Dispute Resolution in the Oil and Gas Industry

8/3/2019 Dispute Resolution in the Oil and Gas Industry

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"DISPUTE RESOLUTION IN THE OIL AND GAS INDUSTRY - RECENT

TRENDS"

by ANTHONY CONNERTY

I. INTRODUCTION

This Paper looks at recent trends in dispute resolution in the Oil and GasIndustries. There is probably little doubt that the two major methods of disputeresolution are still litigation in the national courts and international arbitration. Butit is clear that other dispute resolution processes are being used, amongst themADR and Expert Determination. To state the obvious, which type of disputemechanism will be used in any particular case will depend upon the precise natureof the dispute: a jurisdiction dispute arising out of an international contract is likelyto be settled by litigation rather than, say, expert determination.

This Paper looks in Section II at some of the types of disputes which can arise, and

in Section III at methods of dispute resolution: international conventions, statutoryarbitration and, in the case of commercial contracts, litigation, arbitration, ADRand expert determination.

Sections IV and V look at dispute resolution in the context of two specific factors

which are likely to have an impact on the Energy Industry.

Section IV considers the Contracts (Rights of Third Parties) Act 1999. That Act is

likely to have an effect on arbitration provisions in Energy contracts.

Section V considers Electronic Commerce. E-Com is already being used in the

Petroleum Industry. Its use will almost certainly increase. Will new methods ofdispute resolution be developed? Will on-line trading lead to systems of on-line

dispute resolution?

II. TYPES OF DISPUTE IN THE OIL AND GAS INDUSTRY

Disputes in the Industry can range from maritime boundary disputes betweenStates through oil and gas trading contract disputes to offshore construction and

pipeline disputes.

Some of the areas of dispute which are likely to arise include :

A.International Maritime Boundary Disputes

B.Equipment

C.Jurisdiction Disputes

D.Oil Trading Contracts


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E.Gas Contracts

F.Redetermination

G.Quality Disputes

H.Hedging

III. METHODS OF DISPUTE RESOLUTION USED IN THE INDUSTRY

Introduction

Because of the special nature of the Energy Sector, disputes between States and

disputes between corporations and national governments are likely to arise. Resolution of these disputes may be by way of machinery contained in

international Conventions or in domestic legislation passed by national

governments.

On the commercial front, many of the dispute resolution processes used in the Oil

and Gas Industry will obviously be similar to those used in other areas ofinternational trade.

Given the international nature of many of the contractual arrangements in the

Industry, it is understandable that, in addition to litigation in national courts,

disputes are likely to be resolved by way of international commercial arbitration.

For the future, increased use may be made of two other dispute resolution

processes. First, Alternative Dispute Resolution (ADR) in its various forms(particularly mediation/conciliation). Second, expert determination.

Set out in this section are some of the dispute resolution processes which are likely

to be used in the Oil and Gas Industry.

(1) International Conventions

The third United Nations Conference on the Law of the Sea (commonly known asUNCLOS III) states in Article 2 that:

"(1) The sovereignty of a coastal State extends beyond its land, territory andinternal waters... to an adjacent belt of sea, described as the territorial sea.

(2) This sovereignty extends to the air space over the territorial sea as well as to

its bed and subsoil.

(3) The sovereignty over the territorial sea is exercised subject to this Convention

and to other rules of international law".


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Articles 3 and 5 deal with the breadth of the territorial sea and the "normalbaseline" and Article 3 provides that:

"Every State has the right to establish the breadth of its territorial sea up to a limitnot exceeding 12 nautical miles, measured from baseline determined in

accordance with its Convention". Article 5 states that:

"... The normal baseline formeasuring the breadth of the territorial sea is the low water-line along the

Coast...".

Given the complexity of the subject matter of UNCLOS III it is unsurprising thatthe dispute resolution processes contained within the Convention are themselvescomplex. The first session of the U.N. Convention began in Caracas in 1974 anddiscussions as to dispute resolution processes continued until the Convention wasapproved in 1982. Part XV contains provision for the settlement of disputes.Article 279 provides that States which are parties to the Convention "shall settleany disputes between them concerning the interpretation or application of this

Convention by peaceful means..." Article 287 says that States shall be free tochoose one of the methods of dispute settlement set out in the Convention. Thesemethods include Conciliation in Annex V, Arbitration in Annex VII and "SpecialArbitration" in Annex VIII.

Under the conciliation procedure in Annex V, the Secretary-General of the United Nations maintains a List of Conciliators, each State's party being entitled tonominate four conciliators. Proceedings are instituted by written notification to theother party. A Conciliation Commission is set up comprising five members. Each

party to the dispute appoints two conciliators (preferably chosen from the List).

Those conciliators appoint a fifth conciliator who shall be Chairman.

The Conciliation Commission determines its own procedure and may "draw theattention of the parties to any measure which may facilitate an amicable settlement

of the dispute." The Commission is to hear the parties, examine their claims and

objections and "make proposals to the parties with a view to reaching an amicablesettlement".

The Commission is to report within 12 months of its constitution. The report is not

binding upon the parties: Article 7 of Annex V.

Arbitration proceedings are instituted by written notification to the other party,such notification being accompanied by a Statement of Claim on the grounds onwhich it is based: Article 1 of Annex VII. The Secretary-General of the United

Nations maintains a list of arbitrators. Each State is entitled to nominate four

arbitrators: "each of whom shall be a person experienced in maritime affairs andenjoying the highest reputation for fairness, competence and integrity": Article 2.The Tribunal is to comprise five members, one each of whom is appointed by themember country concerned from the List of Arbitrators, the other three members


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being appointed by agreement between the parties: these shall be nationals of athird State. The Arbitral Tribunal determines its own procedures. Decisions aretaken by a majority vote. Unless otherwise agreed the award is final and without

appeal.

The"Special Arbitration

"procedure in Annex VIII relates to disputes concerningfisheries, marine environment, marine scientific research, navigation and pollution.

(2) Statutory Arbitration

In the UK, the various statutes vesting the ownership of petroleum in the Crowncontain provisions for the granting of licenses.

Disputes involving licenses are to be referred to arbitration. For example, the

Petroleum (Current Model Clauses) Order 1999 contains a provision in Clause 37that if at any time any dispute, difference or question arises between the Minister

and the Licensee:

"as to any matter arising under or by virtue of this licence or as to their respective

rights and liabilities in respect thereof then the same shall, except where it is

expressly provided by this licence that the matter or thing to which the same

relates is to be determined, decided, directed, approved or consented to by theMinister, be referred to arbitration as provided by the following paragraph."

The Model Clause then goes on to provide that the arbitration is to be by singlearbitrator who in default of agreement between the Minister and the Licensee is to

be appointed by the Lord Chief Justice of England.

(3) Commercial Contracts

Introduction

The contractual provisions dealing with dispute resolution in commercial contractsare of vital importance. Provision will normally be made as a minimum for the

following:

1.Forum: in what country should the dispute resolution process take place?

2.Choice of Law: which country's law is to govern the contract? It is, of course,always open to the parties to provide for a choice of laws rather than a choice oflaw and to provide that disputes will be resolved by way of reference to general

principles of international law orlex mercatoria. However, the choice of a

national law is likely to be the norm.

3.Dispute Resolution Process: broadly speaking, there are four dispute resolution

processes in common use: litigation, arbitration, ADR and expert determination.


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If litigation, which country's courts are to have jurisdiction?

If arbitration: is this to be institutional orad hoc? If institutional, which

institution? LCIA, ICC, etc.?

If ADR, should some form of ADR filter mechanism be inserted in the contract,arbitration then only being triggered off in the event that the ADR process fails?

Or is expert determination the appropriate way to resolve disputes?

This Section looks at those four dispute resolution processes.

A. Litigation

Litigation in the national courts is probably - despite the increasing use ofinternational commercial arbitration backed up by the New York Convention - still

the major international dispute resolution process in use.

In the context of international contracts the major problem in relation to litigationis the prospect for one of the parties of that litigation taking place in the courts of aforeign country, conducted in a foreign language and under a foreign system of

law.

However, litigation may be the dispute resolution process used for a variety of

reasons:

No contractual provision is made for dispute resolution.

The bargaining power of one party is such that it is able to insist that litigationtakes place in the Courts of a country chosen by that party.

A deliberate, consensual, choice of the parties.

More than 80% of the cases heard in the Commercial Court in London have noconnection with England in the sense that either the subject-matter of the contract

has no connection with England or one or more of the parties is not English.

Such parties may choose the English courts as the forum for resolution of any

disputes which may arise under the contract and additionally may choose Englishlaw as the law to govern that contract.

Litigation in the national courts may, on the particular facts of the case, be the onlyrealistic option open to the parties. See for example the following cases referred toin the Appendix:

(1) Jurisdiction disputes


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Shell International Petroleum v. Coral Oil; Glencore v. Metro TradingInternational; Caltex Trading v. Petro Trading International; .

(2) No defence to the claim: summary judgment

Petrotrade Inc. v.Texaco.

(3) Injunctions, etc.

Shell International Petroleum v. Coral Oil

(4) Challenge to an arbitral process

Petroleos de Portugal and Petrogal v. BP Oil International; Total Liban v. VitolEnergy.

(5) Challenge to expert determination

Shell UK v. Enterprise Oil.

B. Arbitration

"The English have always been more given to peaceableness and industry thanother people and rather than go so far as London and be at so great charges withattorneys and lawyers, they would refer their difference to the Arbitration of their

parish priest, or the Arbitration of Honest Neighbours":

Edward Chamberlayne:Angliae Notitia, 12th edition, 1684.

(1) Generally

There is no international court to deal with international disputes. Therefore if no provision whatever is made in a contract for dispute resolution, any disputesarising out of that contract (which cannot be resolved by negotiation between the

parties) are likely to have to be dealt with by litigation in the national courts.

If the contract is between, say, a UK party and a non-UK party then that may meanlitigation in a "foreign" court. That may not appeal to the UK party. Equally, thenon-UK party may be faced with having to sue in the UK courts. In each case, one

party will be faced with having to resolve disputes in a foreign country under aforeign legal system and in a foreign language.

The way to avoid the problem is to make provision for some other method of

resolving disputes.

One obvious dispute resolution process to include in an international contract isarbitration. The parties can agree that, instead of their disputes being dealt with in


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the national courts, any disputes will be heard by an arbitral tribunal. Becausearbitration is a consensual process, the parties can decide who will resolve theirdisputes, in which country the arbitration should take place, what law should beapplied to the resolution of that dispute and which language shall be used for the

purposes of the dispute hearing.

The parties can also choose the rules to be applied for resolving the dispute.Additionally, arbitration being aprivate dispute resolution process, the parties willknow that the proceedings will be confidential.

Arbitration may - indeed in many cases should - prove to be a quicker and cheapermeans of resolving disputes than the national courts.

Many commercial contracts in which the parties have agreed to have their disputesresolved by arbitration will specify one of the well- known international arbitral

bodies such as the International Chamber of Commerce in Paris or the London

Court of International Arbitration.

(2) Arbitration and national laws

Arbitrations conducted under, say, the Rules of the ICC or the LCIA, must beconducted in accordance with the relevant national laws, and on an international

basis, with an eye to the New York Convention.

As to national laws, it is clear that arbitration - as a private dispute resolutionsystem separate from the litigation systems of the national courts - can only operatewith the agreement of national governments. Broadly speaking, national

governments support arbitration as a private system principally in two ways. First,by staying litigation in the national courts in circumstances where the parties haveagreed to arbitrate. Secondly, by enforcing in the national courts the awards made

by arbitral tribunals. In addition, the State courts may aid the arbitral process by,say, granting injunctions. But in return the State expects to exercise a degree ofcontrol over the arbitral process by, for example, allowing appeals in certaincircumstances to the State courts against arbitration awards.

ICC and LCIA arbitrations taking place in England are subject to the mandatory

provisions of the English Arbitration Act of 1996.

(3) Institutional Arbitration: the ICC and the LCIA

ICCArbitration

As an arbitral body, the ICC is amongst the world's foremost arbitral institutions.Its revised arbitration Rules came into force in 1998. The Rules deal with thecommencement of the arbitration; the appointment of and challenge to arbitrators;


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the service of the Claimant's Request and the Respondent's Answer; provisions asto the place of the arbitration, the language of the arbitration and the procedures to

be followed at the arbitration hearing; and the provisions relating to the Award and

scrutiny of that Award by the ICC Court in Paris.

LCIA Arbitration

Like the ICC, the LCIA is a truly international organisation. It will arrange andadminister arbitrations under any system of law in any part of the world. It will doso either under its own Rules or under the UNCITRAL Rules. There is no moreneed for an LCIA arbitration to be conducted in London than there is for an ICCarbitration to be conducted in Paris. The LCIA's own Rules have been translatedinto many languages.

The former president of the LCIA (now honourary president), Sir Michael Kerr,has said that:

"There are grounds for thinking that LCIA arbitration clauses are nowadays

increasingly incorporated into contracts. The new 1985 LCIA Rules are being used

world-wide and appear to have achieved world-wide renown".

The LCIA Rules have been revised from time to time, the most recent revisiontaking account of the new English Arbitration Act which came into force inJanuary 1997. The Rules, which follow a recognisable international pattern, took

effect from January 1998.

An arbitration under the LCIA Rules may well have particular attractions for the

Oil and Gas Industry.

Although an LCIA arbitration can take place anywhere in the world, the LCIA is,like the Institute of Petroleum, London based. London is one of the world's majorarbitration centres. The combination of the revised LCIA Rules and the newEnglish Arbitration Act may increase London's attractiveness as a venue forinternational commercial arbitration. In addition, there are various aspects of the

LCIA's Rules which may be of particular interest. Some of these are set out below:

Fast track arbitration:

Article 9 of the Rules provides that, that in exceptional emergency, any party mayapply to the LCIA for the expedited formation of an Arbitral Tribunal. In additionArticle 4.7 gives power to the Tribunal to extent or abridge periods of time underthe Rules and Article 22 gives additional powers to the Tribunal which include the

extension or abbreviation of time limits.

"Seat" and the place of arbitration:


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Article 16.1 of the Rules provides that the parties may agree "the seat (or legalplace) of their arbitration". Article 16.2 states that hearings may be held at "anyconvenient geographical place".

This follows the provisions of the new English Act which states that the parties

may agree upon the "juridical seat" and that the Tribunal can decide proceduralmatters such as when and where the proceedings are to be held.

The result is to give considerable flexibility to the parties and the Tribunal.

Language of the arbitration:

Article 17 states that the "initial language" of the arbitration shall be the languageof the Arbitration Agreement but that, upon formation of the Arbitral Tribunal

(unless agreed otherwise), the Tribunal shall decide upon the language of thearbitration. This is to be done after giving the parties an opportunity to make

written comment.

Interim and conservatory measures:

The Arbitral Tribunal is given power under Article 25 of the Rules (unlessotherwise agreed by the parties in writing) to order any respondent party to a claimor counterclaim to provide security for all or part of the amount in dispute. This isto be by way of deposit, bank guarantee or some other appropriate form. TheTribunal can also make orders in relation to the preservation, storage, sale or otherdisposal of property relating to the subject matter of the arbitration and can inaddition make provisional orders relating to the payment of money or the

disposition of property. Power is also given by Article 25 to make an order inrelation to security for costs by any claiming or counter-claiming party in the

arbitration.

Confidentiality:

Confidentiality may well be a matter of considerable importance to the parties inan arbitration. The new English Act makes no provision in relation toconfidentiality: the view was that it was difficult to draft a statutory provisionwhich would cover all of the necessary exceptions to confidentiality. However,

Article 30.1 of the revised LCIA Rules provides that, unless the parties haveotherwise agreed, they undertake "as a general principle to keep confidential allawards in their arbitration, together with all materials in the proceedings created for the purpose of the arbitration and all other documents produced by another

party in the proceedings not otherwise in the public domain...". An exception ismade to the extent that disclosure may be required "... by legal duty, to protect or pursue a legal right or to enforce or challenge an award in bona fide legalproceedings before a State Court or other judicial authority". Article 30.2 provides


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that the deliberations of the Arbitral Tribunal are likewise confidential and Article30.3 states that the LCIA Court does not publish any award without the priorwritten consent of the parties and the Tribunal.

(4) The New York Convention

The ultimate object of referring a dispute to international commercial arbitration isthe enforcement of the award made by the Tribunal. The United Nations'Convention on the Recognition and Enforcement of Foreign Arbitral Awards of1958 is intended to provide for the mutual recognition and enforcement of arbitral

awards made in countries which are parties to the Convention.

Most of the world's trading nations have ratified the New York Convention. Takethe example of a dispute between UK and German companies. An award madeagainst the UK company could be enforced by the German company in the UnitedKingdom through the UK courts. And if the UK company had assets in, say,

France and Italy, the German company could likewise enforce the award throughthe French and Italian courts since both France and Italy have ratified theConvention.

The New York Convention has been described as "... the most importantinternational treaty relating to international commercial arbitration. Indeed, it

may be regarded as one of the major contributing factors to the rapid development

of arbitration as a means of resolving international trade disputes".

C. ADR

(1) ADR: development

There is nothing new in the concept of ADR: mediation and conciliation have beenused in the East for centuries. What is new is the kind of techniques which have

been developed in the United States. America has led the way in developing newmethods of dispute resolution other than by way of litigation and arbitration.

To a great extent those developments were driven by concern at the delays andexcessive costs of both litigation and arbitration. That concern was not restricted tothe United States; hence the increasing interest in ADR in England (particularly by

the English Courts) and the emphasis now laid upon Alternative DisputeResolution in the Civil Procedure Rules.

ADR is generally taken to cover all forms of dispute resolution other than litigationand arbitration. The reason for this is clear: both litigation and arbitration operateregardless of the will of the parties and result in a binding and enforceableoutcome. The Defendant/Respondent against whom litigation/arbitration

proceedings are launched has no choice as to whether to participate and may be


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faced with a judgment/award which can be enforced in the national courts. Inlitigation the process is imposed by the State. In arbitration the result follows fromthe parties' agreement to arbitrate, coupled with the State's support of the arbitral

system.

But ADR in its various forms - the most familiar being mediation and conciliation- is a consensual process: the parties do not have to take part in it. And if they do,they do not have to abide by the outcome. Generally speaking, national Courts willnot enforce ADR agreements and the ADR process - unlike arbitration - is not

subject to any statutory code.

(2) The Civil Procedure Rules

Lord Woolf's reforms of the civil justice system in England and Wales arecontained in the Civil Procedure Rules 1998. One consequence of the coming intoforce of those Rules is the increasing importance placed on Alternative Dispute

Resolution.

The basic thinking of the CPR is set out in Part 1: the new Rules are a "new procedural code with the overriding objective of enabling the Court to deal withcases justly". Dealing with cases justly includes "saving expense"and ensuring that

a case is dealt with "expeditiously and fairly": Rule 1.1.

Compare the overriding objective with the provisions of the new EnglishArbitration Act. Section 1 of the Arbitration Act 1996 sets out the general

principles of arbitration which are to "obtain the fair resolution of disputes by an

impartial tribunal without unnecessary delay or expense".

The overriding objective is to be furthered by case management, which is toinclude, if appropriate, "encouraging the parties to use an alternative disputeresolution procedure if the Court considers that appropriate and facilitating the

use of such procedure" and "helping the parties to settle the whole or part of thecase". (Rule 1.4(2)(e) and (f). Part 3 contains a specific mechanism (used alreadyin the Commercial Court) enabling the Court to put the overriding objective into

practice: the Court's general powers of management include the power to stay thewhole or part of any proceedings"whether generally or until a specific date orevent".Rule 3.1(2)(f).

Part 26 enables the parties themselves to request a stay of proceedings to enablethe case to be settled "by alternative dispute resolution or other means". (Rule26.4(1)). The Court of its own initiative can stay the proceedings if it considers itappropriate. Whether the impetus comes from the parties or from the Court, a stayof one month can be imposed which can be extended to a specific date or for aspecific period.


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ADR has long been encouraged by the Commercial Court. "This may involve theCommercial Judge inviting the parties to use ADR at the Case Management

Conference or even adjourning the case to encourage and enable the parties to use

ADR..."

The draft ADR order contained in the Commercial Court Guide requires the partiesto exchange lists of three neutral individuals who are available to conduct ADR procedures and/or to provide a list identifying the constitution of one or more panels of neutral individuals available to conduct ADR procedures. The partiesshould then seek to agree a neutral individual or panel. They shall then take "suchserious steps as they may be advised to resolve their disputes by ADR procedures

before the neutral individual or panel so chosen". Specific time limits are laiddown for each part of the process. If the case is not settled, the parties are to inform

the Court.

The Commercial Court Guide makes it clear that the reference to "ADR"leaves the

parties free to use whatever they regard as being the most suitable procedure "be itmediation, early neutral evaluation, non-binding arbitration, etc."

(3) Types of ADR

Conciliation and mediation

The two words tend to be used interchangeably. Both involve the use of a thirdparty neutral who will seek to bring the parties to a settlement. The extent to whichthe neutral takes an active part in seeking to bring about a settlement may attractthe label of "mediator" or "conciliator". However, reference to "mediation" would

seem to be taking the lead, at any rate in the commercial context.

The process of"caucusing" is probably the most significant aspect of mediation.The mediator holds a series of separate meetings with the parties in dispute: this

process is aimed at seeking to bring the parties to a settlement through theidentification of any hidden agendas and the exploration of problem-solving

proposals. The mediator may only divulge what has been said to him by one partyin a caucus session if express permission is given.

Mini-trial

This process is often used in disputes between corporations. A "hearing"takes place before a neutral third party and senior executives of the businessorganisations involved. Those executives will not have been concerned in thedispute itself. Each side presents its case. It is open to the third party neutral toindicate the consequences in terms of time and money should the mini-trial process

fail. This system has enjoyed considerable success in the United States.


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Neutral evaluation

Here, the third party neutral may be a lawyer or retired Judge who can deliver anon-binding evaluation of the dispute should the ADR procedure fail and thematter proceed to litigation or arbitration.

"Neutral Listener Agreement"

This is a system offered by the American Center for Public Resources. Under this

CPR process each party submits its best settlement offer to a third party knownas "the neutral listener" who indicates to the parties whether he considers theoffers to be such as to be negotiable. If so, the "neutral listener"will offer to help to

negotiate so as to bring the parties to a possible settlement.

(4) ADR in an international context

Although ADR in its present form developed in the United States, it is now in useworldwide.

Many of the major international arbitration institutions, such as the ICC, the LCIAand the China International Economic & Trade Arbitration Commission in Beijing(CIETAC), offer a wide range of dispute resolution processes which include botharbitration and ADR.

Other bodies, such as the Beijing Conciliation Centre and the London-based Centrefor Dispute Resolution, are purely ADR bodies.

Then there are specialist bodies, such as the ICC's International Centre forExpertise in Paris and the U.N.'s World Intellectual Property Organisation (WIPO).The ICC offers highly specialist dispute resolution procedures in the area ofdocumentary credits.

WIPO is now operating a scheme aimed at resolving Domain Name dispute.

On these ICC and WIPO schemes, see Section V below.

(5) ADR as a pre-arbitral dispute mechanism

ADR has been used with considerable success as a pre-arbitral dispute mechanismin major construction projects around the world.

In this context ADR is of particular use in contracts involving a considerablenumber of parties. Disputes on such projects require to be settled swiftly in order toavoid disrupting the progress of the works.


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The kind of contractual provision which is likely to be found in connection withsuch projects will require disputes to go through some form ADR"filter"before

proceeding to arbitration. The obvious hope is that the ADR process will in factrender arbitration unnecessary. The type of ADR mechanisms which are usedas "filters" are likely to comprise such processes as adjudication by a panel of

experts or by a Dispute Review Board. It was this kind of procedure which wasused in the Channel Tunnel Group Limited v. Balfour Beattie Construction Limited

and Others [1993] 2 W.L.R. 262, House of Lords.

Similar ADR mechanisms have been used in the Boston Central Artery/TunnelProject and in the Hong Kong Airport Core Program.

(6) Med-Arb, etc.

In addition to ADR being used as a filter mechanism it is possible to use a mixtureof arbitration and mediation or mediation and arbitration. Indeed, whatever

combination of mechanisms the parties choose.

The notion of switching from, say, arbitration to mediation may be difficult forWestern lawyers and arbitrators to accept since this must always involve the

prospect of a mediator having to revert to the role of arbitrator.

But such a course, whilst perhaps strange to the Westerner, would be regarded as perfectly natural in, say, China. For example, provision is made in the CIETAC

arbitration rules for an arbitral tribunal to switch to acting as conciliator.

ADR in its various forms has much to offer as a dispute resolution process. But it

has to be used sensibly. It is not the answer to every dispute. The client whose products are being counterfeited is unlikely to be impressed by the lawyer who

suggests that he try ADR. There will always be situations where an application to anational Court for an order or declaration is the only realistic option available.

The extent of the use of ADR in the Oil and Gas Industry is unclear. The Centre for

Dispute Resolution (CEDR), for example, has dealt with petroleum disputes.

However, for obvious reasons, specific information is unavailable.

D. Expert determination

(1) Expert determination and arbitration

The use of experts to determine technical or valuation matters has been known toEnglish law for hundreds of years. The parties agree to instruct a third party todetermine a specific matter.

The system has been used in the Energy Industry for redetermination and for theresolution of specific matters identified in the relevant contract. See for example


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two of the cases referred to the Appendix: Total v. Arco and Shell (UK) v.Enterprise Oil.

It may be at times difficult to distinguish between expert determination andarbitration. But the differences between the two are significant.

An expert is appointed to obtain the benefits of his expert opinion. It is that expertopinion which will be used to arrive at the determination. Very often the matters to

be decided will involve the expert in a valuation exercise. "Due process" may beconspicuously absent from the system of expert determination: the parties may notnecessarily present their case or submit evidence. In England, at any rate, there areno statutory provisions governing expert determination.

Arbitration, on the other hand, is governed by the provisions of the 1996Arbitration Act. Due process is very much part and parcel of the arbitral process.Leaving aside documents only arbitrations, the parties will in all probability

present their cases to the arbitral tribunal and the decision of that tribunal is basedupon the evidence and submissions put forward by the parties and their

professional advisers. The arbitral tribunal must, in arriving at its decision, applythe relevant law. The expert on the other hand uses his own expertise and decides

the issue in dispute on the basis of his expert opinion.

The assistance of the Courts is available to aid the arbitral process. For example,under the English Act the Court can appoint arbitrators. There is no such provisionin relation to experts. Similarly, the Courts can assist the arbitral tribunal byenforcing peremptory awards of that tribunal, by securing the attendance ofwitnesses and by making orders in relation to the taking of evidence, the

preservation of evidence and the making of orders relating to any property which isthe subject-matter of the proceedings: for example in relation to the preservationand custody of such property. The Court also has powers to grant interim

injunctions and appoint receivers in support of the arbitral proceedings.

An arbitral award can be challenged on the grounds of "serious irregularity" andthere is a limited right of appeal in relation to points of law. No such safeguardsapply in the case of expert determination. Any challenge to the determination of anexpert can only be on fairly limited grounds relating, for example, to fraud or

collusion, or an allegation that the expert had departed from his instructions to a

material extent.

But perhaps one of the most significant differences between expert determinationand arbitration lies in the area of enforcement.

On the domestic level, an arbitral award is normally enforced through the nationalcourts. That is the case in England, where an award is enforceable as if it were a

judgment of the Court.


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No such assistance is available in relation to the determination of an expert. Suchdetermination is enforceable, if it is enforceable at all, purely as a matter ofcontract.

The problem of enforcement on the international level is perhaps even more

significant. The determination of an expert is not an arbitral award and thereforecannot be enforced under the New York Convention.

(2) Some institutions offering expert determination

LCIA

Expert determination is one of the dispute resolution services offered by the LCIA.

ICC

The ICC International Centre for Expertise in Paris provides a set of Rules forExpertise. The International Centre will arrange for the appointment of experts inconnection with "international business transactions". The parties may provide intheir contract for resort to the Centre. The standard clause recommended by theICC is:

"The parties to this agreement agree to have recourse, if necessary, to the ICCInternational Centre for Expertise of the International

Chamber of Commerce in accordance with the ICC's Rules for Expertise".

The parties may agree to submit an existing dispute to the International Centre.

The Rules for Expertise provide that the expert may be nominated by the parties bymutual consent and confirmed by the Centre, failing which the Centre will appoint

an expert.

The expert is "empowered to make findings within the limits set by the request forexpertise, after giving the parties an opportunity to make submissions". The partiesare to provide the expert with all necessary facilities and in particular to makeavailable documents and grant him access "to any place where the expertiseoperations are being carried out."

The Rules provide that "Unless otherwise agreed the findings or recommendations

of the expert shall not be binding upon the parties".

The Centre for Dispute Resolution

CEDR offers a " Model Expert Determination Agreement". That agreementexplains that expert determination differs from arbitration in its greater informality


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and says that there is "no need for a trial-type hearing. Unless the parties agreeotherwise, the Expert may conduct investigations independently of the Parties, and

make the Decision based on those investigations without reference to the Parties."

The provisions of the Model Agreement state that the Expert will act as expert and

not as an arbitrator and state that unless the parties agree otherwise"This ExpertDetermination leads to a decision.... being issued by the Expert. The decision will

be final and binding on the Parties". The agreement provides that the expert is toconduct the Determination "in accordance with procedural directions which the Expert will seek to agree with the Parties. If they cannot be agreed, the Expert's

Directions will prevail".

The agreement enables the parties to provide whether or not the decision of theExpert is to include reasons and whether or not the parties are to be permitted to

challenge the decision "in any legal proceedings or otherwise".

There is provision for the process to switch to mediation: if successful, the ExpertDetermination terminates.

It is interesting to compare the CEDR Model Agreement with the specimen clauseused by Shell International Limited which provides as follows:

"Where, pursuant to any provision of this agreement a matter is required to be

determined by an Expert, the Expert shall be a reputable person fitted by thepossession of expert knowledge and experience for the determination of the matterin question. The Expert shall be appointed by agreement between the Parties or, indefault of such agreement, within 30 days after a party has requested the

appointment of an Expert, by the President of the Institute of Petroleum of theUnited Kingdom. Such expert shall determine the matter in question within 60 days

after his appointment on the basis of terms of reference agreed between the Parties

or otherwise as the Expert shall himself determine, as an Expert and not as an

arbitrator and such determination shall be final and binding on the parties..."

IV. DISPUTE RESOLUTION AND THIRD PARTIES: THE CONTRACTS

(RIGHTS OF THIRD PARTIES) ACT 1999

This Act is likely to be of significance to the Energy Industry. In the context of this

Conference, its relevance lies in the fact that it will enable contractual provisionsrelating to arbitration to be made available to third parties.

The effect of the English law doctrine of privity of contract is that only those whoare parties to a contract are entitled to its benefits and subject to its burdens. This

did not apply to third parties.


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A further result of the doctrine was that exclusion clauses and limitation clauseswere not available to third parties. Himalaya clauses were used in an attempt todeal with the problems of liability and indemnity clauses.

The Contracts (Rights of Third Parties) Act 1999 will permit a third party to

enforce a benefit given to him by a contract to which he is not a party (the rule onobligations as opposed to benefits remains unchanged).

The third party must be identified in the contract and the contract must confirm the benefits upon that third party. There are provisions dealing with variation and

rescission.

Attempts to deal with the problem of the English privity rule by means of

Himalaya clauses and collateral warranties should now no longer be necessary.

The provisions of Section 8 of the 1999 Act are intended to ensure that, where the

requirements of that Act are satisfied, the Arbitration Act 1996 applies to theenforcement of third party rights under the Contracts (Acts of Third Parties) Act

1999.

V. E-COM AND THE PETROLEUM INDUSTRY:

HOW WILL DISPUTES BE RESOLVED?

(1) Generally

For the past few years the emergence and development of the Internet has madechanges to the life of millions of people worldwide. The rate of development is

extraordinary.

Even today no one can predict with certainty where the Internet will take us.

One of the areas where the Internet has had a particular impact is commerce.

Cross-border trading can take place on the Internet virtually without regard to

national boundaries.

Broadly speaking there are two types of business being transacted on the Internet:that between business and the consumer and that between business and business.

The business-to-consumer electronic commerce in America is put at some $8billion. Many consumers in the UK are now becoming used to shopping on theInternet: not just supermarket shopping, but shopping in increasingly sophisticatedareas. In the summer of 1999 Charles Schwab advertised in The Times telling UK

private investors that they could trade on-line on the Dow Jones, NASDAQ, Amex

and US regional exchanges.


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The same newspaper carried an advertisement byIcollectoroffering on-linebidding facilities for millions of pounds worth of sales taking place world-wide byauction houses, antique dealers and art galleries:

"... browse through our extensive archives and reference guides to find out what

you should be paying. Then you can bid on-line to your heart's content."

If the increase in consumer business on the Internet in Britain follows the trend inAmerica, then the rate of growth will be staggering. The estimated business-to-consumer trading in America presently put at $8 billion is reckoned to increase to

$108 billion over the next 5 years.

Other forecasts have put the business-to-consumer transactions in America at some$20 billion in 1999. This estimate, by Forrester Research, an Internet consultingfirm, predicts that the figure will grow to $184 billion by 2004. A survey by Ernst& Young suggests that 39 million Americans, making up 17% of households,

shopped on-line in 1999 and that nearly half of them spent $500 or more. GoldmanSachs forecast that by 2010 Electronic Shopping could account for 15-20% ofretail sales.

The business-to-business consumer (B2C) is small beer compared to the business-to-business trading (B2B). American forecasts for inter-company trading put the

present figure at $43 billion increasing to $1.3 trillion in 2003. One factor whichmight affect those forecasts is the type of company which is presently trading onthe Internet. Well known are the new Internet companies such as Amazon andYahoo! More important may be established firms which have not yet taken fulladvantage of the benefits which the Internet can offer. The Chief Executive ofIBM, Lou Gerstner, is reported as saying that "the storm that's arriving is when thethousands and thousands of institutions that exist today seize the power of this global computing and communications infrastructure and use it to transform

themselves. That's the real revolution."

(2) E-Com and the Petroleum Industry

Petroleum Review has for the past year or so been running a series of articles onElectronic Commerce and the petroleum sector. Although there is interest in thatsector in trading, the main interest to date seems to be concentrated on cost-

saving:"the main reason for the projective growth in E-Commerce is seductively

simple: it purportedly saves money". General Electric recently announced that ithad trimmed $1 billion off its procurement by invoicing exclusively in theelectronic domaine.

"Oil companies are taking note. BP AMOCO Chairman John Browne has stated

that he wants 50% electronic procurement by the end of 1999, and 95% by the end

of 2000... supply chain management, also referred to as e-procurement, involves


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the coordination of a company's purchasing of goods and services. Generally, this

entails whittling down suppliers to a core group, then negotiating savings in return

for loyalty... Since IBM began to put e-procurement for its office equipment in

place three years ago, it has saved an estimated $4 billion. `We'll have gone from

six million invoices to nothing by the end of 1999', says Janet Wood, General

Manager for e-business solutions at IBM".

Shell and Commerce One "a provider of global business-to-business e-commercesolutions" announced a plan to form a joint venture to develop an Internet marketplace for procurement of "a whole range of supplies and services in the oil, gasand chemicals industry. Shell anticipates that the new system will `significantly'

cut procurement cost".

BP AMOCO are reported to have started using the Internet to purchase basiccatalogue items: "these represent only 15% of its $20 billion annual procurementbudget, but 50% of all transactions, and it has targeted $200 million savings

annually from these items alone. By the end of 2000, BP AMOCO aims to conduct95% of all purchases electronically."

Another area where electronic commerce is seen as providing cost-cuttingopportunities for the industry is in spares inventory management: " If you canlocate spare parts in a few minutes using the Internet, and call not just on the

reserves of your own company's sites but also those of other operating companies

who use much the same equipment, you can afford to hold fewer spares".

The provision of information is another area in which the Internet is seen as givingthe opportunity to cut costs. DEAL ("Digital Energy Atlas & Library") is a websitewhich provides a library of basic geo-scientific information on the UK ContinentalShelf." Deal is expected to save the industry millions of pounds a year. By providing quick and simply access to reliable sources of information, costly

duplication in data storage will be eliminated and search time reduced".

(3) E-Com and legal problems

In many of the areas where e-commerce is beginning to have an impact upon the petroleum industry - for example in the provision of information -disputes areunlikely to arise. But in the trading areas where the Internet is used in the business

of buying and selling - Cybertrade - disputes will inevitably arise. The problemthere is that trading on the Internet will throw up problems which have never

before arisen in relation to traditional "paper" transactions: contract formation onthe Internet, digital signatures, etc.

Cybertrade will therefore raise legal problems the like of which have never beenfaced before. Processes used in paper-based trading may not assist in theresolution of difficulties arising in cross-border trading on the world-wide web. A


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contract concluded on-line may involve problems not encountered in a writtencontract executed with the pen and ink signatures of the parties.

Trading on the Internet is likely to create problems which will include thefollowing:

formation of a contract;digital signatures, encryption and authentication;

governing law and jurisdiction;

Formation of a Contract

Take a simple example. A in Manchester is purchasing a book on the Internet fromB Limited in London. What form will this contract take? When and where will it

be made? What will be its terms? If disputes develop, how can the existence of

that contract be established in litigation or arbitration proceedings?

English law, for example, has complex rules dealing with the formation of acontract. One basic rule is that there must be an offer and an acceptance. Does BLimited's Website contain an invitation to treat? Or is there an offer which can beaccepted? And how is the acceptance of the offer to be communicated? Does A's

click on an icon bring the contract into existence?

And if it does, are there terms to be implied into that contract? English lawimplies terms through Statutes: terms as to fitness for purpose and the like areimplied by the Sale of Goods Act. The Unfair Contract Terms Act may strike

down clauses in a seller's standard conditions of sale.

Digital signatures: encryption, decryption and authentication digital signatures

What is the situation if the relevant national law requires that the contract be inwriting? How will Cybertrade deal with that?

Not only may the national laws require the contract to be in written form, but theremay be the further requirement that the written document bear the written pen andink signatures of the parties. English law starting with the Statute of Frauds in1677, and more recently in the Law of Property (Miscellaneous Provisions) Act1989 - requires certain types of contract to be signed.

How will E-Commerce handle this? The answer being advanced is the DigitalSignature: public key encryption can verify the identity of the sender.

In England, two statutes are likely to have an impact on the development of

Electronic Commerce.


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The Electronic Communication Act 2000 is intended to "encourage confidence in

Electronic Commerce and technology underlying it".

The Act provides for the legal recognition of electronic signatures and the

certification of such signatures in legal proceedings.

The second statute is the Regulation of Investigatory Powers Acts 2000. Part III of

the Act is concerned with investigation of electronic data protected by encryption.

Provisions dealing with electronic signatures and their certification, etc. and with

the investigatory powers of the intelligence services, police, and Customs and Excise were originally all contained in the Electronic Communications Bill. In

some quarters there was considerable disquiet at the intention to include

provisions as to Electronic Commerce and provisions as to investigatory powers inone and the same piece of legislation. [For example "the tipping-off" provisionsnow contained in Section 54 of the Regulation of Investigatory Powers Act provide

for a criminal offence carrying a penalty on conviction of five years'imprisonment].

It remains to be seen what effect the Regulation of Investigatory Powers Act mayhave upon the development of Electronic Commerce in the United Kingdom.

The Particular Problems of Governing

Law and Jurisdiction

Again, take a simple example: when the contract for the purchase and sale of a

vehicle is made between A in London and the B Corporation in Germany, whichcountry's law governs that contract and which country's courts have jurisdiction?The country of the buyer or the country of the seller?

In the UK (and most of the European Union) the Rome Convention applies toidentify the governing law: it will be the law of the country which is "most closelyconnected" with the transaction. Likewise, the Brussels Convention deals with thequestion of which country's courts have jurisdiction over that contract. But what isthe position under a trans-border contract entered into between an EU and a non-EU party? Does the law of the seller's country apply? Do the Courts of the seller's

country have jurisdiction? Or in one or both cases is it the buyer's country?

The particular legal problems of governing law and jurisdiction have alwaysexisted in cross-border trading. Because Electronic Commerce is by its very naturea system of trading without national boundaries, problems relating to governing

law and jurisdiction are likely to increase.

(4) New dispute resolution processes for E-Commerce


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When disputes arise in E-Commerce transactions, the traditional dispute resolutionprocesses will be available: litigation, international commercial arbitration and soon. But will the advent of E-Commerce bring with it new mechanisms for dispute

resolution? Will on-line trading bring on-line dispute resolution?

Is it possible that electronic commerce will produce the development of disputeresolution processes which make use of the Internet? Could the costly and time-consuming processes involving physical arbitration hearings be replaced by on-lineelectronic dispute resolution processes? Will we see the emergence of the Cyber

Arbitrator?

Two major international organisations are already looking at the problem: the

ICC in Paris and WIPO in Geneva.

The ICC : Documentary Credit Disputes

The ICC may already have shown the way to resolve cross-border disputes swiftlyand cost-effectively without the necessity for physical meetings.

In October 1997 the ICC published the DOCDEX Rules, the" Rules forDocumentary Credit Dispute Resolution Expertise". The system is made availablethrough the ICC's International Centre for Expertise in Paris and can be used toresolve Letter of Credit disputes where the Credit is subject to the ICC's UniformCustoms and Practice for Documentary Credits (the UCP) or the Uniform Rules

for Bank-to-Bank Reimbursement under Documentary Credits (URR).

The Rules provide for a swift, non-binding determination by a panel of three

Experts. There is no hearing. The party seeking a DOCDEX decision submits aRequest which must identify the issues. The Request must be accompanied by theLetter of Credit in question and other relevant documents. The Respondent submitsan Answer to which is annexed any relevant documents. Three "AppointedExperts" are to draft a decision which is to be submitted to the Centre within 30days. That decision is based on documents only. The Rules state that the partiesmay not seek an oral hearing in front of the appointed experts.

In all probability the three Experts will be from three different countries. There isno requirement in the DOCDEX Rules that the Experts should physically meet.

The communications between the Experts for the purposes of arriving at theirdecision can therefore be by telephone, fax or E-mail. The way is obviously openfor on-line communication between the experts.

Parties involved in DOCDEX cases dealt with so far have come from more than 20countries including Belgium, France, Italy, Spain, Switzerland, Turkey, Bulgaria,

Hungary, China, India, USA and Australia. Experts appointed to the DOCDEXPanel in those cases have come from over 25 countries.


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WIP0 : Domain Name Disputes

The World Intellectual Property Organisation is one of a number of specialisedagencies operated by the United Nations. For sometime WIPO has been workingon an on-line dispute resolution system aimed at dealing with Domain Name

disputes. Draft Rules issued in 1997 contained provisions dealing with hearings.These were defined as including telephone or video conferencing and the"simultaneous, authenticated exchange of electronic communications on the samechannel in a manner that enables all Parties authorised to use the channel to

receive any communications sent and to send communications".

Although intended specifically to deal with Domain Name disputes the draft Rulescould be adapted to deal with on-line Electronic Commerce disputes generally.

Erik Wilbers of the WIPO Arbitration and Mediation Center in Geneva hassuggested that the expansion of Electronic Commerce on the Internet "may soon

lead parties to settle disputes in the same manner as their commerce is conducted".

The WIPO Domain Name Dispute Resolution Procedure is now operational witheffect from December 1999. By mid-2000 WIPO was dealing with more than 700cases.

The WIPO system is based on the ICANN System (Internet Corporation forAssigned Names and Numbers). WIPO was instrumental in the setting up ofICANN. Documents of particular importance in the WIPO scheme are the ICANNRules and Policy Document and the WIPO Supplementary Rules and Policy

Document.

How the system works can be explained by a simple example:

(1) Party A (to be the Respondent in the future dispute) registers a Domain Name

with WIPO.

(2) The WIPO "Registration Agreement" for that registration incorporates byreference the ICANN/WIPO Rules.

(3) Party B (to be the Complainant in the proceedings) says that the registrationwas in "bad faith" (e.g. "marksandspencers.com").

(4) The Complainant makes a written complaint to the WIPO Center, setting outthe grounds of complaint: the Domain Name is similar to the Complainant'strademark or service mark and the registration was made in bad faith: for examplefor the purpose of selling that Domain Name to the Complainant for more thanmere "out of pocket expenses".

(5) The Respondent is to put in a Response.


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(6) The procedure is on-line although communications can be by mail, fax, and e-mail. Hard copies are also to be provided.

(7) A panel is appointed (either one or three).

(8) There is no hearing.

(9) The panel makes its decision and can either order the transfer or thecancellation of the Domain Name.

(10) Within ten days of the issue of the Decision a dissatisfied party can instituteproceedings in a national court.

(11) Subject to that, the Center notifies the parties, ICANN and the Domain NameRegistrar who will, for example, cancel the Domain Name.

VI. CONCLUSIONS

What future trends will we see in dispute resolution systems in the Oil and Gas

Industries?

Litigation in the international courts and international arbitration are likely tocontinue to be the major dispute resolution systems in use.

Expert determination may well increase, but is likely to be restricted to fairly

narrow areas.

ADR may also have an increasing role to play. Information is not easy to come by, but the indications are that ADR is being used and may be used more often aslawyers and their clients become accustomed to mediation and what it can

achieve.

It may well be that ADR will also have a role to play as a filter mechanism of thekind used in the Boston Central Artery/Tunnel Project and in the Hong KongAirport Core Program: i.e. by way of contractual provisions which specify one ormore ADR filter processes, with a long-stop provision for arbitration (or litigation)

should the ADR filters fail to resolve the dispute.

What of electronic dispute processes? As Electronic Commerce becomesincreasingly used in the Energy Sector, will we see new processes added to theexisting dispute resolution methods? Will on-line dispute systems be used to

resolve E-Com disputes?

A distinction has to be drawn between pure on-line dispute systems and the use ofelectronic means to assist and speed up existing arbitral processes. But in both


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areas the likelihood is that the use of the Internet in dispute resolution willincrease.

But sadly, the parish priest and the honest neighbour are unlikely to be lending ahand