UK: When Disaster Strikes: Options And Remedies In International Energy Disputes

Last Updated: 5 November 2003

By Michael Polkinghorne, Coudert Brothers (Paris) and Maria Frangeskides, Coudert Brothers (London)

When a dispute arises in an international energy project, many companies refer to the dispute resolution clause in their contract and institute arbitral proceedings to enforce their contractual rights. While arbitration is an effective means of settling disputes there are other options that should also be considered.

International energy disputes frequently arise from the act of a government body, either where the state entity is party to the contract, or by the intervention of the state in a private contract. The latter can be by way of nationalisation, expropriation or the more benign but equally insidious form of oppressive or discriminatory fiscal or related measures. Since many state entities have international obligations unique to governments under bilateral or multilateral investment treaties, avenues of recourse outside the parties’ contract may exist when problems arise.

We look in this article to some of these avenues found outside the contract, and frequently beyond the investor’s perception.

Contractual Arbitration

Arbitration is often selected in international energy contracts since it provides freedom from the judicial system of any particular state. This is commonly sought where the jurisdiction of a host country is likely to be biased in favour of a local company and/or the contract partner is a state entity.

The comparative ease of enforcement of an international arbitral award is another key advantage of international arbitration. Due to the New York Convention on the Recognition and Enforcement of Awards, it is easier to enforce an international arbitral award than a foreign court judgment in any of the jurisdictions of its 122 signatories which includes most developing countries.

Confidentiality and the parties’ ability to select suitably qualified persons to adjudicate the dispute may also be very important depending on the sensitivity and complexity of the dispute.

Confidentiality is particularly important where the dispute is between major players in the industry who have no wish to air their grievances in public.

Alternative Dispute Resolution

A range of other options should be considered in addition to arbitration. Two in particular have proven to be useful in resolving international energy disputes, and have in the writers’ experience been adapted even where absent from the parties’ contract.

Mediation or conciliation can be a very effective means of resolving disputes especially where there is a desire by both parties to retain some form of goodwill (either because, for example, the dispute is in the context of a long term arrangement). Sometimes animosity between the parties can be overcome by elevating the problem to higher management and having representatives not directly involved in the dispute attempt to resolve it amicably.

This mode of dispute resolution has, in the writers’ experience, been more successful where the ambit of the dispute is limited. Particular care, however, is required where a state party is involved since investors can often suffer in the process due to the lack of a decision maker, or willingness by that decision maker to take the "political" risk of settling what may be a controversial dispute.

It should be borne in mind that mediation leads only to a recommendation, which the parties may agree to use as a basis for settlement – it does not result in a final and binding adjudication. The Mediator’s role is to facilitate resolution of the dispute and to find neutral ground. There is no guarantee that a final resolution will be reached.

Expert determination is a means of resolving disputes which are technical or financial in nature. In complex disputes, expert determination can still be usefully employed to settle the technical or fiscal questions within a broader dispute resolution framework.

Of course the question always arises as to what to do if the dissatisfied party does not comply with the recommendation or ruling. In the case of mediation, the usual answer is "not much". The entire aim of mediation is to allow a free exchange of ideas and this may be hindered (or the process become more "litigious") if the parties know that the ultimate decision will bind them.

With expert determination, the options are more varied. The experts decision can be binding or non-binding. Sometimes it may be non-binding, but will be communicated to the ultimate trier of fact (arbitral tribunal or court), where its content may create a presumption in favour of one of the parties.

The important thing to keep in mind is that there are many alternatives, and that these are matters for the parties’ agreement.

National Courts: What Role?

Remedies available from a national court should always be borne in mind. It is more or less settled law that even where the parties have agreed to resolve their dispute before an arbitral tribunal, they may nevertheless go to national courts for interim or conservatory relief. So one must ask as to where court assistance for interim and conservatory measures to preserve evidence and to freeze assets would be helpful. The English Courts have developed two effective interim measures which have their counterparts in many other legal systems: the freezing injunction (formerly Mareva injunction) and the search order (formerly Anton Piller order).

The freezing injunction serves to freeze an adversary’s assets in a given jurisdiction which may later be necessary to satisfy a favourable judgment. It is commonly sought where an adversary has limited tangible assets, or is likely to dispose of significant assets in anticipation of an award or judgment.

To obtain a freezing injunction, a plaintiff or counter-claimant must make a "good arguable case" that it will succeed in its legal action and that there is a real risk that an eventual judgment or arbitral award in its favour would remain unsatisfied if the injunction is not granted. It is usually necessary to provide some evidence of assets within the jurisdiction and the court should consider that it is "just and convenient" to grant the injunction. Furthermore, the court will normally require an undertaking by the party seeking the injunction, supported by security (such as a payment into court/bond or guarantee), covering possible loss to the defendant. Since this application is made "ex parte", without notice to the other party, there is a duty to make full and frank disclosure to the court and therefore all relevant facts must be disclosed in the supporting witness statement. Failure to do so is likely to result in the order being set aside for material non-disclosure.

This injunction is generally ordered without the knowledge of the adversary in order to prevent it from frustrating the order by relocating or disposing of the assets. The disabling nature of this injunction, and the fact that it is difficult to discharge, combine to make this interim measure a powerful tool to coerce adversaries to settle.

In one legal battle before the English courts, a European petroleum company obtained a freezing injunction to enforce an arbitral award against a Gulf-state company which had refused to participate in the arbitral proceedings. The European company applied for the injunction when it discovered that the Gulf-state company had recently sold oil to an English company. The freezing injunction prohibited the Gulf-state oil company from removing any of its assets beyond the jurisdiction of the English courts, including the debt due by the English company to the Gulf-state company.

A search order is commonly requested by a plaintiff in conjunction with a freezing injunction. This order serves to ensure that a defendant does not destroy or dispose of evidence in its possession which is vital to the plaintiff’s case. The order effectively allows the plaintiff to search a defendant’s premises and photograph and temporarily remove documents in order to copy them for use as evidence in its case. However, courts will not allow the order to be used to acquire evidence prior to commencing a legal action.

There are strict requirements to be fulfilled in applying for a search order. Since this order is generally always granted without the knowledge of the defendant (as with a freezing injunction), the plaintiff must fully disclose all arguments that the defendant might raise if it were present to oppose the application of the order. The plaintiff must also indemnify the defendant for any damages suffered if the search order later proves to be without merit. The defendant must also be notified of its right to have the order discharged as soon as practicably possible.

This order is not to be mistaken as a civil search warrant. Force may not be used to enter the premises and if the defendant refuses entry, the plaintiff may only apply to the court for a contempt order. Furthermore, defendants have the right to obtain legal advice before granting entry to their premises.

Failure to comply with either of these orders may result in a fine or imprisonment or seizure of assets, hence these can be used as very effective ammunition against an evasive opponent.

There are quite restrictive territorial limitations to the application of these measures of interim relief. First, a court must have personal jurisdiction over a company against whom the injunction is sought. Unless the company is present in the territory of the court’s jurisdiction or has submitted to the court’s jurisdiction, this will present a problem in many cases. Second, the property which is the subject of the search order or freezing injunction must also lie within the court’s jurisdiction although English courts have, in the last decade, issued freezing injunctions for assets located in foreign jurisdictions providing that certain other pre-requisites are met (including that there are insufficient assets in England to meet the anticipated judgment).

"FILs, BITs and MTAs"

Where there is state intervention, expropriation or national court bias, it is also useful to think beyond the contract. For instance, there may have been a violation of an investment guarantee contained in a local law (often termed Foreign Investment Laws or FILs), or of a treaty right by the host state.

Bilateral Investment Treaties (BITs) have become the primary mechanism for the international regulation of direct foreign investment.

Ordinarily, countries party to a BIT agree to ensure that foreign investment in that country is not treated less favourably than its competition from nationals or companies of that country (national treatment) or of any third country (most favoured nation treatment). Many BITs require investments to be given fair and equitable treatment and security in accordance with international law. Governments or state bodies are normally prohibited from arbitrarily or discriminatorily impairing the management, operation, use or disposal of investments. (This being said, some BITs expressly allow arbitrary or discriminatory actions subject to review by local courts or administrative tribunal).

BITs typically also prohibit expropriation or nationalisation of the foreign investment except for a public purpose, in a non-discriminatory manner, under due process of law and where prompt, adequate and effective compensation is given.

Tax disputes sometimes fall within the ambit of BITs. Some BITs require treaty parties to "strive to accord fairness and equity" in respect of its tax policies. There have been multiple cases of international arbitration of tax disputes where a change in taxation constituted an expropriation of the foreign investment, restriction on currency transfer or violation of the ‘national treatment’ or ‘more-favoured nation treatment’ provision of an investment treaty.

Where a government has signed and ratified a BIT, it has generally consented to and is obligated to participate in international arbitration with the foreign investor to resolve investment disputes. Normally, the dispute resolution procedures require attempts to negotiate a resolution and provide a minimum period of 3 to 12 months before a binding arbitral proceeding can be commenced. In most BITs, governments consent to international arbitration administered by the International Centre for the Settlement of Investment Disputes (ICSID) or in accordance with the Rules of the United Nations Commission on International Trade Law (UNCITRAL). The private energy company with a grievance will often have the option to select either of these arbitral routes.

Additionally, there are multilateral investment treaties (MTA’s) which contain investment provisions. These include the ASEAN Agreement (The Agreement of the Members of the Association of South East Asian Nations for the Promotion and Protection of Investments), the Energy Charter Treaty (the latter being ratified by a number of countries in Europe and the former Soviet Union) and NAFTA (the North American Free Trade Agreement). Although the Energy Charter Treaty contains investment arbitration provisions, it remains to be seen whether these will be used to their full extent.

Resolution of investment disputes is increasingly being undertaken pursuant to arbitration under the auspices of ICSID. ICSID specialises in conducting international arbitration between governments and private companies investing in the government’s territory. A significant drawcard of an ICSID arbitration is that governments are more likely to comply with an award since the arbitration is supported by a treaty obligation and ICSID is a division of the World Bank.

One of the advantages of this form of arbitration is that the right exists not only independent of any contractual right to arbitrate but may be an additional, rather than alternative, form of dispute resolution. Recent ICSID decisions in the cases of water concessions (the "Vivendi Case") and hotels (the "WENA Hotels Case") have demonstrated that parties may have right to sue the state even after they have gone to local courts or arbitrated under their agreement. While the rules concerning these issues are not always straightforward, it is worth considering this potential avenue of recourse before embarking on actions which may in a sense "box you in" to one form of dispute resolution.

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  • Coudert Brothers is a leading international law firm specialising in complex cross-border transactions. The firm has more than 650 lawyers in 30 offices at major commercial centres worldwide.
  • Coudert Brothers' Paris office was established in 1879. Established in 1960, Coudert Brothers' London office was one of the first multinational partnerships in England and Wales when, in 1990, it became possible to bring together into one single partnership UK solicitors, US attorneys and other lawyers qualified in jurisdictions around the world.
  • Coudert's Paris and London core practice areas are mergers and acquisitions, securities law, energy and natural resources, corporate and commercial, banking and project finance (especially in energy markets), competition, employment, international arbitration, litigation, property, telecommunications and new media and IT.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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