Risk Rewired – The Energy Disputes Podcast - Episode 6

Speaker

Transcript

Jessica Evans (Jess)

Partner

[Music] Hello everyone, welcome to the latest episode of Risk Rewired: the energy dispute podcast, from Burges Salmon. I am on hosting duties today, my name is Jess Evans and I'm a partner in Burges Salmon's energy team where I focus on construction and engineering disputes. In today's episode we are looking at dispute resolution mechanisms in the context of energy projects and I am joined today by two of my colleagues also in the energy dispute team, regular listeners will know them very well by now it's Gregor Hayworth and Chris Wen. Welcome back both.

So dispute resolution mechanisms, we briefly touched on the drafting of these in our very first episode where we were joined by colleagues from our energy transactional team and between us where we were looking at risk mitigation measures at an early stage in an energy project. The conclusion that we reached in that episode is that often parties, and their advisers to be fair, they don't always give the dispute resolution regime proper care or attention when it comes to drafting. In fact the accusation of one of our guests was that such dispute resolution clauses are, quote, 'not sexy' so in this episode we are going to try and demonstrate that that is simply not the case, at least that's the idea, let's see how we get on. It's probably worth starting with some first principles, why include a dispute resolution provision in an energy contract at all? Chris, have you got any initial thoughts for that one?

Christopher Wenn

Senior Associate

Yes, I suppose there's quite a lot of reasons why, but the first one that that kind of springs to mind is that dispute resolution provisions in in a contract will give you the opportunity to avoid disputes, so the way that the clause can be drafted enables the parties to insert different procedures, in order to resolve that dispute amicably between themselves and preserve the relationship, before resorting as an end game to arbitration or litigation as a final result.

Jess

I see your point, so trying to avoid the dispute before it actually gets to a dispute. Gregor?

Gregor Hayworth

Director

Yeah, I guess other parties haven't had the chance to kind of decide on those procedures, they can fit those procedures to the project itself. So for example an arbitration, you know, which could last a couple of years or so, that's unlikely to be a kind of optimal forum for resolving a dispute where the parties wish to to get a quick decision to unlock something and to progress the project.

Jess

Yeah, I can see what you mean, so perhaps if there's sort of a a sticky issue which has come around the specification or the performance regime, just an opportunity to try and resolve that immediately rather than having hanging over for, as you say, a couple of years possibly in an arbitration context. And I suppose the final one that springs to mind for me is, actually, if you have a clear dispute resolution provision that is hopefully going to provide the parties with a pretty predictable framework for resolving the issues that might crop up. That will certainly help reduce uncertainty and is probably therefore going to reduce overall costs, you're not then having satellite disputes around what is the dispute procedure.

Okay so, we've established then a dispute resolution mechanism, it's probably going to be advisable at the very least in most energy projects. What do we think are some of the general characteristics of these projects which might, they might then become more relevant when the parties are considering what is the best forum for my particular project? Chris, any thoughts?

Chris

Yeah, so I suppose when we're thinking about the energy sector generally and contracts that are entered into for construction or maintenance of projects they often involve a number of different factors, one of the factors is international parties, so often the party or parties with relevant technical expertise, and then those that are providing the finance to build or maintain the project, are based in different jurisdictions.

And then secondly, the project that those parties have come together to build and/or maintain is often based in an entirely different location to the parties themselves, so another element of complexity. These are inevitably projects with long terms, given that it usually takes quite a long time to to build a project, and then that project may have a projected lifespan of many decades. And then there're also projects that have massive costs both in terms of CapEx and then also OpEx. Gregor did you have any other thoughts?

Gregor

Yeah, I think energy projects, they often involve complex or un-proven technologies and that can obviously result in, or contribute to, contentious rising and we've seen that relatively recently on a number of battery projects, for example. And equally hazardous site conditions you know, I'm thinking offshore wind farms particularly in the UK, North Sea. Those can give rise to a whole host of issues, and actually those are points that we touched on in episode four of the podcast with Richard and Sarah, we were discussing disputes that could arise across the different technologies.

I guess these points, and those that you mentioned Chris as well, when you take those together they do increase the risk that a number of different types of dispute can arise during the life cycle of an energy project and clearly those disputes will need to be resolved one way or another and so it's really important then that the contract which the relevant dispute relates clearly sets out how the party should go about attempting to resolve the dispute, and not all contracts will contend to dispute resolution clauses, but whatever dispute resolution or jurisdiction provision has been incorporated into the contract these need to not only be legally enforceable, but also practically workable.

Jess

That's really helpful, and actually I suppose there is a degree of linkage in terms of where we started around very much underlining why these contracts should include carefully considered dispute resolution provisions. Gregor, I think you mentioned there The Project Life Cycle, that gives me an excellent opportunity to refer back to the Burges Salmon Energy Dispute Guide, which sets out some of the disputes that can arise across the whole life of the energy project. The guide, it goes through and gives examples of some of those various disputes and also, helpfully we hope, gives practical options intended to help avoid, or at least mitigate, some of the effects of those disputes. So do look out for the guide on our website if you want to know more.

Right, so we've helpfully outlined some of the characteristics which we think are particular to some of these energy projects. When we sort of, looking at those those factors, those characteristics, how do then they impact upon the choice of forum so the parties are looking at what's best for for my project, Chris?

Chris

So I suppose when we're thinking about arbitration and litigation, just taking arbitration first, there's a number of reasons why parties might favour arbitration, and a few of those are the perception that there's no bias from the court of one jurisdiction to one party, particularly important where we're dealing with international parties from different jurisdictions. The second point is that arbitration is confidential, which is often an important consideration for the parties themselves, and also it's important given the subject matter of the dispute which often will involve commercially sensitive information or technology which is cutting edge or one of a kind. The third point is around ease of enforcement, so I can't overemphasize the importance of the New York Convention in its relevance in terms of making arbitral awards easy to enforce in multiple jurisdictions that are signatories to that convention itself.

Parties may also be attracted to arbitration on the basis that the arbitral award is final, so it kind of ends that dispute with minimal rights for the parties to challenge it and take that process forward. And then the last point that it's is that it's a flexible process that can be tailed to the needs of the parties.

Jess

Thanks Chris, that's really helpful, I certainly see arbitration quite commonly in a lot of the agreements I've advised on, but do you think there is still a role for litigation in some of these, in these projects and these contracts?

Chris

Certainly, I mean, I think litigation particularly in terms of litigating in the courts of England and Wales is still highly prevalent in lots and lots of energy contracts, and the reason for that is peculiarities of this jurisdiction, i.e. we have established jurisprudence, a sophisticated system for dealing with complex and high value disputes, and then also a high quality judiciary, so the parties to a dispute, that are submitting it to litigation in this jurisdiction, have a trust that they will get a fair trial and will receive a judgment which is coherent and makes sense.

Jess

I suppose the other thing that we could add with my construction litigator hat on is, because we have specialist courts, so the technology and construction court for example, again with dedicated Judiciary with experience particularly on these matters.

Right then so, arbitration, litigation, it is often the default choice, is certainly what I see probably most commonly in the contracts that I've advised on. But what about alternative dispute resolution? What do we see other than arbitration and litigation, Gregor?

Gregor

We'll often see adjudication, that's used frequently in energy construction contracts, we usually see, well, predominantly see adjudication provisions in UK domestic onshore projects. Adjudication can work really well on live projects where keeping the project moving is critical and the parties need a speedy decision. The adjudication process it's meant to be a kind of quick and dirty process with much tighter time scales than arbitration or litigation essentially the appointed adjudicator will have 28 days to issue a decision of following the referral notice, albeit that deadline can be extended up to 14 days with the referring party's consent and further periods by the agreement of the parties. However, adjudications tend not to lend themselves particularly well to very complex and large claims where you might otherwise have a number of years to progress that claim via arbitration or a court.

Jess

Okay, so thanks Gregor, yeah you can absolutely see there's some real reasons why adjudication might be a good choice for some of these energy contracts, but I suppose it's probably worth flagging isn't it that actually whilst the parties have got a degree of freedom of choice when they're looking at and really thinking about what is best for my project, what forum should I be looking to incorporate into my contracts? There are circumstances actually, where that choice is sort of taken out their hands in a construction context, does that sound right?

Gregor

Yeah absolutely, energy construction contracts can, whether holy or in part, to be subject to the Construction Act, depending on whether the relevant construction operations fall with any of the exemptions under that act, so whether the construction act applies and therefore whether the parties have a statutory right to refer dispute, under that contract, to adjudication at any time that's generally not a straightforward question to answer. You can also have a situation where certain of the construction operations under the contract are covered by an exemption under the act, plus other construction operations are not and that leads to what's known as a hybrid contract.

Jess

Okay so hybrid contracts then, so I think what we're explaining there is there are circumstances where you'll have some of the construction works which might be covered by the statutory adjudication process, whilst other packages or bits of the works, they're not covered by the statutory scheme for adjudication, and instead they will be governed by another form of dispute resolution. So I mean operating that in practice, that could be hugely tricky.

So we've touched on adjudication there, we've explained that we do see it in a number of the contracts that we see in the energy sector, you mentioned offshore there, solar is another one that we do sometimes see.

Thinking about a bit more widely around alternative dispute resolution options, another one that we do see in certain energy sub-sectors is expert determination. So oil and gas, for example, springs to mind on my side for that one, for those who might not be quite so familiar, expert determination, it's a consensual process, what I mean by that is, it's very much a creature of contract. The parties have to actually agree to utilizing it so it's not going to be imposed by statute. Under the process there is an independent expert rather than, sort of, a tribunal or perhaps a court, and it's that expert which is making the final decision on a dispute. That decision, it's usually going to be binding on the parties, not always, the parties can agree in their contracts to have otherwise, but ordinarily it will be binding on the parties. And one of the advantages of the process, certainly from some parties point of view, is the fact that it is usually going to be much quicker and therefore less costly, certainly than say a litigation or arbitration. The idea is that you'll be getting a decision certainly within a matter of weeks, rather than possibly months, but certainly not years.

And I think the reason we see it in some of the oil and gas projects, for example, is because of the technical nature of some of the issues that crop up there and one of the advantages of expert determination is that you can elect to have a specialist expert, someone who actually has real knowledge and expertise in the particular area.

I think probably one of the other reasons why certainly some of the oil and gas players like expert determination is that the process is, sort of, inherently less adversarial in nature than some of the other forums that we've touched on today. Oil and gas, it has traditionally been a fairly small market, and what I mean by that, in the sense of the number of players, certainly not in terms of the scope and the significance of the contracts, inevitably some of those can be quite significant. Because actually it's a smaller market, there is a real commercial desire not to burn bridges, not to alienate your potential future customer or your client, so in those circumstances again expert determination maybe could be a good choice.

We do see expert determination in other sub-sectors, renewables for example, I certainly don't think that's necessarily common but you do sometimes see it in there and I suppose the other point that I would maybe add about expert determination is that it's just not always going to be appropriate for every project. Just as an example, it doesn't tend to work very well, or particularly well where there is substantial factual disagreement which might need sort of oral testimony, and it's really not ideal for if you've got a purely legal sort of a contractual dispute and that's mainly because the appointed expert they they're going to have the expertise in a particular technical specialism but they're quite frequently not legally qualified, so maybe not always best place to sort of decide legal disputes. And I suppose the other point that is key is experts determination is not underpinned by an established body of case law, and certainly in my experience that can mean that the outcomes that we see, they're less predictable, it's sometimes difficult to know which way the experts going to go. So can have its advantages, can work in certain projects, but certainly not going to be the preferred option for dispute resolution in every occasion on every project.

Right so finally then, if you had to summarize, drawing all the points that we've discussed on earlier, what in your view makes a good well-crafted dispute resolution clause, Gregor?

Gregor

I think, for me one of the key things is even before you put pen to paper on drafting, it's making sure that you've chosen the correct dispute resolution framework to fit the project and what likely disputes may arise. We touched on earlier that there's no point in having an arbitration agreement incorporated into a dispute resolution clause where the parties want a very quick turnaround in terms of a resolution to the dispute, similarly you know, conversely even, if you've got an adjudication clause in which the parties may have very complex and significant disputes, that also may not blend itself well, albeit I mentioned the Construction Act statutory restrictions in previous question, which may tie the parties to certain dispute resolution provisions.

Jess

And Chris?

Chris

Yeah, I mean I agree with that and I think all I would add is that there's no substitute for clear unambiguous drafting. So it's worth spending the time to actually properly draft the clause and set back and make sure that it articulates clearly what the parties' process that they adopt to resolve the dispute is, and that all of the timetabling for that process is easy to understand and unambiguous, because often a dispute will arise many years after the parties have negotiated that clause, so it needs to work and hang together well so that they can pick up the document years from now and follow the dispute resolution process seamlessly.

Jess

Thanks both. So my key takeaways then, so we've got really aligning it with your business and considering the possible risks that could arise on your project, and also clarity, being clear and unequivocal in your DRP, your dispute resolution provisions, its meaning, and its effect, and Its workability.

Right, Gregor and Chris, that is probably an excellent place to finish today, whether we have convinced our listeners in the wider energy sector that dispute resolution provisions really are are sexy, that probably remains to be seen, but hopefully we've convinced people to at least give their regime a second look.

Thank you very much to both of you for your insights and for being with us today.

Chris and Gregor

Thank you Jess.

Thank you very much.

Jess

[Music] Thank you for listening to Risk Rewired: the energy dispute podcast, if you'd like to know more about any of the points discussed today or our energy disputes team and how we can work with you, you can contact us via our website. Don't forget tune in for our next episode where we have a special guest joining us, one not to miss. [Music].