INTERNATIONAL COMMERCIAL ARBITRATION: OIL AND GAS SECTOR
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Actions for claims in the energy industry often involve large investments, a robust sense of public interest, and “cross-border” features that warrant the development of a special structure to resolve disputes (International Center for Energy Arbitration). In the belief of Akinjide-Balogun (2000), the possibility for disputes among the players and stakeholders in the global energy sector remains at a high level.
This should not come as a surprise owing to the presence of a number of complicated commercial relationships as well as the high costs in exploring for and harnessing vast amounts of hydrocarbons. Arbitration mechanisms are extensively used in the oil and gas sector, and in particular, the UNCITRAL policies have been extensively used in industry adjudication proceedings. Akinjide-Balogun cites a number of reasons as to why this mode of adjudication is more preferred in the resolution of conflicts in the industry.
One, owing to the technical character of the industry, resolving conflicts must involve an arbiter with extensive knowledge of the industry. Two, given that these agreements were written by professional consultants, it can be posited that these agreements foresee the development of conflicts as well as the integration of dispute resolution mechanisms in the agreements. Third, the global nature of the industry is inclined towards the adoption of these mechanisms for dispute resolution.
Lastly, trade interests and long term business agreements between industry players are critical factors in the aversion of these parties towards litigation that aside from being expensive tend to destroy harmonious business relations. However, in the report of the Investment Climate Advisory Services of the World Bank Group (2011, p. 39), the mere presence of a conflict does not automatically engage the need for an alternative dispute mechanism. In this light, majority of ADR structures integrate incentives or criterions wherein these mechanisms must be engaged.
It is understood that the length of time needed to resolve an issue adds to the costs of the litigation. Among the immediate costs that parties will incur should these opt for litigation include the cost of filing fees as well as retaining the services of a lawyer or lawyers. Aside from the immediate costs, the parties will also incur ancillary costs in opting for this option. Inclusive of these “indirect costs” include work and project stoppages, loss of revenue as well as losses in terms of illegal pay offs. These payments however, variegate from one state to another; withal, in majority of the cases the legal fees form the bulk of the expenses compared to that of the other expenses.
In a number of jurisdictions, the parties to the contract will be hard pressed to find relief in court; legal expenses will often will cancel out or outweigh the potential award should the case be tried in court and if the court finds for them. In addition, the losing party has to shoulder the costs of the winning party in the case; however, the amount of fees that a winning party can recover from the losing party will be heavily dependent on the rules agreed upon by the parties as well as the financial capacity of the losing party to comply with the ruling (Investment Advisory, 2011, p. 28).
Here, it must be noted that parties in a contract must agree on whether to integrate clauses for eventualities for dispute resolution and arbitration. Nonetheless, it is critical when the parties in a transaction are located in different locations or in situations when technical or other complex concerns may arise (Latham and Watkins, 2015, p. 3).
Prior to any consideration for engaging an adjudication accord, Myers (2016) advises undertaking parties to verify whether the governments of both states have adopted the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Aside from this guarantee, the contracting parties in the agreement must also determine that their countries have adopted other bilateral or multilateral agreements evincing the same rights.
Strong (2014, p. 12-13) avers that international trade adjudication has been long recognized as the favored mechanism for resolving multifaceted trade disputes in transnational cases. However, the global business and political community has become disillusioned with this specific mechanism owing to issues regarding higher costs, stoppages, and procedural “red tape.” Owing to these issues, parties in this sector are now assessing other alternatives to resolve transnational commercial adjudication. One of the more engaged processes is mediation. Though transnational trade mediation can be regarded as a new philosophy, “consensus-based” tools geared to resolve trade claims have been practiced before.
“Mediation” as well as “conciliation” methodologies were traditionally the preferred approaches of adjudicating transnational trade agreements in the early half of the 20th century. It was in the period in the immediate period after the Second World War that arbitration rose as an approved practice for resolving transnational commercial disputes. The rationale behind the change in focus in this area is unclear as institutional advocacy for consensus founded conflict resolution mechanisms was still prevalent from the 20th and the early part of the 21st century. In addition, transnational trade arbitration has extensively benefited from the large store of bilateral and multilateral treaties geared to support transnational trade arbitration in the wake of the Second World War. Transnational commercial mediation, for its part, has fundamentally operated as a form of “soft law.”
Withal, many commentators proffer the significant benefits of undertaking transnational arbitration methods over litigation in a number of ways. One, adjudication allows for both parties to create their respective procedures in resolving trade disputes that can arise between them. Two, arbitration allows for the operation of an impartial mechanism to resolve trade claims; third, the parties in the dispute are allowed to choose the operative law that will govern the resolution of the disputes, therefore improving the predictability of the negotiations, and lastly, gives the parties in the dispute the opportunity to select the arbiter who has the particular skills to judiciously adjudicate the matter in a way that is amenable to both parties. Nonetheless, these characteristics can also apply to commercial mediation and can also motivate parties in a trade dispute to opt for mediation.
Nonetheless, Fox and Rosenberg (2013, pp. 55-56) avers that the engagement of international arbitration processes will not translate to an equitable answer to disputes. There will be instances when the state has rejected the use of arbitration in settling disputes with private sector investors, when there is no provision for the engagement of arbitration processed in cases when disputes do arise, or there is no investment agreement that can be used as reference for points of discussion and resolution. In addition, there will be cases wherein the state, though initially agreeing to submit to the ambit of arbitration, will then refuse to abide by the decision of the tribunal as it is adverse to the state.
Prior to the preference for arbitration, litigation, according to Waqas (2015), was the popular mode of resolving disputes within the energy industry until the 1970s, when arbitration started to gain ground among the stakeholders and players in the sector; this was also the time that countries started to nationalize their energy industries and multinational oil and gas companies had devised a “joint pricing mechanism” to subvert the plans of the states. These states in return formed the OPEC to deter the strategies of these oil companies.
Tondapu (2010, p. 1) arbitration proceedings provides a substitute to cross border litigations that are geared by the state to uphold the laws as these are found to the applicable in a specific area of contention. However, in cases when the state proffers for the use of arbitration, the private parties in a contract would prefer arbitration, it being considered as an unbiased process. In the study of the School of International Arbitration of the Queen Mary University of London (2008, p. 2), international arbitration has asserted its supremacy over cross border litigation. Business counsels view international arbitration as a system that is generally unaffected from outside factors, and in sectors such as energy and shipping, international arbitration is the most extensively engaged mechanism in resolving arguments among parties in these sectors.
In the report of the International Center for Energy Arbitration (ICEA), Pinsent Masons LLP avers that there is a growing inclination for “alternative dispute resolutions” even in resolving disputes for high value and complex projects. The ICEA report also showed that there is a strong preference for the establishment for “mandatory high level negotiation” even in the early part of the claim as well as an inclination for the resolution of the claims by way of dispute resolution. According to Pinsent Masons’ John Gilbert, the ICEA contains excellent findings on the structure of dispute resolution mechanisms for use in the energy industry.
However, there must be first a definition of what comprises arbitration. Latham and Watkins (2015, p. 1) define arbitrations as a proceeding “conducted by one or three [adjudicators] in cases who are identified as the “tribunal.” Though similar to the judge in civil or criminal action, arbitrators are chosen by the parties in the proceeding, either directly or indirectly with the use of third parties. In the operation of majority of leading legal systems, the adjudicators render their awards according to the prevailing legal systems unless there is an agreement between the parties to do so otherwise-for example, allowing the arbitration tribunal to decide on the matter on the principle of parity rather than what was stated in the law.
Martin (2011, p. 1) describes four types of wrangling among multinational oil and gas sector. The first, those between two states, primarily engaged cross border issues that are located in maritime areas; traditionally, these involve governments resolving issues on borders and territories. Two, those involving businesses and the government, are also termed as “investor-state” or as “state investment” disputes, with the wrangling centering on the content of the contracts. Third, those that involve two companies having disputes in one, “joint venture agreements” and two, between service contract operators and facility operators.
A major portion of the commercial agreements in the oil and gas industry evince procedures for selecting standard documents and processed depending on their applicability to the project. On an international level, the Federation Internationale Des Ingeniurs-Conseils, or FIDIC form is extensively engaged owing to the extensive range of a number of critical and significant forms. Many of these forms, among them the Plant and Design-build, EPC/Turnkey, and the Client/Consultant Model Services Agreement, are used by multinational banks such as the World Bank for their enterprises and are generally favored multinational banking and financial institutions in drafting financial instruments or contracts. As majority of all oil and gas agreements are EPC/turnkey. FIDIC methods in this regard apply well in these situations (Myers, 2016).
In the report of the United Nations, foreign overseas capital has dramatically increased over time. With this rise comes the anticipation of conflict and the need for mechanisms to resolve these conflicts. Herein, states and other parties must be aware of dispute resolution mechanisms to avert significant delays and concerns for critical sectors to continue supplying the needs of the global community for their commodities (Fox and Rosenberg, 2013, p.80).
Bibliography
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Fox, P.D., Rosenberg, C.B., 2013, The hidden tool in a foreign investor’s toolbox: the trade preference program as a ‘carrot and stick’ to secure compliance with international law obligations, Northwestern Journal of International Law and Business 34 (1) 54-79
International Center for Energy Arbitration, “Dispute resolution in the energy sector: initial report [online] Available at:<http://www.scottisharbitrationcentre.org/wp-content/uploads/2015/05/ICEA-Dispute-Resolution-in-the-Energy-Sector-Initial-Report-Square-Booklet-Web-version.pdf (accessed 24 March 2016)
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Pinsent Masons LLP, 2015, “Survey of international energy firms reveals ‘surprising’ support for online dispute resolution, says expert [online] Available at :< http://www.out-law.com/en/articles/2015/may/survey-of-international-energy-firms-reveals-surprising-support-for-online-dispute-resolution-says-expert/ (accessed 24 March 2016)
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