Dispute Resolution Mechanisms in the Petroleum Sector

4. Dispute Settlement Mechanism (DSM)

When disputes inevitably arise despite any prevention and avoidance methods which may be adopted, a smooth and speedy resolution is usually desirable in the petroleum sector. The petroleum industry players will have an interest in ensuring that the business operations continue during the course of an attempt to resolve any disputes. Depending on the portfolio of international commercial and state investment disputes, a range of dispute settlement mechanisms are available, and the parties may also decide to opt for a multi-tiered dispute resolution clause which would allow them to engage in negotiation, mediation, or another form or combination of alternative dispute resolution prior to commencing litigation or arbitration.

4.1         DSM – Mediation

Mediation is a non-binding Alternative Dispute Resolution (ADR) method. The parties to a contract in the oil and gas industry may provide for mediation in their contract, or when the dispute arises they may enter into a separate agreement to resolve the dispute by mediation. It is common for mediation to be included in a dispute resolution clause, as a first step or a prerequisite to arbitration.

The mediator is not a decision maker, but a facilitator to lead the parties to a settlement. Mediation can be only binding if the parties reach a settlement agreement as an outcome. It can be a cost and time effective dispute resolution tool, considering that the parties are ready to compromise. Mediation tends to be more suitable for national disputes – or at least when both parties are from similar legal jurisdictions or speak the same language. In international disputes, the language, legal culture, and distance differences may decrease the likelihood of reaching a settlement and may increase time and costs. Where state parties are involved in oil and gas disputes, as is often the case, there may also be a barrier to mediation arising from the ‘negotiated’ character of the process, causing a lack of credibility in the outcome with government officials exposed to the accusation that the deal they agreed to was inadequate or to suspicions about their motives for agreeing to it. Additional details relating to the context for negotiated settlements are available in the contract negotiations topic.   

The mediator’s role as a neutral, trained and skilled expert to explore the determinants of a dispute is important, and although technical knowledge and understanding of the sector is advisable, it is not always necessary for the mediator to be an expert in the oil and gas industry.

4.2         DSM – Negotiations

Negotiation is a common first step in most oil and gas disputes, whether this is included in the contract or not. It is also the least costly method of dispute resolution, as it is often the managers of a company (the ones closest to the operation), or a group of staff with different technical experts from each side who negotiate. The lawyers’ main role is to only give advice.

Like mediation, negotiation is not a legally binding procedure and requires objectivity and the good-will of the parties. While there is no industry guidance on the conduct of negotiations, the Association of International Petroleum Negotiators provides trainings, reports and documents to assist the direction of the process. If negotiations prove unsuccessful, other dispute resolution methods such as mediation (above), arbitration or litigation would be the next step. It is important to set a timeframe limit for each step to be initiated and be deemed completed, so that the process towards reaching a binding resolution is not blocked or unnecessarily delayed by one of the parties.

4.3         DSM – Expert determination

Expert determination clauses are commonly found in oil and gas contracts, but this process is mostly used for commercial disputes where an economic valuation or a highly technical assessment is needed. However, in many oil and gas disputes there are also other disagreements involved such as on matters of law. In this case, expert determination may not be suitable. Expert determination is binding, as it is for any commercial contact.

Various international institutions have guidance on expert determination, including the ICC International Centre for Expertise, which has lists of experts and administered services in this area. The procedures can otherwise be agreed upon by the parties or the expert alone, ensuring that the assessment is undertaken in a neutral, impartial and transparent manner.

4.4         DSM – Litigation

The parties to an international petroleum transaction may choose to resolve the dispute in court. Litigation proceedings also often public (hence not confidential), can be time-consuming and the courts may lack specialised expertise. There can be also neutrality concerns. To ensure impartiality and access to a sophisticated legal system, the courts of England and Wales or the United States of America can be selected. That said, host governments and national oil companies are often reluctant to go to another national court, and the investor would be unwilling to accept host government courts.

The national courts could, however, provide support to international arbitration, as they are the forums to enforce arbitration agreements and awards, and could be applied for interim relief and injunctive measures or restrain certain conduct, to preserve evidence, for documentary disclosure and the attendance of witnesses during arbitral procedures.

Nevertheless, both litigation and arbitration procedures carry the risk of harm to a working relationship, which, given the long-term character of investor-state relationships in the petroleum industry, is usually an outcome both parties will try to avoid. There is an increasing tendency to include mediation, conciliation, expert determination, and negotiation (by senior executives) options in the contract prior to the start of any adjudication process.

4.5         DSM – International Adjudication

International maritime disputes between UNCLOS signatories can be resolved under the dispute settlement procedures of the Treaty, but the parties are called upon to resolve any dispute between them concerning the interpretation or application of this Convention by peaceful means. Parties can choose to settle disputes via the International Tribunal for the Law of the Sea, the International Court of Justice, or two arbitral tribunals meeting different requirements as set forth in the Treaty (annexes). However, a state may declare in writing that it does not accept any one or more methods of resolution for various categories of disputes, including boundary disputes between countries with opposite or adjacent territorial seas, Exclusive Economic Zones, or continental shelves.

4.6         DSM – Arbitration

Arbitration emerged as a tailor-made mechanism for the resolution of commercial disputes before a neutral third party (arbitrator) without reference to a court of law.  Originally arbitration was a consensual procedure that required an agreement between the parties to solve their disputes through arbitration where either party was entitled to initiate proceedings.

Investor-State arbitration, however, is a somewhat ‘asymmetrical’ dispute resolution mechanism, whereby only an investor can bring and investment claim against the host State, provided that the host State gives its consent to arbitrate pursuant to the relevant international investment agreement. For instance, the International Centre for Settlement of Investment Disputes (ICSID) Convention provides that such consent to arbitrate may be given by a contract, investment treaty or legislation.

Most International Investment Agreements, which include Bilateral Investment Treaties, free trade agreements with an investment chapter (e.g. North American Free Trade Agreement) and other multilateral agreements (e.g. Energy Charter Treaty), provide rules enabling investors to invoke claims directly against states However, traditionally only states could have rights and duties under international law, and for this reason foreign investors used to solve their disputes through diplomatic protection. International investment agreements are entered into by State parties for the mutual protection of their national investors, as third-party beneficiaries.

2015 UNCTAD statistics suggest that based on an assessment of publicly available cases, States were significantly more successful than investors on average. By the end of 2014, there were 356 investor state disputes:

Today, there is a growing consensus on the potential contribution that investment dispute settlement mechanisms can make to sustainable development. However, this is on the basis that comprehensive and recurring reforms are undertaken, to ensure that the system takes account of the interests of all stakeholders.

4.6.1        Institutional arbitration

Parties to a contract who wish to solve their disputes with the involvement of a specialised institution need to designate, in an arbitration clause, one or a few possible institutions to administer the arbitration process. There are several arbitration institutions, which provide a forum as well as procedural rules under which the arbitration proceedings will take place. ICSID has been the most prominent in the area of investor State arbitration, followed by the International Chamber of Commerce (ICC), the Permanent Court of Arbitration (PCA) and several others within their own spheres of expertise, be that commercial, investment and regional.

Institutional arbitration has the advantage of administrative assistance from the institution, such as a roster of arbitrators to choose from, determined rules including a standard arbitration clause, which would ensure a smooth and speedy resolution, and could be preferable unless the parties are concerned with costs.

The table in this link is a list of the most renowned institutions and their mandates; parties need to carefully consider each institution’s rules, fees and level of administrative support when deciding which institution most suits their specific contract and business relationship.

4.6.2        Ad hoc arbitration

An arbitration is ad hoc if it is undertaken without the involvement of an institution. While it is not always suitable for the long-term nature of petroleum transactions, an ad hoc arbitration has the advantage of being more cost effective than institutional arbitration. Further, institutional arbitration costs often increase in accordance with the amount of the dispute or based on the time spent by the institution and arbitrators. Significant investment disputes settled via ad hoc arbitration in the past, include the Libyan expropriation cases, British Petroleum v. Libya, Liamco v. Libya, and Texaco/Calasiatic v. Libya.

Parties to an ad hoc arbitration may design their own rules of procedure or refer to the law of the forum under which the arbitration is being held. The law of the forum may not always be sufficient to apply to the entire proceedings. In this case, if ad hoc arbitration is chosen, the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL) can be consulted. The UNCITRAL Rules provide a comprehensive set of procedural rules upon which parties may agree for the conduct of arbitral proceedings arising out of their commercial relationship and are widely used in ad hoc arbitrations as well as administered arbitrations.

The International Institute for Conflict Prevention and Resolution (CPR) is another institution that has guiding rules for ad hoc arbitration. The scope of provisions includes management of the process by the Arbitral Tribunal and counsel, without the need for the involvement of a separate administering entity. The CPR also offers some customised services, such as arbitrator selection and a challenge procedure.

Among the francophone West African countries, the Organisation for the Harmonisation of Business Law in Africa (OHADA) provides for ad hoc arbitration under the Uniform Act on Arbitration (UAA). Arbitration rules. These were adopted in 1999 and apply to any arbitration whose seat is in an OHADA Member State. They are generally non-imperative and the parties are free to contract around them. Despite its ad hoc nature, the existence of an arbitration agreement, impartiality of the arbitrators, and requirements for the drafting of awards are prerequisites of the procedure.

The Association of International Petroleum Negotiators drafted a Model Dispute Resolution Agreement in 2004 which may be used as an arbitration agreement or inserted into the contact, as part of the dispute resolution clause. The aim is to provide the option to choose a detailed or simple, and short dispute settlement as the model provides alternative opt-out options and a list of available institutional arbitration options. The model also includes a sovereign immunity waiver. 

4.7       Applicable Law

Applicable law in international arbitration refers to the law governing the dispute, which refers mainly to the law applicable to the substance of the dispute, under which arbitrators will decide the rights and obligations of the parties to the dispute. In sum, it relates to resolution of the merits of the dispute. Procedural rules, on the other hand, regulate the conduct of the arbitral tribunal during the arbitral process. As party autonomy is the essential principle of international arbitration, both in investment and commercial disputes, tribunals are obliged to respect the law chosen by the parties as applicable where identified.

4.7.1        Enforcement

The enforceability of awards rendered in international investment disputes is subject to the special enforcement mechanism of the ICSID Convention for ICSID awards and to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the New York Convention) for non-ICSID awards. The ICSID Convention has to date been signed by 157 states, including many jurisdictions in Africa. It requires contracting states to recognise awards rendered under the ICSID jurisdiction and enforce them as if they were judgements of the contracting states’ local courts. Contracting states also have a duty to recognise and enforce an arbitral award provided that it is made in the territory of a state other than the enforcing state. Nonetheless, state parties to the New York Convention may declare two different exceptions: they may declare they will only apply the convention on the basis of reciprocity; and will apply only awards rendered in commercial disputes.

This does not indicate that awards are not open to challenge. Hence non-ICSID awards can be challenged in the local courts in the seat of arbitration or in other jurisdictions where enforcement is sought, under restricted challenge provisions either under Article V of the New York Convention or under provisions in local arbitration laws. On narrow grounds, ICSID awards can also be subject to an annulment procedure before an ad hoc committee according to Article 52 of the ICSID Convention.