Future of Energy & Arbitration

FUTURE OF ENERGY & ARBITRATION

The UN Climate change conference 2021 encouraged promises of net-zero. Huge efforts are being made to transition away from fossil fuels and toward new energy sources like never before. However, the Energy sector is facing several problems ranging from supply constraints to changes in rules. Political shifts, environmental regulations, volatility of international supply chains, and geopolitics are some of the primary reasons for high disputes in the energy sector. To Solve these disputes, Arbitration is fast becoming a preferred method of resolving these disputes, particularly at the international level. The metropolises of Singapore and London are emerging as seats of international commercial arbitration. Energy projects are typically lengthy and complex, requiring a substantial amount of capital. Energy-related initiatives are typically awfully expensive, where minor mistakes can result in a business organisation losing several million dollars or occasionally trillions of dollars. The arbitration creates a level playing field catering to the complex nature of disputes from entities that may belong to different countries or MNCs. Disputes may arise in all energy sectors, including biomass, LNG, hydrogen, geothermal power, Hydropower, nuclear oil and gas, solar energy, wind energy, offshore wind, etc. these disputes range from costs to research, testing, certification, generation, conversion, transportation, transmission, Manufacturing, distribution, and consumption activities.

The debate about Energy and Arbitration in India has been about the shortage of coal and the disputes between energy companies and some state Governments. One of the primary questions that need to be answered is what makes arbitration the most favoured dispute resolution method in the energy sector. Any dispute that concerns the generation of the source of energy qualifies as an energy dispute. With the onset of Rapid development in the energy sector, there has been a great need for arbitration to be used as a mechanism for resolving disputes. Justice Raveendran, the Former Judge of the Supreme Court of India, Expressed his ideas. He said ‘it avoids technical Rules of Evidence, it avoids procedural technicalities, it results in a binding decision, which is not open to question except certain permitted grounds. Most importantly, it gives a choice to have Specialists or technical experts as adjudicators, who can appreciate and understand technical issues and provide practical decisions, cut costs, offer a selection regarding venue and provide a non-hostile atmosphere.

Another significant issue is what is the nature and scope of arbitration in the energy sector. The energy sector is a complex sector that involves parties ranging from small companies to nation-states and, in some cases, consortiums of states. Jatinder R Cheema, a distinguished lawyer at the Supreme court of India, expressed his views about the nature of energy disputes. He said,” Energy disputes may fall into various categories depending on the parties involved. Two major categories, however, are commonly seen as disputes between states, which means State entities and private parties, the dispute between two private parties, majority of the disputes in the energy sector pertain to supply agreements, quality of the product quantity of the hydrocarbons Transportation, storage of hydrocarbons, pipelines, engineering construction International boundary between states, especially in offshore fields, Joint venture, joint operating agreement and with respect to the environment such as oil spills and nuclear power plant disaster. Defects and Lead completion of low-carbon renewable energy projects are generating a large number of disputes such as price review, Supply, Transportation, storage, decommissioning, and asset retirement obligations as expected to continue to do to dominate the disputes claimed’’. Energy disputes often involve complex and controversial issues related to security, sovereignty, and public welfare. The Construction and design of the contracts in this sector are unique and complex in their own way, given the involvement of large players and no single Universal legal system. The high value of large contracts leads to high stakes, which may go into billions of dollars. In a scenario where there is no existing uniform legal, or regulatory mechanism to safeguard the rights of parties, the parties resort to arbitration as a means of dispute resolution as the same is based on a contract between the parties.

The third concern is about Customising arbitration procedures for effective adjudication of energy disputes. The energy sector is a rare field with disputes related to controversial issues like t security, sovereignty, and public welfare. The questions of confidentiality, Intellectual property rights, sensitive information, and trade secrets force the parties to go to the forums that maintain their privacy and provide a platform that is seemingly neutral for both parties. There is a need to create domain knowledge experts who can guide the arbitrators in a better way. These disputes involve questions of supply agreements, product quality, engineering construction, international boundaries between states, particularly in offshore reserves, transportation, hydrocarbon storage, joint ventures, joint operating agreements, and environmental issues such as oil spills and nuclear power plant disasters. Flaws and Lead completion of low-carbon renewable energy projects can only be effectively solved by people who are technical and domain experts in these fields. Francis Xavier, Partner, International Arbitration, Rajah & Tann Singapore LLP, while supporting the idea of domain experts, he also cautioned about getting caught in too much technicalities. He said ‘when you get to an energy dispute, which is very complicated… because this area is highly regulated, so you will have regulations and national laws of several countries colliding with each other, many of you have pointed out the need for expertise, domain expertise in several areas, Quantum, technical engineering, price. And so, you have a very protracted, very complex, huge amount of documentation. If you don’t have the rigour to get it done efficiently, then this is going to take forever and you’re going to get bogged down in all sorts of skirmishes, technical, legal, and so on, right? 

Recommendations

The panelists deep-dived into multiple issues surrounding the energy sector and arbitration and made the following recommendations:

• Around the world, there are numerous unique and frequently opposing legal systems. As disputes arise, various codes, tribunals, and laws will have to develop or evolve to the problems brought on by quickly developing new business realities.
• Because the energy sector is so specialised, it’s typical for specific kinds of conflicts to be submitted to an expert decision rather than arbitration because we require the expertise in that particular sector to address the issue.
• Any changes in Legislation have a negative impact on the costs and disputes, which impacts the sector. The Rules shall not be modified now and then and, if changed shall be given prospective effect
• For a smooth rollout of the infrastructure that is user-friendly, understandable, and easy to follow, monitor, and time-out, there should be a single-window clearance.
• Wide-scale implementation of private-public partnership models shall be followed to minimise costs and for the effective completion of infrastructure projects like the distribution of energy lines
• Emergency arbitrator Provisions shall be incorporated and there shall be immediate remedies for parties like an injunction within a short period
• Lawyers, Judges, and other Arbitrators must be trained in India they should act as arbitrators in a field where they do not have experience before entering the arbitration.
• Institutional as well as ad hoc arbitration needs reform in India. There is a need to have dedicated arbitrators who would do one arbitration in a day, maybe two sessions.