What is energy arbitration and why is it so popular?

The international energy industry is multi-faceted, comprising fossil fuel (coal, oil and gas), nuclear, wood, biomass, but also hydro, geothermal, wind, solar, wave and tidal power.

Instead of the jurisdiction of a state court, an arbitration agreement can determine the jurisdiction of a private court, i.e. an arbitral tribunal. Like state courts, arbitral tribunals render substantive, final, binding and enforceable awards. The main reasons why arbitration is of enormous importance in international trade are the choice and influence on the composition of the arbitral body (neutral, knowledgeable and experienced experts in that specific field), the generally faster procedure, the exclusion of the public, the possibility of structuring the procedure and the fact that cultural and geographical diversities of the parties can be taken into account.

Typical issues linked to energy arbitration

When dealing with energy contracts, there are many risks that do not occur in other contracts. The geological risk of an investment that does not yield the profit one is expecting can be relatively well assessed by technical experts ahead of the parties entering the contract. The issue (as often) arises when resource is proving to be e.g. a gold mine. A majority of energy-related contracts are lengthy contracts often concluded over a period of 5, 10 or 20 years. For example, a mining concession will usually allow a foreigner investor an exclusive right to a specific mine. These type of contract require a substantive investment by the investor, in exchange the investor is granted an exclusive right over a lengthy period of time over the proceeds of the mine. This particular lengthy contractual period is also attractive as a means to secure a long-term supply of energy. However, given that these contracts are so lengthy, they are particularly vulnerable to legislative changes or changes in circumstances. 

An example of a change of circumstances often planned for in long term gas supply agreement is the price adjustment clause. It is not possible in a contract spanning over 20 years to already determine the price in a manner that is immovable. Given the length of the contract, the parties usually plan for price revision clauses. There are many ways in which such clauses can be drafted but often, they plan for a pre-determined mechanism to adapt the price in case of a change of external circumstances which directly affect the price of gas. The parties to such clauses will want to be extremely cautious when drafting such a clause, if they are too vague, then they can be triggered at any time and for any reasons. If they are too narrow, then they may be too limited and lose their purpose. There has been a significant increase in the number of disputes that have been brought forward linked to price revision clauses due to the ever evolving geopolitics of the world.

Another common problem in the energy sector is the imbalance of power between the parties. Indeed, when a private party has, as opposing party to an energy contract a state owned company, it is easy to doubt the willingness of the local court to render a decision against its own government. This gives rise to what is called investment arbitration. The ICSID convention allows a private investor to bring a claim against a host state in an arbitration and allows investors to have specific protection under specific Bilateral Investment Treaties.

Besides the fact that, as shown above, to resolve disputes in energy related matters specific know how is required, also a neutral ground provided by an arbitral tribunal is another factor which makes arbitration so popular in the energy sector. Experienced arbitrators in the energy field who provide a neutral ground to resolve the dispute: two most important elements granted by international arbitration.

Switzerland as place of arbitration

Switzerland, and in particular Geneva, is a central place when it comes to e.g. commodities trading (including for example oil and gas) and it is one of the world’s leading arbitration places. As a key advantage, Swiss arbitration law, i.e. lex arbitri, does not allow for any undue interference by state courts during or after the proceedings. Switzerland is one of the few jurisdictions where any application to set aside an award must be brought directly to the country’s highest court. Very limited grounds are available and applications rarely succeed (i.e. only 2 %). The Swiss Supreme Court will render its decision within four months on average. Setting aside proceedings usually do not prevent the award from being enforced in the meantime. This reduces the risk of costly and lengthy post-arbitration litigation before state courts to a minimum.

Conclusion

International arbitration disputes in the energy and therefore natural resources sector have considerably increased in recent years, and so have their economic and political importance. The specific issues and complexities of disputes in the arbitration energy sector will become increasingly important in the course of the next few years further expanding the role of arbitration in this sector. Given the predominance of Switzerland as an arbitration center together with its history of a place of trading for commodities and its renowned arbitral experts Switzerland can only be seen as an essential place for energy related disputes.