The energy sector internationally, is renowned for undertaking large projects that span a long period of time, and due to this time interval, a couple of things tend to change in the process.
It is due to these changes that disputes often arise. Therefore, an effective way to prevent or effectively manage these disputes is the way to go.
This article will be presenting a brief overview of how to prepare forehand in order to avoid the disputes altogether, the types of disputes that do arise, the types of resolution methods available and the legal framework for international arbitration.
The theme of this write-up is arbitration and how it can be used as an effective tool in energy arbitration.
Prior preparation for disputes
Preparation is key. Any project that doesn’t have all areas planned for or prepared against is headed for a failure or complications somewhere in the future.
Nevertheless, with regards to energy arbitration, there are several benchmarks (during the process of the transaction), whereby both parties can factor in how they want to resolve any dispute that may come up during the course of the project. These are:
1. At the projects inception, during contract drafting, before anything is started
2. When an actual dispute does occur, the parties can sit down and decide how they want it resolved before it spirals out of control.
Types of disputes in energy arbitration
Three types of disputes usually come up in energy arbitration, namely:
1. Disputes between states
These type of disputes usually occur between governments, because most times, these projects cuts across borders. But, on some occasions, companies are in between them. And, in developing countries, these companies are often called upon to either help in funding the costs of the disputes, or to help in providing legal assistance in resolving the conflict.
Therefore, it’s really imperative that companies do their research on the places they are about to carry out a project on, to see whether these disputes are present, and to plan adequately for them.
2 .Dispute between company and state
This is usually between governments and companies. It occurs when a government changes the terms of its contract with a company without prior notice. It can be detrimental to the company if not planned ahead for\. Therefore, companies should be very careful when drafting the terms of their contracts and should pay close attention to and seek legal counsel on the government clauses contained therein.
3. Disputes between companies
They are also called commercial disputes, and they are very common. In energy arbitration, they can be grouped into two viz;
A dispute between partners in a contract, and
A dispute between the operators and service providers
Ways of Resolving Disputes
There are several methods available for the resolution of disputes. They can be used jointly or individually depending on the kind of dispute. They include the following:
This is a very common tool when it comes to economic or technical evaluations in energy arbitrations. This is only used when there is an initial written agreement between the parties
and it is not awarded as a tool for arbitration in international courts
This is a very famous tool among lawyers. Nevertheless, it is not the go-to when it comes to resolving international cases. Reason for this being, the difficulties encountered in enforcing courts judgments on foreign grounds, the long duration of the trials and the costs accrued, and the dislike for local courts by foreign investors
This method is the most embraced and the most commonly used when it comes to resolution of disputes, especially in energy arbitration. Arbitration is a flexible legal process that provides a very effective way by which parties can settle whatever dispute they might have.
This usually comes up unplanned for, during the course of a dispute. If it wasn’t noted in the contract as part of the resolution methods, then, it can be engrafted into a multiple leveled resolution process. Although it doesn’t cost as much as the other methods for resolving disputes, in order for it to be effective, the full cooperation of the parties involved is needed as well as a discarding of any bias or emotional attachment to the case.
This method shouldn’t be used alone, but in collaboration with other methods.
The use of mediators
This can be a very effective tool for resolving disputes, especially if and when the parties involved are very committed to and knowledgeable about the process. Then it proves to be really effective, because the parties interests the priority here, and not the terms of their contract per see.
Dispute Review Board
This is very common, mostly in construction projects, whereby a board consisting of three people is set up to oversee a project from start to finish. Though making waves in the construction sector, this method of resolution has not quite made it yet to the energy sector. If and when it does, it can be a very effective tool in the resolution of disputes.
Legal framework for International Arbitration
There are several elements that, when used together can provide a strong and effective structure by which international arbitration can be carried out.
1) The agreement for arbitration or the arbitration clause
This is the basis for international arbitration. It functions on party autonomy, which gives parties the right to do as they will in the resolution of their disputes and to make provision for it in their contracts legally.
2) Investment treaties and conventions
There are several treaties and conventions which are recognized globally for the enforcing of arbitral awards and the insuring of investments. Some include
– The New York convention
– Regional conventions
– Energy Charter Treaty
– Bilateral investment treaties (BITs)
– Multilateral trade agreements, among others.
3) Sequential rules of arbitration
All arbitrary processes follow these rules. But they are not quite clear, hence the parties have to spell out and agree to a set of rules which they will abide by throughout the process of arbitration.
4) Sovereign laws of a country
The sovereign laws that govern a country provide the environment for the effective enforcing of the rules of arbitrations and the allocation of arbitral awards as well as making up for any shortcomings in the contract relating to the execution of the project or resolving disputes. These laws can also disregard an award or withdraw any immunity given.
5) Federal Courts
These are the enforcers of arbitral rules and awards. They retain the authority to ensure that arbitral processes are carried out fairly and according to order
Factoring Resolution Clauses into Contract Drafting
There are necessary clauses that should be factored in when drafting the terms of agreement for a project. As disputes are a given in the undertaking of any project, however minor these dispute may be, planning ahead is a good decision.
Below are clauses parties should take note of
Seat of arbitration
Broad form clause
Choice of law
Consent to agreement
This article sought to provide a succinct review of things to note when it comes to resolution of disputes in the energy sector. Dispute are inevitable, so, knowing the right steps to take as well as planning ahead for them makes a wise decision, always.
For the successful execution of a project, provisions should be made for dispute resolution. To achieve this, you need a team of experienced lawyers, specializing in this area of law, at your disposal, and that is why Rattsakuten is here. For consultation or inquiry, feel free to contact us now.