International Commercial Arbitration Is A Preferred Method For Oil And Gas Dispute Resolution.

Applicability of the International Law

‘Despite recent developments in the field of Litigation, parties embroiled in an oil and gas dispute still prefer to choose International Commercial Arbitration as a preferred method of resolving their disputes.’

Examine the truth behind this statement and evaluate the reasons why this may be the case in Oil and Gas Disputes.

Must reveal evidence of sufficient reading and research, and, must refer to industry related academic journals and articles adequately.

Oil and natural gas has today evolved to a highly tradable commodity due to its easy access in the form of pipelines known as Liquefied Petroleum Gas. Due to the increasing international exchange and oil and gas agreements, many complex issues have to be addressed by the host country and the foreign oil company (Oil and Gas disputes, 2015). Innumerable debates are raised concerning the issue. There are lot of rules and regulations concerning the oil and gas industries and it is concerned largely by the states. The main issue relates to the extent to which the regulations can be imposed and this varies from one state to another.

Usually the disputes in such contracts involve two different countries, the governments of which might be at war with each other. Thus, the legal system encompasses within itself a host of issues related to type of legal systems used, national sovereignty, international treaties and conventions, extraterritorial application of domestic laws, so on and so forth (Born, 2009). Usually the contracts define the mode of dispute resolution to be used in such cases. The principle of sovereign immunity is recognized in international law, which states that a party to the contract cannot be sued in a foreign land without the presence of an express or implied clause in the contract for the same. There are also Corporations that recognize the principle of restrictive sovereign immunity. The United States also allows a waiver of the express or implied clause of the sovereign immunity by application of the Foreign Sovereign Immunities Act. Thus modern laws and agreements are changing to treat everyone on equal terms but litigation related to oil and gas are still complicated to be resolved as they are encompassed by political and national issues which are better dealt with through diplomacy (Brister, 2014).

The oil exploration process is sought to high risk. Therefore, they types of agreements that could be potentially entered into could be joint operating agreement or marketing agreement. In a joint operating agreement, one party is termed as the operating party who is responsible for the day-to-day exploration and exploration of oil and the management of the related affairs. The other non-operating party will reimburse the operating party at the fixed decided percentage or on a pro rata basis (Brister, 2014). Thus in this type of contract, the determination of the share of interest is the most vital aspect and can be the subject matter of the dispute. The accounting principles also lay down the estimate of the expenses and revenues, the basis for reimbursement of costs incurred by the operating party and the indemnification of liabilities of the operating party in case of default or negligence. Thus, the authorization of any payment or liability is decided by the votes cast either in favor or against the proposed resolution (Kolkey et. al, 2012).

Key Principles in Contract Formation

The second type of contract with reference to oil and gas is marketing contract wherein the rights for marketing and sale of the oil and Liquefied Natural Gas are sold to the counter party who might be in another nation. These contracts require proper knowledge of the market and the ability to store, transport the gas through the pressurized tanks, and develop the adequate facilities to maintain them at the required temperature. All this involves heavy cost and so the market research has to be extensively done before entering into a marketing contract (Brister, 2014).

In contracts, dispute resolution provisions are usually an afterthought pondered upon when the relationships have already got strained. Thus, it is essential that adequate importance should be given to these provisions at the initial stages itself. 

Disputes may be related to boundary claims, jurisdiction claims, equipments and assets related claims, quantity and quality of goods, insurance and hedging issues. Though every nation has sufficient number of courts and legal systems in place to effectively address these issues, it is seen that Alternate Dispute Resolution Process in increasing adopted by parties in comparison to the litigation process (Kluwer, 2014).

Arbitration is the mechanism that allows the disputes to be resolved outside the courts. The two major types of arbitration are institutional arbitration and ad-hoc arbitration. Under institutional arbitration, the parties to the dispute submit the proceedings to a particular arbitral institution for determination. Such institutions have a pre determined set of policies and procedures to conduct the arbitral proceedings. The parties can do the court for arbitration and the selection of the qualified arbitrators. The fees charged for this can sometimes be more than the amounts involved in the dispute that is a disadvantage (Kluwer, 2014). In ad hoc arbitration, there are no fees payable to the arbitral institution and the selection of the arbitrators, rules and the parties decide all regulations for the arbitration. Thus there is more flexibility in an ad hoc arbitration and so is more suitable for the smaller or less expensive claims (British Petroleum, 2015).

The Oil and Gas industry has undergone a massive change after the liberalization and the opening up of nations for more trade and agreements. The traditional court proceedings require the disclosure of sensitive information, which might be of strategic importance, and so this is seen as a demerit of litigation. For instance in the case of Lyondell-CITGO Refining, LP v. Petroleos de Venezuela, the US Court demanded access to the Board Meeting Minutes though the Venezuela Law prohibits access to the same without appropriate security clearances. Thus, the Plaintiff was in an unenviable position (Buhring & Kirchhof, 2006).

Dispute Resolution

In such cases, International Arbitration forums come to rescue where the access can be refused by resorting to the NOC.

The International Commercial Arbitration rules permit the selection and appointment of an impartial expert to review the documents and determine the objectivity and propriety of the information contained subject to the appropriate security clearances (Kendall, 2008). Usually oil and gas contracts involve parties from two different countries and neither party will be willing to be subject to the laws of another country. To prevent a home country advantage for any one party, the International Arbitration Rules require the appointment of a neutral arbitrator after analyzing the residence of the independent arbitrator and the relationship of the arbitrator’s nation with the nations of the parties to the arbitration (Buhring & Kirchhof, 2006). Hence, arbitration is the best method that can be resorted to in case of disputes and is a strong option for both the parties.

The corresponding proceedings are also simpler and more flexible in comparison to the US Courts. The IBA Rules also contain a provision wherein the Arbitral Tribunal can pronounce the judgment without withholding the compelling and sensitive documents (Deventer, 2010). 

The US Courts permit withholding information of the common law grounds but does not recognize the exclusion of disclosure due to technical or commercial confidentiality. The arbitration institutions again recognize this. Thus, it is seen that largely arbitration has more lenient terms than courts with respect to the disclosure of information. Parties drafting the arbitration agreement can include the procedure for arbitration based on mutual understanding and coherence (Deventer, 2010).

Party Autonomy is also one vital principle of the International Arbitration that states that the parties are free to choose the set of arbitrators and the seat of arbitration. However in cases where the parties fail to choose these, it shall be decided by the Arbitral Institution (Kendall, 2008). The Arbitrators chosen are usually qualified and experts in the subject and possess adequate knowledge about the subject matter of the contract as they are specifically selected and appointed by the parties as opposed to the court judges and magistrates who do not necessarily possess knowledge about every specific business case that comes across them (Buhring & Kirchhof, 2006). The Arbitrators do no have any relation with the parties or the country to the dispute.

In litigation, the judges are typically appointed by the state and the state law prevails at the venue decided by the jurisdiction under which the case falls. This is construed as a strict and formal proceeding. On the contrary, in arbitration here is freedom without limits with respect to all these aspects. The litigation process is completely out of control of the parties to the case who have to be a the mercy of the advocates, lawyers and barristers who fight the case on their behalf and can turn he case the way they like by their mastery over language. Whereas in case of arbitration, the case is more personal to the parties as they fight it and argue on their own, for themselves and for their benefit. Thus, gain or loss belongs to the parties themselves (Kolkey et. al, 2012).

Types of Arbitration

The time and costs involved in litigation are also high as the court fees, barrister fees, etc have to be met and the court keeps giving newer dates for the producing of evidences. Arbitration cannot be called a less expensive approach at all times, but it is definitely less time consuming. On the other hand, court involves a lot of time and is expensive too (Paul, 2010). The privacy and confidentiality are the two important aspects that can be efficiently maintained in the arbitration proceedings.

Due to the widespread globalization today, the impact of one particular court order can be seen on other transactions also. As seen in a recent case of Yukos, Russia’s largest oil private player which filed for bankruptcy in Texas, the Russian Government could not force the sale of assets of the company as it had obtained an injunction order against the sale in Texas. Deutsche Bank also refused to finance a party participating in the sale of the assets of Yukos. Thus, it can be seen that the commercial and global parties are impacted by court orders and so to avoid all this, international arbitration can be seen as a mechanism for the resolution of disputes by enabling the parties to draft favorable contractual terms (Horton, 2012).

Off late, private oil, players are subject to criticisms due to the massive profits they make and are subject to frequent scrutiny by the taxation authorities for the windfall profits, at the same time the pay packages of the top executives are under scanner. The litigation process in the courts makes a lot of information public that can be avoided through international arbitration (Born, 2014).

When two parties go to the court, there is enmity between them leading to bitter relationships. Usually oil and gas contracts are for decades and long term, so the maintenance of amicable relationships is necessary. Peaceful ways will lead to better understanding and judgment. Moreover, it will not spoil the business that is running (Born, 2014). Arbitration provides for dispute resolution in a peaceful and friendly manner by which businesses can be run normally even after the disputes. The appropriateness and the autonomy of the parties are maintained to foster a long term business relationship. Disruption in the business can lead to heavy for both the parties and huge cost can be involved in the process of litigation. Resorting to the process of arbitration is the best mechanism in the long run. Both the parties can get satisfaction after resorting to arbitration. 

Conclusion

Due to the unique advantages, the international commercial arbitration should be largely adopted by companies as a standard mode of settling disputes. This will set a theme of peaceful action. Moreover, it helps in settling of disputes by resorting to arbitrators instead of courts. Settlement in the court takes time and money is wasted. There are many points to prove the neutrality of the arbitration proceedings which repeatedly the traditional courts have failed to deliver. Traditional courts are also time-consuming in nature and therefore it cannot be said to be desirable at all times. Moreover, arbitration settles the dispute by considering the matter of both the [arties and hence is effective in nature. Thus, the need to create a win-win situation even after the dispute is essential which in most cases is achieved by arbitration.

References

Born, G 2009, International Commercial Arbitration, Kluwer

Born, G 2014,  International Commercial Arbitration, Frederick, MD: Wolters

Brister, A 2014, Farmout Agreements: The Basics, Negotiations and Motivations. Oil and Gas Law Digest.

Brister, A 2014, Introduction to Joint Operating Agreements. Oil and Gas Law Digest.

British Petroleum 2015, BP Global/About BP/Angola, viewed 15 March 2016, <www.bp.com/sectiongenericarticle.do?categoryId=427&contentId=2000571#2014344>.

Buhring,U.C and Kirchhof, G.L 2006, Arbitration and Mediation in International Business, Washington DC.

Deventer, N.K 2010,  Yearbook commercial arbitration, Huntington: New York

Horton D 2012, Federal Arbitration Act Preemption, Purposivism, and State Public Policy. Forthcoming in Georgetown Law Journal.

Kendall, J 2008, Expert Determination. 4th edition

Kluwer A 2014, International Commercial Arbitration, Austin: Walters

Kolkey, D.M, Chernick, R,  Neal, B.R 2012,  Practitioner’s Handbook On Arbitration and Mediation, Huntington, N.Y.

Oil and Gas disputes 2015, Global Dispute – oil and gas, viewed 15 March 2016, <https://www.fess-global.org/files/OilandGas.pdf>.

Paul, S.T 2010, LLM Oil & Gas Law, University of Aberdeen: Assistant Lecturer, Rivers State University Of Science And Technology, Port Harcourt: Nigeria.