Managing and Resolving cross-border Disputes in the Energy Sector
15 December 2022
15 December 2022
Palmer: Energy companies operate in an environment where projects generally involve a variety of public and private stakeholders, significant investment and programmes that span years, if not decades. In addition, these projects often involve the use of cutting-edge technology, have touch points with geographically and politically challenging jurisdictions, and form part of complex global supply chains. It is therefore unsurprising that energy companies become involved in cross-border disputes. Of course, today's energy market is being impacted by a combination of factors that have produced price volatility, particularly, but not exclusively, in the gas sector. That volatility creates fertile ground for disputes. Often these disputes relate directly to pricing, but we are also seeing attempts by sellers to reduce gas and energy volumes and potentially to avoid contractual supply obligations altogether. That is particularly so where there is a disconnect between available spot prices and prices being received under long-term supply contracts that may have been set months or years in advance.
Palmer: As a general comment, commercial relationships in the energy sector are often long term and frequently operate across projects, borders and cultures. That creates incentives for energy companies to look at alternatives to more formal dispute resolution mechanisms such as litigation or arbitration. ADR provides participants with the opportunity to manage and resolve disputes before they escalate, which can not only save time and cost but can also preserve these critical business relationships. While there is no 'one size fits all' approach, direct negotiation features at some stage in almost every dispute in the sector. Most commonly, it is used as the first step in a dispute resolution journey, either because is mandated by an escalating dispute resolution clause or because it is instigated by the parties at the time the dispute arises. While negotiation should be kept in mind at all stages of a dispute, typically we find that it can be most effective either at the time the disputed issue first arises, before the parties have formed entrenched views on the matter, or following a mediation or other structured ADR process.
Palmer: In our experience, arbitration tends to be the preferred means of resolving disputes in the energy sector where there is a cross-border element involved. This popularity stems from a perception that, in comparison with litigation before national courts, arbitration offers the advantages of a neutral forum, confidentiality, the ability to select subject-matter experts as arbitrators, and ease of enforcement by way of the New York Convention. Arbitration is, however, perceived to be more costly and slower than litigation, depending of course upon the national court system involved. This is a factor driving interest in the use of ADR.
Palmer: Where a nation state is involved as an opposing party, investment treaties or contractual stabilisation clauses in contracts may provide an avenue for obtaining redress. The key to managing these disputes from an investor's perspective is effective investment structuring from the outset. As well as pushing for contractual stabilisation clauses in contracts with states or state-owned entities (SOEs), this involves proper investment treaty planning, such as establishing a chain of ownership to an entity registered in a jurisdiction that is a signatory to a relevant treaty, considering which particular corporate nationality and treaty offers the best investment protection, and checking specific wording of the relevant treaty to ensure that the protections will apply. All of this should be done before the investment is made. Restructuring the project or transaction to secure treaty protection at a later date could run the risk of 'abuse of process' type defences, and thus ultimately be unsuccessful.
Palmer: Energy disputes can arise in many ways and can range from construction disputes to pricing disputes to investor-state disputes and more. If referred to arbitration or litigation, the majority of these will require expert consideration of the complex issues involved. Most commonly, a party appointed expert witness will be engaged to provide independent expert opinion to an arbitral tribunal or a court. Such evidence could relate to matters such as delay or quantum in a construction dispute, market conditions in a gas pricing dispute or valuation of an asset in an expropriation claim. Often, this evidence is crucial to the outcome of a dispute. It is particularly important when engaging and preparing an expert witness to ensure that the expert's independence is not compromised. Where an expert gets involved in advocating a case, he or she may be precluded from acting or at the very least his or her bias is likely to prove counterproductive. Where a party requires assistance from an expert in preparing a claim or case, we suggest considering a consulting, or so-called 'dirty', expert to act as an adviser.
Palmer: Steps that can be taken in advance of a project or transaction include preparing clear contract documentation, building relationships with counterparties, and ensuring that systems are in place to address anticipated issues in a proactive manner and before positions become entrenched, which, in turn, requires careful assessment of risk in advance of a project or transaction. Some organisations in the sector implement policies across their business mandating the use of ADR in order to avoid the development of formal disputes, however others prefer to address this in a more ad hoc manner. In addition, it is important that stakeholders, including in-house counsel, should have a deep understanding of the company, including the board's general appetite for risk, commercial objectives and priorities. This will assist in identifying opportunities for flexibility around contested issues and so avoiding development of formal disputes.
Palmer: Our expectation is for a continuation of volatile conditions in the energy market over the coming months. The impact on supply of Russia's invasion of Ukraine and the resulting sanctions, coupled with uncertainties as to anticipated levels of demand, will continue to drive the current wave of price-related disputes. In Asia-Pacific, many long-term liquified natural gas (LNG) supply contracts are either in or are approaching the window for periodic price review; given differing price expectations between buyers and sellers we expect a number of these to result in arbitration proceedings. That said, we also anticipate that energy companies will remain concerned with the perceived inefficiency of arbitration, arising from the perception that the time and costs associated with arbitration often are disproportionate to the amounts at stake. We expect to see this driving interest in ADR processes such as mediation, especially for lower-value disputes.
The article was first published in the Jan-Mar 2023 issue of the Corporate Disputes magazine. Click here to read the full article for insights of other practitioners alongside Rob Palmer.