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Dispute Resolution in the Oil and Gas Industry

(published 2010) By Barrister Aemen Zulfikar Maluka

The Author is the  Executive Director and Founder of Josh and Mak LLP (UK).She is a Barrister from the Lincolns Inn and has a Master of Laws Degree from the University of London in Corporate and Communication laws and another Masters in Oil and Gas Law from the University of Aberdeen.

Introduction

The pith and substance of any successful international or national legal framework pertaining to and providing for agreed dispute resolution procedures[1] in the energy sector is largely premised upon the extent to which it can cater to the to constantly evolving and complex nature of the industry itself[2]. The success of the same then is largely dependant on the development and maturity of such legal frameworks as well as the likelihood and speed of their enforceability[3]. In this vein to aid the discussion of whether or not the current state of dispute resolution frameworks in their current form appropriately cater to the needs of the oil and gas industry the author has in the paragraphs below sought to demonstrate and discuss such deficiencies currently faced by dispute resolution frameworks around the world in the national and international contexts.

Alternative Dispute Resolution in the United Kingdom

Taking the example of United Kingdom, it is clearly an example of a well-developed dispute resolution regime in terms of a coherent legal framework which supports properly managed dispute resolution systems. For example the Civil Procedure Rules 1999 encourage attempts at ADR[4] (Alternative Dispute Resolution) before the parties go into litigation. In other jurisdictions like Netherlands, Norway and the United States mediation can even be a compulsory requirement by the court before formal hearing commences. In the United Kingdom some aspects of energy disputes like those pertaining to employment even require mandatory subscription to formal complaints and dispute resolution procedures before the dispute is taken to court. In the context of the UK Energy Sector specifically, Ross[5] has observed that the industry has developed its own particular arrangements in terms of dispute resolution where as DR processes might be utilized as a means to an end of achieving strategic advantages over the other party by using the unique cultural dimensions of the industrial practices. This serves the dual purpose of avoiding litigation while at the same time avoiding a break down of industrial relations. In addition to this it is now being suggested that with the recent passage of the Arbitration (Scotland) Bill (SP Bill 19), Scotland will have one of the most sophisticated arbitration regimes, which might, in addition to encouraging the use of Arbitration in local energy disputes, attract more international energy disputes for arbitration here[6]. However two interesting things must be noted here before an illusion of perfection is created on part of the UK dispute resolution processes. Firstly energy disputes (particularly pertaining to oil and gas drilling, installation, extraction etc are not governed by compulsory statutory adjudication processes set out for the construction industry in the Housing Grants, Construction and Regeneration Act 1996,Part II.This means that the choice of using alternative dispute resolution mechanisms over litigation can potentially be abused by powerful industry players as a means to an end of benefiting from a power imbalance with a financially weak opponent[7].Furthermore it should also be noted that after much time is wasted on mediation it would be frustrating if no consensus is reached as mediation outcomes are not binding on the parties[8].A better alternative is arbitration , the award for which is binding in nature[9].This leads us to the second query , whether the fact that courts will be unwilling to look into an arbitration award or reverse it actually promotes the power imbalance in the industry.It theory the duty of the court is to strike a fair balance in commercial relations as well as matters of public importance. While mediation and arbitration both provide for confidentiality in terms of commercially sensitive information of the parties involved in the dispute, there is arguably an inherent danger that an issue of public importance (for example pertaining to environmental damage) might go unnoticed and not be amenable to the jurisdiction of a court of law.

Secondly when we look at the judicial attitude in the UK towards arbitration Auchie[10] has pointed out that the courts have shown a “a cavalier attitude”[11] by being more than willing to give effect to an arbitration clause This attitude is apparent from the case of Fiona Trust & Holding Corp v Privalov[12]. However the courts have been less liberal in upholding such clauses in the case of expert determination and in Thames Valley v Total Gas[13] the court refused a stay to give effect to an expert determination clause in the absence of finding any substance in the claim for force majeure. Interestingly enough it should be noted however that had this agreement have been for arbitration a stay would have had been mandatory under s.9 of the Arbitration Act 1996[14].

International arbitration

The cultural dimension

Although international arbitration has always been one of the powerful mechanisms in the form of available to foreign investors to counter some of the political risk involved in foreign investment there are a number of hurdles which exist for States as well as private parties in international energy arbitration. One issue is clearly that of culture[15]. This can be in terms of dealing with parties from other industries as well as foreign jurisdictions or even industries. Maniruzzaman[16] has cited this as another reason why arbitration mechanisms in the international field have often failed to cater to the desirable ends of expedient and cost effective dispute resolution. While discussing the example of Asia he stresses on the need of understanding that certain cultural norms and values will always dictate the dispute resolution process .In the case of East Asian countries he observes that despite the infusion of Western dispute settlement mechanisms like the UNCITRAL Model Law and the New York and ICSID Conventions into local laws, their approach energy disputes is largely consensual approach to the dispute resolution process where negotiation is almost always and strongly preferred to legal action[17].In contrast to this, taking the example of UAE, it is possible to see that despite the country’s highly rated commercial standing in the energy world, its dispute resolution systems are less than perfect and most of its energy disputes will often and preferably be litigated than resolved by alternate dispute resolution processes.Infact according to Kwan and Teale[18] many foreign investors have learnt their lesson that arbitrating an energy dispute in the UAE may give rise to many problems in terms of the language of the award (unless it is incorporated in the contract that disputes will be resolved in English).There is no specialist legal framework for Arbitration in the UAE and many other problems arise due to the availability of limited disclosure requirements, no provision for confidentiality or privilege and the fact that the validity of the awards is dependent upon ratification by a local Dubai court. Finally it is surprising to see that until 2006 the UAE refused to be bound by the New York Convention on the Recognition and Enforcement of Arbitral Awards of 1958 which may be a matter of considerable concern for foreign parties facing an arbitration dispute in UAE.

The problem of drafting of arbitration clauses

One of the major hurdles still facing the industry players whether at national or international levels despite the development of sophisticated model contract regimes providing for arbitration are the drafting and provision of arbitration clauses in contracts. Bishop[19] has suggested that many nuances can be avoided by careful drafting of such clauses as he goes on to say that,” there is no such thing as a single “model”, “miracle” or “all purpose” clause appropriate for all occasions[20].” Therefore matters would be much easier for the contracting parties where special attention is paid to the Treaty requirements, which the parties seek to rely on in the event of arbitration. More recently much concern has been shown for what Bishop has termed as “pathological arbitration clauses”[21], which are basically so defectively drafted that later on upon interpretation, the entire arbitration agreement may result in the nullification in whole or atleast part.

The case of Investor State Disputes: Rogue host states or Rogue foreign Investors?

For any foreign investor, setting up an oil and gas project in a foreign jurisdiction is a risk especially in terms of a possible expropriation by the host country[22] or sudden and uncalled changes in local regulatory schemes, foreign currency risk or retaliatory action against the investor’s home state for example due to war[23]. More importantly there is an issue of the neutrality of arbitrators in a forum, which might be of constant concern to the parties involved[24].

Particularly in the context of international litigation there have been instances where the arbitration process has been hindered by technical issues of jurisdiction as well as the refusal to cooperate on behalf of a state party whose presence in the energy sector might nonetheless be of immense strategic importance in the international playing field[25]. One such example is of Russia’s recent withdrawal and rejection of the ECT in 2009.An after effect of this is the Yuko’s case[26] where the aggrieved investor alleging expropriation of his assets has struggled for four years until December 2009 just to have the simple issue of the jurisdiction of the Energy Charter upon their case decided. Judging by the general speed of international tribunals in deciding such matters it will certainly take another two years before an award is made which puts the notion of arbitration as a time and cost saving exercise into considerable doubt.

Last but not the least, Salomon and Saunders[27] have taken the view that the commonly held perception that investment treaty arbitration often favours wealthy nations over developing host countries is not quite true. They do admit however that when faced by such a arbitration dispute the respondent country will have little choice but to instruct an international law firm and face prohibitively high legal fees which can have an adverse effect on their economy. At this point it is also true that the poor host country cannot claim a World Bank loan, pro bono advice or representation to secure its rights in the arbitration proceedings. In addition to this a common complaint on behalf of such host nations has also been that the arbitration process is perhaps too pro-investor and little or no regard is given to the local public and environmental law of the host state in the main texts of the Bilateral treaties and their subsequent interpretation by the tribunals[28]. Much criticism has also been made of the inherently confidential nature of the arbitration process and the “clash between discovery obligations imposed by tribunals and secrecy obligations imposed in relation to official government documentation in many countries”[29]. Finally it has also been said that such multilateral or bilateral instruments providing for arbitration lay too much emphasis upon property rights and the protection of foreign investment and compromise the economic and environmental interests of the country[30]. In response to these criticisms Salomon and Saunders[31] state that such provisions actually promote the rule of law and that ,”if arbitration processes can have a benchmarking effect on fostering equality under the rule of law, BITs are a positive development”[32]. They further state that even though reliable statistics are available for ICSID claims, statistical data from the same denotes that “the record is remarkably even, with an equal number of wins and losses for states in the twenty year period to the end of last year”[33].

 

Conclusion

It has been seen in this paper that despite the obvious advantages of alternative dispute resolution mechanisms for those involved in the Energy Industry at the national and international levels in the form of maintaining business relations, the notion of time and money saving may often turn out be an overrated concept in the absence of coherent legal frameworks. Even though sophisticated arbitration regimes like those that exist for the  UKCS(United Kingdom Continental Shelf) have so far made effective use of such dispute resolution mechanisms, many regimes like East Asia and the UAE still lag far behind in reconciling the requirements and methodologies of the international arbitral tribunals and inter-state technicalities with their local laws and government policies. Finally the view that investor state disputes often undermine the poor host country is also untrue as the Yuko’s case has shown and it is quite possible that a host country’s conduct in honoring their international obligations can be as disagreeable as that of a greedy multinational foreign investor’s intentions.

It can be said then that while it is true that the parties to an energy dispute will opt for agreed dispute resolution processes, they might be doing so because of industrial pressures rather than in the hopes of saving time and money.There is an inherent power imbalance in the industry whether in the case of investor-state disputes or commercial disputes at the national level.This leads us to the conclusion that despite being the lesser evil for a firm facing the horrors of expensive and time consuming litigation, the arbitration mechanisms in place today and the way they are used are less than perfect when catering to the needs of the major industry players in the energy economy today.

Table of Legislation

 

International Instruments

 

1966 Convention on the Settlement of Investment Disputes between States and

Nationals of Other States (Geneva)

1958 Convention on the Recognition and Enforcement of Foreign Arbitral

Awards –The New York Convention (US)

Energy Charter Treaty 1994

North American Free Trade Agreement, 17 Dec. 1992, 32 ILM (1993) 296 and 605 (entered into force 1 Jan. 1994) (hereinafter ‘NAFTA’)

New York Convention on the Enforcement of International Arbitration UNCITRAL Arbitration Rules (UNCITRAL, 1976)
UNCITRAL Model Law on International Commercial Arbitration 1985*
UNCITRAL Model Law on International Commercial Conciliation 2002*
WTO General Agreement on Trade in Services (GATS) Article XXIII *
WTO Understanding on Rules and Procedures Governing the Settlement of Disputes *
            Both available via https://www.wto.org/english/docs_e/legal_e/legal_e.htm
 
Local Legislation (United Kingdom)
 
Arbitration (Scotland) Bill (SP Bill 19)
Arbitration Act 1996
Civil Procedure Rules 1999
Housing Grants, Construction and Regeneration Act 1996,Part II
 
 
 
Table of Cases
 
 
 
Fiona Trust & Holding Corp v Privalov [2007] UKHL 40; (2007) The Times, October 25, 2007
 
Thames Valley Power Ltd v. Total Gas & Power Ltd [2006] 1 Lloyd’s Rep. 441
 
Yukos Universal Ltd (Isle of Man) v Russian Federation; Hulley Enterprises Ltd (Cyprus) v Russian Federation; Veteran Petroleum Trust (Cyprus) v Russian Federation
 
 
 
Bibliography
 
  1. A.Amkhan, “Consent to submit investment disputes to arbitration under Article 26 of the Energy Charter Treaty”(2009) Int. A.L.R. 72
  2. P.Auchie, “The liberal interpretation of defective arbitration clauses in international commercial contracts: a sensible approach? (2007) A.L.R. 206 -208
  3. R.W. Bentham, Arbitration and Litigation in the Oil Industry, Oil & Gas Law & Tax.Rev. (1986) Pp 35
  4. R.Bishop, “A practical guide for drafting international arbitration clauses”, (2000) I.E.L.T.R. 16-20
  5. Emmanuel Gaillard, “Russia cannot walk away from its legal obligations”, Financial Times, August 18 2009
  6. Mhairi M. Garcia,” Territorial delimitation and hydrocarbon resources” in Geoffrey Picton-Turbervill (Ed)  “Oil and Gas: A Practical Handbook (2009) Published by Globe Law and Business, London
  7. James Kwan and Emma Teale  “Arbitration in the United Arab Emirates: the traps, the tricks and tips for the unwary”, (2006) International Arbitration Law Review, Int. A.L.R. 95
  8. A.F.M. Maniruzzaman, “The problems and challenges facing settlement of international energy disputes by ADR methods in Asia: the way forward”, (2003) I.E.L.T.R. 193 -196
  9. O’Neill, “International Arbitral Jurisdiction: When taking control goes out of control,” Dispute Resolution Journal, May/Jul 2003; 58, 2, pp68-77 & 85
  10. Margaret Ross “Dispute Management and Resolution”, Chapter 16 in Gordon and John Paterson (eds), Oil and Gas Law: Current Practice and Emerging Trends, Dundee University Press, 2007
  11. Gregory White, “Court Rules against Russia in Yukos Claim” Euractive (1 December 2009) retrieved on 9 Dec 2009 available at https://www.euractiv.com/en/energy/court-rules-russia-yukos-case/article-187869
  12. Roberts, Gas Sales and Gas Transportation Agreements: Principles and Practice (Sweet & Maxwell 2004), Ch 35 “Dispute Resolution”
  13. Salomon and Saunders, “Does investment treaty arbitration favour the wealthy?” (2005), European Lawyer Euro. Law. 80-81
  14. Thomas W. Walde, “Investment Arbitration Under The Energy Charter Treaty; From Dispute Settlement to Treaty Implementation, (1998) The Centre for Petroleum and Mineral Law & Policy, Paper presented at the Conference on Energy – Arbitration Gulf Arbitration Centre available at www.dundee.ac.uk/cepmlp/journal/html/Vol1/article1-10.pdf
  15. Thomas Waelde  Negotiating for Dispute Settlement in Transnational Mineral Contracts, 7 Denver J. Intl. L. & Pol. (1977) 33.

[1] The term “agreed” denotes the use of negotiation, mediation and conciliation, neutral evaluation, Mini Trials, Med-Arbitration, Expert Determination and Arbitration. [2] Many academics have spoken at length on this see in particular the seminal works of R.W. Bentham, Arbitration and Litigation in the Oil Industry, Oil Gas Law & Tax.Rev. (1986) Pp 35. And Waelde, Negotiating for Dispute Settlement in Transnational Mineral Contracts, 7 Denver J. Intl. L. & Pol. (1977) 33.For a more modern treatment of this the author has referred to Margaret Ross “Dispute Management and Resolution”, Chapter 16 [3] Ibid ft.1 [4] As apparent from the pre-action protocol requirements CPR 1999 [5] Margaret Ross “Dispute Management and Resolution”, Chapter 16 [6] See ft.5 above. This of course brings to mind the well known accusation of “forum shopping” by parties to international treaties but logically enough having their dispute dealt by a well developed and reliable arbitration framework would be the priority of any party to an energy dispute [7] Ibid. [8] Ibid [9] Ibid. [10] P.Auchie, “The liberal interpretation of defective arbitration clauses in international commercial contracts: a sensible approach? (2007) A.L.R. 206 -208 [11] Ibid [12] [2007] UKHL 40; (2007) The Times, October 25, 2007 [13] Thames Valley Power Ltd v. Total Gas & Power Ltd [2006] 1 Lloyd’s Rep. 441 [14] See ft.10 [15] A.F.M. Maniruzzaman, “The problems and challenges facing settlement of international energy disputes by ADR methods in Asia: the way forward,” (2003) I.E.L.T.R. 193 [16] Ibid [17] Ibid [18] James Kwan and Emma Teale “Arbitration in the United Arab Emirates: the traps, the tricks and tips for the unwary”, (2006) Int. A.L.R. 95   [19]R.Bishop, “A practical guide for drafting international arbitration clauses”, (2000) I.E.L.T.R. 16-20 [20] Ibid 16 [21] Ibid p 18 [22]The legality of which can be questionable, refer to the example of the Yuko’s case where it was allegedly illegal and politically motivated. For a comment on this see, Emmanuel Gaillard, “Russia cannot walk away from its legal obligations”, Financial Times, August 18 2009: A.Amkhan, “Consent to submit investment disputes to arbitration under Article 26 of the Energy Charter Treaty”(2009) Gregory White, “Court Rules against Russia in Yukos Claim” (2009)   [23] Thomas W. Walde, “Investment Arbitration Under The Energy Charter Treaty; From Dispute Settlement to Treaty Implementation, (1998 [24] O’Neill, “International Arbitral Jurisdiction: When taking control goes out of control,” (2003) pp68-77 & 85 [25] See Mhairi M. Garcia,” Territorial delimitation and hydrocarbon resources” in Geoffrey Picton-Turbervill (Ed)  “Oil and Gas: A Practical Handbook (2009) [26] Yukos Universal Ltd (Isle of Man) v Russian Federation; Hulley Enterprises Ltd (Cyprus) v Russian Federation; Veteran Petroleum Trust (Cyprus) v Russian Federation [27] Salomon and Saunders, “Does investment treaty arbitration favour the wealthy?” (2005), European Lawyer Euro. Law. 80 [28] Ibid [29] Ibid p.81 [30] Ibid [31] Ibid [32] Ibid

[33] Ibid