UK: Oil, Gas & Energy Disputes: Trends in Tough Times - Part 2*
2009 Global Energy Conference

Article by Dr. Robert Gaitskell, Q.C.**

To view Part 1 of this article, please click here.

[VII] ICSID ARBITRATION

Sovereign States As Participants In Energy Projects

7.

7.1. Where the contracting parties are both private companies, no particular difficulties arise. However, things become more problematic if one of the parties is a sovereign state.

7.2. Say, for example, an oil company invests substantial funds in exploration and exploitation of certain gas and oil reserves within a certain country, the host nation. Assume, then, that for various political reasons the host no longer wishes to have this oil company carrying out activities within its borders. It expropriates the very expensive equipment on its land and expels the oil company's personnel. What can the oil company do? The oil company will have to rely upon investor-state arbitration. However, since the party it wishes to sue is a sovereign state, this raises difficulties.

7.3. For an interesting discussion of some of the difficulties that may arise where there are disputes concerning petroleum deposits, see Higgins, R. "Problems & Process: International Law and How to Use It", pp. 136-142, 1998, OUP.

7.4. The general rule is that one state cannot exercise its sovereign dominium over other sovereign states. This principle is sometimes expressed in Latin: "par in parem non habet imperium", meaning, one equal cannot exercise authority over another equal⁴⁵. If a national court were to attempt to exercise jurisdiction over the actions of another state this would amount to an attempt to exercise such (forbidden) dominium. Consequently, national courts and tribunals have consistently refused to allow governments to be sued within their jurisdictions.

7.5. However, the above general position has caused great difficulties with the globalisation of economic activity. This is particularly so where such activity takes place within states where the dominant political philosophy is based upon a view that the state owns all the means of production, including the land and its resources. In those circumstances, virtually any economic activity by a multinational company is likely to involve the company entering into contractual relations with the state itself. As a result, and by a process of judicial interpretation, absolute immunity has given way (in various countries, e.g. England) to the doctrine of restrictive immunity, modifying the original common law position.

7.6. The practical solution to the above difficulty of suing a sovereign state is to be found in the arbitration procedure available under the International Convention for the Settlement of Investment Disputes ("ICSID Convention").

ICSID: The International Convention For The Settlement of Disputes

7.7. The idea of having an international agreement along the lines of the ICSID convention was first mooted in 1961 by the then General Counsel of the World Bank⁴⁶. The World Bank is also known as the International Bank for Reconstruction and Development ("IBRD"). One of the principal drivers for the creation of such a convention was the increasing awareness that the best way to promote international private investment, particularly into developing countries, would be to establish effective legal machinery for impartial disputes resolution. The ICSID convention is also known as the "Washington Convention" of 1965.

7.8. By 1965 the Convention was ready for signature and ratification. The 20 ratifications required for its entry into force were quickly achieved and the Convention became operational on 14^th October 1966. It was widely supported, including by newly independent African states, who wished to encourage foreign investment. At the time of its inception many of its features were important new developments. For the first time, there was a system available by which non-state entities, corporations or individuals, could sue sovereign states directly, and where State immunity was much restricted, and under which international law could be applied directly to the relationship between the investor and the host State, and where the operation of the 'local remedies' rule was excluded, and, most importantly, in which the tribunal's award would be directly enforceable.

7.9. The system was initially restricted to those cases where both the national state of the investor, and the state party, were parties to the Convention. However, this meant that if one party to the dispute did not meet this requirement, the dispute could not be submitted to ICSID, even if both parties so wished. In 1978 this difficulty was resolved by the creation by the World Bank of the so-called "Additional Facility", which permits usage of the ICSID system even if only one party meets the requirement, provided that both consent.

7.10. When the Convention was first conceived the intention was that consent to jurisdiction under that system would derive mainly from express references to it in the arbitration clauses of investment contracts. However, since then the sources of consent have been significantly broadened so that ICSID's procedures may be used where there are provisions in inter-state bilateral investment protection and investment guarantee agreements, and also where there are multilateral arrangements such as the North American Free Trade Agreement ("NAFTA"). Bilateral investment treaties are commonly known as BITs.

7.11. The success of the ICSID system is demonstrated by the fact there are, currently, many hundreds of cases being dealt with under that Convention. Such arbitrations, where one party is a non-state entity, and the other is a sovereign state, are commonly known as "mixed arbitrations".

7.12. The current position is that the ICSID Convention has been ratified by over 125 States, and newly independent States are generally keen to become signatories in order to attract foreign investment⁴⁷.

7.13. ICSID is simply a framework within which the procedures of arbitration and conciliation may occur. Its offices are based at the World Bank headquarters in Washington D.C. It has an Administrative Council and a Secretariat. It maintains panels of suitable persons, recognised in the fields of law, industry or finance, "who may be relied upon to exercise independent judgment": ICSID Convention, Article 14(1). Persons chosen from these panels may then serve as arbitrators or conciliators. Each State Party may designate four persons to the Panel of Arbitrators, and four to the Panel of Conciliators. There are a few conciliations.

7.14. ICSID's jurisdiction is set out in Article 24 of the Convention:

7.15. For ICSID's jurisdiction to take effect, it is necessary for two levels of submission to its jurisdiction by the parties. The first level, as contemplated by Article 25, is the ratification of the Convention. The second level of submission is achieved when both parties give their written consent to submit their particular dispute to the ICSID procedure. Such consent may be found, for example, in a Concession Agreement between the investor and the host state. Submission may also be achieved by a BIT, and there are now thousands of such treaties in existence.

7.16. Besides the BITs referred to above, submission to ICSID is often achieved in Multilateral Investment Treaties (MITs), such as the European Energy Charter.

7.17. Potential investors should be wary of a particular problem. Many host countries require that investment be channelled through a domestic company. In such a case recourse to the ICSID Convention is lost because, if a dispute arises, the relevant agreement is one between the State and a company incorporated within that State (rather than a national of a difference State).

7.18. Once an appropriate dispute arises, either of the parties to the contract may request arbitration from the ICSID Secretary-General. Once the ICSID arbitration procedure has commenced, national courts are obliged to dismiss any claims that ought properly to be part of the ICSID procedure. It is open to the parties jointly to choose three (or, indeed, any odd number) of arbitrators, but in the absence of such overall agreement, it is the norm for each to nominate one, and for those two party-nominated arbitrators to choose a third person as president. The tribunal is obliged to observe the rules of law agreed by the parties or, in the absence of any such agreement, to apply the law of the contracting State party to the dispute, and applicable rules of international rule.

7.19. Most importantly, if one party (generally the State party) refuses to cooperate, this does not frustrate the arbitration procedure: Article 45. Awards of the tribunal are binding on the parties and there is no appeal to municipal courts by way of appeal. However, either party may, within 45 days of the award, request the arbitral tribunal to deal with any question which the tribunal omitted to decide, or to rectify minor errors within the text of the award. Further, in a procedure reminiscent of that applying to ICC arbitrations, either party may request an interpretation of the award where the parties disagree as to its meaning. There is also a procedure whereby, provided the point is raised within 90 days of the award, a revision of the award may be requested where new facts emerge which decisively affect the award and the applicant's ignorance of those facts was not due to any negligence on his part. Finally, and very importantly, there is a procedure for annulment.

7.20. Annulment is provided for in Article 52, which states:

7.21. Such an application must be made within 120 days of the award. Unfortunately, the wide range of reasons for seeking annulment has seriously affected the confidence which non-State parties have in the procedure.

7.22. In theory, enforcement of awards produced under the ICSID procedure ought to be unproblematic. By the convention each contracting State is obliged to enforce the awards as if they were final judgments of that State's own national courts. The difficulty is that a State is not obliged to override its own laws on sovereign immunity, and these laws may provide immunity from enforcement. However, if a State refuses to satisfy an ICSID award against it, that refusal would constitute a breach of the State party's treaty obligation, which would entitle the State of the investor to pursue the matter internationally.

[VIII] MEDIATION

What Is Mediation?

8.

8.1. A convenient definition of Mediation is a process conducted by an independent third party, in a strictly confidential manner, where the objective is to facilitate the parties resolving their disputes.

8.2. Mediation in the UK contemplates the third party mediator simply enabling the parties to reach their own deal. It does not (unlike some other jurisdictions) involve the mediator expressing his own views in plenary session about the strengths and weaknesses of the parties' cases. Of course, it is still open to the mediator, when in a private caucus meeting with one or other of the parties, to ask searching questions designed to encourage the party to face up to difficulties in its case. This is commonly known as "reality testing".

8.3. The procedure in which the third party expresses in plenary session to both parties his/her own view of what the deal should be is, in the UK, generally termed "conciliation" rather than mediation.

8.4. My own view is that, having tried both mediation and conciliation, where parties start by believing that conciliation is the process they want (since they consider a third party's views will help them resolves the dispute), the best procedure is:

By using the above procedure the mediation is not hamstrung by the mediator being obliged to express his views. Without any doubt, if a mediator is obliged to give his opinion, the chances of success in the mediation are greatly reduced. This is for the good reason that, during the mediation, the parties will not be frank with the mediator and, consequently, he will not be in a position to help them get a deal. The parties will, quite understandably, pretend that their particular case is stronger than it is, because they will know that any recognition of weakness will be used against them when the mediator has to express his views.

How Much Mediation Is there?

8.5. The principal mediator appointing body is CEDR. Its case figures are:

Why Does Mediation Work?

8.6. There are a host of reasons suggested for why mediation works, notwithstanding that the parties will themselves have tried negotiating beforehand. Below are some of the more important reasons.

8.7. A mediation day is often the first occasion when all the relevant players in the dispute are present in one room. In particular, the "decision makers" for all parties will be there and able to see for themselves exactly what their own and the other parties' cases are all about. Since they will have committed themselves for the day, they are shielded from incoming telephone calls and other pressures, and so are able to devote themselves to resolving the dispute in a way that, invariably, has not happened before.

8.8. The whole process is confidential at two levels:

8.9. Sheer economics. A one-day mediation (and only rarely is more than one day needed), with preceding short (about 6 pages) Position Papers, with a few key supporting documents (e.g. the contract, any pleadings and crucial correspondence), will cost each party a relatively modest sum. By contrast, a big energy dispute will often cost each party hundreds of thousands if not millions of dollars. The investment in a mediation is worth while even if a deal is not secured, because the likelihood is that the issues will have been clarified and the parties will have moved closer so that, at a later stage, a deal may be possible.

8.10. By "reality testing" a mediator will encourage each party to face up to the difficulties in its own case. Since the mediator is an independent person, the parties are more willing to listen to his concerns about their weaknesses than if the same points were made by the opposition.

[IX] DISPUTE BOARDS (SERIAL ADJUDICATION)

Dispute Boards/Panels (DBs)

9.

9.1. Dispute Boards (DBs) involve a procedure whereby a panel of 3 engineers/lawyers (sometimes just one) is appointed at the outset of a project. The DB visits site 3 or 4 times a year and deals with any incipient disputes. This generally avoids a dispute crystallising into an arbitration.

9.2. With World Bank encouragement, FIDIC has included the DB procedure in its standard form for some time. Recently the ICC has produced a set of DB rules⁵¹, as has the ICE.

Contrasting DB And Other Procedures

9.3. The Dispute Board procedure has certain characteristics which differentiate it from other dispute resolution processes. These are:

Why DBs Succeed

9.4. Experience shows that Dispute Boards are successful, that is, they deal with and finally dispose of virtually all the disputes that come before them. Broadly, it seems that something in the order of 97% of disputes referred to a DB will not go beyond that procedure into arbitration or litigation. Why are DB's so successful? The following reasons are often put forward:

Background To The DRB Procedure

9.5. It seems one of the earliest usages of the Dispute Board Procedure was on the Boundary Dam in Washington in the 1960s. The procedure was also used in 1975 on the Eisenhower Tunnel, and the popularity of the procedure grew steadily from that point. By 1981 the procedure was being used internationally, for example the El Cajon Dam in Honduras. Experience indicated that, notwithstanding that DB members had to be paid for their involvement throughout the project, the total costs of the procedure were substantially less than the conventional method of a major project being followed inevitably by a major arbitration. Some practitioners have calculated that a DRB will generally cost in the order of 0.2% of the project costs. Obviously, the bigger the project, the less the cost of the procedure in relative terms. US experience shows DBs are cost effective for medium sized (e.g. US$50m) projects upwards. Arbitration is said to cost, typically, about 4% of project costs.

9.6. The successful U.S. experience led, in 1995, to the World Bank making the procedure mandatory for all International Bank for Reconstruction and Development (IBRD) financed projects in excess of US $50 million. That led naturally to the procedure being used, in 1997, by the Asian Development Bank, and also the European Bank for Reconstruction and Development.

9.7. The commonly favoured model for Dispute Boards in the USA was and is the Dispute Review Board (DRB), under which "Recommendations" are issued in respect of the particular dispute being dealt with. This is a relatively consensual approach to dispute resolution. Broadly, if neither party formally expresses dissatisfaction with a Recommendation within a stated period of time, the contract provides that the parties are obliged to comply with Recommendation. If either or both parties do express dissatisfaction within the limited time period, then the dispute may go to arbitration or court litigation. Although the parties may choose voluntarily to comply with a Recommendation while awaiting the decision of the arbitrator or court, there is no compulsion to do so.

9.8. In 1995 FIDIC introduced a Dispute Board approach into its Orange Book form. In November 1996 FIDIC introduced the procedure into Clause 67 of its 4^th edition Red Book. The approach adopted by FIDIC is the Dispute Adjudication Board model, whereby effect must be given forthwith to a Board decision. A firm decision was more attractive than the possible alternative of a recommendation that need not be complied with, i.e. the more consensual Dispute Review Board model. If no 'notice of dissatisfaction' is issued within 28 days of the Board's decision it becomes final and binding. If a notice is issued then the matter may proceed to arbitration, although the parties are obliged to comply with the decision in the meantime. This approach, of an immediately binding decision, has been maintained in subsequent versions of the Red Book.

The ICC DB Procedure

9.9. Since 2004 the ICC has offered three types of Dispute Board:

Overview – DBs

9.10. In overview, therefore, the DB procedure has been fashioned by the engineering/energy project marketplace to address its current concerns. The DB procedure amounts to serial adjudication. It may be expected to be used increasingly on larger projects. The result is likely to be a reduction in arbitration.

[X] ADJUDICATION

What Is Adjudication?

10.

10.1. The term "adjudication, when used nowadays in the UK, Australia, Singapore, Malaysia, Hong Kong and various other states, invariably is taken to mean statutory adjudication in the construction industry. Of course, outside the construction industry the term has long been in use, with many and various meanings. However, in 1996 the English Parliament passed an act⁵² which came into force in 1998. This imposes adjudication on all parts of the construction industry save for the nuclear and process engineering sectors. All affected contracts are deemed to have provision within them for adjudication, to achieve protection of periodic payment cashflow for the contractor, and to ban "pay when paid" clauses.

What Makes An Adjudication System Work?

10.2. An effective adjudication system, that actually achieves the objective of protecting a sub-contractor's periodic payment cashflow, requires three interlocking elements. These are:

10.3. The importance of this point, namely, that an adjudication scheme to protect sub-contractors is only as good as the robustness of the court system which underpins the enforcement of the adjudicator's decision, is one that cannot be over-emphasised. It means that, in international terms, regardless of what legislation is passed, there must be an appropriate court system in place ready to back up the statutory adjudication process.

Adjudication Numbers

10.4. Statutory adjudication was introduced in England by the 1996 Housing Grants, etc. Act. It came into force in early 1998 and since then has become extremely popular. Most appointments are made by professional bodies such as the Royal Institution of Chartered Surveyors (RICS) and Royal Institution of British Architects (RIBA), because those institutions are written into the principal construction contracts (e.g. JCT) as the appointing authority.

10.5. It is difficult to get figures from the RICS, RIBA etc. but to get an idea of how adjudication is developing, figures are available from the Chartered Institute of Arbitrators (who also appoint adjudicators when asked). Their figures are:

10.6. The CIArb adjudicator appointment figures above indicate a falling off in adjudication. It is thought that the proportion of appointments made by bodies such as the RICS and RIBA is dropping partly because parties now know who the good adjudicators are and so are approaching those adjudicators directly. In the UK there are probably several thousand adjudications per year (although many of these are in respect of modest disputes.)

Overview Of UK Adjudication

10.7. Although the parties may (Section 108(3)) choose to accept the adjudicator's decision as finally determining the dispute, in practice it is unusual for any formal agreement to this effect to be made. Nevertheless, anecdotal evidence indicates that the vast majority of adjudication decisions are not taken on to arbitration or litigation, and are effectively accepted by the losing parties.

10.8. The indications are that adjudication is one of the principal factors accounting for the significant reduction in litigation and arbitration in the construction field in recent years, as discussed above.

10.9. At this point it is worth contrasting UK statutory adjudication with arbitration in its various forms. Adjudication is effectively a filtering process. If either party is dissatisfied with the quick and relatively cheap procedure it can insist on taking the dispute to an arbitration, which will be finally determinative. Thus, the principal difference between adjudication and arbitration is that the former is not determinative if either party wishes to proceed to court or arbitration.

10.10. It is noteworthy that although the number of court and arbitration cases is down, the number of lawyers, both solicitors and barristers, is rising. This is a sure sign that the legal profession is needed by the marketplace. When I was called to the bar in 1978 there were about 3,000 barristers and 60,000 solicitors in England and Wales. Today the bar numbers over 11,000 and the number of solicitors has doubled. Indeed, throughout that period the bar has increased in size every year without exception⁵⁷. This applies also to the construction and engineering/energy bar. When I joined Keating Chambers 30 years ago I was the 13^th member. Today we have 51 members, and we continue to grow. This tells us that although the mix of construction dispute work has changed, it continues to grow. In particular, the reduction in court and domestic arbitration cases has been more than compensated for by new work flowing from adjudication and mediation, and by the buoyancy of international arbitration work.

The Effect Of Adjudication On English Domestic Arbitration And Litigation

10.11. TCC (English Technology & Construction Court)

Arbitration – Domestic

Conclusion

10.12. What is now clear is that the advent of adjudication, in those jurisdictions where it has been introduced, has totally transformed the dispute resolution landscape.

[XI] EXPERT DETERMINATION

11.

11.1. As referred to above, expert determination has generally been little used and statistics are extremely difficult to obtain. Commonsense would indicate that there must have been some reduction in the number of expert determinations as a result of the influence of adjudication and mediation, but perhaps not as great as the effect upon litigation and arbitration. Since the numbers of disputes dealt with by this procedure are so small, it is unnecessary to spend any significant time upon it.

11.2. Expert determination is a procedure available to parties who have written it into their contract or subsequently decided to use it. They engage a third party, with expertise in the particular subject-matter in issue, to give a determination upon that specific issue:

11.3 My own experience is that, partly as a result of other new procedures becoming available, parties are more aware nowadays of the expert determination process and, therefore, are tending to make more use of it, albeit that the level of usage is still very modest. In summary, therefore, although the uptake of this process has presumably been dampened by the effects of adjudication and mediation, because parties are becoming more innovative in the face of the rapid expansion of the range of dispute resolution procedures available, overall the number of expert determinations has increased slightly in the course of the past decade. However, the number of such determinations is so small as not to have any significant effect upon trends overall.

[XIII] CONCLUSION – OVERVIEW OF ENERGY DISPUTES

12. The credit crunch has affected all the various groups involved in the energy industry. In such volatile times disputes are inevitable, as markets and margins shrink, and parties have to move swiftly to avoid becoming a victim. At such times we need to keep in mind the variety of dispute resolution procedures available to us, and at an early stage formulate a strategy that is best suited to the nature of the particular dispute with which we are dealing.

Footnotes

* © All rights reserved, the Author. This lecture merely contains some suggestions as to possible approaches to dispute problems and does not contain any legal advice and all liability of any kind whatsoever (including for negligence) is hereby comprehensively excluded. Any reader or other person wishing to obtain legal advice should consult a lawyer.

** Dr. Gaitskell is a practising Queen's Counsel in Keating Chambers, London, U.K., and acts regularly as an Arbitrator, Mediator, Dispute Board Member, Adjudicator and Expert Determinator in energy disputes. He is also a Chartered Engineer, a Fellow of the Institution of Engineering and Technology (FIET), and a Fellow of the Institution of Mechanical Engineers (FIMechE). As an engineer he was involved in the design of oil rigs and power stations. He is a former Vice-President of the IET (Europe's largest professional engineering body). He also sits as a part-time Judge in the Technology & Construction Court (TCC), London. Dr. Gaitskell is the Editor of "The Engineers' Dispute Resolution Handbook", September 2006, Thomas Telford, London. His PhD, from King's College, London, concerned Engineering Standard Form Contracts. He is the Chairman of the IET/IMechE Joint Committee on Model Forms, which produces the MF/1-4 Suite of Contracts (used for power station and other infrastructure projects).

45. See, for example, Templeman, Lord, "Public International Law", 2000, Old Bailey Press, p. 108.

46. See Schreuer, C.H., "The ICSID Convention: A Commentary", Foreword by Professor Sir Elihu Lauterpacht, CBE, QC, p.xi, 2001, Cambridge.

47. See, for example, Collier, J., and Lowe, V. "The Settlement of Disputes in International Law: Institutions and Procedures:, 2000, OUP, p.6EP, 59-73.

48. CEDR statistics from www.CEDR.co.uk.

49. (2005) 149 S.J. 307.

50. 21 March 2006 CEDR "Resolutions", Issue 38, Spring 2006. a total of 2700 mediations in the past 12 months, an increase of 35% in two years since 2003. (About 55:45% split between directly referred cases to individuals, and those through appointing bodies like CEDR.)

51. The material which follows is based on a lecture given by the Author at an ICC Conference on 14.10.04.

52. The Housing Grants, Construction & Regeneration Act 1996.

53. CIArb Annual Report 1998, page 7.

54. CIArb Annual Report, 2000, page 10.

55. CIArb Annual Report, 2003, page 3.

56. CIArb Annual Report, 2006, page 6.

57. Morrison, N., 'Mosiac of Memories', Counsel, Feb 2005, p.30.

58. Most appointments are made in respect of particular schemes, e.g. ABTA in respect of travel disputes. The ad-hoc appointments are the non-scheme disputes. The Chartered Institute of Arbitrators' Annual Report, 1996, page 10.

59. The Chartered Institute of Arbitrators' Annual Report, 1997, page 5.

60. CIArb Annual Report 1998, page 7.

61. CIArb Annual Report 2000, page 10.

62. CIArb Annual Report, 2003, page 3.

63. CIArb Annual Report 2003, page 3.

64. CIArb Annual Report 2006, page 6.

65. CIArb Annual Report, 2006, page 6.

66. At the SCA Conference presentation of this paper the attendees were generally of the view that expert determinations were usually conducted in a very similar fashion to an arbitration, notwithstanding the theoretical difference in procedure.

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