April 01, 2016
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Given turbulent times in world energy markets, companies look for ways to protect themselves against unwelcome surprises and to give themselves an edge over the competition. The ability to prevent disputes from arising, and turn them to your advantage when they do, can be critical. However, important considerations for achieving these goals, and key methods for meeting them, are often neglected. Relevant points to consider in energy projects and transactions include the following:
Project Construction Phase: Nip Problems in the Bud Through Multi-Tier Dispute Resolution Provisions That Deploy Dispute Review Boards (DRBs) or Dispute Adjudication Boards (DABs) Too often, minor disputes in the field mount up, with snowballing effects as small problems turn into large ones. Critical path schedules and owner-contractor relations can be disrupted as tempers fray and work goes undone: the bridge between issues in the field and formal disputes at the arbitration table becomes all too easy to cross.
Experience in recent years suggests that new ways of approaching construction issues in the field can go a long way toward reducing the number, and harmful effects, of field construction disputes. In particular, the use of standing DRBs (which issue recommendations as to how incipient disputes should be resolved) or DABs (which render binding decisions about incipient disputes and which decisions may be appealable in arbitration for matters involving amounts above a certain monetary threshold) in projects can ward off many issues and ensure that others are resolved to mutual satisfaction before they cause appreciable cost or schedule effects.
Typically, for both DRBs and DABs, the parties select a neutral expert prior to the commencement of a project to serve as an on-call third party when minor disputes arise. For large, complex projects, the expert may be full-time on site; multiple experts may also be engaged, particularly where various types of experience and expertise would prove helpful (additional experts may be party-nominated, but must be impartial). The empowered neutral(s) are then provided with background information about the project, and periodic updates and reports, to ensure that they maintain keen awareness of project nature and progress. As issues emerge that the parties cannot resolve quickly among themselves, the parties engage the dispute board to render its opinion on a “real-time” basis. A DRB decision represents a recommendation to the parties; a DAB decision binds them. However, the technical difference between DRBs and DABs often proves illusory, as experience suggests that the parties typically adopt decisions by either entity. Quick resolution of disputes also keeps owner and contractor positions from hardening, thereby ensuring that the parties maintain a generally constructive working relationship – which in turn can reduce the incidence of further disputes arising.
Major procurers of construction services often find DRBs/DABs invaluable. For example, dispute resolution procedures enabled the massive CERN particle accelerator project to save substantial time and money in the construction process, including through the avoidance of ripple effects that otherwise would have resulted from small, lingering problems disrupting critical path schedules. CERN constituted a panel of five experts (based on its own research and feedback received from potential contractors during the bidding process) authorized to hear disputes between or among CERN, the contractor(s) and the independent engineer. The panel’s decision bound the parties until the conclusion of the construction process, at which point a party could, if still aggrieved, invoke arbitration.
Many governmental authorities and other project sponsors require the use of DRBs/DABs in significant projects. Use of DRBs/DABs also facilitates financing: diminished concerns about potential cost and delay issues mitigate project risk profiles for lenders. Thus, the relevant question for dispute boards becomes not whether to use them, but how they can best be crafted to work optimally for you.
Complex Transactions: Ensuring Integrated and Consistent Dispute Resolution
A variety of issues can arise in the implementation of complex transactions, affecting various stakeholders in a number of different ways. Not infrequently, however, parties learn to their chagrin that dispute resolution procedures that were drafted late in the negotiation process and implemented inconsistently across various documents result in diffuse and uncoordinated dispute control mechanisms that also pose the risk of yielding inconsistent results in proceedings related to the same set of core facts. For example, improper coordination of dispute control mechanisms between a guaranty and the contract(s) containing the guaranteed obligations can lead to the guarantor being found liable in one proceeding while its subsidiary defeats the relevant contention in a separate proceeding (this being an unfortunate real-life situation involving a major company).
Thus, careful thought needs to be given as to how best to coordinate dispute resolution proceedings in a complex, multi-stakeholder transaction. A standard dispute resolution clause – often involving multi-stage proceedings starting with negotiations by senior corporate officials, followed by mediation/conciliation, with arbitration as the final stage – provides a solid foundation, but may not adequately address all coordination issues that can arise in a multi-contract/multi-party setting. Unfortunately, however, the dispute resolution clauses in many transactions never proceed beyond this necessary, but often insufficient, stage. In a complex multi-contract/multi-party transaction or project, disputes can arise among different parties under different agreements, even though the core facts and legal issues may be common to those disputes. Without streamlined dispute resolution clauses across all relevant transaction documents that include provisions to address these overlapping issues in a meaningful and expeditious way, various proceedings can be launched and prosecuted in an inefficient and costly manner, all the time posing tactical and strategic challenges relating to inconsistent results. These problems can be obviated, if not eliminated, through the employment of contractual dispute resolution provisions that empower, or even direct, arbitral tribunals to consolidate the hearing of any two or more parallel arbitrations arising under any of the transaction documents involving any such common issues of law or fact. Similarly, it may sometimes be desirable to include provisions that empower an arbitral tribunal to join additional parties to the transaction documents to a pending arbitration even though such party was not originally named a party to the proceedings.
In this regard, parties drafting dispute resolution clauses often overlook the fact that the arbitration rules of most arbitration institutions (including frequently used rules such as the ICC rules, the LCIA rules, and the UNCITRAL rules) do not contain comprehensive provisions on consolidation and joinder. Parties that wish to ensure that related parallel arbitration between different parties arising under different transaction documents can be consolidated, or that additional parties may be joined even though they are not parties to the agreement that gave rise to the primary dispute, therefore must add express provisions on consolidation and joinder to their contractual dispute resolution clauses. One notable exception involves the Hong Kong International Arbitration Centre (HKIAC), whose Administered Arbitration Rules include comprehensive provisions on consolidation and joinder that obviate the need for including equivalent procedures in the contractual dispute resolution clause.
Providing mechanisms for efficient and rational treatment of complex, overlapping issues in advance yields successful results far more often than trying to accomplish this after disputes have already arisen and parties are already at loggerheads. The presence of clear procedures can also ward off potential gamesmanship by parties seeking to exploit differences between different agreements and parties involved in the transaction. Energy-related disputes can be difficult enough without their being aggravated by – rather than having their solution facilitated by – dispute resolution clauses.
Cross-Border Transactions: Consider Potential Treaty Applicability and Provisions, and Avail Yourself of Opportunities Presented
Over the last decade, disputes under bilateral investment treaties, regional trade and investment agreements like the North American Free Trade Agreement (NAFTA), and specialized treaties like the Energy Charter Treaty (to which the EU, most European countries, and some Central Asian and Asian countries (like Japan) have become parties) have proliferated, and the amounts involved have soared. In a recent Energy Charter Treaty arbitration proceeding involving former Yukos shareholders and the Russian Federation, for example, claimants won the largest arbitration award in history by a factor of twenty: over $50 billion. In cross-border transactions, energy companies typically give considerable attention to tax strategies, and to ensuring that they design project ownership structures to implement those tax strategies properly. Until recently, however, ensuring that project ownership structures took proper advantage of treaty-related opportunities on the investment front received much less attention. Given the uncertain levels of legal and investment regime stability and neutrality in many countries where significant energy and natural resource opportunities are located, as well as issues that can arise even in countries with much more sophisticated governmental and legal frameworks (the recent solar project experience in Spain and the phase-out of nuclear power in Germany come to mind), companies need to devote considerably more time and attention to examining the opportunities, and issues, posed by investment treaties that may be relevant to their contemplated projects and transactions, including structuring their investments in a way that ensures investment treaty protection, as well as seeing how those treaties can be employed once disputes have arisen.
In the next article, we will turn to additional salient opportunities for energy industry stakeholders, as well as other dispute resolution issues that merit their attention and awareness.