Commercial/civil law – substantiveRules and industry standards
Describe any industry-standard form contracts used in the energy sector in your jurisdiction.
In the oil and gas upstream industry, a typical set of agreements is applicable, starting with the joint operating agreements (JOAs), for which the choice is wide, as the AIPN models compete with AAPL, CAPL, AIPN (and the Australian version), OGUK, etc) that coexist in Argentina with its local version (Unión Transitoria), as a non-partnership, unincorporated agreement to be registered in the Public Registry of Commerce, updated under the new Civil and Commercial Law Code that has recently come into force. The extended exploitation concessions are still operated with JOAs as initially used during the 1990s, therefore as per the AIPN model of such time (and in many cases, with partial incorporation of uncomplete formulas to address, for example, rights of first refusal, balancing, etc, a source for continuing conflicts), and eventually, requesting a financial or economic carry of the title holder, or a negotiated price, and possibly offering participation in the title as well, and with eventual sole risk provisions. Alternatively, production-sharing or services contracts may be entered into with the holder of the concession, mixed with a carry. Farm-in agreements do and will play a significant role in participating in existing exploitation concessions and those to be extended, the holder of title to the concessions being
- the other party, YPF;
- the provincial entities that have emulated YPF’s role under the redistribution of jurisdiction and eminent domain of the subsurface hydrocarbons to the provinces, even under the stricter terms imposed by the current Hydrocarbons Law 27007; and
- private oil companies.
As regards the oil services industry, the current international versions for seismics, drilling, workovers, etc, are adapted to local constraints that have to do with the market rigidities regarding labour and resulting lack of flexibility (the current lack of investments has given way to significant reforms of the collective bargaining agreements with the oil industry unions, to allow for the overall labour cost reductions, first in the Neuquén Basin Area, focused on shale exploration and exploitation, and then to other basins).
Natural gas term supply agreements are influenced by the many interferences of the regulated market and to a categorisation of each of them as per the source and even the historic layer to which they corresponded (in recent years, the government authority had established a priority of natural gas dispatch by each shipper, and exempted from such restrictions those supply contracts with incremental gas - exceeding a certain threshold, or of a non-conventional source - a source for disputes resulting from such restrictions and priority assignment). A wide dispersion of gas supply agreements followed, with numerous amendments to previously made gas supply agreements, and supply to CAMMESA, to deliver such natural gas to thermal power plants in its name. Power term supply agreements between generators and large customers were banned in 2013 (Resolution SE 95/13), and must now be entered into exclusively with the dispatch centre, CAMMESA (the power dispatch centre and broker between supply and demand for power, described below), and for gas to be delivered to thermal power plants out of bid calls from gas producers (starting for the summer supply, an easy task given the seasonal abundance of supply) together with supply from Bolivia and LNG imports re gas, at subsidised, lower than import, prices.
CAMMESA was originally designated by law to broker the supply and demand of power, arbitrating between spot prices paid to power generators and seasonal tariffs paid by distributors, with the balancing contribution of a self-adjusted but now extinct (because of the tariffs freeze) compensation fund. CAMMESA receives subsidies and imported gas from the government for supply to thermoelectric generators so that the latter are able to meet demand. This role of CAMMESA is further strengthened by making it the purchaser agent of long-term renewable energy contracts under the Renovar plan, for new gas-fired power projects voiced the second quarter of 2016 and beyond, and as the counterpart for the new integrated projects it has invited interested parties to present. All these programmes make CAMMESA the monopolistic purchase agent that will have to pass such energy acquisition costs to distributors and large customers, in an as-yet undefined energy matrix that will instead have to respect open market practices to gain the economic equilibrium of aggregate supply and demand.
The regulations that have accumulated over the years are now being changed to eliminate the burden of energy-related price distortions. This should, however, provide a new opportunity to develop state-of-the-art, standard-term agreements for both gas and power supply, as the reconstruction of the energy balance will require open-season bidding for firms to supply long-term commitments at posted prices in order to obtain investments to cover the current gap (which until now has been filled by imported natural gas supplied at a loss by the government) and restrictions on gas and power demand. Such term contracts system should supply the aggregate demand of distributors, and additionally should be used for medium-term contract supply to large customers, eventually traded in a term contract trade market.
Natural gas shipping agreements and power supply transmission agreements are of a more standard nature, though open access should be ensured to enable the grid’s future expansion. This expansion will give new opportunities to sign contracts with third parties to make enhancements and ancillary extensions in order to optimise the current network of pipelines, gas distribution and power transmission. As seen in question 1, the to-date open question on markets to be mainly driven by term contracts, in both gas and power, is being analysed, but both the transition path and the final legal framework are pending. As for pipelines to be built for shipment of shale hydrocarbons, Decree 589/17 has extended the exclusionary rule of pipelines built by hydrocarbons concession holders (freeing them from the regulated framework of the gas pipelines licensees), to agreements to be reached by groups of producers with gas transportation licences for the expansion of the pipelines network at freely agreed prices and economic arrangements between them.
What rules govern contractual interpretation in (non-consumer) contracts in general? Do these rules apply to energy contracts?
The new Civil and Commercial Law Code has updated the general guidelines for the interpretation of contracts:
- article 1,061: the common intention of the parties and the principle of good faith (the rather novel distinction of a traditional subject, now made express, is clear support to such principle as a supplementary requirement to be considered when interpreting the contract’s language and the performance of a contract party);
- article 1,063: the precise meaning of the words employed, as per their usual meaning;
- articles 1,064/5: the circumstances and preliminary negotiations, the behaviour of the parties before and after the agreement;
- article 1,066: the useful effects interpretation principle; and
- article 1,067: ensuring trust and loyal behaviour.
Describe any commonly recognised industry standards for establishing liability.
In Argentina, it would be difficult to identify whether there is a fiduciary duty obligation of the operator towards the other contract parties. It is, however, subject to a general duty of care, of common reliance, and of loyalty (the above-mentioned new Code establishes this duty for administrators in general - article 159). The conduct must at least be negligent to be subject to compensation for damages (article 160). As per article 1,743, an anticipated waiver is not valid if it is against good faith or if there is a deliberate attempt to cause prejudice to the other party (article 1,743).
In general, the parties under their agreements can establish limitations to otherwise liability standards which could make them liable to the other parties, by exempting negligence to the extent no gross negligence is excluded, as it is deemed to be similar to wilful behaviour and hence not waivable. Knock-for-knock clauses can be set forth to delineate the effects of each party’s defaults or assumption of risks. Good practice should carefully forecast the effects of regulatory changes in the economic equilibrium of the parties, especially in areas prone to be hit by such changes, such as supply agreements (both international - as could be the case for the renaissance of international export gas supply agreements and their limitations - and domestic, transportation and transmission (ie, dispatch regulations altering existing shipping agreements, interruptible or non-interruptible conditions, third-party access rules, effect of offtake agreements altered by market regulations, declaration of emergency and urgency measures by the government, etc)). The general question of who is to blame for the allocation of risks is of paramount importance, as well as definitions regarding these events, extraordinary circumstances, the dividing lines between direct and indirect, and consequential damages, and rules for guidance in case of conflicts with the regulatory agencies or government whenever a joint venture is affected (taxation matters, royalty determination, environmental standards and litigation, supply duties or price caps imposed through new laws, access restrictions, etc). Mitigation duties are also essential, and are seldom considered as a part of the contractual duties between parties of the variety of contracts and associations. These aspects should be addressed in detail.Performance mitigation
Are concepts of force majeure, commercial impracticability or frustration, or other concepts that would excuse performance during periods of commodity price or supply volatility, recognised in your jurisdiction?
The definition of force majeure resulted from reference to sections 513 and 514 of the Civil Law Code of Argentina (now article 1,730 of the Civil and Commercial Law Code), together with events that may be captured by a contractual definition.
According to common law, ‘force majeure’ means any event or circumstance (other than financial inability to perform) that is beyond the reasonable control of the party claiming force majeure. The circle of events labelled as force majeure under common law coexist with the concept of force majeure stemming from the Civil and Commercial Law Code provision, also identified as an unforeseeable event, and will rule either expressly or by default (if there is no clause to the contrary, as the parties may shift the burden of such events between them) in any contract.
Under this section, both unforeseeable events and force majeure concepts are considered jointly. The other Civil and Commercial Law Code provisions refer to both concepts as if they were one, by using the terms interchangeably.
The doctrine does not fully agree on the differences between one and the other case, the majority considering that one addresses unforeseen circumstances, while the other concept addresses the impossibility of avoiding such events that do not allow the performance under the contract.
The effect of such force majeure is expressed under section 1,732 of the Civil and Commercial Law Code, whereby the debtor will not be liable for damages and interests caused to the creditor because of lack of performance of the obligation, when these result from an objective and absolute impossibility, not attributable to the obliged party, unless (article 1,733) the debtor would have committed performance regardless of such force majeure or, if this event would have occurred because of its fault or would have occurred when already in default, if this default had not been motivated by such fortuitous event or force majeure.
Doctrine and court precedents do not agree on the events that can be classified as force majeure, and several sections across the former Civil Law Code and Commercial Law Code did make reference, in specific contracts, to it by defining some of the consequences of a particular application of such concept. To clarify the concept, the doctrine refers to comparative law, and thus includes: acts of God, similar to those defined under English law precedents; acts of the enemy, such as war and blockade; and sovereign acts, meaning a governmental resolution prohibiting, for example, foreign trade.
It is less clear whether the doctrine and court precedents support the idea that, in order for the concept to apply, extraordinary diligence should have been applied by the party claiming force majeure.
In general, it can be said that some elements have been identified as requirements under Argentine law for force majeure. The event in question must:
- have been unforeseeable, taking into account the nature of the expected performance, the parties’ intentions (representations) and relevant circumstances;
- be irresistible, which means a total, unexpected impossibility of reasonable performance, either by action of law or of the facts that have occurred;
- be insurmountable and currently occurring, therefore excluding potential facts; and
- be ‘exterior’, which means that it must not be connected in any way with the party claiming force majeure.
In the many court precedents that refer to this concept, the case-by-case approach has been preferred, allowing for different rulings, depending on the set of circumstances under judgment. One of the regular matters for disagreement is if the impossibility or irresistibility of the force majeure case has to be ‘absolute’ rather than ‘relative’, barring any possibility of performing, excluding the application of force majeure if the performance could have been achieved by extraordinary means and costs. Court precedents have instead used the concept of unforeseability of extraordinary circumstances, which have substantially changed the economic equation of the contract (a matter that has been largely addressed during periods of hyperinflation in Argentina, or substantial exchange devaluations, pegged with rigid exchange controls, if the price was quoted in, or adjusted by, foreign currency).
In general, it is requested that the set of circumstances be such as to be easily evidenced as constituting a notorious event.
As regards the concept of a fact ‘exterior to’ a non-performing party, it requires an absolute lack of connection with the latter in order to qualify. For example, it has been considered that a strike restricted to the personnel of the non-performing party cannot be an excuse, while a general strike or a revolutionary strike does qualify for such an excuse.
A shortage of supplies necessary to perform the obligation committed has also been considered as not qualifying, as has an extraordinary increase in costs (except for the theory of unforeseeability, under section 1,198 of the Civil Law Code) with respect to the effects of sudden devaluation and hyperinflation, allowing the contract to be terminated. This theory was voiced in any case in which a fixed price has been destroyed by sudden hyperinflation or extreme devaluation. Article 1,091 of the Civil and Commercial Law Code rules the matter in a similar way, but now expressly grants the right to request a court’s adjustment of the contract’s balance.
With the agreement of the other party, instead of a termination the court may adjust such price.
In general, war or civil war, acts of God resulting from nature such as a tornado or an earthquake, and sovereign acts have been accepted. Article 1,091 allows the party invoking such unforeseeability to request an adjustment.
Instead, floods, extraordinary rain and extreme winds have or have not been accepted according to whether the parties can foresee such occurrences with due consideration for past statistics. Fire is generally accepted as a reason when it is started outside the premises, and when due diligence was applied in establishing preventive measures before the fact. However, if the fire originated in the premises of the non-performing party, it is generally not accepted as force majeure.
Several court precedents have established that, in principle, fire is not an unforeseeable event, unless special circumstances exist.
As it is assumed that lack of performance in a contract is by itself evidence of the non-performing party’s guilt, the party calling for force majeure has the burden to prove its occurrence and its qualification as such.
Setting aside the theory of unforeseability that has allowed the revision of contracts regarding pricing, or its termination when there is a promise by one of the parties to deliver a product or a property at a posted price, always related to episodes of hyperinflation or extreme devaluation, the court precedents in Argentina have been very strict about allowing events to be considered as force majeure.
In the case of natural gas supply, the issue to consider is whether the restriction of international supply has been imposed on the seller by the authorities and new regulations, or if it is a result of the general natural gas supply agreement signed by the government with an aggregate of the majority of natural gas producers of 2004, more likely a kind of a forced choice (see the Compañía de Aguas del Aconquija SA and Vivendi SA v Argentine Republic case discussed below), given the threat under which consent was to be given, or else face the discrimination against the non-signing parties, redirecting their natural gas to local consumers at prices considerably lower than the price admitted for the other suppliers that would have signed the general agreement.
In Compañía de Aguas del Aconquija SA and Vivendi SA v Argentine Republic (ICSID Case No. ARB/97/3) award of 20 August 2007, where we were the co-counsel for the claimants, Argentina was found to have expropriated a water services concession through regulatory taking. The arbitrators determined that renegotiating in a transparent, non-coercive manner is appropriate, but it is wrong (and unfair and inequitable in terms of the relevant bilateral investment treaty (BIT)) to bring a concessionaire to the renegotiation table through threats of rescission (paragraph 7.4.31, p. 215 of the award). The Total SA v Argentina case demonstrates the lack of choice when the Acuerdo de Gas proposal of 2007 was completed by forcing those that would not sign it to have their natural gas output diverted from their contracted destination, and delivered instead to other consumers at substantially lower prices to satisfy local aggregate demand, thus relieving the signatories from having to supply at lower prices.
The Secretariat of Energy set up a general agreement with natural gas producers that had committed a certain level of supply to the domestic market under a gradual price increase path, to instead divert the supplies intended for export to the domestic market consumers or, if not sufficient, to further force supply to domestic consumers that would not have reached a supply agreement. Given such experience, it is advisable to define these events and other governmentally imposed restrictions in new gas supply agreements, determine which party is to bear such risk, and their consequences. The contractual provisions should thus consider the end of hardship, the reduction of the restrictions, the sharing of the economic effect of the alternative benefits the natural gas producers might obtain in the case of a later increase in domestic prices, levelling them with international prices, with the idea of sharing losses and negotiations to mitigate the damage caused, or of the profits from a later upswing in the economic situation.
How government interference with the international gas supply agreements would be interpreted by international arbitrators is case-dependent, and results primarily from the wording in the agreements for such events, as well as the applicable law, and the arbitrators may have to review and decide on the effects of public policy in the duties assumed by the parties.
The new Civil and Commercial Law Code has set forth in section 1,011 that in the case of long-term contracts, a special duty of cooperation must be observed, with respect to the reciprocal commitments, by giving the chance to the other party to renegotiate the same in good faith.
One of the most significant arbitration cases in recent times, besides the cases for international treaty arbitration addressed by me in the sister publication of the Getting the Deal Through series, Investment Treaty Arbitration, 2017 and 2019, is the CCI No. 1632/JRF/CA YPF v AESU & TGM (2016, continued in 2017). As informed by YPF to the Stock Exchange, the arbitral award imposed a significant amount as damages compensation for liability implied by an anticipated termination of export gas supply and in relation to a delivery or pay provision, and for anticipated termination of a gas transportation contract. The case has been commented on by Diego Fernández Arroyo in Arbitration International 2017,0,1-28, and court resolutions can additionally be found online. Therefore, the information from the facts involved can be discussed. Nullification requests by different parties involved in the multi-party arbitration were filed in two different countries, the courts of Uruguay and Argentina, with conflicting views (in the case of YPF v AES Uruguaiana, 15 Oct 2014, mandating the suspension of the arbitral procedure, and considering the court had jurisdiction on the annulment appeal as it was so empowered by the relevant arbitration clause). The case involved a gas-by-wire scheme ending up with a power supply agreement to Brazil under a grid of related contracts starting in Argentina with the export gas supply and shipping and transport contracts to Uruguay as delivery point, for gas firing a power plant in that country to sell power to Brazilian utilities. The case is a good example to address the current subject of FM, frustration and government regulatory changes stopping short of prohibitions, because the issue was, following said publication, related to the two-step restrictions on gas exports by means of removal of export permits or the imposition of absurd export withholdings with the effect of more than doubling the market price. The description of the facts adds the condiment of an anticipatory breach and, with respect to arbitration clauses, separate choice of law provisions for annulment litigation. The cross claims were addressed by means of a voluntary consolidation in a single multiparty, bifurcated (splitting liability and quantum phases), arbitration under ICC rules, and diverging arbitral awards annulment court procedures (based on conflicting views on lex arbitri, the law governing the arbitration procedure itself) in Uruguay and Argentina.
Showing that fiction anticipates reality, the case is strikingly similar to the moot arbitration case prepared by this author for a session in the IBA Annual Conference in Dubai, in 2011, in which the study of a hypothetical interruption of power supply from country B to country C owing to a feedstock agreement (natural gas supply) interruption by a natural gas supplier from country A (the A,B, C countries have become, in the real case, Argentina, Uruguay and Brazil) was proposed. In the moot arbitration, the gas supplier was invoking FM, caused by country A, considering in addition that it was a source of international liability of the country causing the regulatory changes. Some of the questions referred to in Dubai were: what would the effect be of FM defences in the ICC arbitration or litigation due to country A’s actions; if the rejection of FM excuses by the gas supplier bore consequences on the defence by the power producer in the power supply interruption claims (and on ancillary transport agreements), and the effects of cross arbitration with an ICSID case for the government interferences with the legitimate expectations of the foreign investors. The temptation exists to add a subtitle as used in films: ‘any relation to reality is mere coincidence.’
What are the rules on claims of nuisance to obstruct energy development? May operators be subject to nuisance and negligence claims from third parties?
The principal obstacles for the operation of fields under granted exploitation concessions do not derive from the owners of the property where the exploitation occurs, as by law they have to admit such activities to be performed by the exploitation concession holder, limiting themselves to receiving a statutory compensation for the nuisances provoked, and eventually claiming for proven damages if such compensation does not suffice.
The main obstacles result from claims related to the environment involving claims of aquifers’ pollution (largely unproven), the remediation of open pools, etc. There is a significant caseload of claims pretending to request either restitution of the soil conditions, or damage compensation to adjacent surface owners or villagers (though such exploitation is generally made in scarcely populated areas, a fact that minimises the impact).Liability and limitations
How may parties limit remedies by agreement?
The predetermination of damages estimate and the setting forth of caps or liquidated damages’ lump sums is admissible to the extent they do not make the party acting with gross negligence substantially exempt from the consequences of the same, as a party may not be exempted from performing what it had committed to do, by giving it the chance to deliberately omit its duty of care, or acting with gross negligence that could be assimilated to such deliberate omission.
Each time more caution has to be considered in farm-in agreements, in agreements for an adequate carve out of environmental risks arising from the past, allotting liability for farmers on non-disclosed contingencies, to attempt to solve issues that are well known in other countries.
Is strict liability applicable for damage resulting from any activities in the energy sector?
Yes, strict liability is applicable in the case of contractual liability for lack of performance, to the extent that damage is a consequence of a performance default, or in the case of tort liability.
The oil and gas industry is considered a risky sector, whereby a rule of balance of risks and benefits is implied to conclude that full compensation is due unless the event causing the damage was caused by the victim itself or by a third party for which it is not answerable.