ABOUT TDM
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TITLE
Dawn of a New Era: Creation of an Energy Arbitrators’ Panel
AUTHOR
Hew R. Dundas
Chartered Arbitrator DipICArb CEDR-Accredited Mediator
International Arbitrator, Mediator and Expert Determiner
Member - Panel of Chartered Arbitrators of the Chartered Institute of Arbitrators
Member - Regional Panel of Arbitrators of the Singapore International Arbitration Centre
Member - Panel of Arbitrators of the Regional Centre for Arbitration, Kuala Lumpur
Arbitrator of the International Arbitration Court of the Republic of Kazakhstan
Member - London Court of International Arbitration
(also Dundas Energy Services, International Petroleum Law & Risk Management Advisers)
website: www.dundasarbitrator.com
SUMMARY
Several industries/commercial sectors have their own arbitration schemes with tailor-made rules and, more importantly, panels of Arbitrators with specific expertise in that industry/sector; examples include the maritime and commodities sectors. These schemes work well and are widely applied internationally e.g. the great majority of international shipping disputes are referred to arbitration under the auspices of the London Maritime Arbitrators Association. There is no equivalent in the international oil and gas industry, although there are panels in the USA which purport tobe of oil and gas/energy arbitrators.
Experience of London oil and gas arbitration shows that some cases are heard by tribunals of three QCs with no practical experience in oil and gas whereas the case would have been better heard by a tribunal including one or more arbitrators with relevant practical experience in the industry.
It is proposed that an international Energy Arbitrators Panel be established to meet this perceived omission in the spectrum of dispute resolution options available to the international oil and gas industry. This article describes the background to the creation of the Panel, outlines a proposal for it and discusses some key issues relating to it.
Dawn of a New Era: Creation of an Energy Arbitrators’ Panel
1 Introduction
The origins of arbitration lie in the practice, dating back almost to the dawn of commerce[1], whereby two merchants in dispute would refer the matter to a third merchant, experienced in the same trade, known to and respected by both disputants, for a decision; such decisions were traditionally practical, based more on customs of trade than on legal analysis, the latter becoming a significant factor in the later 19th century as commerce, both UK domestic and international, grew rapidly and became substantially more complex.
The English Arbitration Act 1889 substantially codified existing practices and successive Arbitration Acts have refined and developed English arbitration law; the 1950 Act was widely copied, in whole or in part, in the English-speaking and common law worlds. The UNCITRAL Model Law of 1985 has led to a further process of rationalisation and harmonisation of arbitration law worldwide both through the wholesale adoption of the Model Law by nearly 50 countries and the adoption by many others of new arbitration legislation substantially mirroring the Model Law[2].
This steady development of arbitration law and practice in England and elsewhere has taken it some distance away from its merchant origins although those origins still survive, particularly in the oil and gas industry, in Expert Determination where disputes are still resolved in a way little changed in more than 500 years.
In the period up to 1996, English arbitration increasingly came to resemble litigation and arbitral practice and procedure showed little evident difference: Court rules of evidence, the Rules of the Supreme Court[3] and other features of litigation were commonly adopted in arbitration and one purpose (of many) of the 1996 Act was to strip away unnecessary litigation-derived procedures from arbitration and to try to bring it back nearer to its historical starting point where disputes involving practical matters were decided by industry practitioners providing practical solutions.
2 Sector-Specific Arbitration
Two major commercial sectors have their own forms of arbitration with significant similarities to historical arbitration; these are the maritime and commodities sectors which have purpose-built arbitration schemes and panels of arbitrators with sector-specific expertise. However, there are key differences between arbitration in these sectors[4]:
(i) A substantial proportion of the world’s maritime arbitrations are carried out in London under the Rules of the London Maritime Arbitrators’ Association (LMAA). It is an appointing body (i.e. if you need a tribunal for a maritime dispute it can appoint one) but is not an administering body (i.e. one which administers the arbitration process as would the ICC, LCIA, AAA and others). The LMAA, other than its role in appointments, is an association of individual maritime arbitrators, all with substantial expertise in maritime matters; LMAA arbitrators include not only maritime practitioners (e.g. shipping brokers, Master Mariners etc) but also distinguished lawyers, whether from within the shipping sector (e.g. the P&I clubs), from firms of Solicitors specialising in maritime matters or senior QCs and retired members of the judiciary with substantial specialist maritime experience at the Bar/Bench. The LMAA is an undoubted success as demonstrated by the high proportion of international shipping contracts with LMAA arbitration clauses; however, there are those in the shipping sector who argue that there are too many lawyers and not enough practitioners and therefore that awards can be ‘unduly legal’ as opposed to practitioner-driven, a divergence from the historical origins of arbitration as set out above.
(ii) There are numerous commodity sector bodies and this article is not the place to detail them all or to compare and contrast the different arbitration schemes such bodies have; one leading example is the Grain and Feed Trade Association (GAFTA) whose standard forms of contract are widely used in international grain trading. An immediately visible difference between GAFTA and LMAA Arbitrators is that the former must have extensive experience in commodities trading and it would not normally be possible for a GAFTA arbitrator to be from a solicitor firm, even a firm with significant commodity expertise, nor to be a QC/retired judge - the focus is on commodity traders and practitioners. In addition, GAFTA is an administering body.
There is no purpose in comparing these two or any other such bodies at present; suffice it to say that each provides a longstanding tradition of sector-specific arbitration involving specialist arbitrators. There is no doubt that these (and similar) approaches to arbitration are effective if not always wholly perfect and are widely accepted, not just in England but worldwide given the pervasive influence of English law in the international environment.
Importantly, the English High Court is supportive of arbitration and one of the ways in which it demonstrates that support is consistent with the concept of the practitioner-arbitrator, there being ample jurisprudence[5] to show that, so long as the arbitrator’s conduct of proceedings meets the statutorily required standards, the Courts will normally support his decision; they do not review the factual matrix enveloping the arbitration and do not normally review the arbitrator’s analysis of the facts and his conclusions[6].
3. The Oil & Gas Industry
What then is the position with regard to the O&G industry ?
There is no equivalent body to LMAA/GAFTA et al although all the leading arbitral institutions (including ICC, LCIA, AAA and others) have lists of Arbitrators including those representing themselves as having O&G expertise. Many arbitrations have been carried out under the auspices of these institutions and, it might appear, all is well and nothing needs changing. However, it has become increasingly apparent in recent years that this is not the case and there is ample evidence of arbitrations which have gone awry through having a wrongly-constituted tribunal.
A non-arbitration example is a recent High Court case[7] where Mr Justice Cresswell delivered a masterly judgement in a commercial dispute over the quality of pipe supplied for a subsea pipeline. In simplified terms, the first 15% of his lengthy judgment was introductory, the next 80% was metallurgical analysis and the final 15% was his conclusion. Why did such a dispute have to be decided by a judge ?
Another, very high profile O&G case was the Amoco CATS pipeline case[8] where the House of Lords had to address, in effect, two key issues concerning a gas transportation agreement: (i) whether or not a subsea tie in valve had been serviceable and (ii), if so, what were the commercial consequence ? Why was the House of Lords asked to make a decision about the serviceability of a valve ? The fallacy of this case going to the House of Lords is shown in that the two leading judgments were effectively ‘non-legal’, referring to almost no statute or case law but instead referring repeatedly to "commercial man" or "rational businessman", all within the context of the O&G industry. Why does the O&G industry need judges to tell it what oilmen think ?
What the O&G industry lacks, at least outside the USA, is any panel of arbitrators analogous to those of LMAA/GAFTA i.e. one whose members combine arbitral experience with direct experience in the O&G industry. As a consequence, it is all too common to find arbitral tribunals on O&G disputes to be composed of three eminent QCs, each with substantial experience of presenting cases in court and with experience of serving on such tribunals but with no direct experience of O&G. It has been argued that such a 3-QC Panel creates the same fallacy as the House of Lords had in the Amoco case and, in many actual circumstances, arbitrators, however distinguished but lacking any practical O&G experience, are asked to decide issues of an essentially practical nature, whether relating to the quality of welding, to events at 12,000’ subsea or the serviceability of pipeline valves; having experts present to explain these things to QC-arbitrators or to judges misses the point entirely.
In 2002, two separate groups arrived, almost simultaneously but completely independently, at the conclusion that the O&G industry needed a panel of specialist O&G arbitrators, i.e. broadly analogous to the LMAA/GAFTA panels. The two groups had quite different constitutions: the first was an oil major-driven Working Group, co-ordinated through a leading firm of London solicitors, whereas the second was the Oil and Gas Branch of the Arbitration Club[9], an informal discussion group of those involved in dispute resolution in the O&G industry including practising arbitrators, oil company and contractor representatives, solicitors, barristers etc.
The preliminary conclusions reached by the two separate groups was that, in broad terms, consideration should be given to the establishment of a Panel of Arbitrators, ideally combining extensive of oil and gas industry expertise experience with arbitral skills and qualifications; a key factor here was the assumed requirement for industry experience. After various rounds of discussion and reasonably wide consultation, in July 2003 the Working Group circulated a discussion document which set out its concept of what it called the "Energy Arbitrators Panel", identifying some of the issues and raising additional questions. The discussion document was widely circulated and has been already the subject of extensive comment; this consultation process is still in progress and it would be inappropriate in this article to try to second-guess its conclusions. However, it will be helpful to identify some (but not all, in view of space limitations,) of the factors which have generated discussion and some of the questions which have been posed but have not yet been fully answered.
It must be stressed at the outset that the Panel, when established, is not intended to supersede any existing panel, list or database of arbitrators but is intended to offer parties an additional option as regards selection of arbitrators. Further, while it is clear that that there are some disputes not ideally suited to determination by judges or QCs, there is no doubt that there are some disputes which are eminently so suitable. Party autonomy is fundamental to modern arbitration and that autonomy must be permitted to stretch to cover the selection of the arbitrator which the disputant party wishes.
4. The Proposed Panel
In this section I shall outline the key elements of the Working Group’s discussion document already in circulation, deferring comment and discussion to section 5 of this article.
The document recognises that, in energy disputes, arbitrators are generally selected on the basis of quality and consistency in decision-making but suggests both that appointments made by the major arbitral institutions lack transparency with appointments appearing to be made from a limited number of “tried and tested” individuals and that such repeat appointments do not serve adequately the needs of arbitration users in energy disputes.
Instead, it is intended that the Panel provide arbitration users with access to arbitrators having recognised expertise in energy disputes and it is proposed that they be highly skilled lawyers with proven experience, either as arbitrators, external lawyers or in-house legal counsel, in deciding or managing complex technical and legal disputes, in a domestic and/or international settings. Extensive experience in one of the following sectors is preferred, but not essential: oil, gas, power generation or renewable energy, although experience in other relevant areas presenting a similar degree of technical and legal issues will also be considered. Further, the proposed arbitrators will be fluent in written and spoken English, and preferably in one other international language. They will have excellent character, a creative mind and the ability to apply a mature and balanced analysis to legal, personal and business affairs. They will also possess excellent drafting skills and the ability to listen, exercise judgement and be decisive.
Initial discussion within the Working Group suggested that (i) the scope of energy disputes had to be ascertained; (ii) in order to be credible, the Panel had to reflect both the major operators and contractors; and (iii) it had to have an international range including both civil and common law practitioners. Potential difficulties were envisaged with keeping the Panel current, with publicising it and making it accessible and whether the Panel required to be “housed” with an arbitral institution or trade association.
One of the objectives of the Panel is to identify to arbitration users those individuals who might never have arbitrated but have sufficient alternative relevant experience to be considered for appointment. Conversely, it is also intended that the Panel should include distinguished arbitrators who might have no specific experience in energy disputes.
The Working Group saw an important difference between, on the one hand, acting as an arbitrator (i.e. making a decision on the parties' legal rights) and, on the other, acting as an expert, (i.e. either acting as expert determiner or as adviser to a tribunal on issues of a technical nature) and it considered that, generally, the training, skills and experience of lawyers made them better suited to act as arbitrators, whilst technical determinations could be more efficiently performed by experts drawn from industry.
In order to keep the Panel current, it was proposed that appointments thereto should be of limited duration (e.g. 24 months) as is the case for some international arbitral panels.
The proposal envisaged several options for the way forward including: (i) unofficial, ad hoc use on a voluntary basis; (ii) linking the List to an arbitral institution where that institution would appoint from the Panel and users would agree to arbitration under the auspices of that institution, or that the institution would agree to use the Panel to assist the parties in agreeing the composition of the tribunal under its rules; (iv) creating an appointment procedure making specific reference to the Panel, to be used in the context of either ad hoc or institutional arbitration (if compatible with the applicable rules); (v) promulgating an arbitration clause whereby each party would undertake to appoint from the Panel but where the chairman would be appointed either jointly by the parties, or by the party-appointed arbitrators, or by an appointing authority; (vi) adoption of a set of arbitration rules for energy disputes in which the Panel was used, e.g. the UNCITRAL Rules (vii) standard-form and ad hoc contracts should contain a dispute resolution clause mandating (a) arbitration, (b) application of the UNCITRAL Arbitration Rules and (c) selection of arbitrators from the Panel
5. Comment and Discussion
Consultation continues in respect of the discussion document and it would be inappropriate to pre-empt the conclusions of that process; communications within the oil and gas industry and within the arbitral community have raised a number of questions but, at the moment of writing, few firm answers - these will follow at the conclusion of the consultation process. Consequently, this section of the article will summarise the key questions and issues raised but will not seek to provide answers.
The initial response to the original proposal that the Panel be lawyer-only was criticised as contradictory to one of the raisons-d’être of the whole concept and that part of the proposal is likely to be dropped; the principle of party autonomy mandates that the parties should have the option. However, the proposal that distinguished arbitrators without O&G experience be considered for appointment to the Panel is wholly contradictory – parties can choose such an arbitrator if they wish but that has nothing to do with the Panel. Further, it is questionable whether binding parties in contract to appointing from the Panel is appropriate.
The proposal has been perceived in some quarters as OilCo-driven and, as the proposal recognises, it is essential that the contractors not only buy in to the concept but also play a significant role in shaping progress.
A series of key questions relate to the sponsoring institution including (i) what alternatives to the proposal’s suggested bodies are available ? (ii) should the institution be merely a ‘house’ or be a full-scale nominating/appointing body ? (iii) is an administering body desirable/appropriate/necessary ?
A whole class of arbitrations is company v State entity (e.g. including BIT, ICSID, NAFTA or ECT): should Governments be able to nominate members to the Panel ? If so, given that Governments tend to prefer senior QCs or retired judges, could this not be seen as a contradiction of the essence of the Panel that its members have O&G industry experience ?
As outlined in Section 2 above, there are several commercial sectors with their own tailor-made forms of arbitration, including Maritime (LMAA) and Commodities (GAFTA, FOSFA, RSA and LME etc); do any of these forms of arbitration immediately present themselves as an appropriate model for the O&G industry to follow ? Given the distinction between the constitution of the LMAA and GAFTA panels, particularly in respect of the concept of “commercial man", what is appropriate to the O&G industry ? Who constitutes a "commercial man” in the O&G industry ?
While discussions to date have substantially been within the O&G industry, the broader intention is that the Panel will be widened (but perhaps not initially) to cover all aspects of the energy industry; the key players in O&G are well-known but who will deal with disputes arising in electricity generation, tidal power, wind farms, geothermal power or solar energy if appointments to tribunals are to be made from the Panel ? Is there anyone “out there” with both arbitral experience and experience in geothermal power etc and, if not, who will conduct the first geothermal arbitration - Adam, Eve, the Serpent or the Apple ?
6 Interim Conclusions
The response to the proposed establishment of the panel has been near-unanimously positive and the discussion centres on detail; a wide range of interested parties are supportive of the concept although the voice of the contractors has not yet been fully heard.
The extensive and successful track record of similar forms of arbitration in the maritime and commodities sectors demonstrates powerfully not only that the concept can work in the O&G industry but that it will work in whatever final form it takes.
Traditionalists (perhaps better described as dinosaurs) are welcome to take their disputes to court and risk a hearing before a Judge who has little comprehension of the difference between rapeseed oil and Arab Light and whose only experience of the O&G industry is his periodic visit to a gasoline station. In whatever final form it materialises, the Panel will offer disputing parties in the O&G industry a pool of very specific expertise from which they will be able to choose Arbitrators who should be able to deliver decisions in a time-limited and cost-effective manner enabling companies, whether oil or contractor or other, in the O&G industry to get on with their respective businesses and not waste time in courtrooms.
Significant issues remain to be resolved but, given the breadth of the consultation process, the wealth of experience being contributed and the quality of the initial contributions, we can confidently predict that these issues will be resolved in the broader and better interest of all sectors of the O&G industry.
Dawn of a New Era indeed !
[1] E.g. refer to the works of Professor Derek Roebuck who has publishes extensively on the history of arbitration.
[2] Including England where the Arbitration Act 1996 substantially tracks the Model Law albeit with some deletions and, in particular, with additional provisions not contained in the Model Law; the latter can mislead observers into assuming that the Act is significantly different from the Model Law.
[3] Colloquially known as the “White Book”, superseded by the Civil Procedure Rules w.e.f. 26th April 1999.
[4] These are summarised only very briefly and in necessarily simplified terms, this article not being a treaties on such arbitrations.
[5] E.g. see Checkpoint Ltd v Strathclyde Pension Fund [2003] EWCA Civ 84; 6th February 2003.
[6] Of course there are challenges to arbitrators under ss.67/68/69 of the Arbitration Act 1996 but it is evident that the statutory thresholds are interpreted firmly and that it is difficult to sustain a challenge.
[7] BHP Billiton Petroleum Ltd & Ors v Dalmine SpA; [2002] EWHC 970 Comm; 16th May 2002; it should be stressed that nothing in this case went awry.
[8] Amoco UK Exploration Co & Ors v Teesside Gas Transportation Ltd & Anr; [2001] UKHL 18; 4th April 2001.
[9] Refer article by the author in OGEL 2.
