Parties the Oil and Gas Industry

“Is It Inevitable That Those Engaged In The Oil And Gas Industry Will Opt For Agreed Dispute Resolution Processes (Whether Personal To Their Contracts Or Set By International Instrument), Rather That Defer To The Procedures Of National Courts? Do You Consider Their Options To Be Adequate For Industry Needs?”

Introduction

The number of parties involved within the oil and gas industry, along with the complexity of drilling, exploring and production activities may increase the potential of disagreements, conflicts or different understanding upon the agreements signed between the parties which are likely to cause disputes. As the industry is known as a high-cost and high-risk commercial business, it is impractical for the business players to discontinue any business activities whilst seeking settlement over disputes. Therefore players see it as being critical to solve disputes in a swift and effective manner along with avoiding public attention which would be disadvantageous to the ongoing businesses. Consequently, players must decide the most suitable scheme and at the same time, still able to maintain the ongoing relationship. Delay is costly!

Generally, there are two basic ways in resolving disputes within the industry: adjudication scheme through the national court and the non-adjudication schemes – voluntarily agreed by the disputants – which varied from the least intervention scheme: negotiation, mediation, neutral evaluation and mini-trial; to a more intervention schemes: med-arb, expert determination and arbitration. For the purpose of the paper, the present author will consider whether it is unavoidable that parties within the industry will opt for agreed dispute resolution schemes rather than defer to the procedures of national court. This paper will also consider whether the preference is adequate for the industry’s needs.

Alternative Dispute Resolution (“ADR”) Within Oil And Gas Industry

The Tendency To Avoid Any Litigation Procedures

As the oil and gas industry is a heavily regulated industry, sometimes it is necessary to have decisions from the court on a point of law, or protective or injunctive remedies. Thus when a dispute arises, litigation procedure will be unavoidable, at least for the aspect of the dispute for which an order is necessary. However, many issues need to be considered within this conventional legal method. The slow pace of litigation, expensive legal fees, court attitude, judges who handle the case not being specialized concerning the industry concerned, and a decision underlying a win-lose approach are often reasons for the parties to resolve the disputes at hand outside the court through various forms of ADR as discussed below. In addition, ineffective outcomes from court litigation, as well as the risk that any disputes settled through such litigation may not have the desirous result, have increased the tendency among the industry to settle their disputes outside the court.

Following the legalization of the Civil Procedure Rules 1999, the conduct of litigation in England has entered a new regime. Within the new legislation, the court strongly encourages the disputants to use a form of ADR where the court considers it appropriate, and to facilitate the use of such procedure. Thus, litigation will be the last approach to settle any disputes arise from a commercial agreement.

The term “Alternative” within the ADR, might cause misunderstanding, as if the scheme in the end – especially within commercial disputes – will replace the process of litigation in the courts. In this regard, it is needed to be understood beforehand that ADR is a dispute resolution scheme which coexists with the settlement of disputes through the courts. It is usually conducted outside the jurisdiction of the court.

There are various mechanisms within the ADR where each scheme having its own inherent procedures:

1. Negotiation

Being the least intervention dispute resolution scheme agreed by the disputants, negotiation is a non-binding scheme by which the disputants interact with one another and make an effort to settle any disputes without the intervention of a third party. Negotiation allows the disputants to have the maximum control over the process and its outcome.

2. Mediation

With relation to the oil and gas industry, Hew R. Dundas argues that mediation ought to be successful as disputes within the industry by and large are purely commercial disputes between equally commercial parties. In this case, a mediator acts only as a facilitator and scrupulously avoids making any kind of evaluation and recommendation concerning either party’s case during the negotiation process (a facilitative mediator). With the mediator acting as a facilitator, the parties are expected to follow any decision which is derived from their mutual agreement. Mediation tends to be more successful when the mediator has specialist knowledge of the industry or of a technical process used within it. Awareness of appropriate legal terminology required is also valued. The drawback, however, is that it is seen that the outcome is no more than an agreement enforceable as a contract in law. Parties may not appreciate its usefulness.

3. Early Neutral Evaluation (ENE)

As a preliminary assessment of facts, evidence or legal merits, ENE aims to serve as a basis for further and fuller negotiations, or, at the very least, helps the disputants avoid further unnecessary stages in litigation. An independent person – known as a neutral – will expresses a non-binding opinion on the merits of the issues specified by the disputant. However, the success of ENE relies upon the disputants’ faith in the fairness and objectivity of the neutral third-party as well as their willingness to compromise. An ENE is generally suitable for cases which require technical, scientific or specialist issues requiring expert involvement.

4. Mini-Trial

A mini trial is broadly used in resolving any issues capable of negotiation especially substantial commercial or technical disputes with mixed facts and law issues; including patent, construction and contract disputes, product liability and joint venture disagreements. It is not suitable when the case turns exclusively on issues of law and credibility. The key success of this approach is the presence of both sides’ of the disputants and the exchange of information that takes place during the mini-trial. A neutral will be appointed to sits with the disputant’s senior executives and assists them to negotiate how they will settle their disputes. Mini-trial helps the industry as it puts the senior executives in the position of listening to the case as adjudicators and negotiators, with an additional input of a neutral applying facilitative scheme.

5. Med-Arb

To overcome the drawback of mediation where its outcome is no more than another agreement, the industry is now developing a process which starts as a mediation and finishes as arbitration. A mediator will try to bring the parties to compromise their disagreement. If the parties fail to compromise, they will then proceed to arbitration. The advantage is the time and cost efficiency as it uses the same person for both roles (mediator and arbitrator). However, this advantage may be a disadvantage to the process as the disputants may be less open with the mediator in private session if it is known that the mediator may act as arbitrator. As for the mediator, one will not be able to fully ignore any information given by the disputants when acting as arbitrator. As a result, it could affect the fairness of the outcome given. Med-arb is not suitable in any cases where either mediation or arbitration would be inappropriate; or for any case where the parties may want to disclose confidentiality information with the mediator. In the United States, it is generally used to solve labor contract negotiations disputes.

6. Expert Determination (ED)

Considering that it is essential for the industry to keep any business activities running whilst the disputing parties seek settlement over disputes, it is common for the parties to choose ED over any other mechanisms by referring the disputes to a third neutral party for determination. The key feature of this scheme is its speed as the disputants will appoint an expert within the oil and gas industry to consider issues and make a binding decision or appraisal without necessarily of having to conduct any enquiry following adjudicatory rules.

7. Abitration

When parties based in a single state enter an agreement and opt to dispense with an arbitration clause, the local courts will decide the dispute. Depending on the state, the applicable law may be from the common law tradition, the civil law tradition, Shari’a, or another legal tradition. However as the parties involved within the oil and gas agreements are usually from different jurisdictions, they will consider the local legal system and mechanisms of the local judiciary as something foreign for them. Thus, it is understandable when they decide to opt for international commercial arbitral institution as the forum for disputes. Not only will they feel more comfortable as they have control over the rules used, but the arbitrator appointed to resolve the disputes is believed to have integrity, honesty, expertise, and professionalism in their fields (and in no way not representing the parties nor having anything to do with the case). Moreover, as the outcome- based on a win-win solution approach – shall be final and binding, the arbitration forum remains efficient in terms of time and cost. This, however, depends on the agreement of the parties to execute the arbitral awards as it has no effective force of power. In addition, the benefit of international commercial arbitration for international oil and gas disputes can only be achieved when arbitration agreements and procedures are well thought out.

To summarize, with the drawback of litigation procedures, business players within the oil and gas industry are now seeking an alternative requiring more efficient schemes in terms of time and cost. This, however, applies only to disputes which do not require any decisions from a court on a point of law, or protective or injunctive remedies. Despite the wide variety of alternative schemes – where each of every scheme has its own advantages and disadvantages – there are several common features which distinguish them from procedures of national court:

1. In ADR, the disputants are largely free to fashion the procedures. As a result, a flexible rules in assist the parties could allow them to have more control over the procedure;
2. As the focus on interest in ADR is merely the contentious issues, the outcome could be more satisfying and efficient;
3. With a management involvement – involving the business players directly in the scheme – a more creative and forward looking outcome will be achieved.
4. ADR focuses on relationship. Thus, the disputants will be able to maintain a positive relationship even after the disputes have been resolved;
5. Confidentiality used within an ADR scheme is a critical element to avoid any unnecessary public attention which would be disadvantageous to the ongoing businesses; and
6. With a limited transaction costs as an approach, ADR schemes generally produces significant savings in terms of the time invested, the direct costs of the procedure and the many indirect costs arising in the context of disputes.

Conclusion

Although ADR can be useful as a complement to litigation – which is sometimes unavoidable – it can often assist in solving disputes before litigation becomes necessary. The success of ADR within the oil and gas industry is reliant upon the continuing co-operation and goodwill of the parties to resolve the disputes. ADR can be an alternative from the costly and time-consuming process of litigation without having to discontinue any ongoing business activities. However, the author observes that the most appropriate dispute resolution scheme should always be determined on a case by case basis, depending on the particular circumstances of each case. The nature of the dispute, the identity of the parties, the courts’ jurisdiction, and the location of assets are only some of the many factors which should be taken into account when deciding which form of dispute resolution scheme suit the parties’ best.

Moreover, the author also considers that it is essential to include a clear, comprehensive and internally consistent dispute resolution provision in every commercial agreement within the industry. The effort to tailor the provision during the negotiation and drafting stage will be the most suitable approach in avoiding any costly and time-consuming dispute settlement scheme. Further, it is at the drafting stage that the parties have the best opportunity to take control on how they would settle any potential disputes.