Oil and gas disputes in a volatile world – how to be ready. By Deborah Ruff, Julia Kalinina Belcher, and Charles Golsong
Recent months have shown that volatility continues to affect oil and gas markets, where issues of supply disruption due to, for example, sanctions imposed by the US on Iran and deepening supply losses in Venezuela and an overall slowdown in demand, are all at play. Volatility means more players reconsidering contracts which, in many cases, were signed in a different price environment. Yet, even in a situation of continuing volatility, reserves need to be developed and disputes over such development will continue.
As a result, we continue to see substantial numbers of energy-related disputes: the London Court of International Arbitration recently highlighted how ‘energy and resources’ disputes make up almost a quarter of their caseload1, whilst the most recent report published by the International Centre for the Settlement of Investment Disputes (ICSID), dealing with state-investor disputes, showed a similar figure2. With the above in mind, how can companies ensure that they are prepared for a dispute?
Anticipate the dispute
It should go without saying, but familiarity with the contracts which your company is party to is of paramount importance: it ensures that risks can be identified early and costly disputes avoided, or at least mitigated. Preparedness is key: proactively considering your contracts will be far more beneficial than hurriedly flicking through them once a claim has been issued against you.
A pre-emptive review by outside counsel or in-house lawyers not involved in the initial drafting may prove worthwhile: they may identify risks which have not been considered and should, based on prior experience and knowledge of case law, be able to advise as to how potential claims may best be approached.
In particular, consider any developments in the law governing your joint operating agreement affecting its interpretation, including, for example, relating to good faith or damages clauses.
Ensure proper contractual safeguards in relation to the host state
When negotiating contracts, be mindful of potential disputes. Where there will be potential state involvement, which will usually be the case where natural resources are involved, consider, for example:
- Structuring transactions to benefit from bilateral investment treaties (BITs) and/or from the Energy Charter Treaty;
- Be mindful of new developments in case law in this area, such as the recent Achmea decision on intra-EU BITs, and structure or re-structure accordingly. Doing so after a dispute has arisen will be too late;
- How to obtain the best possible protection against expropriation, unfair treatment, etc. by the host state or by state companies by taking advantage of most favourable nation clauses, umbrella clauses and widely drafted BITs;
- Including stabilisation clauses to protect fiscal and other terms and, if possible, having these enshrined in national law;
- Including waivers of sovereign immunity, both in respect of jurisdiction and enforcement (though note that legislation in countries of enforcement will also be relevant – in England, the State Immunity Act 1978 will apply, and a party seeking to enforce will have to bring itself within one of the exceptions to state immunity);
- Include a choice of law other than that of the host state, such as English law;
- Include a jurisdiction clause which will take you outside the courts of the host state; and
- Consider enforcement of a favourable award before a dispute has even arisen as part of the risk profile of the investment.
Consider document management policies and disclosure
Developing a document retention policy after a dispute arises is too late. Think now about what you do and do not want to keep, and what you may have to disclose in the event of a dispute – assume a dispute and act accordingly:
- Identify those involved in a deal and ensure relevant communications/documents are preserved and easily accessible;
- Confirm all discussions in writing, by email, etc.;
- Try to ensure that relevant employees have an ongoing obligation to assist with evidence after they leave;
- Think before firing employees with knowledge of the dispute – they may go to the other side; and
- Keep records of oral agreements, meetings and telephone conversations.
Don’t make it harder on yourself
Do not bury your head in the sand and hope that all those emails and letters threatening litigation will come to nothing.
- The best way to avoid a dispute is to deal with any correspondence in a calm, collected manner. Review your legal and factual position properly before responding substantively and always think before hitting “send” how what you have written will be perceived by a judge or arbitrator.
- Take into account whether the relationship is a valuable, long-term one and act accordingly to try to de-escalate.
- At the outset, consider limiting those who are authorised to respond to the other side to a small number of people to ensure a consistent response.
- Also consider which communications should be made on a “without prejudice basis”. Any settlement correspondence which isn’t so marked is liable to end up being put before a judge or tribunal, so seek the help of lawyers before taking a substantive step. For example, you must take care under an English law contract to avoid being in a position of anticipatory breach.
- From the outset, consider mediation – better to spend a little now than a lot later.
- Remember that, under English law, an innocent party cannot recover for losses it could have avoided. While the bar for mitigation is not usually set too high, taking steps to limit losses should be considered.
Consider your position
When a dispute is looming, ask yourself the following questions before filing your claim:
- Have you satisfied contractual pre-dispute requirements (e.g., structured negotiation, mediation, etc.)?
- Will there be any assets to satisfy your judgment/award and, if so, where are they located? If they are at risk of having been moved or dissipated by the time the award or judgment appears, what can you do about it?
- Do you need other urgent interim relief and, if so, where do you go to get it and what do you need to show?
- If pursuing an arbitration, consider whether and what early relief is available from the courts of the seat of the arbitration before the tribunal is formed, and what the relevant test is; and
- If you are seeking an injunction, are you prepared to pay the price (undertaking in damages, bank guarantee, payment into court, etc.)?
As Dwight Eisenhower once said, “in preparing for battle I have always found that plans are useless, but planning is indispensable”. Just as unpredictability will always be a feature of the oil and gas industry, disputes in the sector will always exist. Following the above guidelines should at the very least ensure that you are as ready as can be.
1 Facts and Figures – 2017 Casework Report, at p.5, available here: http://www.lcia.org//media/download.aspx?MediaId=679
2 The ICSID Caseload – Statistics, Issue 2018-2, at p.12, available here: https://icsid.worldbank.org/en/Documents/resources/ICSID%20Web%20Stats%202018-2%20(English).pdf
Pillsbury Winthrop Shaw Pittman
Deborah Ruff is a Partner, Julia Kalinina Belcher is Counsel, and Charles Golsong is Senior Associate, at Pillsbury Winthrop Shaw Pittman, an international law firm with a particular focus on the technology, energy & natural resources, financial services, real estate & construction, and travel & hospitality sectors. Recognised as a top firm for client service, its lawyers are highly regarded for their forward-thinking approach, their collaboration across disciplines and their unsurpassed commercial awareness.
For further information please visit: www.pillsburylaw.com/en