Legal Outlook Energy and Resources Disputes Episode 5

Dispute Resolution Mechanisms - transcript

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Transcript



Dan Brown:
Welcome everyone. My name is Dan Brown. I'm an energy and infrastructure partner at Ashurst, and I'm helping our clients reach their net zero ambitions. This is the latest in our series of podcasts on the topic of renewable entity disputes. It's a series in which we hope to elicit from our market leading renewable energy disputes lawyers the lessons they have learned from acting in renewable energy disputes and the tips and tricks for avoiding and managing those disputes. Today, I have the absolute pleasure of being joined by Michael Weatherly, and he's a disputes partner in our Singapore office. And also with Tammam Kaissi, a senior associate in our Dubai disputes team. Now we're going to be addressing the questions of which dispute resolution mechanisms are best suited to resolve disputes in our renewable energy sector. Michael and Tammam, welcome.

Michael Weatherley:
Thank you, Dan.

Tammam Kaissi:
[inaudible 00:00:59] Pleasure to be here.

Dan Brown:
Now, Michael, let's start with you. Why disputes? Why did you want to become a disputes' lawyer?

Michael Weatherley:
I think I like arguing, to be honest, and that's certainly what my mum will say. From a young age, I would always take every argument I could. So I quite enjoy that and dispute seems a natural fit in that regard.

Dan Brown:
Excellent. So look, let's turn to a question that I guess is on the minds of many of our listeners. Why are we spending a whole podcast talking about what tends to be a pretty vanilla standard form clause in a contract?

Michael Weatherley:
Never one to shy away from the tough questions. I suspect you like many that have been in this game for a while know exactly why then, which is that without an effective dispute resolution clause, really the rest of your agreement could potentially end up being pointless. The dispute resolution clause is what allows you to ultimately enforce those other rights that you and your teams fought so hard for in negotiations. So assuming you're an offshore wind farm owner, for example, you bargain really hard for this availability guarantee regime in the O&M agreement for the turbines. The contractor, who's often also the original turbine supplier, they've failed to meet the promise level of average availability. And now you want your liquidated damages. The contractor says, "No, that's absolutely outrageous. There was a permitted downtime event that excuses me. I don't have to pay."

Or what do you do? Well, you might try and resolve things commercially, but if you can't do so, you need to invoke the dispute resolution clause to get paid. And so if that clause is defective in some way, and I've seen many that are, what next? And the answer sadly, and something I've lived through many times, I'm living through it right now is that you'll probably spend probably a year or more essentially fighting about how and where your dispute should be resolved. Not actually moving any closer to getting paid the amounts you're owed.

Dan Brown:
Michael as a front end lawyer, I won't take it personally that you think that we'll need to renegotiate the causes that my payment I draft, but absolutely can appreciate the importance of those provisions. And you're right, there are sometimes not focused on it as much as they should be, at least in my experience. And so Tammam, jumping to you for a moment, how did you end up in Dubai?

Tammam Kaissi:
So basically I spent the last 10 years working on energy disputes in Paris. And I was really focused on energy disputes and the Middle East. And it just felt more natural to be closer to clients and to move out there where everything is happening in that field. I mean, that's the official reason, but it is also true that after 10 years in very gloomy Paris, I was looking for a bit of sun and the site of the sea.

Dan Brown:
Well, Dubai certainly seems to be the most amazing place for sun and sea. So Tammam, Michael's given us a really good landing on why we're here today. Perhaps you can ease us into the topic by giving us an overview of the main dispute resolution mechanisms you're seeing in the renewable energy space at the moment.

Tammam Kaissi:
Absolutely. Thank you, Dan. So maybe we can start by making an important distinction between on the one hand, preliminary or interim dispute resolution mechanisms. And on the other hand, final and binding dispute resolution mechanisms. So in terms of preliminary or interim dispute resolution mechanisms, parties often results to preliminary forms of dispute resolution mechanisms, particularly during the construction phase of major projects such as renewables in order to ensure that the project is progressing smoothly and that the contractor is receiving progress payments. Knowing that the parties would be able to have a more thorough fight over this dispute once the construction phase is completed. So just to give you an example, some [inaudible 00:05:37] form contracts feature Dispute Adjudication Boards as a pre-arbitral step. These are usually referred to as DABs. These are systems that allow parties to pay now fight later as we refer to them.

So basically whenever there's a dispute between the parties over an issue during the construction phase of a renewable energy project, the parties may resort to DABs in order to receive a relief that is binding, but not necessarily final. So if one of the parties is dissatisfied with the DAB's decision as one of the parties often is, it may later resort to arbitration for a final resolution of the dispute. However, in the meantime I think, and this is what is important about DABs, that the satisfied parties would need to comply with the DAB decision and move forward with the project.

Now, in terms of a final and binding dispute resolution mechanism, you've really got three main options. I would say that by far and the most commonly used dispute resolution mechanism in [inaudible 00:06:50] projects share some of the renewal energy project is international arbitration. Particularly for cross-border disputes in which parties from multiple jurisdictions are involved. I suspect we'll delve into that a bit later. The second option is national court litigation, which is also a feature in this industry particularly for purely domestic projects. And finally, the third option is expert determination in which technical experts rather than arbitrators or judges issue a final and binding determination of the dispute. But this is limited to disputes of purely technical nature.

Dan Brown:
Okay, Tammam. So if I've understood correctly, we've got a whole different variety of contractual mechanisms or contractual standard that there's many different approaches to resolving disputes from Dispute Agreement Boards to expert determination. And knowing the likely makeup of our listeners today, who have all come from a varied background with varied interests. Perhaps we can just focus on some of the key differences between perhaps I guess, arbitration and litigation, which I feel are probably the more common approaches to resolving disputes, particularly in the renewable sector.

Tammam Kaissi:
Yes, certainly, Dan. I would say there are four particular differences between the two processes. First is procedural flexibility. Arbitration is really a very consensual process. The parties have great control over the arbitral rules they would like to apply to their disputes. Importantly, the parties have great control over the selection of the decision maker, meaning the arbitrator. They typically select arbitrators whom they trust and whom they believe have the required expertise in the subject matter of their dispute. This is unfortunately something that is not available in court litigation. Also, court litigation procedures are often determined by legislation and can be very rigid in comparison to arbitration.

The second difference is finality. Litigation usually allows numerous levels of appeals whereas arbitration does not. And the arbitral award is final and binding except in limited circumstances where it can be annulled. The third difference is time and costs. Given the numerous levels of appeals before state court, litigation can often be lengthier and more honorous than arbitration. But this really varies from one jurisdiction to another. That said, unfortunately, arbitration does not enjoy a reputation of being either cheap or fast.

Now the most important difference I would say is the global enforceability of arbitral awards pursuant to what is known as the New York Convention. The New York Convention has 168 state signatories and allows parties to enforce their awards globally with only very few limited exceptions. Now this international enforceability is very attractive to parties in cross-border disputes. And particularly in the renewable energy space, given the potential involvement of several parties from multiple jurisdictions and the likely need to seek enforcement of decisions in foreign countries. Now in contrast, there are some limited international agreements relating to the enforcement of foreign court decisions, but nothing of the scale of the New York Convention.

Dan Brown:
Now Michael, Tammam has just helpfully highlighted some of the really appealing features of international arbitration. Although I know that he left out international travel, five star hotels in Dubai and Paris and those sorts of things that are, in my mind, yes, all right, the perks associated with resolving something through international arbitration, which I'm sure clearly I've stated. But it seems to me that one of the really particularly appealing elements to international arbitration is really about this cross-border enforceability of awards. What are the other perceived benefits of arbitration, particularly as it relates to renewable energy disputes?

Michael Weatherley:
I mean, global enforceability of awards is the big one. But related to that is the fact that international arbitration really allows parties to choose a neutral place and procedural law. And so where you've got parties from different jurisdictions as is often the case in renewable energy projects, this avoids the need to submit to the jurisdiction of the courts of the home state of the other party. So no party has this home granted advantage that you might hear about. And particularly that's of great value in the projects that are located in emerging and developing countries. And in those countries, there might be a perceived risk that litigation before the local courts could be very time consuming, potentially there might also be issues of bias or corruption in favor of the local counterparty who may very well be state owned or state controlled. So there's that benefit.

I think the other two points I'd make are around confidentiality and expertise of decision makers. As to confidentiality, it does change from jurisdiction to jurisdiction. But as a general rule, litigation favors public open justice. Arbitration on the other hand, or at least commercial arbitration typically takes place as an entirely private and confidential process. And when you're operating in an industry with new and emerging proprietary technologies, as you are in the renewable energy space, confidentiality really does matter. You don't want your competitors having insights into the operation of those technologies. And frankly, you also don't want your customers knowing that maybe they're subject to alleged defects. The confidentiality of arbitration allows you to avoid those issues.

The final point I think is to pick up on something that Tammam's already mentioned, which is the ability in arbitration to choose your decision maker. Most renewable energy disputes that I see are highly technical. They're often driven by factors that are quite unique to the renewable energy industry. And in that context, you want a process where the person deciding on your claims or defenses understands how that industry works. They understand how that technology works. They understand what the commercial drivers are. In an arbitration, you can pick that person, whether they're a lawyer doing mainly renewable energy work such as yourself, or an industry expert. You do have that flexibility.

Dan Brown:
That seems to be a really important point, doesn't it? That given the pace of change of the technology involved in our energy transition, it's really important that the person that is ultimately arbitrating on the issues understands the technology. And look, I'm also mindful that we don't want to be blindly promoting arbitration in all circumstances. When should we not use arbitration? When is it not the best option?

Michael Weatherley:
It's a hard thing for an international arbitrator to admit when arbitration is not appropriate, but it's an important point to make. Essentially in purely domestic disputes, especially where you can get quick, efficient, inexpensive justice from the local courts. But that of course depends on where you are in the world. And it changes jurisdiction to jurisdiction. The confidentiality of arbitration is also not for everyone. So some of our government clients in particular are sometimes unwilling to enter into arbitration agreements because government transparency, government accountability is seen as being more important. Particularly in relation to what is a politically charged industry, such as renewable energy. They prefer the public open justice of domestic courts in that context.

Dan Brown:
So that's a really important consideration I guess I hadn't totally appreciated until now, which is one of the options around arbitration which makes it so attractive is the confidential nature. But actually it's not one size fits all for all parties.

Michael Weatherley:
I think that's right, yeah.

Dan Brown:
And so Tammam, what about adopting different methods for different types of disputes? Tell us more about, for instance, expert determination for technical disputes and arbitration for others. I mean, is that a good approach or is that an approach that people take in the renewable sector?

Tammam Kaissi:
Sure. So, I mean, this is certainly a feature I have seen in contracts in the renewable energy space. And on their faith, I think these clauses represent the sensible commercial approach to dispute resolution because they ensure that different types of disputes are sent to the most appropriate decision maker. However, there are potential problems with these split clauses. So for example, I mean, there's a significant uncertainty and scope for argument as to what exactly constitutes the dispute of a technical nature. So what is meant by technical? So the question is whether this clause covers only purely technical dispute, or does it extend to dispute that involves mixed questions of law, facts and technical issues. I mean, and practice disputes are rarely contained to only one issue or one clause of an agreement. It's often very difficult to define with precision which parts of the disputes fall within which mechanism.

So for this reason, I would say that such clauses often provoke time consuming and costly jurisdictional battles as to where a particular dispute should be heard distracting really the parties from actually resolving the dispute itself. This is a matter of that Michael touched upon a bit earlier. We often, us dispute lawyers see ourself battling jurisdictional issues for months and months or a year before actually delving into the merits of the dispute. Importantly also these split clauses may also result in some issues being determined by one decision maker and other related issues being determined by a different decision maker. And this often results in efficiency and potentially in consistent decisions. I mean, this is not all to say that you should not have expert determination at all in your contracts. It clearly has its uses, but I think one should carefully think about where and when these mechanisms must be used and also have experienced dispute resolution lawyers having a look at the clauses to advise on the best mechanism to be adopted.

Dan Brown:
So it sounds like to me, the more I'm listening to all of the various different issues and iterations and of circumstances that could potentially arise in the actual implementation of these renewable projects. And to me, it seems more and more that one size, and I've said it before, that one size doesn't fit all. That we really need to examine, not just the parties to the particular contract but a whole lot of other consideration, a lot more closely in terms of making sure that the documentation is fit for purpose in a broader sense. But Michael, I guess one of the things that I'm also really keen to understand from you is what about the concepts of tiered dispute resolution arrangements. For instance, starting with amicable discussions between the parties. Now, if that fails then moving on to arbitration or something like arbitration. Is that a worthwhile approach? I know we see it often in documents that we work with or receive from counterparties, but is that something that we can entertain?

Michael Weatherley:
I mean, it probably comes back to your point about, it's not a one size fits all approach, and it's a very common. But there are very different views on whether it's a good idea, but it is one of those issues that I find polarizes disputes lawyers in particular. Those who are in favor of that kind of clause, they point to the benefits of maintaining relationships, giving the parties a chance, a formalized chance to talk it out, to essentially avoid what can be an expensive litigation or arbitration process. And of course, I see the value in that. But in my experience, it has caused more problems than its worth. If parties want to settle, then they are going to settle and they don't need a clause to tell them to do it. But if they have no incentive to settle, if one party is just trying to avoid their liability, or perhaps they're just not ready to settle yet, they don't have enough information. Then these kinds of tiered provisions really just cause delay and they increase the scope for two different problems.

One's a limitation problem. If you're up against the limitation period, potentially these kind of causes are going to prevent timely commencement of your action. But more commonly, they also give rise to jurisdictional or admissibility objections. If a party wants to cause havoc in an arbitration context, for example, they can easily use these tiered provisions to do that. And it's a tried and tested argument that I've seen many, many times. Essentially, it's three things they say, well, these negotiations are mandatory, they are preconditioned to starting arbitration. Then they'll say, but they weren't carried out strictly in accordance with the clause, for whatever reason. The meeting didn't happen within the specific timeframe that was listed, for example.

And then they say, because of that defect, the tribunal, well, you don't have jurisdiction now. You've got to dismiss this case. And on one of our cases at the moment, we've been dealing with an objection just like that for over a year now. It doesn't have merit in this particular instance, but it's easy to allege. And ultimately, it takes time and money to deal with it. And sadly for the parties, in the meantime the underlying dispute is no closer to being resolved. So my personal experience is that it's probably not worth it.

Dan Brown:
I really love something you said then which is, if you're incentivized to resolve the dispute or you're minded to resolve the dispute, you're going to do that anyway, regardless of the way that the contract expressly says that you have to sit down and have good faith negotiations, or have to resolve it at your executive team level or whatever else. But the converse is actually true which is, if you're not minded to resolve it, if you want to drag things out, if strategically that is the best outcome for you, then you'll look for a way to exploit that mechanism that says hey, we need to talk to each other first. I think that's a really, really important piece around those tiered arrangements. So as you all know, and as our listeners will know, it's a bit of a tradition on our series to wrap up the podcast with a best renewable energy dispute war story from your practices. So what have you got for me? Tammam, share something, preferably not from my front end documents that I prepared.

Tammam Kaissi:
No, sure. So in a recent dispute relating to the construction of a solar park, we were working with a technical expert on a question relating to the park specifications. The experts we were working with knew his field extremely well, but did not have any experience producing expert reports in the context of international arbitration proceedings or testifying before arbitral tribunals. Now this meant that the expert did not fully understand the level of scrutiny his reports would go through and therefore, the amount of work he was required to put in in order to produce robustly substantiated reports. We are used to working with experts like these. And as we worked closely with this expert, challenging his testimony over and over in the hope that he would be able to produce a more robust report.

However, the problem is that the report was not evolving at the anticipated pace and before it was too late, we had to fire that expert and fallback on a second expert. Now the second expert proved to be a much more effective expert that was able to produce a robust report on time, but we had to go through a lot of pressure and stress to make that happen. I guess that the moral of the story is that while expertise in the field such as in the renewable energy sector is mandatory, it is also important for our experts to have experience producing litigation, arbitration style expert reports, or at least to be properly briefed on what is expected from them.

Dan Brown:
Thanks, Tammam. That sounds like it was a really frustrating process where you're dealing with an expert that effectively, they're expert at what they're doing. It kind of reminds me a little bit of that showbiz saying where they say you shouldn't work with animals and children, making sure you get the right expert on a range of things, right. Not just the intellectual know-how but also about their ability to deliver a report that can clearly articulate their expertise as it applies to the facts in the relevant situation.

Tammam Kaissi:
Absolutely.

Dan Brown:
Michael, what about you mate?

Michael Weatherley:
Thinking back over the cases and picking one though, it's hard. But I think for me, it's probably a recent SIC arbitration that we had. It's in relation to a consortium agreement for the construction of a geothermal power plant. One of the most interesting things about it was this fascinating clash of cultural styles and how that contributed to the breakdown of the relationship. But the underlying facts involved a, quite a brazen attempt by one of the consortium members to try and essentially engineer an exit from the project. The project had become financially disadvantageous to it and they wanted out. And how they did that was start sending increasingly baseless variation claims for our client who was the consortium leader to then pass on to the employer.

And our client was understandably unwilling to make baseless games against the employer, including, because I didn't want to destroy the relationship. But the other side used that unwillingness as grounds for terminating this consortium agreement. They filed their termination notice, walked off the job and left our client holding the baby as it were. Our client still had to complete the construction, but thankfully we had an arbitration clause that was fit for purpose. So we were able to relatively quickly and effectively bring a claim for wrongful repudiation and to seek reimbursement of the quite significant additional costs to complete that project. We won, of course. I don't know if I'd be telling you the story if we hadn't. But the counterparty was left with an 80 million US dollar award against it, which when I reflect on it was a very expensive way for them to learn what were some pretty basic lessons about the law of termination.

Dan Brown:
That's a really interesting war story, at least from my perspective because you touched on one of the things that inherently will run through, I believe most arbitrations, which is the cultural aspects because the arbitration by its very nature, ultimately in many cases is international or has links to international counterparties. And so really diving into that cultural counterparty pace in order to drive a dispute mechanism that is culturally sensitive and appropriate is really important. If everybody's ultimately wanting to row the boat in the same direction of resolving something in a way that's culturally appropriate and sensitive. And so I actually hadn't thought about that as a relevant consideration, but we're sending all the work you do across borders and jurisdictions. But that's really important, Michael.

Well look, thank you very much, Michael and Tammam, for your time today. I found this really fascinating insight into the important elements of dispute resolution clauses, particularly international arbitration. If any of the listeners have any further queries or they'd like to connect with us to better understand any elements of the discussions today, please feel free to reach out to us on ashurst.com.

Now the next exciting installment of our podcast series dives a little bit more deeply into the most preferred dispute resolution mechanism, which is arbitration. And it asks how one goes about appointing and educating your arbitral tribunal. And look, I'm sure there's many relevant and important considerations around that seemingly innocuous appointment process. So to ensure that you don't miss out on any future episodes, please subscribe now on Apple podcasts, Spotify, or even your favorite podcast platform. And while you're there, please feel free to keep the conversation alive and leave us a writing. What you think of us in our podcast is really important to ensure that we can deliver you content that's relevant and valuable and hopefully really engaging. Thank you so much for dedicating your time to listen to us today. We've really enjoyed it. Thank you.

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