Dispute resolution in oil and gas

Litigation

Litigation in oil and gas industry is similar to litigation in any other industry. It involves the parties presenting their case with evidence and arguments in front of judge or jury and the court issuing a binding decision subject to appeal.

PROS

• The process is very formal with both sides offering their version of dispute and given enough time to provide evidence to support their argument.
• The verdict is final and binding (subject to appeal). This means that every case has a winner and a loser.
• The whole process is open and transparent from the onset and is open to public.
• It is easily enforceable in same jurisdiction. Hence, a winner gets away with its version of dispute being enforced on other party.
• It creates precedent for future similar court cases.

CONS

• While the process is formal and involves lawyers and judges, it gets away from the hands of the disputants. Judges (or jurors), who are in fact a foreign party to the dispute and usually lack awareness of oil and gas contract technicalities, end up making decisions.
• Though the decision is final, it can be appealed and it is possible the decision can be overturned, which could result in another round of court hearings and an added burden of cost and time.
• Because of its openness to the public, oil and gas disputants are usually reluctant to take this route of dispute resolution. The oil and gas industry is a closely knit fraternity that requires confidentiality.
• Although the decision is enforceable in the same jurisdiction, it becomes somewhat controversial and difficult to enforce in a foreign jurisdiction unless an agreement exists between the two countries. Even if the agreement is in place, it may create a type of xenophobia in the judicial system of the host country.
• It comes at a very high cost and time consumption that can eat away the available resources of the disputants. Also, there is the possibility it could be appealed and enforcement in a foreign jurisdiction may be problematic.
• It is usually detrimental to the relationship of oil and gas disputants, which is so crucial in the oil and gas industry. Litigation usually ends up in a business divorce between the contesting parties.
• The decision is binding and does not offer a middle ground, which might have been reached by mutual consensus.

Arbitration

Arbitration is a binding method of dispute resolution much like litigation with the exception of a mutually agreed third-party neutral - generally an expert in the specific field. This is, comparatively, the most widely accepted method of settling a dispute.

PROS

• The disputing parties have the right to choose the arbitrator or institution depending on the complexity or expertise of each.
• The whole process is done in private, away from the public eye, which means confidentiality is maintained, which is crucial in the oil and gas sector.
• It is more flexible than litigation and can be customized according to disputant needs. Parties to a dispute can choose between institutional arbitration or ad hoc arbitration, which gives more flexibility and visibility.
• The award of arbitrator or institution is easily enforced in countries that have ratified the 1958 New York Convention.
• The cost element is usually lesser than that of litigation and consumes lesser time.
• The disputants are free to choose the venue and platform for arbitration.

CONS

• Though considered less costly and time consuming, it can quickly become as much expensive and time consuming as litigation if one party decides to prolong the proceedings.
• Arbitration has the potential to become as formal as litigation in case of adverse parties.
• There is very limited scope of appeal after an award due to which parties might be reluctant to use this method of dispute resolution.
• The decision is not enforceable in countries that are yet to sanction the 1958 New York Convention. Hence, arbitration does not become an attractive option to settle the dispute via arbitration in those cases.

Expert determination

Expert determination too like litigation and arbitration is binding on oil and gas disputants. It involves choosing an independent expert or umpire having vast knowledge in the field. Though, unlike litigation and arbitration, expert determination is usually used to settle technical and financial claims.

PROS

• Expert determination involves an industry expert who is well aware and knowledgeable of potential disputes in oil and gas industry. This gives confidence to disputants that decision would be reached based on the individual's knowledge who is expert of the field.
• The matters can proceed behind closed doors and confidentiality is maintained.
• If parties have agreed to bind with expert determination then the dispute outcome is final.
• It is much faster and cheaper than litigation and arbitration. Along with that it comes up with an added benefit of being less formal than the above mentioned two methods of dispute resolution.
• The business relations usually remain intact even after the resolution of dispute.
• It gives flexibility to oil and gas disputants to choose their own set of rules and regulations.

CONS

• The outcome of expert determination cannot be easily challenged and there is very narrow margin of it being appealed other than fraud and manifest error.
• This method is usually used to determine the technical and financial side of dispute without any interpretation of law.
• The expert or umpire concludes the outcome based on his own findings and there are no rules for natural justice or due process to be followed.
• The ED process is not easily enforceable until there is a bilateral agreement between international disputants.

Apart from the above mechanisms of binding dispute resolution, parties can come up with their own set of mechanisms which they can pen it as binding on parties.

Thus, the disputants need to be careful when choosing a mechanism as choosing one over the other comes with its own set of pros and cons.

Comparison of arbitration to litigation

In order to establish a critical comparison between the two most used binding methods of dispute resolution i.e. litigation and arbitration, we first need to know the principal difference between the two and then look at their evolution over ages and then try to conclude their advantages and disadvantages.

Litigation is a process by which one party, called claimant or plaintiff, files a lawsuit against another party, called defendant, to enforce or hold a particular right or action. Litigation is presided over by a judge or jury who listens to the arguments and witnesses of both parties and then passes on the judgment which becomes binding (subject to appeal). As such, the parties do not have any control over the proceedings or deciding who the judge would be.

Litigation, by far, used to be the preferred methos of the oil and gas industry in the 1970s, until arbitration took over, when countries were nationalizing their vast hydrocarbon reserves and International Oil Companies (IOC) had formulated a joint pricing mechanism to deter the plans of these countries. In return, OPEC was formulated by National Oil Companies (NOC) against this joint cooperation of IOCs and then followed a series of court cases which set the precedent for all similar future cases.

Arbitration, on the other hand, is a process whereby parties to a dispute agree beforehand to settle their disputes, if any, by a neutral third party which can be a person or institution. The chosen third party is usually a reputed one with considerable knowledge of the oil and gas industry. The proceedings of dispute remain much like litigation unless parties have decided otherwise.

Arbitration has been a very old method of settling disputes even before the invention of the modern court system but it was not until OPEC's formation and oil embargo that arbitration really took over from litigation in oil and gas disputes. The oil and gas industry was in dire need of a mechanism that could be tailored and customized to the needs of oil and gas disputes. Arbitration provided that flexibility, along with its enforcement, which became an attraction for many years.

As is evident from the comparison in Table 1, arbitration has a few advantages over litigation. However, in recent years this trend is changing and arbitration is becoming as public and resource-consuming as litigation. Also, due to the nature of it being heard behind closed doors, the lawyers and oil and gas companies are usually unaware of the interpretation of law. This is slowly drifting the oil and gas law into a complex mystery where only a selected few can access law application and interpretation. In the long run, it will put oil and gas lawyers at a big disadvantage.

In light of this, it is desirable that oil and gas disputants develop their own binding method of dispute resolution or resort to more consensual methods of dispute settlement.

Process confidentiality

Confidentiality used to be one of the primary reasons to choose arbitration over litigation, as arbitration kept a lid on dispute matters. Litigation meant making matters open to the public and thus inviting negative publicity and revealing trade secrets. This is changing as confidentiality in arbitration is becoming as volatile as in litigation.

Traditionally speaking, parties used to agree on confidentiality clauses and none other than disputants and the arbitrator had access to arbitral information unless the disputants decided otherwise. Until the 1990s, this kept matters confidential until the exploitation of two major factors began to chance the practice.

• The losing party in arbitration decided to move to court and thus challenge the arbitral award. The local court then asked for the arbitral proceedings to be brought in front of the court; thus making the whole matter public.
• If one party did not comply with the award of arbitration, the winning party had to resort to litigation to get the award implemented. Again, confidental matters were distorted.

These factors can be broadly attributed to the following:

• All countries have their own set of laws which may require arbitral proceeding to be brought in front of court, if required. Thus, the parties themselves had to carefully select the jurisdictions where confidentiality of arbitral proceedings is respected. (Newark v. NYC Law Department)
• Absence of how and where to define the boundaries of confidentiality so that all aspects of arbitral proceedings remain under carpet. (Those Certain underwriters at Lloyds v. Occidental Gems, Inc.)
• All countries and arbitration institutions have not been able to put a coherent framework for confidentiality e.g. Dubai International Financial Centre (DIFC) dictates that all matters of arbitration remain confidential until DIFC court orders to produce so. On the other hand the Arbitration Act 1996 (London which is seat of London Court of International Arbitration) is silent on matters relating to confidentiality.

These factors have really dented the popularity of arbitration, which was fast replacing litigation.

In view of the above, it can be safely said that arbitration only provides limited confidentiality. It is up to the parties wishing to resolve matters behind closed doors to draft an agreement in such a way that resorting to litigation or non-secrecy becomes unattractive.

English courts referring to alternative dispute resolution

It is true that English courts are now more inclined to refer parties to explore more consensual ways of ADR to settle disputes. This is because England's Civil Procedure Rules 1998 (CPR) encourages it. Rule 1.4(2) states: (e) encouraging the parties to use an alternative dispute resolution procedure if the court considers that appropriate and facilitating the use of such procedure; and (f) helping parties to settle the whole or part of the case.

By acting on the above, the courts are obligated to advise the disputants to discover the outcome of a dispute in harmony. The disputants, though, are not compelled to resort to ADR but to consider it as a method to resolve dispute in which parties have more power to resolve disputes on their own terms and achieve a middle ground in which everyone is a winner. This helps the court to actively manage the case and save precious time and disputant an early outcome of a dispute with added benefits of cost. However, it is silent on which mechanism of ADR to use to settle the dispute.

English courts in particular are now willing to take a more aggressive approach while deciding the outcome of disputes in which ADR has been refused unreasonably by disputants. The following cases set the precedent for all future disputants who seek to neglect ADR:

• Susan Dunnett v. Railtrack plc
• P4 Limited v. Unite Integrated Solutions plc

In a landmark case of Susan Dunnett v. Railtrack plc, the claimant lost the appeal but the court ordered each party to bear its own cost which breached the earlier principle of allocating cost to the winning party. Though the defendant won and as per earlier procedures would have been allocated the cost as well but because it earlier neglected the court recommendation and advice to consider ADR while claimant was agreeable to it, the court instructed each party to bear its own cost. The court criticized the defendant and warned that: "...if they turn down out of hand the chance of ADR when suggested by the court, as happened on this occasion, they may have to face uncomfortable cost consequences".

The above case dictates and sets a precedent that in case of court feeling ADR as appropriate prerequisite or substitute for litigation, the parties should be resorting to all available mechanisms of ADR or risk the cost of proceedings.

Courts granting stay of proceedings

It is true that English courts would grant stay of proceedings where ADR has commenced. It is due to the fact that English Civil Procedure Rules 1998 allows the court to do so as part of active case management.

As per Rule 1.1 (2) (b) and (d) of Civil Procedure Rules (CPR) 1998 titled "Overriding Objectives", the court has to

"(b) saving expense"

"(d) ensuring that it is dealt with expeditiously and fairly"

It also obligates court to undertake active case management (Rule 1.4) and encourage parties to settle their dispute by ADR (Rule 1.4 (2) (e)).

"(e) encouraging the parties to use an alternative dispute resolution procedure if the court considers that appropriate and facilitating the use of such procedure;"

According to Rule 26.4 (2) and (2A), a stay can be granted by the court if the parties request so or if the court thinks that a stay would help the expeditious outcome of dispute settlement.

"(2) If all parties request a stay the proceedings will be stayed for one month and the court will notify the parties accordingly.

(2A) If the court otherwise considers that such a stay would be appropriate, the court will direct that the proceedings, either in whole or in part, be stayed for one month, or for such other period as it considers appropriate."

To summarize the above mentioned rules, the court as part of active case management has to encourage and facilitate parties to resort to ADR (Rule 1.4) and at the same time try to save cost and reach a decision speedily (Rule 1.1). So, if the parties or court thinks that ADR can resolve the matter then the court has the authority to stay the proceedings (Rule 3.1 and 26.4) as it deems necessary to the expeditious outcome of dispute settlement.

In Cable & Wireless plc v IBM United Kingdom Ltd [2002], the court while actively managing the case and using the overriding objective, ordered the disputants to use ADR. Though, in this case ADR failed and proceedings continued in court.

Hence, in the light of above rules and case, it can be safely said that English courts in particular are now more inclined towards encouraging parties to ADR and stay the court proceedings until ADR has concluded.

Stay on expert determination

If expert determination has commenced as a mechanism to resolve dispute, English courts would grant stay to proceedings. This is due to the fact that court can use Rule 1.4 (2) (e) to encourage parties to resolve matters by ADR and at the same time use Rule 26.4 (2A) of CPR 1998 to grant stay.

Though Rule 1.4 (2) (e) is silent on precisely which mechanism of ADR to use for resolving the matter, it can be considered that any mechanism other than litigation can be used. ADR has been defined as following:

"Collective description of methods of resolving disputes otherwise than through the normal trial process." (Glossary of Civil Procedure Rules 1998)

In Halifax Life Limited v. The Equitable Life Assurance Society, Halifax maintained that the expert determinator or umpire did not give reasons for rejecting their claim and did not disclose anything about his meetings with the Equitable Life Assurance Society. Therefore, the umpire did not execute what he was intended to do, and thus this constitutes a manifest error.

The court adjourned the case proceedings and directed the expert determinator to provide reasons for his decision.

By virtue of above, it can be safely said that where expert determination is the process chosen by parties for resolution of disputes between them, any court proceedings in respect of issues covered by the ED agreement will be stayed.

ABOUT THE AUTHOR

Muhammad Waqas is a mechanical engineer currently pursuing a degree in energy law. He resides in the United Arab Emirates where he has gained experience in the oil and gas sector. His areas of expertise include energy politics in the Middle East and European regions.