Alternative Dispute Resolution in Energy Industries

Mustafa Oğuz Tuna

• Publisher: Routledge
• Year: 2022
• ISBN:
  9781000566000
• Edition: 1
• Topic: Law
• Subtopic: Law Theory & Practice
• Index: Law

The disputes that arise between host states and investors in the energy sector put a high number of valuable and vital projects in the countries at risk. Investment treaty arbitration mechanisms, as the traditional remedy, have provided a solution to these problems for decades. However, as the number of disputes increases, the sufficiency of arbitration in responding to disputes became questionable in addition to the long-lasting and costly cases. Accordingly, ADR mechanisms outside the arbitration cannon have triggered growing interest among practitioners.
Despite the attraction and the apparent benefits of ADR such as being cheaper, faster and with better outcomes compared to arbitration, there are also hurdles in front that hinder the application of ADR. This has lead to the underuse of ADR in appropriate contexts.
This study has been conducted to research the gap for the applicability of the ADR methods for investment disputes in the energy sector with the doctrinal analysis of the existing literature either promoting or opposing ADR. Its findings provide guidance for alternative dispute resolution practitioners on when to use ADR, how to use ADR and on what disputes ADR to be used to resolve conflicts in International Energy Investment.

1 Introduction

DOI: 10.4324/b22817-1

1 Background

For the last decades, energy contracts have played a significant role between the states that possess crucial energy resources and private energy companies willing to invest and raise their profits. In energy contracts, both sides seek to protect their interests, whether contractual or not, so as to provide the maximum benefits on behalf of their accounts. In relation to this, disputes tend to arise inherently as long as the parties sustain their current values and future worries. Although there are certain legal mechanisms settled by the contract for the prevention of possible disputes or to decrease the effects of them, the most significant issue in the event of a dispute is how to approach that dispute and what resolution method must be adopted.

At this point, the parties tend to bring the dispute in front of an arbitral institution, rather than state courts of which there is more doubt of their impartiality, either to protect their interests or try to resolve the dispute in the most efficient way. This is a necessary result of the absence of an international investment court or a valid litigation system for multinational investment disputes.¹ Eventually, since it has been used for decades by the disputants in energy disputes, arbitration gained popularity and gradually developed its own rules. However, the intensive experiment of arbitration over time has brought along certain problems as well. These problems may be attributed to a variety of factors. In general, the confrontational position of the parties, overrunning budgets and time-consuming processes are the main ones. As a result of these issues, parties may not always gain the benefits they expect by applying to arbitration.

1 In fact, there is a “global adjudication system,” in which international investment and other commercial disputes are “resolved by binding and final arbitration, as regulated, however, by national legislation and judiciaries.” Peter D. Cameron, International Energy Investment Law: The Pursuit of Stability (Oxford: Oxford University Press, 2010). P.32.

In energy disputes, the many kinds of subject matter and the duration of the time that both parties spend on the process are comparatively high compared to cases in other sectors. However, despite the increasing costs and busy workload, the number of cases at arbitral institutions such as The International Centre for Settlement of Investment Disputes (ICSID), International Chamber of Commerce (ICC), Stockholm Chamber of Commerce (SCC) or The London Court of International Arbitration (LCIA) still continue to rise each year. One reason for this is the unfamiliarity of the other alternative dispute resolution (ADR) ways, and accordingly the energy lawyers see arbitration as the only solution when a dispute arises.

As a quick example, in Plama Consortium v. Bulgaria, the legal costs involving both the jurisdiction and arbitral stages to the claimant amounted to USD 4.6 million; on the other side the respondent’s legal costs were USD 13.2 million. The claimant was required to pay all arbitration costs and half of the respondent’s legal costs.²

2 Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Award on 27 August 2008. Para. 310. Another example illustrates the top level of this issue: In the case of Yukos v. Russia which is the largest award ever rendered by an arbitral tribunal, the dispute was filed at PCA in 2005 and stemmed from the breaching international obligations under the Energy Charter Treaty (ECT) in respect of appropriating the assets of Yukos. The Tribunal, after 9 years in 2014, ordered the Russian Federation to pay damages of at least USD 50 billion to the majority of the shareholders of Yukos in the combination of three cases. The total cost of the process that Russia was sentenced to was USD 60 million for legal fees and EUR 4.2 million for arbitration expenses. This was by far the largest amount ever rendered.

Not every single energy arbitration case had the same result, but similar effects appeared regarding the proportions of costs and the time that parties spent adding to destroyed relationships. To overcome such impacts of arbitration on the parties, amicable settlement ways have been being promoted in recent years, and there have been surveys conducted to support the wider use of alternative ways like negotiation, conciliation and mediation. In this context, the goal of this book is to research the greater use of amicable solutions for energy investment disputes in light of the negative aspects of litigation and arbitration.

2 Rationale Behind the Emergence of ADR

Increasing demand for energy resources inevitably brings the international figures of the energy sector together. It is mostly the case that the energy projects require a high amount of investments and technical expertise which can be met by foreign sources. These include a great variety of prominent oil and gas companies, national oil companies, government-backed subsidiaries and basically foreign investors. Once the parties attempt to do energy business with a great number of budgets, the investment relationship may bring out some issues with regards to the prominence of the energy resources as both parties tend to protect their interests as much as they can in the long term. Naturally, a variety of disputes are likely to arise between the parties. In this aspect, considering the high-value assets, immense budgets and long-term major energy investment projects, the disputes between the host states and the international energy companies receive the biggest share of the whole international disputes by economic sector, according to the statistics of the leading dispute resolution institution, ICSID.³

3 The ICSID Caseload Statistics (Issue 2021-2) Chart 8: Distribution of All ICSID Cases by Economic Sector. P.12.

Under the circumstances, these disputes pose a great risk for the future of investment projects. Hence, managing the dispute needs a highly attentive assessment by the parties first, then the neutral third parties like arbitrators, mediators and legal experts from the beginning of the occurrence of the dispute until it is resolved.⁴ As a consequence, in an evolutionary process and because of its inherent characteristics, international energy disputes have developed their own doctrine according to some scholars.⁵ However, energy investment law is an integral part of investment law and it is not a separate investment regime so the law applicable to both is part of the same framework.⁶

4 Timothy Martin, “Dispute Resolution in the International Energy Sector: An Overview,” Journal of World Energy Law & Business 4, no. 4 (2011). 5 Doak Bishop, “International Arbitration of Petroleum Disputes: The Development of a ‘Lex Petrolea’,” CEPMLP discussion paper, no. DP12 (1997). Scott Looper, Kim Talus, Steven Otillar, “Lex Petrolea and the Internationalization of Petroleum Agreements: Focus on Host Government Contracts,” The Journal of World Energy Law & Business 5, no. 3 (1 September 2012). 6 Stephan Schill, “Concluding Observations – Foreign Investment in the Energy Sector: Lessons for International Investment Law,” in Foreign Investment in the Energy Sector: Lessons for International Investment Law, ed. Eric De Brabandere and Tarcisio Gazzini (Leiden: Brill, 2014). P.268, 270.

Furthermore, on the point of dispute resolution, a number of mechanisms are already available which can be applied to international energy investment contracts with no extra conditions.⁷ Among all of these methods, there is no doubt that international arbitration has evolved most and become an indispensable reference for the parties of the energy investment contracts over time.⁸ Several factors have played a major role in bringing arbitration to its present level, considering the convenience and advantages to the parties involved. In addition, international institutions such as ICSID⁹ , ICC¹⁰ and LCIA¹¹ have made a remarkable contribution to the improvement of the various dispute resolution mechanisms in the way of practising the actual disputes, especially in arbitration. In particular, for the investor-state energy disputes, ICSID provides the ability for the investors to bring a claim against a state directly without any procedural formalities¹² and gives direct right to enforce awards in contracting states.¹³ Apart from that, today there are more than 3264¹⁴ international investment treaties and international trade agreements signed by states around the globe and almost all of them have investor-favoured protection provisions and dispute resolution clauses, especially in arbitration.¹⁵ Further to that, more specific provisions about dispute resolution and arbitration¹⁶ are presented in the Energy Charter Treaty¹⁷ signed by 54 countries.

7 Vaughan Lowe QC, John G. Collier, The Settlement of Disputes in International Law: Institutions and Procedures (Oxford: Oxford University Press, 1999). For additional information: John G. Merrills, International Dispute Settlement, 5th ed. (Cambridge: Cambridge University Press, 2011). 8 Margaret Moses, The Principles and Practice of International Commercial Arbitration, 2nd ed. (Cambridge; New York: Cambridge University Press, 2012). Giuditta Cordero Moss, International Commercial Arbitration: Different Forms and Their Features (Cambridge: Cambridge University Press, 2013). 9 Jan Paulsson, Lucy Reed, Nigel Blackaby, Guide to ICSID Arbitration, 2nd ed. (Alphen aan den Rijn, the Netherlands: Kluwer Law International, 2011). 10 Eric Schwartz, Yves Derains, A Guide to the ICC Rules of Arbitration, 2nd ed. (The Hague, the Netherlands: Kluwer Law International, 2005). 11 Reza Mohtas...

Table of contents

• Cover
• Half-Title
• Series
• Title
• Copyright
• Dedication
• Contents
• List of Illustrations
• List of Abbreviations
• Acknowledgments
• 1 Introduction
• 2 Alternative Dispute Resolution Mechanisms
• 3 ADR in the Current Investment Law Regime
• 4 Drawbacks of the ISDS System
• 5 Institutional ADR Rules
• 6 ADR in Energy Investment Disputes
• 7 Conclusion
• Index