Risk Rewired – The Energy Disputes Podcast - Episode 3

Speaker	Transcript
Christopher Wenn, Senior Associate	[Music] Hello and welcome to Risk Rewired, a fortnightly podcast by the Energy Disputes team at Burges Salmon. I'm Christopher Wenn, a senior associate in the Dispute Resolution team. Over this series, we'll be joined by industry professionals and our expert Energy Disputes team delivering valuable insights and practical solutions for managing risks and resolving energy disputes. In today's podcast, we'll be discussing the topic of effective management of disputes from the perspective of a commercial KC. I'm delighted to be joined for this podcast by Sebastian Isaac of One Essex Court. Sebastian took silk in 2022 and is an outstanding advocate who is adept at dealing with complex and demanding commercial disputes. On a personal level, Seb has been one of the brightest and most commercial barristers I've worked with, and it's a pleasure to have time to speak with him today. Hi Seb.
Sebastian Isaac, KC, One Essex Court	Hi, nice to see you.
Chris	So just to start, it would be great for our listeners if you could introduce yourself and indicate what kind of matters you've been working on recently, and your background.
Seb	Yeah absolutely. So, I'm a general commercial barrister at One Essex Court so I'm not a specialist only in oil and gas disputes, I work across the areas of commercial law including in banking and finance and in civil fraud, but I have a particular specialism in oil and gas and commodities disputes. So along with oil and gas, mining and metals, and sometimes even agricultural commodities, and I find that those two areas probably come together in terms of the matters that I deal with.
Chris	So,in terms of the cases that you've worked on in the energy sector, or that have an energy sector leaning over the years, what are the key themes or issues that you've noticed as to the kinds of commercial disputes that tend to emerge on those projects?
Seb	Absolutely. In one sense the most characteristic thing about energy disputes is the sheer variety of disputes that come up in the energy sector, particularly when you're talking about disputes coming into the United Kingdom from all over the world. So, when I first started in the mid-2000s, there were a lot of disputes that came out of the North Sea that were really pure contractual construction disputes, often relating to take or pay contracts for supply of gas, or supply of oil. But there are also, you know I've dealt with disputes relating to AAR owed by the Ukrainian National oil and gas supplier to Gazprom, I've dealt with disputes relating to the joint venture ownership of fields offshore from West Africa, Chris, you and I have dealt with a very interesting little dispute about the supply of petrol and diesel to a West African buyer, and I've dealt with disputes relating to the supply of electricity to the Kazak national electricity company by an American owner of a Kazak generator. That kind of variety is really what you get. The real themes that I think, and the reason there is a big litigation risk in the energy field, I think is that there are some unique characteristics, and they cut across each other and create this risk of litigation, and one of those is that what you are supplying or buying is usually an essentially fundable commodity.
Chris	Yeah.
Seb	If you're buying gas, you really don't care usually what gas you get. There are obviously different grades of oil, but nonetheless it's a commodity, and it's a commodity that's traded in the spot market. And that means that, as with all commodities, as with agricultural commodities, as with metals, you can be in or out of the money on a contract that you make to buy those commodities. But then, whereas with agricultural commodities you're normally buying over a pretty short time horizon, with oil and gas, and electricity and energy, you're generally needing to make contracts over a very long time horizon to make them work, because the investments are so substantial, and that means that you've got a really elevated risk of finding yourselves two years, five years, 10 years down the line, where one party is very heavily in the money, and one party is very heavily out of the money, and that is a recipe for someone to want to breach their contract.
Chris	So just in terms of thinking about the energy disputes that you've worked on, I'm interested in understanding your thoughts on how those energy disputes have been managed, and then particularly if we could go into your thoughts on the utility and success of different ADR techniques in resolving those disputes. One of the things that always strikes me in the field is, you're entering into very long-term contracts and the parties have to work together for a very protracted and long period of time, so it's worth maintaining those commercial relationships as between them as effectively as possible.
Seb	Yeah absolutely. I mean I probably don't have as much experience as you do of running the relationships end-to-end if you know what I mean, because you're the real expert in coming in at the beginning of the relationship before there's a dispute, and managing it throughout. Whereas as a barrister, I'm very much a specialist for a short time when the dispute is happening. But one of the things that I do really notice about disputes, is that the cases where the dispute is best managed, and often where the dispute doesn't actually end up going to litigation in court which is always your hope, is — I always say you want your litigators involved when you're making your contract, and you want your contract lawyers involved when you're litigating, because those are different skills and it is important for your litigation, it is important I think when you're making a contract, not to make the contract in summer and assume that it will never rain. Conversely, it's important not to only have litigators involved because then you'll never do any deals, because you see nothing but rain!
Chris	[Laughter] Well we see drizzle, we see drizzle! But yes, we do see rain. So, in terms of just coming back to the utility and success of ADR in resolving energy disputes, I think before we started the podcast we were discussing in detail the prevalence of dispute escalation clauses in energy contracts. Did you have any thoughts on those and their effectiveness, and the importance of key case law that's coming through in affecting how those escalation clauses are interpreted?
Seb	Yeah, absolutely. I mean I actually think that escalation clauses are a useful tool, particularly when you're talking about these long-term relationships. In a joint venture, to explore a field somewhere, or in a long-term supply arrangement, you really don't want to be jumping to litigation before you explore whether this is a relationship that you can salvage. I also think that there have actually been some quite interesting recent developments in how escalation clauses are enforced by the court. There's actually some useful cases that I think, certainly litigation lawyers, are aware of, but I think it's useful for people to be aware of more widely. One is called Kajima Construction and Children's Arc Partnership, and another is called Lancashire Schools and Lancashire County Council, and it's worth just thinking about what they tell us. It's actually quite odd, because the effect of those cases is that escalation clauses are in some senses less powerful than people had thought, in the sense that where it is inefficient, or where it would make the management of a dispute worse, then the court will not actually stay the litigation in order to force you into the adjudication or meeting system that has been provided for.
Chris	Right.
Seb	But conversely, I actually think that they make escalation clauses a better and more useful tool, because one of the things that people sometimes used to worry about is, if I put in an escalation clause, what if I get to the end of the limitation period and I want to sue, and the other side saying well you can't sue me because we haven't been through the escalation process, and my claim becomes time barred. And what the courts have said recently is basically, we're not going to enforce the escalation clause if the effect would be to time bar your claim, or in the case of the Lancashire Schools case, we're not going to force you to go through a two-party escalation process if there's seven party litigation and the whole thing would be made unworkable if you went through the escalation process. So, I think the position is, you can put in an escalation clause with confidence that you will be able to invoke it and use the procedure where it will be useful and will help you, but that it's not going to be enforced where to do so would have damaging consequences and make the party's ability to get their dispute resolved unworkable. So I'm certainly an advocate of escalation clauses, particularly in these cases where often you've got multiple parties, you've got joint ventures, you've got farming arrangements, and it just makes sense for these types of commercial parties to have a mechanism to explore whether or not they can resolve their disputes, and I think it's another example where you say, well look we want to do this end-to-end while we're making the deal, we want to have people with litigation expertise saying what type of escalation system is A) going to be given effect by the court, and B) going to give us a good opportunity to resolve these kind of disputes before they become too serious.
Chris	Yeah. And just thinking about the different options to resolve a dispute, often one of the questions that comes to me from clients is whether there is any merit or advantage to them to go through litigation or arbitration at the end of a dispute escalation clause for example, or generally.
Seb	Yeah.
Chris	I know that you've had a lot of experience throughout your career in both the courts and through various arbitration institutions, I didn't know if you had any thoughts in terms of the energy sector specifically, in terms of if there's merits on one over the other, or if you have any specific kind of preference from the cases that you've worked on?
Seb	Yeah absolutely. I mean I would say that the big advantages each way are probably quite clear. The most important question when you're deciding whether to be in litigation or arbitration, in my view, is how important confidentiality is to you, because that is the one thing that you are guaranteed in arbitration and cannot have at all in litigation. And often, when we're talking about big energy sector deals, you're talking about deals that are very sensitive and where you know there's often potential kind of government and regulatory involvement, you're often dealing with issues that almost reach the level of foreign policy in some of the countries in which you're operating in, and there's a very strong case I think for a confidential dispute resolution mechanism and that's when you choose arbitration every time. Conversely, it has been my experience that although you can use the jurisdiction of the English Court when you are doing an English arbitration, to support the arbitration and to provide remedies that the arbitrators can't give directly, if you are in a case where you think, if this goes wrong I'm going to need injunctions, if this goes wrong I'm going to need freezing orders, if this goes wrong I'm going to need urgent relief, in that case my view is that even an arbitration in England and Wales where you do have the opportunity to go and apply for those remedies to the court, is not going to be as effective in providing that kind of support to you because, for example, you are not supposed to get an interim order from the court if the arbitrators can give that order. But the question of whether or not an order is needed so urgently that the arbitrators can't give that order, is always going to be a contested one, so you're always going to have a fight that you don't have if you can go straight to court. And the other thing that I think favours using the courts is, the essence of the arbitration process is that the arbitration agreement is only between the two parties who have agreed, or three parties, or have many parties have actually entered into that arbitration agreement. So, it does create problems where you've got a dispute which involves two parties who have entered into a contract which has an arbitration agreement on it and a third party who hasn't. At that point you almost inevitably end up splitting your dispute resolution so that you're having to fight in two jurisdictions, whereas if you don't have an arbitration agreement, the court would just take jurisdiction over all of those disputes and probably consolidate them. So those to me are the factors that you're having to weigh up when you are deciding, and they're obviously particularly acute with oil and gas and other energy disputes, because you both may very well need confidentiality, but you also are very likely to have multi-party litigation and it's difficult to be absolutely sure that every single potential party to a dispute is going to also be party to the arbitration agreement.
Chris	Yeah, I see that. So, moving on to the last theme that I wanted to go through with you in terms of your thoughts on mitigation of disputes in the energy sector, so they don't arise at all. And you touched upon the importance of litigators being involved in contract drafting which I wholly endorse, and then when a dispute arises, contract lawyers being involved in the litigation process. I didn't know if you had any other thoughts in terms of how parties can go about at the start, when they're negotiating their contracts or entering into agreements, how they can think ahead or put in place mechanisms so that they don't end up in a dispute with their counterparty?
Seb	Yeah absolutely. I mean I think two things that I always think it's worth being particularly conscious of are, first having a properly thought through and well-drafted price variation clauses, if that's something that is even possible as part of the type of deal you're doing. Because as I said I think at the beginning, one of the drivers of disputes in the sector is when one of the parties ends up so far in, or so far out of the money, that it's almost perverse not to find some pretext to assert a breach, and that's where you need a price variation clause. Obviously, there's a cost to that as well because inevitably you are giving up the simplicity and the contractual clarity of just saying the price is X if you know what I mean.
Chris	Yeah.
Seb	But I think, if you're talking about a 10 or 20 year contract in a very volatile commodity, it's always worth thinking what is the price arrangement that we are going to both be willing to live with in 10 years, and in 20 years, and then achieving a situation where a price variation clause prevents rather than causes litigation, falls to the clarity of the drafting of that clause and that's where you want, I think, both your commercial and litigation lawyers to be looking at it with a view to, what would we be saying if we were in a fight about this clause. So that I think is a really useful and important thing to have in mind at the beginning of the of the process. Another big driver of disputes in the energy sector I think, is the exposure to regulatory change and regulatory risk because it's obviously a sector where governments have an enormous amount of interest where there are active regulators, and changes in the regulations can have a huge effect on the commercial outcomes of a contract, so just to give an example, I worked a few years ago on a case about the supply of electricity to various airports and there was a very very long-term deal for supply of electricity, but regulatory changes then meant that there was a requirement to allow third party access to the electricity supply into the end users, and suddenly the effect of that deal looks very different for the parties. So one of the things that I think that you have to have in mind at the outset and think about how you're going to manage it all the way through, is our contract regulator proof, and you can never be regulator proof but I guess regulator strong.
Chris	As near as.
Seb	As near as. Are we in a position where it's flexible enough to deal with the kind of regulatory changes that might happen in the market that we're operating in, and how are we going to manage the relationship if and when there is a change in regulations, a change in law, which affects the context in which we're operating and delivering under this contract. So, thinking at the beginning about volatility, and thinking about regulatory change means that you can try to future proof your contract a bit so that it doesn't all come as a surprise to you when someone's doing better or someone's doing worse in the situations that exist you know five to 10 years later.
Chris	That's really helpful, thank you Seb. All that leaves me to say is thank you very much for your time today which I'm most grateful for, and we look forward to the next podcast. Thank you very much.
Seb	It's been a great pleasure speaking to you as always. Thanks Chris.
Chris	Thank you for listening to Risk Rewired, the Energy Disputes podcast. If you would like to know more about our Energy Disputes team and how our experts can work with you, please visit our website. Don't forget to subscribe, and thanks for listening.