Parties to dispute
Pre-arbitral procedural requirements
Avenues for dispute resolution


On January 19 2017 the Cabinet issued Annex 2 to Decree 43, which comprises a model exploration and production agreement for petroleum activities. The agreement acts as a production-sharing contract, by virtue of which the state retains ownership of the underlying natural resources and compensates the investor (or group of investors) with a share of the production.

As complex, capital-intensive and long-term arrangements involving resources that often face significant political and sovereign concern, production-sharing contracts such as the exploration and production agreement have frequently been the subject of international commercial and state investment disputes. Oil, gas and mining disputes account for 25% of all cases registered under the International Centre for Settlement of Investment Disputes (ICSID) Convention and Additional Facility Rules.(1) Similarly, 13% of the disputes registered in 2016 under the International Chamber of Commerce's Arbitration Rules concerned the energy sector.(2)

Disputes are therefore a significant risk in any international energy project, and the extraction of oil and gas in the offshore reservoirs of Lebanon's exclusive economic zone is not exempt from such risk. Arguably, this risk does not concern whether a project will be subject to a dispute, but rather how well the parties can manage that dispute. Undeniably, areas of risk relating to dispute management directly correlate to the wording and structure of dispute resolution mechanisms found in production-sharing contracts. This update examines whether the dispute resolution mechanism provided in the exploration and production agreement allows for the efficient management of any potential disputes that may arise.

Parties to dispute

As indicated above, the state is expected to enter into an exploration and production agreement with a group of investors (also known as 'rights holders').(3) Pursuant to Article 4(3) of the agreement, it "shall have no fewer than three (3) Right Holders at any time". Article 6 of the agreement adds that rights holders will be deemed to have formed an unincorporated joint venture and that their obligations under the agreement and in respect of all petroleum activities must be treated as joint and several.

Considering the above, one commentator believes that the dispute resolution mechanism under the agreement ought to reflect this multi-party reality.(4) According to this commentator:

"if an [exploration and production agreement] defines the rights holders collectively and inseparably as a 'party', there will be a potential risk that locus standi will be denied to an individual rights holder in the event that it seeks to invoke the [agreement's] dispute resolution provisions and the remaining parties to the unincorporated joint venture are neither willing nor obliged to participate."

These views can be contested for a number of reasons. First, although the exploration and production agreement contains provisions governing joint and several obligations of rights holders as parties to an unincorporated joint venture, the rights holders are each treated as parties to the agreement in their individual capacity. It follows that, as a contractual party to the agreement, each rights holder would have locus standi (ie, the right to bring an action in court) in the event that it seeks to invoke the agreement's dispute resolution provisions, notwithstanding whether the remaining rights holders are neither willing nor obliged to participate. Second, even when assuming that only the unincorporated joint venture is to be treated as a party to the agreement, the rights holders would not be deprived from their right to seek remedy under the agreement owing to the so-called 'majority rule' under Lebanese corporate law and to derivative actions available to shareholders. In application of the majority rule, where an individual rights holder is a majority shareholder in the unincorporated joint venture or can cause the majority of shareholders to vote in a specific way, the remaining rights holders cannot then prevent the unincorporated joint venture from invoking the agreement's dispute resolution provisions. As for derivative actions available to shareholders (also known as an ut singuli action) – these allow, among other things, shareholders (eg, individual rights holders who are unable to cause the unincorporated joint venture to seek remedy under the agreement) to initiate legal proceedings on behalf of their company against its management when the latter has failed to bring suit. Third, and in any event, the solution to any potential deadlock arising from this multi-party reality does not lie within the dispute resolution mechanism provided in the agreement, but rather in a shareholder or parallel agreement to be entered into by the parties to the unincorporated joint venture.

Pre-arbitral procedural requirements

Pursuant to Article 37 of the exploration and production agreement, a "dispute shall be resolved, if possible, by negotiation between the Parties". The question that arises from this provision is whether pre-arbitral negotiations are mandatory in the agreement or merely optional. The importance of this question pertains to the utility of holding good-faith talks before initiating arbitral proceedings and, more importantly, to the consequence of non-compliance with negotiation as a pre-arbitral procedural requirement.

International arbitration agreements frequently impose pre-arbitration procedural requirements that apply before arbitral proceedings commence.(5) Among other things, these provisions often require parties to resolve their disputes through good-faith negotiations.(6) These provisions are designed to enhance the efficiency of the arbitral process by encouraging amicable dispute resolution and avoiding unnecessary proceedings and expense. For pre-arbitral procedural requirements to be mandatory, the language of the governing provisions must be clear in this regard. However, even in such cases, a question still remains as to whether pre-arbitral procedural requirements constitute jurisdictional bars to the initiation of arbitral proceedings or should instead be regarded as matters of admissibility or procedure that are capable of remedy and whose breach does not ordinarily preclude arbitration.

In the case of the exploration and production agreement, and despite the confusing language contained in the first sentence of Article 37,(7) negotiation is arguably a mandatory pre-arbitral procedural requirement under the agreement. This argument is based on:

  • the use of the term 'shall' in Article 37; and
  • the fact that the agreement requires negotiation for 30 days, following which the parties must settle their dispute by way of arbitration or expertise (as discussed below).

As for non-compliance, considering the divergent decisions by arbitral tribunals, the courts and other authorities on the characterisation of pre-arbitration procedural requirements,(8) the legal consequences of breaches of the requirement to negotiate under the agreement are uncertain. For that reason, any party wishing to settle a dispute under the agreement should first try to resolve the dispute by negotiation for a 30-day period.

Avenues for dispute resolution

In the event that negotiation fails, the exploration and production agreement provides that "either Party shall have the right to have such dispute determined by arbitration or a sole expert as provided for in this [agreement]". The agreement further specifies that "save for any matter to be referred to a sole expert pursuant to the provisions of this agreement, the Parties shall submit any dispute… to binding arbitration". On reading these provisions, it appears that the settlement of disputes through an expert or by way of arbitration are mutually exclusive. The mutual exclusivity of the available forums undoubtedly prevents the adverse consequences of parallel proceedings in front of competing jurisdictions. However, the question remains as to whether the agreement's available avenues for dispute resolution are truly mutually exclusive. This cannot be the case insofar as an expert determination is not enforceable per se.(9) In effect, while the agreement refers to a sole expert's decision as "final and binding", it directs the parties to arbitration for the purpose of "compelling compliance with such decision or seeking damages from any lack of compliance". It is reasonable to assume in such a case that the unsuccessful party may then seek to resist the making of such a declaration or order on the basis that the arbitral tribunal should not, in its discretion, enforce the expert determination. Whatever the case may be, it arises from the foregoing that, where the agreement provides that a sole expert must issue a determination on a specific matter, the settlement of disputes through an expert or by way of arbitration are consecutive, rather than mutually exclusive. Further, while an expert determination may reduce the time and costs of any subsequent arbitral proceedings, there is always the risk that the challenging party will succeed in subjecting the claiming party to lengthy proceedings in the hope of revisiting the expert findings.(10)

Another issue arising from the available avenues for dispute resolution is the possibility to appeal an arbitral award issued in connection with the agreement. Under Lebanese law, in domestic arbitration,(11) arbitral awards may be appealed unless the parties have expressly waived their right to do so.(12) In this respect, the agreement provides that "arbitration and sole expert determination as aforesaid shall be the exclusive method of determining a dispute pursuant to this [agreement]". While some commentators believe that the foregoing provision amounts to a waiver by the parties of their right for appeal, the wording used could still benefit from being redrafted in more explicit terms so that no future disputes arise in relation to the possibility of appealing arbitral awards issued in connection with the agreement.


In light of the above, it can be argued that no deadlock could reasonably arise from the dispute resolution mechanism provided in the exploration and production agreement. Nonetheless, for the reasons explained above, some of the agreement's provisions could benefit from being redrafted in clearer terms in order to ensure that potential disputes arising from the agreement progress efficiently.

For further information on this topic please contact Mohamed Y Alem, Mazen Ghosn or Jana Tebbo at Alem & Associates by telephone (+961 1 999 717) or email ([email protected], [email protected] or [email protected]). The Alem & Associates website can be accessed at


(1) ICSID caseload statistics, Issue 2017-1, p 12.

(2) ICC, Dispute Resolution Bulletin 2017, Issue 2, "ICC practice and procedure", p 113.

(3) The 2010 Offshore Petroleum Resources Law defines 'right holders' as "any joint stock company which is participating in Petroleum Activities pursuant to this law through an Exploration and Production Agreement or a Petroleum License that permits it to work in the petroleum sector".

(4) For further details please see "Model exploration and production agreement: dispute resolution in the face of divergent interests", Z Obeid.

(5) See Klaus Peter Berger, "Law and Practice of Escalation Clauses", (2006) 22 Arb Int'l 1.

(6) See Simon Chapman, "Multi-tiered Dispute Resolution Clauses: Enforcing Obligations to Negotiate in Good Faith", (2010) 27 J Int'l Arb 89.

(7) It is unclear whether the term 'if possible' relates to negotiation or settlement by way of negotiation. In the first case, this would suggest that negotiation is a mere option depending on whether it is possible to negotiate.

(8) Compare Burlington v Ecuador, ICSID Case ARB/08/5, decision on jurisdiction (June 2 2010), para 315; Murphy Exploration v Ecuador, ICSID Case ARB/08/4, award on jurisdiction (December 15 2010), para 149; and Wintershall v Argentina, ICSID Case ARB/04/14, award (December 8 2008), para 116 with Hochtief AG v Argentina, ICSID Case ARB/07/31, decision on jurisdiction (October 24 2011), para 96; and Telefónica SA v Argentine Repub, ICSID Case ARB/03/20, award on jurisdiction (May 25 2006), para 157.

(9) To obtain a successful expert determination, a party must commence proceedings in a court of competent jurisdiction for a declaration or order for specific performance of the agreement by which the parties agreed to the resolution of the dispute by expert determination.

(10) This is particularly true given the tight timeframe during which the sole expert is expected to issue a determination under the exploration and production agreement.

(11) Notwithstanding the debate about the nationality of Lebanese incorporated companies owned or controlled by foreign parties, it is anticipated that some rights holders will be solely Lebanese. In such cases, disputes between them and the Lebanese state under the exploration and production agreement would qualify as domestic arbitration as no cross-border flow would have taken place.

(12) Article 799, Civil Procedure Code.