International Energy Contracts Need Enforceable Arbitration Agreements
If the premise that international energy contracts should include enforceable, effective arbitration agreements is not yet axiomatic, it is at least widely accepted. More importantly, it is true. If arbitration did not already exist as an alternative to local court systems, it would have had to be invented for international energy projects to thrive.
Arbitration provisions address a plethora of issues arising from the very nature of energy projects, which involve very substantial, long-term investments in foreign jurisdictions, often with developing legal systems. Local counterparties frequently include powerful state-owned oil entities or a state itself. Arbitration allows parties to remove themselves from a local court system and submit their disputes to a neutral forum within a well-established legal framework, enforceable under multinational treaty (if planned correctly). This mechanism encourages contract performance and good faith between the parties by depriving either side of a home court advantage and promising fair redress of wrongs. Having arbitration language in one’s contract, however, does little good if the arbitration provisions are not effective. This note sets out the basics for an effective, enforceable, and workable arbitration agreement.
What Should Be Included In Every Agreement
Submission to Arbitration
Every arbitration provision should begin with a clear, unequivocal agreement to finally resolve disputes with respect to the parties’ relationship through binding arbitration. Obvious as including such a provision may seem, we recently reviewed a draft agreement which did not contain anywhere in it an actual agreement to submit disputes to arbitration. The parties had forgotten the submission agreement in the morass of an overly-complicated dispute resolution provision.
A court will order arbitration only of those disputes that the parties have agreed to submit to arbitration, whether by contract or by treaty.[1] The scope of the matters subject to arbitration is defined by the parties’ consent. Parties may make their agreement as broad or as narrow as they wish, but absent some specific reason to narrow the submission, a contract should include the accepted language of a “broad-form” clause – that all disputes, claims, or controversies “arising out of or relating to” the contract will be finally resolved by arbitration. This language will be deemed to encompass a broad range of disputes with respect to the parties’ contractual relationship. A provision stating only that any dispute “arising under” the contract will be arbitrated may be read narrowly as applying only to disputes regarding contract performance and interpretation, and not to extend to incidental disputes with respect to the parties’ relationship.[2]
In addition to the agreement to submit disputes to arbitration, a clause providing for arbitration of a dispute in the United States should also include a statement that judgment on the award may be entered by any court of competent jurisdiction, as provided by Section 9 of the Federal Arbitration Act.[3] While this requirement technically should not apply to foreign arbitrations, best practice is to always include such a provision in any arbitration agreement.
While creating an agreement to arbitrate can be as simple as stating that “all disputes will be settled by binding arbitration,” a more refined provision can avoid many tangles over the scope of the parties’ agreement and the procedures to be followed. [4] In addition to the agreement to arbitrate language, an international arbitration agreement should: (i) identify the applicable rules, (ii) specify the seat of the arbitration, (iii) identify the number and method of appointment of the arbitrators, and (iv) specify the language of the arbitration. Almost everything else will be addressed by the arbitration rules.
Designate an Established Arbitral Regime/Set of Applicable Rules
The agreement should identify an established set of international arbitration rules, whether administered or non-administered, to govern the arbitration. All of the major international arbitration regimes have rules that are comprehensive, well-tested, and accepted as fair by courts reviewing them.
Do not mix arbitral regimes! Do not try to divorce a set of rules that are meant to be administered from the administrator or try to “mix and match” rules and administrators. The AAA/ICDR Rules, LCIA Rules, ICC Rules, et al, are designed around the services of the particular administrative body; they do not work in a non-administered environment or work with other institutions. A provision, for example, providing that the arbitration will be conducted under the ICC Rules but administered by the Singapore International Arbitration Centre, is an invitation to disaster. [5]
The one exception to this rule is with respect to the designation of an Appointing Authority for an arbitration under the UNCITRAL Rules. Since the UNCITRAL Rules are non-administered, it is important to designate an institution that will appoint arbitrators in the event of a party default in doing so. All of the major international arbitral institutions are willing and able to serve as Appointing Authority for an UNCITRAL arbitration. Also, while arbitration under rules designed to be administered suffers greatly without administration, a proceeding under the UNCITRAL Rules can be administered quite effectively. Some institutions, such as the Permanent Court of Arbitration and ICSID, will fully administer an UNCITRAL arbitration at the parties’ request.
Designate the Seat of the Arbitration
Designating the seat is among the most important, if not the most important, decisions in an international arbitration agreement. As a general rule, the local law of the place of the arbitration governs the procedural framework for recognizing and enforcing arbitral agreements and awards, and under the New York Convention,[6] the seat is the only place at which an award may be set aside. It is therefore essential to designate a seat in a neutral location with a well-developed body of international arbitration law, and in most cases in a country that is a party to the New York Convention. Each jurisdiction has its own quirks of law, but all of the most popular arbitral venues have modern arbitration laws and courts with significant experience in arbitration issues. There are good reasons why London, Paris, Geneva, Stockholm, Singapore, and New York are all popular arbitration venues beyond good food and nice hotels.
Identify the Number and Method of Appointment of the Tribunal
Every set of arbitration rules has an effective procedure for selection and appointment of arbitrators. It is, however, important to review those rules and determine whether they provide the parties with their desired degree of flexibility and control over the appointment process.
To avoid uncertainties, the arbitration agreement should specify the number of arbitrators to hear and decide any dispute. The number of arbitrators (typically one or three) may be made dependent upon the amount in controversy or complexity of the dispute, which can be a useful mechanism to tailor the proceeding to a particular dispute but requires careful drafting.
The procedures for selection and appointment of arbitrators vary by institution and rules, and which set of rules one chooses may be influenced by these provisions. Even if they have different default appointment mechanisms, the arbitral institutions will generally honor the parties’ agreement with respect to nomination of arbitrators; for example, that the claimant(s) will nominate one arbitrator, the respondent(s) will nominate one arbitrator, and the two so nominated and confirmed will nominate the third arbitrator, who will serve as chair of the tribunal.[7] This deference to the parties’ agreement is, however, tempered by some limitations to protect fundamental fairness. For example, no international arbitration provider or rules will allow the appointment of non-neutral arbitrators, even if the parties agree otherwise.
Specify the Language of the Arbitration
While not essential, it is good practice to designate the language in which the arbitration is to be conducted. This can avoid disputes and compromises resulting in significant additional effort and expense, such as having to submit pleadings and documents. Having to produce decisions and awards in two languages can also result in significant delay. Witnesses will almost always be allowed to testify in the language with which they are most comfortable, with interpretation to the language of the arbitration.
Simple Sample Clause
Applying the rules set out above, the following is an example of a short and simple, broad-form arbitration clause:
Any dispute, claim, or controversy arising out of or relating to this agreement, including its existence, performance, interpretation, breach, validity, or termination, will be finally resolved by arbitration in accordance with the Rules of Arbitration of [international institution/rules], before a tribunal of three arbitrators. The seat of the arbitration will be [place], and the arbitration will be conducted in the English language. Judgment on the award may be entered by any court of competent jurisdiction.
While an arbitration agreement may take many forms, and it may well be desirable to add or vary terms in a particular contract, a provision similar to this should be enough to create an effective and useable international arbitration agreement.
Do Not Reinvent the Wheel or Over-Complicate the Dispute Resolution Provisions
As can be seen from the above, it is seldom necessary for an arbitration agreement to exceed more than a few paragraphs. One rule of thumb is that there will be one mistake in every paragraph of a dispute resolution agreement, and while that may not always be the case, mistakes happen more often from over-drafting than under-drafting. The best way to avoid problems with a dispute resolution provision is to keep it short and simple.
With respect to the agreement to arbitrate, the major international arbitration rules all anticipate most of the procedural situations that may arise in an energy arbitration, even in those concerning complex disputes involving multiple parties. Unless one has a specific reason in a particular contract for derogating from the standard provisions in the chosen rules, there is no need to do so. Do not reinvent the wheel.
Having additional dispute resolution provisions, such as negotiation, mediation/conciliation, or expert determination, may be useful and desired in particular contracts. It is important, however, that none of these ancillary mechanisms conflict with the arbitration agreement or could be used to prevent the arbitration from going forward. Over-complicating dispute resolution provisions also increases the risk of conflicts between related contracts. Be careful that all non-arbitration dispute resolution provisions are consistent with the arbitration agreement, and that the arbitration agreements are consistent over related contracts.[8]
