1st ITA-IEL Joint Winter Forum on International Energy Arbitration

The Institute for Transnational Arbitration (ITA) and the Institute for Energy Law (IEL) recently held their first Joint Winter Forum on International Energy Arbitration on February 20-21 in Houston, Texas. Benjamin Jones, an associate at Jones Day in San Francisco and Executive Editor of ITA’s law journal World Arbitration and Mediation Review, reports.

Organised to follow directly after the IEL’s 65th annual oil and gas law conference, the event was the first joint conference between the ITA and IEL, both of which are divisions of the Center for American and International Law in Dallas, Texas. The forum was co-chaired by John Bowman, partner at King & Spalding in Houston, Michael Goldberg, co-chair of international dispute resolution at Baker Botts in Houston, and Susan Karamanian, associate dean at George Washington University Law School. 

A highlight of the joint conference was the luncheon interview of Charles N. Brower, 20 Essex Street Chambers and Judge on the Iran-US Claims Tribunal, by his son, Professor Charles H. "Chip" Brower of Wayne State University Law School.  This was the third in a series of oral history video interviews of preeminent international arbitrators conducted by the ITA’s Academic Council.  Click here to view the video interview.

The conference itself included discussion of the development of a body of specialised law in gas disputes, whether state counterclaims in investment treaty arbitration may resolve concerns about the legitimacy of the system, and the adequacy of remedies in international energy arbitration.

ITA-IEL Winter Forum

Is a body of specialised law emerging in international gas disputes?

A common theme throughout the conference was whether international energy arbitration is a distinct practice. Several panellists addressed the question of whether a body of specialised law is emerging in international gas disputes. 

The question first arose in a debate between Jeremy Wilson, partner at Covington & Burling in London, and Graig Alvarez, partner at Fernelius Alvarez in Houston, regarding whether arbitrators or judges were better positioned to resolve disputes arising from the shale gas boom. The debate was moderated by Suzana Blades, senior counsel at ConocoPhillips in Houston.

Wilson argued for arbitrators, asserting that the issues involved in shale gas disputes are contractual in nature and turn on well-settled law, such that there is no need for courts to develop precedents specific to the shale industry. Wilson illustrated his point by considering disputes involving implied covenants to develop; while such disputes may involve novel questions about the duties of a prudent operator, the relevant case law underlying the legal issues is settled. He also noted that US precedent in this area may be of little relevance abroad, as the lessor-lessee model of hydrocarbon exploitation is virtually unique to the United States. 

Alvarez challenged Wilson’s argument that new case law is not needed, and pointed to the need for case law interpreting recent statutes enacted to regulate the shale industry. In particular, Alvarez noted a December 2013 decision of the Pennsylvania Supreme Court, Robinson Township v Commonwealth of Pennsylvania, in which the court held that numerous portions of the state’s shale drilling law violated an environmental rights amendment in the state’s constitution. Alvarez argued that the law surrounding shale development is still in flux, and that judicial resolution of shale gas disputes is necessary to establish precedent in this area. 

In another session, Laurence Shore, partner at Herbert Smith Freehills in New York, raised the same question of whether a specialised law is emerging in international gas disputes in his year-in-review presentation of the top ten developments in international energy arbitration in 2013. In particular, he called attention to price review arbitrations arising from long-term gas supply agreements, including an ICC tribunal’s recent award in RWE v Gazprom, in which the Czech buyer was able to secure an adjusted pricing mechanism that “reflects the relevant conditions on the gas market at the time of the price revision in May 2010.” 

Shore observed that many commentators have expressed concern about price review mechanisms, given the lack of guidance in price review clauses and under applicable law. He explained that while gas price review issues could emerge as a lex specialis – or a lex petrolea, as he described it – the development of a specialised body of law has been inhibited by the fact that such disputes are resolved in arbitration, where expert reports and awards are kept confidential, and that few experts participate in multiple disputes. 

Can state counterclaims salvage investment arbitration?

Mark Friedman, partner at Debevoise & Plimpton in New York, presented a paper that he co-authored with Ina Popova, an associate in that office, with Karamanian moderating the discussion. The paper raised the question of whether the increasingly frequent assertion of counterclaims by states can salvage investment arbitration from a perceived legitimacy crisis.

Friedman drew a parallel to Russia’s Bolshoi Ballet, a once-grand institution in decline whose planned refurbishment failed to live up to expectations. Quoting former Russian prime minister Viktor Chernomyrdin, Friedman cautioned: “We hoped for the best, but in the end things turned out as usual.” 

Friedman identified three areas of concern for state counterclaims in investment arbitration. First, he observed that there are significant treaty-specific jurisdictional limits on what counterclaims can be asserted. He contrasted Goetz v Burundi, in which an ICSID tribunal held that the treaty language – defining qualifying disputes to include “interpretation or application of any investment authorization” – extended to the state’s counterclaims, with Roussalis v Romania, in which the tribunal held that the treaty language – limiting qualifying disputes to those “concerning an obligation of the [host state] under this Agreement” – did not extend to counterclaims arising under Romanian law. Limitations in the treaty could thus lead to an “option” for the investor whether to allow the state’s counterclaim to proceed. 

Friedman then discussed admissibility, noting the difficulties of determining the requisite connection between an investor’s claim and the state’s counterclaim. Friedman noted that the Saluka v Czech Republic tribunal described the “connection” test as a “general legal principle,” but that different institutional rules have different requirements regarding admissibility of counterclaims. Friedman also pointed to a series of decisions, including Amco v Indonesia, Saluka, and the recent UNCITRAL case of Paushok v Mongolia, holding that state counterclaims that arise from domestic law lack the requisite connection to the investor’s claims. Friedman noted that the evolving analysis of admissibility could effectively lead to a situation in which the investor’s claim dictates the scope of admissible state counterclaims. In this regard, he raised the recent decision in, in which the tribunal rejected jurisdiction over the state’s counterclaims because it had no jurisdiction over the primary claims. 

A third area of concern is the rules of arbitral procedure, Friedman said. He observed that investors may not be able to challenge ICSID counterclaims as “manifestly lacking legal merit,” and that investment tribunals are constituted before the investor is aware of the state’s counterclaims, which may create a mismatch between their areas of expertise and the issues that they must ultimately determine.   

In summary, Friedman concluded that merely asserting state counterclaims more often “will not, in itself, materially improve the legitimacy of the system.” He also expressed concern that counterclaims may in fact further undermine the legitimacy of investment arbitration if we do not adequately consider the specific challenges that they raise; indeed, statistical data indicates that state counterclaims rarely succeed.

Andrea Bjorklund, professor at McGill University, commented on the paper and raised the question of whether counterclaims may overcompensate for perceived asymmetry between investors and states by limiting investors to treaty claims, while inviting states to submit counterclaims under diverse areas of municipal law. Responding to comments from the audience, she and the authors acknowledged concerns about whether investment tribunals were the appropriate bodies to hear state regulatory counterclaims, such as those involving tax or environmental laws.

Concerns with the role of tribunals in policing the conduct of investors and states alike were echoed in a debate regarding whether arbitral tribunals have inherent authority to apply principles of human rights in energy disputes, which was moderated by Ruth Teitelbaum, associate at Freshfields Bruckhaus Deringer in New York and vice chair of the ITA Young Arbitrators.

Jeffrey Sullivan, partner at Allen & Overy in London, argued that tribunals have that inherent authority, while Monique Sasson, author of Substantive Law in International Investment Arbitration and co-managing editor of the online ITA Arbitration Report, argued that they do not. Sullivan and Sasson found common ground that in the investment arbitration context, a tribunal may be authorized to apply principles of human rights law if those principles were erga omnes or recognised as applicable by both contracting states.

Finally, the participation of states and state enterprises in energy arbitration was the subject of a panel moderated by John Bowman, which included Abby Cohen Smutny, partner at White & Case in Washington, DC, and Miriam Harwood, partner at Curtis Mallet-Prevost Colt & Mosle in New York. The panel featured a wide-ranging discussion of timely issues in what Bowman described as a “speed-dating” format, including, among other things, the potential risks and benefits of bringing parallel arbitrations against states and state enterprises; the circumstances in which international law is applicable to contracts between private parties and state enterprises; document discovery issues in disputes involving state enterprises; and the challenges of enforcing an arbitral award against a state enterprise. 

Smutny and Harwood discussed each issue from the perspective of both a claimant energy company and a respondent state enterprise or state. Among the most significant takeaways from the discussion was Smutny and Harwood’s shared view that commencing treaty arbitration against a state in an effort to gain settlement leverage in a commercial arbitration with a state enterprise is highly counterproductive, and may actually create impediments to settlement of the commercial claims. 

Are remedies adequate in international energy arbitration?  

Michael Goldberg moderated a panel discussion on remedies in international energy disputes. Panellists included Stephen Jagusch, global chair of international arbitration at Quinn Emanuel Urquhart & Sullivan in London; James Loftis, head of international dispute resolution at Vinson & Elkins in London; and Eduardo Silva Romero, partner at Dechert in Paris. Goldberg asked each panellist to comment on a specific issue relating to remedies.

Silva Romero first considered the availability of specific performance in international arbitration. He noted that parties to contracts with states or state entities often seek to enforce a stabilisation clause by requesting that the tribunal order a state not to apply a newly enacted law; or a renegotiation clause by requesting that the tribunal order the renegotiation of the contract in light of changes in applicable law. Silva Romero explained that tribunals face a number of practical difficulties in granting the specific performance of such obligations. In discussion, Jagusch posited that both the timing and presentation of a request for relief matter significantly, suggesting that a tribunal may be more willing to ask a state to refrain from enacting a new law pending the outcome of the dispute than to order a state to not enforce a law already on its books. 

Loftis discussed price review decisions in long-term LNG and gas supply agreements, noting that the issue has gained significant currency in recent years. He noted that gas price review awards often risk modifying the contract in ways that parties find commercially unrealistic or surprising. Loftis identified several factors underlying this problem, including poorly worded review clauses in older gas supply contracts; single-phase proceedings that require parties to submit complex formulas before understanding the tribunal’s views; and tribunals without industry experience that adjust pricing formulas to reflect their sense of fairness. 

Loftis identified several potential cures to unpredictability in price review arbitrations. He noted that some parties are developing price collars or bands that limit the scope of potential adjustments, although disputes arise as to where the band should be set. He also explained that final-offer or baseball arbitration may be well-suited to such disputes, as it imposes discipline on the parties to submit realistic formulas and prevents tribunals from making improper adjustments. 

Jagusch then described the emergence of moral damages in international arbitration, asking whether “moral damages might save arbitration from decades of frankly miserly damages awards?” He thought not but observed that, although moral damages have a long history, including centuries of French jurisprudence and the US-German Mixed Claims Commission’s seminal statement in the 1923 Lusitania case, only in recent years have moral damages become common in international practice, including in the case law of human rights courts, ad hoc tribunals and the International Court of Justice. 

Moreover, Jagusch identified a number of investment arbitrations in which moral damages were asserted, including three cases where these were awarded – Benvenuti v People’s Republic of the Congo, Desert Line v Yemen, and Al-Kharifi & Sons Co v Libya – though none of these led to substantial moral damages awards. He argued that Al-Kharafi, an award rendered in March 2013 under the Unified Agreement for the Investment of Arab Capital in the Arab States, was significant in that it marked the largest known award of moral damages – US$30 million. 

Jagusch summarised his “take-home points” on moral damages as follows: “In relation to treatment of individuals, if the state has behaved egregiously, seek moral damages. To succeed, however, you need evidence of measures causing substantial harm. The damages must be more than symbolic, but can be proportional to the scale of the investment. Do not frame damages as punitive; reparation is the test. And consider who has suffered and to whom compensation would be made.” 

Goldberg asked the panellists whether they believed “tribunals are getting the job done in determining damages.” The panellists each expressed their concern that arbitral decisions on quantum remain uncertain, resulting in user dissatisfaction and inflated damages claims. 

Silva Romero offered hope for the future, observing that arbitral tribunals no longer “split the baby” but rather seek to reconcile conflicting analyses provided by expert economists. He described two ways in which tribunals accomplish this. First, arbitral tribunals may identify the key variables necessary to determine quantum, and either calculate damages themselves or request the party-appointed experts to apply the tribunal-determined variables in their computational models. Second, in tribunals composed of civil law arbitrators, the tribunal may appoint a damages expert to help it reconcile the parties’ conflicting positions on quantum. Silva Romero acknowledged, however, that common law lawyers were unlikely to welcome a tribunal-appointed damages expert – a point readily agreed by his co-panellists. 

The final panel of the conference was moderated by Michael Goldberg and involved a distinguished group of Houston-based in-house counsel, including William Buck, general counsel, upstream, at ExxonMobil; Alan Crain, chief legal and governance officer at Baker Hughes; and Bill Noble, assistant general counsel at BP America Inc. The panel engaged in lively discussion in response to questions raised by Goldberg, including with respect to selection of counsel, selection of arbitrators, and mechanisms to improve the efficiency and costs of arbitration.