case and must completely be put aside. For them, the fair value of the expropriated assets is best represented by net book value. They contend that this accords with State practice and case authorities and is supported by the theory of unjust enrichment. Furthermore, in the Respondents' view, recovery of future profits in the case of a lawful expropriation should be excluded for various obvious reasons. One of them is that "going-concern value could never have been part of the legitimate expectations of the parties". The result of the award of lost profits pursuant to the DCF method would also be absurd, since the Claimant would be able to invest the amounts, including lost profits, received as compensation, and therefore obtain a real rate of return for such an investment, which would be tantamount to double recovery. Such an award would also produce an unreasonable rate of return. Amoco made an investment of $6 million (in 1967 and 1968), it is averred, for a half share of the capital. By the end of 1978 the net book value of Khemco had increased to $29.3 million, of which $14.65 million was Amoco's share. Moreover, Khemco had earned, after taxes, $82.5 255 million by the end of 1978, that is $41.25 million in profit for Amoco. This means a return in excess of $50 million on an investment of $6 million. The Respondents contend that compensation of $183.2 million on top of that for loss of future profits would be the opposite of fairness and equity.

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260. Having rejected the two methods proposed by the Parties, the Tribunal is now confronted with the task of determining what practical ways can be utilized to ascertain the proper compensation to be paid in this Case. Before entering into this issue, however, it will be helpful to summarize the relevant findings previously made.

261. As a starting point, the Tribunal finds that the measure of such compensation shall be the full value of the asset taken, pursuant to Article IV, paragraph 2, of the Treaty, that is the full equivalent of the property. Compensation which would only amount to a part of this value is, therefore, excluded.

262. In the instant Case the expropriation for which the Claimant seeks compensation occurred or was completed by the Special Commission's decision nullifying the Khemco Agreement. Formally, therefore, the Claimant was deprived of its contractual rights under the Khemco Agreement, and the compensation due relates to these 270 rights. It is not disputed, however, that the value of such rights equals the value of the shares owned by Amoco in the Joint stock company incorporated pursuant to the Khemco Agreement. The measure of the compensation to be paid, therefore, is half the value of Khemco at the date of valuation. Both Parties have submitted their own valuations on the basis of this assumption.

263. Khemco was a going concern at the time of the expropriation, even if its activity was temporarily reduced by reason of the events associated with the revolutionary movement which came to its peak with the establishment of the Revolutionary Islamic Government in February 1979, with the troubled situation in Iran continuing for some time after the proclamation of the new regime. After its expropriation Khemco remained a going concern, even if it was at some time merged into NPC, and the plant from which it had drawn its revenues continued to be exploited as late as the subsequent events permitted. Going concern value, accordingly, is the measure of compensation in this case.

264. Going concern value encompasses not only the physical and financial assets of the undertaking, but also the intangible valuables which contribute to its earning power, such as contractual rights (supply and delivery contracts, patent licences and so on), as well as goodwill and commercial prospects. Although those assets are closely linked to the profitability of the concern, they cannot and must not be confused with the financial capitalization of the revenues which might be generated by such a concern after the transfer of property resulting from the expropriation (lucrum cessans).

265. The value of a going concern - of Khemco in this case - is "made up of the values of the various components of the undertaking separately considered, and of the undertaking itself considered as an organic totality - or going concern - therefore as a unified whole, the value of which is greater than that of its components Parts"; to take the words of the award in the AMINOIL case. AMINOIL, supra, para. 1'78, 21 Int'l Legal Mat'ls at 1041. The arbitral tribunal in that case added that account should also be taken "of the legitimate expectations of the owners". This last remark, however, has to be understood in relation to a previous finding of that tribunal, which noted that this concept of "legitimate expectations" had been used by the Parties in their contractual relations with a specific meaning. In the present Case, the legitimate expectations of the Parties can only be deduced from the history of the concern and from its various components, as well as from the terms 271 of the Khemco Agreement, taking into account the circumstances prevailing at the time of the taking. Finally, the liabilities of Khemco at the valuation date have to be deducted from the total value so determined.

266. Regrettably, because the Parties focused on the two methods previously rejected, they did not provide the Tribunal with much of the data relating to the various components listed in the two preceding paragraphs. The Claimant produced learned studies including numerous calculations relating, for the most part, to projections into the future. Only a few documents relating to Khemco's financial situation, contemporaneous with or prior to the process of expropriation, were submitted. The Respondents, for their part, advanced only a few figures, and those are without substantiation. The Tribunal, therefore, is not in possession of the data necessary to take a meaningful decision, and such data as has been provided has not been properly discussed by either of the Parties outside of the context of its favorite theory. In any event, therefore, it would not be fair for the Tribunal to use that data in another context without asking the Parties to present their comments.

267. Accordingly, the Claimant is ordered to submit to the Tribunal all the data relating to the various components listed in paragraphs 264 and 265 above, as well as its views on the most appropriate method, or methods, to be used in order to calculate the value of these components and of the concern as a whole, taking into consideration the findings of the Tribunal contained in this Award. Among other elements, the Claimant should provide the Tribunal with the following: the total investment made by the two parties in Khemco (amounts and dates); the annual reports, control budgets and financial statements (with all the relevant annexes) of Khemco; the net book value of Khemco as of 31 July 1979; the replacement value of Khemco's assets at the same date; and the estimated value of Khemco's intangible assets at the same date, including goodwill and commercial prospects.

268. The time limit for the submission of that evidence and views will be determined by a separate order, as well as the time limit for the submission by the Respondents of their comments and complementary data and evidence. The Tribunal intends to issue its final Award on compensation on the basis of the written pleadings and evidences so submitted. If it deems it necessary, the Tribunal may invite the Parties to submit additional comments or data.

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