The international energy sector invests in large, complex, capital-intensive projects that have spanned a long time. A lot of things including circumstances, governments, economics and parties invariably change within the period of the project, from inception to completion, which often leads to disputes.
Since disputes are a significant risk in any international energy project, parties, therefore, need to continually manage that risk from the beginning of the contract through to the point when a dispute arises to when it is eventually resolved.
This article provides the knowledge and the tools to do so.
Planning for disputes
It pays to plan for these things. There are several points in any transaction where parties can play a significant role in how their disputes will be effectively managed and resolved. These are:
(1) When the parties involved first make a deal and draft a dispute resolution clause into the agreement; and
(2) When the parties involved have an actual dispute and select their arbitrators, dispute counsel and the mediators or other dispute resolution facilitators.
Been proactive in matters like these have the advantage of potentially increasing benefits and minimizing losses.
Types of disputes in energy arbitration
There are essentially three types of disputes found in energy arbitration.
- State versus state disputes: These are boundary disputes concerning oil and gas fields that cut across international borders, many of which are located in maritime waters. Most times, these disputes are mainly between governments because only they can claim the sovereign title and resolve boundaries with their neighbouring states. However, oil and gas companies do get indirectly involved in these disputes when they are granted permissions that straddle disputed boundary lines. Sometimes, companies are asked by developing nations to help fund the dispute costs and to provide data and legal expertise to aid in resolving the boundary dispute.
Companies, therefore, need to get acquainted with these disputes and be able to manage them properly when they find themselves in the middle of one.
- Company versus state disputes:These are often called state investment or investor-state disputes. They occur when governments significantly change the terms of the contract or expropriate an investment.
- Company versus company disputes: These are often called international commercial disputes. There are two subcategories when it comes to disputes between energy companies.
The first is between joint venture participants in contracts while the second is between operators and service contractors. These disputes make up the majority of disputes in energy arbitration.
Types of dispute resolution methods
There are several dispute resolution methods that parties can employ when it comes to energy arbitrations. They can use one or several of them together depending on the circumstances of the dispute.
The various types of dispute resolution methods include the following:
Negotiation between the parties at the time of a dispute usually comes as a matter of course. There may or may not be a provision for negotiation in the contract/agreement but it can be formalized as part of a multi-tiered dispute resolution process. It is possibly the least expensive of any dispute resolution method and potentially the most commercially viable solution. But it needs the total co-operation of the parties and a great deal of objectivity and detachment in the parties’ behaviour to avoid negative emotions and bias views that get in the way of a settlement. But, It should not be the only dispute resolution method.
Mediation involves the parties being well prepared and committed to the overall process of dispute resolution. When that happens, mediation can be a very effective and successful tool in dispute resolution. This is because the focus is on the real interests of the parties, not their contractual or legal entitlements.
This is one of the most used tools in technical assessments or economic valuations in energy arbitrations. The decision of an expert is only as a contract between the parties and is not enforceable as an arbitration award in court systems all over the world. It would require the written agreement of the parties involved.
Dispute Review Board
This usually consists of a three-member board that is selected for the duration of a large construction project. They have proven to be very effective in the construction industry, but have not quite spread to the energy sector in any significant manner. If they were used, they would be very effective in energy investment projects.
This is one of the most common dispute resolution tools for lawyers. But, it is not the preferred tool when it comes to resolving international disputes for several reasons. These include problems encountered in enforcing court judgments in international jurisdictions, the length and the cost of the trials as well as an aversion to local courts by foreign investors.
Arbitration is the most widely accepted and used dispute resolution method when it comes to energy arbitration. It is a legally binding process that provides the most flexibility to parties seeking to resolve their disputes.
Legal framework for International Arbitration
Several elements combined provide an effective and enforceable legal framework for international arbitration. They are the:
A. Arbitration Agreement or Clause
B. Arbitration Conventions and Investment Treaties
C. Arbitration Procedural Rules
D. National Laws
E. National Courts.
1) The Arbitration agreement
This is the foundation of international arbitration. It is based on the principle of party autonomy, which states that parties have the right to decide how and where they wish to resolve their disputes and they are to provide for that in their contracts in a binding, enforceable manner.
2) Arbitration conventions and investment treaties
Some several international conventions and treaties are recognized and do enforce arbitral awards and the protection of investments. They are:
- New York convention
- Regional conventions
- Energy Charter Treaty
- Bilateral investment treaties (BITs)
- Multilateral trade agreements
3) Arbitration procedural rules
All arbitrations are subject to these rules. However, the rules tend to be broad and ambiguous.
Therefore, the parties need to agree upon a specific set of procedural rules by which to conduct their arbitration.
4) National laws
The national laws of a country enforce the rights and obligations of the arbitral conventions and treaties. They provide the execution mechanisms for arbitration agreements and awards, along with making up for gaps in parties’ arbitration agreements or dispute resolution clauses. In addition, national laws govern the nullification awards rendered in a country and the waiver of sovereign immunity.
5) National Courts
The national courts provide the authority to enforce arbitration agreements and awards.
They also provide orders that aid arbitration, such as interim relief and ways to preserve evidence, documentary disclosure and the attendance of witnesses. These courts also ensure procedural due process and the fundamental fairness of arbitral proceedings.
Drafting dispute resolution clauses
Parties cannot anticipate exactly, what a future dispute will be about, including what side of the dispute they will be on when it comes up. Therefore, a simplistic approach and clarity when drafting dispute resolution clauses are very essential.
The following are some of the components to be included in or considered concerning dispute resolution clauses in international agreements:
. Broad Form Clause
. Arbitral Rules
. Arbitrator Appointment
. Seat of Arbitration
. Choice of Law
. Consent to Judgment and
. Multi-Step Clause
This article sought to provide a succinct review of the important things to note when it comes to dealing with the disputes encountered in energy arbitration. It covered the various types of dispute that comes up, the types of dispute resolution mechanisms available as well as the legal framework for international arbitration.