What are the advantages of using international arbitration to resolve energy project disputes?

Energy and renewable transition projects are at the heart of the global economy and invariably pose complex technical challenges with high stakes and little or no room for error.

From resource extraction and renewable power generation to energy trading, energy projects can be commercially, environmentally and politically sensitive – particularly where they cross borders or involve the participation of states.

The management of risk associated with energy projects is therefore crucial – and arbitration, as a dispute settlement mechanism, is well suited for the management of any conflict that may arise in their development and life cycle.

Why arbitration is suited to energy disputes

Protects the commercially and politically sensitive nature of energy disputes

Unlike court proceedings, arbitration is generally confidential. Subject to limited exceptions, the existence and details of a case, documents produced or submitted, any hearings, and any orders and awards are confidential.

This allows parties to minimise the risk of reputational damage or adverse impact on their supply chains by reducing the chances of information about a dispute or other sensitive information from being published.

Suits the technical, regulated and complicated aspects of energy projects

Parties can typically choose the arbitrator(s). They can, for example, require candidates to have experience and expertise in a specific industry, such as the energy sector, or specific technical, legal and/or commercial matters. Arbitrators must also be independent of the parties and the dispute.

Where an energy project is technical, involves significant regulation or other complexities, or involves state participation, this feature of arbitration will be particularly beneficial.

Caters for cross-border disputes and international parties

Energy projects often involve more than one jurisdiction. The parties, components and supply chains may span multiple countries. For example, the components for renewable energy assets are primarily manufactured and supplied from certain jurisdictions. Energy projects are also often of high value. Arbitration is well placed to cater for complex, multi-jurisdictional and high-value disputes.

International enforcement is more straightforward. Given the cross-jurisdictional nature of energy projects, parties frequently wish to enforce the decision in a dispute in another country, for example, where the opposing party's assets are based.

Arbitral awards are generally enforced much more easily and quickly than court judgments. This is thanks to the New York Convention, which allows an award rendered in one of the 170+ signatory states to be enforced in any of the other signatory states, as if it were a local court judgment.

The parties can agree the rules applicable to a dispute and the location of hearings. Choosing the procedural rules means parties can tailor proceedings to suit their dispute. Crucially, they can agree the timetable and may adopt an expedited procedure. That can be key to minimising delay to a project.  Choosing the location of hearings allows parties to ensure that these take place in a neutral jurisdiction in which neither party is based and which is most convenient for their representatives to attend. Alternatively, hearings can be fully virtual or hybrid.

Arbitral awards are final and binding. There are typically very limited grounds to challenge or appeal an award. The grounds available depend on the law of the seat. They usually include lack of jurisdiction, procedural impropriety and appeal on a point of law. However, the bar is very high and certain grounds are often excluded by party agreement, such as appeals on a point of law (such agreement is often made by the parties adopting the arbitral rules of a major arbitral institution). As such, parties can expect a degree of certainty and finality in the outcome of an arbitration.

Investment treaties 

Investment treaties are international agreements between two or more states that provide the terms and conditions under which private investors from one country invest in another.

There are two main types:

• Bilateral investment treaties are agreements between two states.
• Multilateral investment treaties are agreements between more than two states, such as the Energy Charter Treaty and the North American Free Trade Agreement.

Under these kinds of treaties, each state offers private investors from another contracting state protections when they invest in the receiving state. For example, the receiving state must not: favour domestic investors' interests over foreign investors' interests; offer better protections to investors under another treaty; or expropriate foreign investors' investments without providing prompt, adequate and effective compensation.

To access these protections, investors – including investors in international energy projects – should conduct "treaty planning" when structuring their international investments in order to maximise the protections available under various investment treaties.

What is investment treaty arbitration?

Under an investment treaty, foreign investors have the right to refer a dispute to arbitration where they believe a receiving state has breached its obligations to the investor.

Investment treaty arbitrations are similar to typical commercial arbitrations in many ways. There are, however, some important differences.

Specific characteristics of investment treaty arbitrations include:

• The arbitration agreement takes the form of a standing offer by the contracting state to arbitrate "qualifying disputes" under the treaty.
• An investor will always be the claimant and a receiving state will always be the respondent.
• The definition of "investor" varies from treaty to treaty and might include natural persons, corporations, business associations and government-related entities.
• Domestic laws can have limited relevance. Tribunals will apply the terms of the treaty and consider relevant public international laws and conventions.
• Investors have a much more limited role in choosing the applicable procedural rules, as these are identified in the treaty.
• It is more likely that the arbitration and any award will become public.
• Political and public policy factors may influence the arbitration.

Osborne Clarke comment

Ensuring that arbitration is the selected dispute resolution mechanism for a given energy project is best done at the outset of a project when drafting the relevant contracts. The applicable laws and rules can be complex and parties should always check with a disputes lawyer before agreeing to any particular contractual provisions. Ineffective or problematic provisions typically add significant time and cost in the event of a dispute later down the line.

For investors in international energy projects, the relevant laws and treaties should be consulted so that the investment can be best structured to maximise protection.