David Waldron, a partner and Richard Ellison an associate in the litigation practice at global law firm Morgan Lewis’ London office, review the options
The commercial terms of oil and gas agreements are generally negotiated in great detail, and the governing law of the agreement chosen as a result of these negotiations.
However, the choice of jurisdiction is often something of an afterthought. This is despite the fact that the jurisdiction chosen can be crucial to an agreement’s effective performance: it is the jurisdiction where the judge or arbitrator decides on what the content of the governing law is, and how this applies to the facts of a dispute. Careful thought should be given to jurisdiction.
Enforcement
Production sharing agreements are generally based on a model contract or precedent; there may be little scope for negotiating the jurisdiction. However, the jurisdiction chosen can have a major impact on the commercial attractiveness of a PSA.
Where national courts are likely to be partial, an agreement could prove to be unenforceable. For other types of agreement, there is often an expectation that disputes will not occur or will be resolved amicably. However, at the time a dispute arises this is unlikely to be the case.
To maximise its effectiveness, an agreement should be enforceable in as many jurisdictions where the adverse party has assets as possible.
One of the most attractive features of arbitration, as against litigation, is the relative ease with which awards can be enforced internationally. The New York Convention, to which 149 countries are signatories, provides for enforcement of foreign arbitral awards on the same basis as domestic awards.
There are a limited number of bases on which the New York Convention permits local courts to refuse to enforce an award; the most frequent and contentious of these is where it would be contrary to public policy to do so.
It is often advisable to seek local law advice on this point for the jurisdictions where enforcement is likely to be sought.
The international enforcement of national court judgments can be much more problematic, and generally depends either on the existence of a bilateral enforcement treaty or on the willingness of local courts to enforce foreign judgments on a reciprocity basis.
Confidentiality is generally regarded as one of the main benefits of arbitration, which makes it particularly attractive for oil and gas agreements.
Although the precise scope of the confidentiality obligation will depend on the governing law chosen, the rules of all the major arbitral institutions provide for a high degree of confidentiality. The comparative costs of litigation and arbitration will depend on the nature of the dispute and the seat or jurisdiction chosen.
An imbalance in spending power can often be harder for an arbitral tribunal than a national court to remedy. Arbitration has traditionally been regarded as quicker than litigation. This advantage is waning, and delaying tactics by parties are common.
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Expertise and partiality
In arbitration, each party is generally able to appoint their own arbitrator. However, the appointment of the third arbitrator is often the responsibility of the two party-appointed arbitrators or an arbitral institution, which can lead to the appointment of an unexpected chairperson. Drafting can stipulate that arbitrators have particular qualifications or experience, which can be helpful in technical disputes.
It is generally possible to ensure that arbitrators are impartial. The same is not always true of national courts; this can be a particular concern where they are to rule on a dispute between a state entity and a foreign company. Advice should also be sought to ensure that the national law of the arbitral seat prevents excessive interference in arbitrations by the local courts.
The London Court of International Arbitration (LCIA) is generally highly regarded, particularly in terms of cost and speed for lower-value disputes. Fees are capped at an hourly rate per arbitrator. However, its rules give limited scope for the joinder of parties or the consolidation of disputes, which is an increasingly frequent demand in international multiparty agreements.
The International Chamber of Commerce (ICC) is based in Paris, and its fees are set by reference to the value of a dispute. These fees can be very high by comparison with other arbitral institutions, and ICC arbitrations can move slowly.
The ICC Rules contain extensive provisions for multiparty disputes, which is often desirable in the oil and gas sector; awards are subject to oversight by the ICC court.
Like the ICC, Stockholm Chamber of Commerce (SCC) fees are calculated by reference to the amount in dispute, although these are generally slightly lower than those of the ICC. Its rules provide for mechanisms allowing expedited resolution of disputes, but limited scope for multiparty disputes.
A final point to consider is whether a dispute can also be brought under the investor protection provisions of a bilateral investment treaty as an alternative to the contractually agreed dispute resolution mechanism.
Although slow and costly, and often not subject to confidentiality, investment treaty arbitration applies only the terms of the bilateral investment treaty together with any relevant provisions of international law, and is delocalised.
