UK: Oil, Gas & Energy Disputes: Trends in Tough Times - Part 1*

2009 Global Energy Conference
Last Updated: 1 February 2010

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

To view Part 2 of this article, please click here.

(Presentation: Saturday, October 3, 12.30 – 1.30pm)

LECTURE SYNOPSIS

Abstract

In the current credit crunch, with the oil price half what it was a year ago1, and with environmental concerns about fossil fuel power stations and safety concerns about nuclear generation, there are some interesting trends to be found in the oil, gas and energy ('energy') industries. This presentation starts with a swift survey of how the key players in the energy sector are behaving: the oil companies, the national oil producers and consumer nations. What does the future hold? Secondly, we look at the types of disputes which emerge from energy industry activity.

The third broad part of this presentation looks at how the sector players are approaching dispute resolution in these tough times. Since the cost of litigation and arbitration has become prohibitive, parties have moved towards sophisticated strategies for avoiding or resolving their disputes in the most cost-effective manner. The starting point is at the time of contract drafting. An agreement should include a multi-layered disputes clause that uses a variety of techniques, including negotiation, mediation, expert determination and dispute boards, besides arbitration as an ultimate fallback. Each of these, in various combinations, can offer a route out of the dispute. The spectrum of energy disputes facing the parties is surveyed, and suggestions are given as to planning to avoid wasting costs and alienating trading partners.

THE ENERGY SECTOR

Introduction

  1. The importance of accessible energy resources cannot be overestimated. This is demonstrated by the effect on the global economy of variations in the oil price, and by the number of armed conflicts in oil producing regions. It is also demonstrated by the size of the industry.
  2. In the course of the past two years, as the global economy has teetered on the brink of collapse, the oil price has fluctuated from over US$140 per barrel to less than US$35, and now is around US$70. GNP is down around the world. All this is the background to the three important questions which this presentation addresses:
    1. How are the players in a global energy sector behaving in their current straightened circumstances?
    2. What type of disputes arise in times like these?
    3. How can those players deal with their disputes in the most cost and time effective manner?

[I] PLAYERS IN THE ENERGY SECTOR: HOW ARE THEY COPING?

1. The backdrop to any discussion about the energy industry is the oil price. Optimists say the current price is way below the peak and is currently depressed largely because of the sluggish global economy. They say the only way is up. Pessimists say the current price is far above the 20 year average of US$33 per barrel. So, for them, the long term trend is down. We have to form our own view. There are a variety of significant players in the energy sector, including the sovereign states fortunate enough to have oil and gas reserves, the oil multinationals, governments who need to secure reliable energy sources for their citizens and, last but not least, the lawyers advising and assisting all of them. We now take an overview of how these various groups are coping in these tough times.

The Oil Producers

1.1.

1.1.1. OPEC2 consists of 12 oil producing nations3, and pumps about a third of the world's crude oil. OPEC's annual revenues from oil and gas sales exceeded US$1 trillion in 2008 for the first time, helped by the sharp spike in prices in July 2008. This figure was 35% up on 2007 exports, which were themselves a record. Now OPEC sees a continuing decline in oil demand.

1.1.2. The background to fluctuations in the oil price are the conflicting views within the industry as to whether or not the world is running out of oil. For pessimists, we are already in a period when output from oilfields must decline because the reserves are not there to sustain production at past levels. However, many take the contrary view, and say that what is lacking is investment in oilfields and production. Where investment is permitted, rapidly increased production, as in Angola, is possible. Angola trebled its output in 7 years4. They say such investment has been discouraged by the big Gulf supplying nations. They say the appearance of scarcity amounts in reality to a simple cut in production by OPEC, which has reduced overall output by about 5 million barrels per day, which is greater than the drop in global demand caused by the credit crunch. This deliberate production cut by OPEC, affecting a third of the oil produced, is supported by Russia, which accounts for about another 12%. The effect of this reduction is demonstrated by the change in Saudi Arabia's stance on prices. Earlier in this decade that country said the right price for crude was in the range of US$20-25. Currently, they say it is US$70-75.

1.1.3. Are we running out of oil? "No", says Tony Hayward, the Chief Executive of BP. He sees global production declining from dropping demand, rather than from a scarcity5. Last year oil consumption in the developed world fell 1.6%, the largest drop since 1982. Energy efficiency, showing itself in, for example, greater miles per gallon in motor cars, may mean the fall continues. However, non-OECD demand accounts for 51% of the total, and that looks set to continue rising. At present production rates there is enough oil in the ground for about 42 years, about 1.26 trillion barrels of proven reserves.

1.1.4. Saudi Arabia, with its very substantial reserves of about 264 billion barrels6, is able to exert a commanding influence over the pricing and marketing strategies adopted by OPEC. OPEC's total oil reserves are about 1.027 trillion barrels. This shows a 7.9% increase on last year, largely as a result of Venezuela's contentious upward reappraisal of its reserves to 172 billion barrels, making it number 2 in the pecking order. Saudi Arabia earned US$283 billion from oil exports last year. Broadly, when the oil price collapsed OPEC took a decision to support the market price by reducing production. However, that has not been entirely successful, since a number of members have produced more than their allocated quota in order to increase their revenue. In practical terms, any further depression in oil prices is likely to lead to splits within OPEC.

1.1.5. One of the consequences of the current oil price, which is high by historic standards, albeit it is half the peak of a year ago, is that the oil multinationals now find it financially feasible to investigate higher cost fields. We will consider this development in a moment. There is also an incentive now to investigate high-cost alternatives to oil, such as wind, waves and solar power. Given the right financial incentives, substitutes can be developed. As the Saudi Oil Minister, Sheikh Yamani, said in the 1970s: "The Stone Age did not end because the world ran out of stones. Nor will the oil age end because we have run out of oil." One particular driver in this regard is China, the world's second biggest oil consumer, which has a huge incentive to find alternatives to reduce its strategic dependence on oil. Western countries, anxious about climate change, are equally motivated to move away from fossil fuels.

The Oil Companies

1.2.

1.2.1. The oil companies have had to move quickly to cope with the collapse of the oil price. Take, for example, ConocoPhillips, a company that uses high sulphur heavy crudes, which normally cost significantly less than higher quality light crude oils. This company appears to have suffered a 76% drop in second-quarter earnings to US$1.3 billion, reflecting the collapse in crude oil prices and refining margins. Upstream earnings collapsed from about US$4 billion to around US$725 million. This was despite the company pumping an additional 122,000 barrels a day during the quarter, lifting daily output to 1.8 million barrels. There was also weak demand for fuel in the US, hurting the company's petrol, diesel and heating oil downstream business7. Refining and marketing suffered a loss of US$52 million for the quarter.

1.2.2. Rosneft, Russia's biggest oil company, reported a 63% drop in profits in the second quarter because of the collapsed price. Net profits dropped to US$1.6 billion from US$4.3 billion the previous year8.

1.2.3. Total's profits last year, when the oil price peaked at US$147, were a record-breaking Euros 14 billion on revenues of E180 billion9. The company's chief executive, Christophe de Margerie, is of the view that global oil production is close to its peak because of lack of resources and investment, and the West's concern for the environment and energy efficiency. He believes the exceptions are India and China, where demand has some way to go. He says the 6 oil 'supermajors', Shell, Exxon-Mobil, ConocoPhilips, Chevron, BP and Total itself, need to diversify into renewable energy and nuclear power. Thus, Total is currently part of a consortium bidding to build 2 new nuclear reactors in the UAE, while already building a new reactor near Dieppe in northern France. This nuclear involvement marks out Total from the other oil company giants. Total sees its project management experience and financial clout as something it can bring to such schemes10.

1.2.4. All the significant players continue to seek new oil reserves, although the reduced price means that certain sources (e.g. oil-sands, where production costs are very high) cease to be viable at the present price. For example, 31 companies are currently competing for contracts covering 43 billion barrels of crude in untapped fields in Iraq. Exxon-Mobil, Shell and BP are all involved. The position in Iraq is complicated by disputes about the legality of contract auctions, and over the Iraqi Kurdish Regional Government's decision to make its own awards of licences to foreign companies11.

1.2.5. Although certain important finds have been made recently (such as Brazil's Petrobras find, and BP's potential new field in the Gulf of Mexico), these new fields tend to be inhospitable and technically-challenging environments. There is also the potential for vast new oil reserves to come on line as the arctic ice melts. However, as we shall see in a moment, this raises the potential for international armed conflict, as a multitude of nations lay claim to those fields.

Consumer Nations

1.3.

Fossil Fuels

1.3.1.

1.3.1.1. The fossil fuels of oil, coal and natural gas, are likely to provide more than half the world's energy even by 205012. The BP Statistical Review of World Energy, of June this year, suggest that we have enough known reserves of oil to last 42 years at present production rates; gas for 60 years; and coal for 122 years. Some think these are over-optimistic figures13. The problem of greenhouse gas emission is being tackled in Europe by capping emission levels and allowing companies to trade emission allowances. In December of this year a conference in Copenhagen will be exploring these problems.

Oil

1.3.1.2. The vast majority of nations need to import oil from elsewhere, even those, such as the US and UK, that have a certain degree of internal supply. The OECD14, the 30 developed countries, including the US, the UK, Japan, Germany and France, are overall showing a reduced demand for oil, for the third year running, which is reflecting itself in the reduced price. For example, there has been a 6.4% drop in US oil demand, amounting to about 1.3 million barrels per day reduction. Some nations, such as China, need very substantial oil imports and securing these can be determinative of foreign policy.

Gas

1.3.1.3. Natural gas is the cleanest fossil fuel, but gas resources are also problematic. The background to disputes here is the current fall in gas consumption worldwide, the first decline for 50 years15. This weak demand has, inevitably, produced falling prices. One example of foreign policy being strongly influenced by the need for secure energy supplies is the attempt of European nations to find alternative gas supplies to reduce their current reliance on Russia's uncertain supplies. Recently, the International Energy Agency ('IEA') warned that the supply of Russian gas through the Ukraine may be disrupted at any time. The background problem is the difficult economic situation in the Ukraine from the global downturn, and Russia's reduction in gas production investment because of the falling price. Gazprom (the Russian gas supplier) appears set to postpone the launch of its huge Bovanenkovo gasfield, on the Yamal peninsula, by a year to the second half of 2012 because of the current glut in global gas supplies. This will allow Gazprom to reduce its 2009 spending by 20% to just over US$16 billion. The immediate problem is that Naftogaz, the Ukraine's gas utility, is finding difficulty in funding payments to its Russian counterpart. The European Union ('EU') is brokering emergency funds from the International Monetary Fund ('IMF') and the European Bank for Reconstruction and Development ('EBRD'). The Ukrainian pipelines are used to export 80% of Gazprom's gas to Europe, amounting to a quarter of Europe's gas supplies. Trouble has flared in the past. In January 2006 Gazprom stopped gas flow over unpaid bills16. In the long-term, Europe is looking at the US$8 billion Nabucco pipeline, bringing gas 2,000 miles from Azebaijan, as an alternative to Russian supplies. Meanwhile Russia is planning its US$10 billion South Stream pipeline project to bypass Ukraine and deliver gas to south-eastern Europe under the Black Sea17. All these projects will generate substantial contracting work, and their inevitable claims disputes.

1.3.1.4. China has substantial coal reserves and its power plant building programme is currently making great use of this. Coal fired power plants in the West now routinely have desulphurisation technology. Many new coal-fired stations are expected to have carbon-capture technology, to retain CO2 and pump it underground into exhausted oil reservoirs for storage until at some point in the future we can work out what to do with it.

1.3.1.5. A desire to minimise a nation's vulnerability to an insecure global oil and other fossil fuel supplies, and to reduce greenhouse gases, has persuaded many nations to look more seriously at renewable energy supplies. For example, China has signalled it aims to generate about 20% of its energy from renewable sources, such as wind and solar power, by 202018. At the moment renewables, including hydropower, account for only 7% of global energy. Taking nuclear power as a precedent, it is likely that it will take about 25 years for such alternative energy resources to become significant contributors globally. Let us consider some of these renewables.

Nuclear Power

1.3.2.

1.3.2.1. There is a renewed and widespread interest in nuclear power, including in the Middle East. Abu Dhabi has agreed terms with France for US$2 billion worth of nuclear stations. Russia is currently attempting to sell US$1.8 billion worth of such technology to Egypt19, while Jordan is signing contracts. Russia's Rosatom is negotiating a nuclear cooperation deal with Nigeria. Such proliferation impacts on other countries such as Namibia, which annually produces 10% (4,366 tonnes) of the world's uranium oxide needs for nuclear feedstock.

1.3.2.2. The UK is expected to licence a new generation of reactors in 201320. These should come on line about 4 years later. In addition, there are contracts in place for clearing up existing nuclear sites. The budget of the UK's Nuclear Decommissioning Authority's ('NDA') 3 year budget to 2011 is £8.5 billion.

1.3.2.3. In France 80% of electricity generation is by nuclear reactor21. Electricite de France ('EDF') operates 58 reactors in France. For 2009 it has planned investments of E 7.5 billion, but to fund that it is pushing for French electricity prices to increase by 20% over 3 to 4 years22. The French designed 'European Pressurised Reactor' ('EPR') is intended to be the world's most powerful nuclear reactor. Each is capable of generating 1,600 megawatts ('MW') of electricity, enough to supply a city of 2 million people23. However, the prototype, built in Finland, is late and seriously over-budget.

1.3.2.4. Over the next decade the world demand for nuclear power plants is expected to be 180.24However, Germany has indicated it will close its nuclear power stations by 202225. Whether this threat materialises will need to be assessed close to the time.

1.3.2.5. The EU, the USA and Japan are collaborating in a mammoth nuclear fusion project, known as ITER, based in France. "ITER" means "the way" in Latin. The construction budget for the first phase is €5 billion. Of course, nuclear power, whether generated by fission or fusion processes, raises safety concerns, in the light of Chernobyl in the Ukraine and the Three Mile Island incident in the USA.

Wind

1.3.3. Wind-driven turbines are making a small but increasing contribution to international energy sources. However, this source is unlikely to be more than a minor contributor for many years to come. There are environmental disfigurement issues. Wind today supplies about 1% of global energy, from about 70,000 turbines. In order for wind to provide 10% of the energy requirements for 2030, there would need to be another 1.5 million turbines covering an area nearly the size of France. That would mean expanding today's turbine production of about 15,000pa to nearly 100,000 per year by 203026. However, the Danish company, Vestas, has recently closed its manufacturing plant in the UK, citing low orders. Siemens promptly indicated it would fill the gap it perceived in anticipation of UK government subsidies for renewable energy27.

Solar

1.3.4. Again, although power generation from solar panels is making an increasing contribution to available power, it is still small in extent. China has just signed a deal with an Arizona company, First Solar, the world's largest manufacturer of solar cells, to convert an area of Inner Mongolia into a big power station by carpeting 25 square miles of desert with panels. It has been predicted that by 2030 wind, solar and hydropower will account for 30% of electricity generation, up from 18% today28. However, Solon, the German solar module maker, recently reported a first half loss of E 53 million because demand collapsed after a cut in subsidies from the Spanish government29.

Biofuels

1.3.5.

1.3.5.1. Notwithstanding billions of dollars in government subsidies, biofuels now account for only about 1% of global energy. However, the downside is often far too obvious. While biofuel is produced, food crops can be neglected. Deforestation can also be a problem. This is unlikely to be a major source of energy in the foreseeable future.

1.3.5.2. The International Energy Agency recently estimated30 that between now and 2030 about US$16 trillion will need to be spent worldwide on constructing green power systems, including hydroelectric projects. That is a lot of engineering and construction business in the next 20 years.

Overview Of The Players

1.4.

1.4.1. From the above it is clear that the global energy industry is moving through rapidly-changing and troubled times. Each group is taking steps to ameliorate its position in the current economic crisis. Thus, the produces cut production to maintain prices, the multinationals look for new fields, governments look for alternative energy sources, and the lawyers do a magnificent job of helping everyone to achieve their objectives.

1.4.2. However, as each party acts to protect its own interests, there are inevitably going to be many disputes. We now move to the next part of this presentation, and consider what kind of disputes are likely to arise, and how best they can be dealt with, minimising the cost and time involved.

[II] DISPUTES & INTERNATIONAL ENERGY PROJECTS

2. International energy projects involve disputatious issues at every level. This comes about because of the extensive nature of the activities which may, potentially, be included within such projects.

2.1. At one end of the spectrum of activity are so-called "upstream" matters such as exploration and production, while at the other end of the spectrum are the "downstream" activities where the fuel produced by the upstream activities is distributed (e.g. by transportation from terminals) or consumed (e.g. in power stations). A brief survey of the range of activities involved makes plain the complex nature of energy projects, and why disputes are inevitable.

(A): "Upstream": Exploration And Production

2.2. Established on-shore reserves have already generated more than their fair share of disputes, often leading to armed conflict. This can be clashes between sovereign nations, as in the Middle East, or it can be disputes between a government and its own people. For example, I was recently involved in a dispute concerning the Bonny Island oil terminal in Nigeria. There is a widespread problem in that country as local people express their views that they are benefiting insufficiently from the oil wealth in their midst. Some time ago navy gunboats exchanged fire with the Movement for the Emancipation of the Niger Delta in Delta state. This is where Chevron's Escravos export terminal is based, as is the Nigerian government's Warri refinery31.

2.3. So far as oil and gas are concerned, much exploration and production nowadays concerns off-shore facilities, positioned (usually) on various continental shelves. For economic and technical reasons, fuel exploration in the shallow waters around coastlines is much more attractive than the exploitation of resources under the high seas. As easily locatable reserves dwindle, oil companies are obliged to extend their search into the deeper parts of the ocean. All offshore activity generates an enthusiasm, in nearby sovereign states, to claim ownership of the adjacent areas of seabed or continental shelves. The potential for disputes is plain. The Artic is a current example, where 5 nations (the US, Canada, Russia, Denmark and Norway) are 'sabre-rattling' in advance of a carve up potentially significant oil fields32 that are becoming accessible thanks to melting ice and new technology. It is estimated that the Arctic natural gas reserves may be worth US$1.4 billion for each of the next 25 years. It has been suggested that 13% (90 billion barrels) of the world's undiscovered oil reserves, and 30% of its gas reserves (44 billion barrels) lie north of the Arctic circle. The Danish Minister of Science, Technology & Innovation has been quoted as saying: "When we are talking resources, we are also talking politics". Historically, lawyers have favoured drawing a 'median' line that charts the nearest point of the coastlines. This approach is supported by Canada and Denmark, who, on that basis, claim an 'outer continental shelf' that extends up to 350 miles from their coasts. However, other lawyers favour drawing straight lines to a particular central point and then slicing the pie33. This method benefits the US at Canada's expense. Russia does well whichever method is adopted. This is perhaps fortunate, since it has gone to the trouble of sending a submarine to the seabed there to plant a flag to show it takes its rights very seriously. Earlier this year Moscow said: "In a competition for resources it cannot be ruled out that military force could be used - - "34.

2.4. The oil and gas facilities used for exploration and, hopefully, production, are often very sophisticated technologically. They must be able to withstand extremes of weather and the buffeting of the sea and storms. Their construction is a very expensive business and their transportation from the construction yard to the point of usage is often difficult. Delays in the creation of such rigs, and defects in the construction, give rise to many disputes.

2.5. Exploration and production on land is no less hazardous, from the point of view of disputes. For example, it may be that the isolated area where oil and gas deposits are located is in a region where an indigenous community claims rights. See, for example, the Energy & Natural Resources Law Journal, November 2005, Vol. 23, No. 4, pages 385-605, IBA, which is devoted to the issue of indigenous people and the development of natural resources.

2.6. The above-mentioned activities, namely: exploration, production, the construction of rigs, etc., requires funding on a massive scale. This introduces the problem of project finance. Each such project needs to be considered individually so far as financing is concerned. For example, oil and gas projects are generally financed by the multi-national oil companies, whereas an energy resource such as water (used in hydroelectric power plant) might need to have its exploitation financed by a development agency35. Sometimes, the financing will involve the host state and this, in turn, can generate problems of state immunity when disputes arise. This issue of sovereign state immunity is considered in detail below.

2.7. Then there are the environmental issues associated with such exploration and production. Often these involve international considerations, because scarce resources such as oil and gas are often piped over great distances, crossing one or more national boundaries. See, for example, Manning, P.H., "Conference report: Transborder Guidelines relating to environmental issues in international construction and utility projects in the developing world", April 2003, International Business Lawyer, pp.81-82.

(B): "Downstream": Oil Refineries And Power Stations

2.8. As we have seen, upstream activities, such as the exploitation of offshore gas and oil reserves, involve the design and construction of technologically advanced exploration vessels and production platforms. Their creation involves the making of complex contracts, often with "tiered" dispute resolution clauses, involving, initially, negotiations between Chief Executive Officers (CEOs), possibly mediation, perhaps a dispute board (although these are not yet common for such projects), with arbitration as the finally determinative procedure. For downstream activities such as oil refining and power generation, the design and construction of the necessary facilities once again requires similar considerations, namely: the negotiation of appropriate contracts for very complex process engineering plant, with suitably sophisticated dispute resolution clauses.

2.9. The types of contract used for the design and construction of such complex facilities, whether for use in the upstream or downstream processes, fall, broadly, into two types:

2.9.1. Oil company specific contracts (e.g. an oil company's standard oil rig contract form, tailored to the specific circumstances of the relevant offshore field); and

2.9.2. Industry-wide or international standard form contracts, generally used for the creation of, for example, power stations.

2.10. As regards company-specific contractual documentation, little can be said in a general presentation since, by their very nature, each company has its own standard terms and conditions, adjusted to the particular locality in which it is working. These are generally non-negotiable, certainly so far as the more important clauses are concerned. Even if negotiation is possible, it is often a tortuous process. Consider, for example, a US oil company's oil platform, being constructed in a Scottish yard for use in the North Sea. If the Scottish fabricator wishes to tinker with a clause he will be obliged to raise it with the UK solicitors representing the oil company (and this may involve both Scottish attorneys in, say, Aberdeen, as well as a big City of London firm which oversees the company's interests in the UK/Europe), as well as dealing, ultimately, with the US company's attorneys in Houston. Thus, seeking a variation to the company's standard terms is no easy matter and not to be embarked upon lightly.

2.11. As regards industry-wide or international standard forms, a commonly used form for power stations is the FIDIC "Yellow Book" (i.e. the Federation Internationale des Ingenieurs-Conseils' Conditions of Contract for Electrical and Mechanical Works). Where World Bank funding is involved, the FIDIC Yellow Book is generally required. In such cases, particularly, for power stations of any size, the World Bank's enthusiasm for 'dispute boards' will be reflected in the tiered dispute resolution clause.

2.12. In summary, while oil prices remain at historic highs, with the expectation of further price increases, the drive to secure and exploit further reserves will inevitably lead to conflicts between the players at all stages of the upstream and downstream processes. We shall now consider how best to avoid or minimise such conflicts, and how to resolve disputes in the most cost efficient manner.

[III] AVOIDING DISPUTES

3.

3.1. Since energy and construction sector disputes such as, for example, those arising from the delayed construction of an oil rig or power station, are often generated because of the technical and complex nature of the obligations on the performing parties, there are certain techniques that can be adopted in order to reduce the number of disputes. In particular, the parties to such contracts should take care to make the most of the following five techniques:

3.1.1. Before any substantive work on the contract is carried out, the parties should ensure that a finalised contract in writing has been executed.

3.1.2. Within that contract the scope, quality and timetable for the works should be clearly defined.

3.1.3. All the contract terms should be clear and, if possible, fair, and, where appropriate, standard form or well-established contracts should be used.

3.1.4. The contract terms should require early notification of potential disputes, and there should be a well-structure dispute resolution clause offering a menu of settlement strategies to the parties (and, accordingly, going well beyond simple arbitration/litigation).

3.1.5. Effective project management should be employed throughout the project.

Each of the above is now considered briefly.

Finalised Contract

3.2. Contracts are often negotiated in conditions of extreme urgency, where the Purchaser wishes the Contractor to commence activity as soon as possible in order to meet stringent completion deadlines. In such circumstances there is a temptation to allow work to commence on the basis of a "letter of intent". However, this is generally most unwise in complex infrastructure projects. Generally, where work commences on such an uncertain basis the likely outcome is that the Purchaser will receive significant claims from the Contractor, in respect of matters such as late instructions, and will be obliged to deal with these in the absence of a firm contractual procedure. The end result may well be, depending on all circumstances, that the Contractor becomes entitled to be paid on a quantum meruit basis, while the Purchaser finds itself unable to secure any redress for delay.

Define Scope, Quality And Time For Work

3.3. This follows on from the previous point. Unless essential elements of the contract, including particularly the scope, quality and timing for the works, are precisely set out in the contractual provisions there is a high likelihood of subsequent disputes. The more technically complex the subject matter of the contract, the more imperative it is that the scope and quality of the intended works should be described with precision in the specifications. Often such disputes can be reduced by careful identification in the specification of relevant international quality standards.

Clear And Fair Contract Terms

3.4. A good starting point (and, often, a good finishing point) is the usage of internationally recognised standard forms, such as the FIDIC forms already mentioned. The use of such standard form contracts often makes the production of the tender package easier. Further, tendering contractors can respond quickly because of their experience and familiarity with the form in question. In addition, insurers, for example, take a benign view of the usage of such familiar forms. Some funding bodies insist upon particular forms being used. The temptation to amend such forms in any significant way should usually be resisted, since even seemingly simple amendments may have far-reaching knock-on effects which neither party anticipated at the time of drafting, but which seriously skew the contractual risk and introduce uncertainty.

Tiered Dispute Resolution Clause

3.5. The parties may save time and costs by using a tiered/escalation dispute resolution clause containing, e.g.:

3.5.1. CEOs negotiate.

3.5.2. Mediation.

3.5.3. Expert determination for specific issues concerning financial matters (accountant) and technical engineering matters (engineer).

3.5.4. Dispute Board (which model – see below?)

3.5.5. Contractual adjudication (statutory adjudication is available in certain jurisdictions, notably the UK, Australia, New Zealand, Singapore and (soon) Malaysia and China36.)

3.5.6. Arbitration.

3.6. However, if such clauses are to be used then they must be drafted carefully. In the Australian case of Aiton Australia Pty Ltd v Transfield Pty Ltd [1999] NSWS C1996 such a clause was held to lack sufficient certainty for enforcement. This mean that when an application to stay court proceedings was made, in order to oblige the other party first to attempt a dispute resolution procedure, the application failed because there were no provisions dealing with the appointment of a further mediator should the originally appointed mediator be unable to act, and where the question of mediator's remuneration had not been dealt with. Such a problem can usually be avoided by adopting a commonly used provision referring to a well-known appointing body.

Good Project Management

3.7. Once the project commences, disputes can be avoided by sound management of the contract by competent and experienced personnel. Detailed written and visual (e.g. photographs and videos) records of all stages of the work should be retained. If claims are subsequently made, they can often be dealt with by the parties consulting such records for a clear statement of the contemporaneous position when it is alleged the problem arose and remained. (For example, in a recent arbitration involving the speaker, a claim concerning the effects of the monsoon on road traffic was quickly compromised when contemporaneous photographs were produced which showed the torrential rains which fell, and their effect on the transport system serving the oil refinery site.

[IV] TYPES OF DISPUTE RESOLUTION

4.

4.1. As a result of the rapid development in international trade following the Second World War, the number of energy infrastructure projects throughout the world has multiplied significantly, decade after decade. The outcome is that the increased developmental activity has generated a corresponding increase in disputes between the various international parties involved. In turn, the concern about the time spent, costs incurred, and loss of good business relationships, which all seem inevitably to flow from hard-fought arbitration and litigation, has driven a desire to find better ways to deal with disputes. In particular, arbitration, the normal dispute resolution procedure for international energy project disputes, has caused concern because of the management time (with associated costs) that such procedures involve.

4.2. Much thought has been given by lawyers and law-makers to finding alternatives that will enable disputes to be resolved quickly, at minimum cost, and without destroying business relationships. Mediation and Dispute Boards are two such procedures which are now widely used to deal with international energy disagreements.

4.3. Arbitration itself can be made more user-friendly by the adoption of innovative processes such as "witness conferencing". All these matters are considered below.

Arbitration, Mediation And Other Procedures

4.4. Arbitration is a "finally determinative" form of dispute resolution, the outcome of which is binding, and in respect of which it is very difficult to appeal.

4.5. Until relatively recently (about 20 years ago) arbitration, court litigation, and (to a very minor extent) expert determination were the only readily accessible forms of dispute resolution, and all were and are finally determinative.

4.6. However, in recent years, four types of "temporarily determinative" forms of dispute resolution have become available, and these all function as "filters" to reduce the number of disputes which proceed to the finally determinative processes. The new procedures are:

4.6.1. Mediation.

4.6.2. Early Neutral Evaluation (ENE).

4.6.3.Adjudication, either pursuant to statute (e.g. Singapore's Building and Construction Industry Security of Payment Act 2004) or contractual.

4.6.4. Dispute Boards, following one or other of the three possible models:

  1. Dispute Review Board (DRB): Non-binding recommendation (e.g. USA model).
  2. Dispute Adjudication Board (DAB): Temporarily binding decision (e.g. FIDIC/World Bank model).
  3. CDB: hybrid Combined Dispute Board (e.g. ICC model).

Range Of Procedures

[V] DISPUTES – STRATEGIES AVAILABLE

5.

5.1. International energy and construction infrastructure contracts invariably specify that, if other attempts at resolving a dispute fail, the parties should resort to arbitration. There is a powerful reason why arbitration, rather then litigation within a court system, is preferred in such circumstances. Invariably, where a contractor or consultant is doing work outside its own country, it will feel uncomfortable having a dispute about its work in that foreign country being dealt with by a local judge. Arbitration avoids this problem. For smaller disputes, the arbitration clause will generally permit a sole arbitrator to be appointed, either by agreement between the parties or by an independent international appointing body. For larger disputes, the arbitration clause will generally provide for a three-person tribunal, where each of the disputing parties appoints one arbitrator, and the two appointees then agree a third person to act as chairperson. In this way, both sides have confidence in the impartiality of the tribunal as a whole. For bigger projects it is becoming increasingly common for the dispute resolution clause within the contract to provide for a 'dispute board' (see below). In essence, such a board is involved from the outset of the project, attending site several times a year and, if necessary, conducting serial adjudications.

5.2. Assuming a tiered dispute resolution clause has been included in the contract, if a dispute does arise the parties have available to them a useful menu of procedures, from which they can choose those techniques which are likely to provide the quickest and most cost effective resolution in the particular circumstances applying. This will involve considering the pros and cons of the various procedures identified in the menu. Generally speaking, as mentioned, for international disputes litigation in the courts is highly unattractive to at least one party and so is unlikely to have been included within the tiered clause. This means that the choice of techniques is to be found within procedures such as CEO negotiation, mediation, adjudication/ dispute board, expert determination and arbitration.

5.3. Once a careful choice of techniques has been made, and the procedure towards an ultimate determination of the dispute has been set in motion, it is essential that the parties do not simply sit back and wait for it to reach its ultimate, and very expensive, conclusion. They should conduct regular reviews to determine whether circumstances have sufficiently developed to enable an attempt at compromise to be made.

5.4. Similarly, there should be close scrutiny of all bills from external lawyers and experts to ensure that costs to the party in question are minimised. This means that when such external professionals are engaged their terms of engagement must be carefully negotiated and set down in writing so that there is no doubt later as to what is properly chargeable.

5.5. There should be a particular individual identified within the party company to act as project manager for the dispute resolution procedure, and she should use tools such as bar charts, etc. to ensure that all deadlines are met, fee invoices are scrutinised, and opportunities for settlement are taken. She should maintain regular contact with any outside law firm and consulting engineers instructed, and ensure they are fully informed as to developments in the relationship between the parties, and they in turn must ensure that the party remains fully aware of developments within the arbitration procedure.

5.6. Corporate counsel involved in dispute resolution will no doubt be aware of the vast amount of useful material available on the internet. These include the following:

5.6.1. Appointing a lawyer: see the directory of lawyers produced by Chambers and Partners, for both international and specific jurisdictions: www.chambersandpartners.com.

5.6.2. For general case reports from Britain and Ireland: www.bailii.org.

5.6.3. For adjudication cases: www.adjudication.co.uk.

[VI] INTERNATIONAL ARBITRATION

6.

Trends In International Arbitration

6.1. UK domestic construction/engineering arbitration appears to have reduced by about one third compared to 10 years ago. This is partly due to the availability of cheap and quick statutory adjudication.

6.2. By contrast, the number of international arbitrations (including engineering/construction disputes) appears to have increased.

6.2.1. ICC: about 660 in total per annum (including energy, construction/engineering).

6.2.2. LCIA: 270 (total) cases filed in 2006/2007 (2 year period), so about 135 new cases per year. This is 32% better than the previous biennial period.

Arbitration – International

6.3. Arguably, the biggest international arbitrator appointing body is CIETAC in Beijing, although the disputes are concerned only with Chinese projects.

6.4. Besides CIETAC, the principal appointing bodies, include:

6.4.1. ICC (International Chamber of Commerce, Paris);

6.4.2. LCIA (London Court of International Arbitration).

6.4.3. SIAC (Singapore International Arbitration Centre).

6.4.4. KLRCA (Kula Lumpur Regional Centre for Arbitration).

6.4.5. DIAC (Dubai International Arbitration Centre).

6.4.6. HKIAC (Hong Kong International Arbitration Centre).

6.4.7. The Swiss Chambers of Commerce.

6.4.8. ICSID (see below).

6.4.9. ICDR (International Centre for Dispute Resolution), the international division of the American Arbitration Association in Europe37. 586 cases in 2006.

6.4.10. SCC (Stockholm Chamber of Commerce).

6.5. ICC Appointments

82% of costs of ICC arbitration relate to parties' own costs, with only 18% for ICC and arbitrator fees and expenses38.

1997: 45239

1999: 52940

2001: 540 (similar to 2000)

2002: 600 approx.

2003: 580

2004: 570

2005: 52141

2008: 66342

6.6.LCIA Appointments

2005: 74 arbitration tribunals established, in respect of which 152 individual appointments of arbitrators made.43

2006: 133 new filings. 80 tribunals established, in respect of which 175 individual appointments of arbitrators made (of which 46 (52%) were sole arbitrators, and 43 (48%) were 3-person tribunals).

2007: 137 new filings (LCIA News, November 2008.)

A survey by Fulbright & Jeworski44 shows ICC preferred by 43% of respondents to the survey, with 33% preferring the LCIA, and only 9% preferring UNCITRAL (where the parties administer their own arbitration, without any supervising body). 6% prefer ICSID (International Centre for the Settlement of Investment Disputes).

Reducing Arbitration Time And Costs

(i) Agree Upon Correct Institution

6.7. Parties should avoid the UNCITRAL (non-institutional) procedure because a difficult respondent can use that procedure to delay matters.

6..8. ICC charges depend on sum in issue, so particularly cost-effective if long complicated dispute about a modest sum.

6.9. LCIA depends on hours expended so particularly cost-effective for big sum in issue which will not take an inordinate amount of time to deal with, e.g. point of law.

(ii) Appoint A Single Arbitrator?

6.10. Costs of panel are immediately reduced to one third of costs for 3 person panel.

6.11. Much easier to find diary dates for tribunal.

6.12. However, loses the big advantage of a three person tribunal, namely that each party (which distrusts the other party and any arbitrators from the other party's jurisdiction) can appoint its own arbitrator, with the two nominees appointing the chairman (who will, presumably, be entirely independent and neutral).

(iii) Procedural Rules?

6.13. IBA Rules of Evidence and Disclosure of Documents.

6.14. Always keep in mind the rules of the institution chosen, e.g. ICC Rules as regards Terms of Reference (compare LCIA which has no equivalent procedure).

(iv) Efficient Hearing

6.15. Parties should consider using 'witness conferencing' e.g. all experts of similar discipline give evidence in a single tranche. See Wolfgang Peter's important article, "Witness' 'conferencing' ", in Arbitration International (LCIA Journal), 2002, Vol. 18, No. 1, pp 47-58.

6.16. Witness statements stand as evidence in chief, with bullet point summary at outset and, possibly, a photograph.

(v) Ask For A Time Estimate For The Award

6.17. Bear in mind the nominating body (e.g. ICC) will often take a number of weeks to scrutinise and approve a draft award. (Such scrutiny enhances the status of the award, resulting in easier enforcement.)

6.18. Get a time commitment from the tribunal so that it drafts the award while the evidence is fresh in its mind.

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).

1. July 2008: US$147; December 2008 US$35; September 2009: around US$70 per barrel. (The Times, 14 May 09.

2. The Organisation of Petroleum Exporting Countries.

3. Saudi Arabia, Angola, Nigeria, Iran, Iraq , Venezuela, Ecuador, the United Arab Emirates, Qatar, Kuwait, Libya and Algeria.

4. The Times, 20 August 2009, p. 24.

5. The Times, 11 June 2009, p.47.

6. The Times, 9 July 2009, p.41.

7. The Times, 30 July 2009.

8. The Times, 2 September 2009.

9. The Times, 10 August 2009, p.40, 41.

10. Ibid.

11. The Times, 29 June 2009.

12. The Times, 20 June 2009, p.70.

13. The Times, 11 June 2009, p.47.

14. Organisation for Economic Cooperation and Development.

15. The Times, 30 June 2009, p.43, quoting the IEA's 'Natural Gas Market Report 2009'.

16. Ibid.

17. The Times, 13 July 2009.

18. The Times, 11 June 2009, p.47, quoting Zhang Xiaoqiang, Vice Chairman of China's National Development & Reform Commission.

19. The Times, 24 June 2009, p31

20. The Times, 12 June 209.

21. The Times, 3 July 2009.

22. The Times, 10 August 2009, p.39.

23. The Times, 1 July 2009.

24. The Times, 28 September 2009.

25. The Times, 15 June 2009, p.45.

26. The Times, 20 June 2009,p.70.

27. The Times, 15 June 2009, pp.44-45.

28. The Times, 20 June 2009, p0. 70.

29. The Times, 19 August 2009, p.43.

30. The Times, 7 May 2009, p.5.

31. The Times, 16 May 2009.

32. See, for example, Time Magazine (October 1, 2007, pp 24-31), 'Fight for the Top of the World'.

33. The Times, 4 September 2009, p.34

34. The Times, 14 May 2009, p.34.

35. See, for example, Clement-Davies, C., "Financing water for all": the report of the World Panel on Financing Water Infrastructure and its Legal Aspects, Business Law International, September 2004, Vol. 5, No. 3, pp. 337-363.

36. See Gaitskell R. (Ed.), "Engineers' Dispute Resolution Handbook", Thomas Telford 2006: Chapter 10.

37. ICDR: 586 cases filed worldwide in 2006 (increase of 10% on 2006): see 23.9.07 Bird & Bird website article: 'European Arbitration in 2006'.

38. ICC Report 2008, p.15.

39. ICC Report. 452 is the number of new requests for arbitration filed with the ICC between 1 January 1997 and 1 January 1998. Arbitrators of 62 different nationalities were appointed or confirmed by the ICC Court.

40. 529 new requests for arbitration filed with ICC between 1 January 1999 and 1 January 2000: see ICC Report, page 10. 849 arbitrators of 57 different nationalities were appointed or confirmed by the ICC Court.

41. 521 new requests for arbitration filed with ICC between 1 January 2005 and 1 January 2006. See ICC Report page 10. 948 arbitrators of 68 different nationalities appointed or confirmed. In 2005 British appointees accounted for about 22% of total tribunal appointments. See ICC Annual Report 2005, page 14.

42. ICC 2008 Report, p.15.

43. LCIA News, Volume 12, Issue 1, January 2007, page 4.

44. Third Annual Litigation Trends Survey Findings, 2006, page 26.

The articles and papers published by Keating Chambers are for the purpose of raising general awareness of issues and stimulating discussion. The contents must not be relied upon or applied in any given situation. There is no substitute for taking appropriate professional advice.

For further information on how our members can assist you, please contact the Senior Clerks, John Munton and Nick Child, in the first instance, on +44 (0) 20 7544 2600. They and their teams of Clerks will be pleased to advise you on the member of Keating Chambers appropriate to your requirements.

© KEATING CHAMBERS

www.keatingchambers.com

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