THE ARBITRATION AGREEMENT: What it means for Non- Signers

By Marcia Ashong

In the recent decades the international petroleum industry has experienced some major transformations, transformations which have led to a robust industry of new market entrants all in competition for the world’s petroleum resources. Much of the changes have been attributed to the constant rise in petroleum commodity prices, and others to the growing national awareness of the importance of energy products, not just as a catalyst for national development but to the growing need for energy security as scarcity becomes a reality. Upon this backdrop is the development of international arbitration (IA) in the petroleum sector.

Out of all International Centre for the Settlement of Investment Dispute cases (ICSID) in 2009, 38% of those were energy related of which 25% (32 cases out of 128), were directly related to oil and gas and mining disputes[1] (see figure 1 image below). Contrast this development to ten years ago, when there were only 3 cases which were related to oil, gas and mining.[2] The trend towards IA in the oil and gas sector has been unprecedented, and has brought many scholars back to the drawing board because of the previously held theory that recourse to arbitration in the sector will continue to remain scarce. This old paradigm was related largely to the nature of the early oil and gas markets, “where the structure of the industry then was still very much influenced by the break-up of the Standard Oil Trust in the early part of the Century”[3] -the result being, a very loosely integrated “global” oil and gas market with a handful of super oil participants; therefore recourse to arbitration was mainly between those international oil companies (IOCs) and their host governments (HG).[4] Arbitration among the IOCs, thus, was very rare and even more so amongst their contractors.

In recent years, however, this trend has changed towards an industry favouring settlement of disputes by recourse to IA. And the trend has not been isolated to investment arbitrations. Investor-State arbitration issues have on the other hand, shifted from a focus on post colonial fight for control of natural resources to a diverse set of actions related not just to the volatile commodity price, but also changes in laws related to the shift towards liberalisation, and the fight against the notions of obsolescing bargaining and creeping expropriation.[5] These new investment arbitration issues are further evidence of the complicated nature of the new oil and gas global market.[6] And “within the conflict-laden energy industry”,[7] oil and gas contracts in the commercial arbitration context have also generated a high number of disputes. They range from those “among operators, non-operators, and joint ventures in oil and gas property acquisition, exploration, and development; in energy supply and marketing arrangements; and in oil and gas construction projects.” [8] Furthermore, the advent of the New York Convention (NYC), has also played a vital role in bolstering investor confidence in the IA process, it seems almost intuitive that as more States signed on the Convention the number of cases submitted to arbitration followed the trend.[9]

Figure 1[10]

ICSID Cases by Sector

 As the oil and gas sector then becomes more globally integrated with a diversity of players, ranging not just from OIC’s and their HG’s but also powerful national oil companies (NOC’s), foreign and national contractors and sub-contractors, lending institutions, local content companies, shareholders, regulatory agencies, environmental agencies and so on- the result of the greater acceptance and resort to IA has in itself further complicated this form of dispute settlement which has its early roots in simplicity. For the oil and gas industry (OGI) the added challenge is the effect arbitral awards now have on multiple parties as a result of the uniqueness of the contractual frameworks associated with oil and gas projects; the effect it can have not just on the initial signatories to the arbitration agreement, but to the whole set of interconnected players who all form to make a oil and gas projects a reality, As parent companies, subsidiaries, contract assignees, and so on, find themselves bound by such agreements, not to mention  the effect a decision can have on the general public at large as growing concern for public policy and the effect petroleum policy has on national development.

It is in this area that this paper seeks to delve; those non-signatories to the oil and gas (OG) arbitration agreement (AA) who are nevertheless affected by arbitral awards. The aim of this paper is to analyse some of the current trends in IA with regards to third party non-signatory involvement. Amidst the strict rules and realities of the arbitral process, I will analyse current methods being utilized for non-signatory joinders, and future options that might be available to stakeholders in the international oil and gas industry (IOGI). And suggest ways stakeholders in the OGI may utilize the strict rules to their advantage.

Arbitration is a novel tool in the legal world, a system which is designed to put parties’ interests foremost and take the complex working of the courts system out of intricate contractual disputes. At the heart of arbitration is the arbitration agreement. The clear and unequivocal statement by parties to an agreement that they wish to submit their disputes to a body they have agreed to, to laws they have chosen and to rules they deem neutral enough to be in their best interest. As one author posited, “arbitration is private justice born out of the parties’ will.”[11] The agreement thus, is considered separate[12] from any other provision, it is in fact so vital that be it contained in an arbitration clause, a submission agreement, there are suggestions to create an autonomous system of arbitration (based on the agreement) devoid of national rules.[13] Nevertheless, the consent parties give to an arbitration agreement is the only means by which the tribunal can be set up, therefore an intricate set of rules have been created not just to recognise when these agreements might exist but to interpret their meaning so as to give full effect to the wishes of the parties who submit to it.[14]

The Agreement and Privity of Contract

The general rule in IA is that only those, party to the agreement determined by reference to the applicable rules may be bound by the agreement. This follows the common law principle of “privity” which stipulates that a contract cannot confer rights nor impose obligations which arise under it on any other person except the parties to it, this equally means that a person not party to that agreement cannot sue upon the contract to obtain promised performance.[15] Furthermore, it is required by the NYC that the consent to arbitration must be in writing.[16] Meaning, consent to non-signatories must be explicit.[17] The extension of an arbitration clause then to a party not originally signed on the agreement to arbitrate would in effect seem to go beyond the ambit of the purpose to submit to arbitration in the first place. After all the point of arbitration is not to circumvent the wishes of the parties by imposing rules they have not agreed to be bound by.

 

Exceptions to the Rule of Privity

However, a third party non-signatory joinder may be necessary in a number of situations; specifically for the oil and gas sector. Some of those might include but are not limited to:

·         where there are multiple and interdependent contracts such as those relevant in exploration and development agreements, where for instance, a license is linked to an agreement between IOC’s themselves (such as a joint venture agreement, JVA), which is further linked with the contractors agreement; contractors who not only have to meet the obligations under the contract but also by signing that agreement are subject to the provisions of the government issued licence.[18]

·         where, a party to the arbitration agreement is a member of a group of companies and its parent company or subsidiaries have been involved in the “commercial transaction underlying the relevant contract, even though they may not be signatories to that contract.”[19]

·         where, issues of confidentiality arise and a subsidiary or parent company breaches the confidential provisions but was not party to the agreement and the counterparty wants recourse to the parent.

·         and where, as a matter of public policy an arbitral award has direct social and political impact way beyond the interests of the parties alone.

In such cases it would seem that only a rigid system would not allow for such parties obviously affected playing some role in the proceedings. Just as the case in English common law[20], the rule of non-signatory parties to the arbitration agreement is also filled with exceptions.[21] To understand the full context of the exceptions pertinent to the arbitration, the national rules (lex arbitri) need to be scrutinized. For our purpose we shall look at some of the main exceptions used in various jurisdictions, but also those that may be of direct relevance to the IOGI, they are (but may not be limited to):

·         The rules relevant to the “group of companies” doctrine

·         Assignment rules, and

·         Agency rules

One other avenue which can be arguably noted as not necessarily needing a direct contractual agreement to arbitrate  is where investors seek arbitration based on a bilateral investment treaty (BIT) signed between his State of origin and that of its HG, this is also important but limited. The party seeking to rely on the bilateral investment treaty (BIT) arbitration relief has to first satisfy that his home country has an established BIT with the HG and furthermore satisfy the definition of investor for those purposes. Notwithstanding the fact that not all players in the IOGI are necessarily foreign investors, for instance where as a matter of law a mandate by the HG stipulates the inclusion of local companies, with participation rights in the development of petroleum fields, these companies naturally would not fall under the BIT because they fail the foreigner’s test, and this situation is not just limited to local content companies.

NUTSHELL:

According to Marcia, as global energy demand increases, sources of oil and gas are becoming incredibly important to nations whose citizens continue to grow more dependent on them. This dependence has led to a more robust international petroleum industry, as a result of globalization, underlined by an increase in stakeholders and complicated contractual frameworks. Amid this development is the evolution of arbitration in the petroleum sector. Her analysis has taken a look into the challenges faced by non-signatories to such agreements, but who are nevertheless affected by arbitral awards, and suggests a way forward amidst the realities of the arbitration process.  To view Marcia's professional profile and for more information on this article, please click here..-->

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[1] International Centre for Settlement of Investment Disputes, The ICSID Caseload Statistics , Issue 2010-1

[2] Anderson, S., Perez-Rocha, M., Dreyfus, R., Mining for Profits in International Tribunals: How Transnational Corporations use Trade and Investment Treaties ad Powerful Tools in Disputes over Oil, Mining and Gas, 1, Institute for Policy Studies (2010).  Note also that out of this number 7 such cases in that whole decade

[3] Wälde, T.W., The Role of Arbitration in the Globalisation of Energy Markets: Perspective in the Year 2000, 2, Oil and Gas Energy Law Intelligence [OGEL], Vol. 6, Issue 3, (2008)

[4] These early arbitrations were post-colonial in nature as the new States vied for international recognition and demanded more control of their natural resources.

[5] Usually explaining the recourse of states to unilateral actions

[6] Cameron, P.D., International Energy Investment Law: The Pursuit of Stability, 183, (2010)

[7] Haigh, D.R., Unique Issues in Oil and Gas Contractual Disputes: Injunction, Multi-party Specific Performance, Forfeiture & Arbitrability, [OGEL], Vol. 5, Issue 2, (2007)

[8] Ibid

[9] Wälde, T.W., supra note 3, pg. 8. Also it is believed that with the entry of litigious US Companies, the exploitation of arbitration is bound to increase

[10] ICSID Caseload Statistics, supra note 1, pg. 22

[11] United Nations Conference on Trade Development, International Commercial Arbitration: The Arbitration Agreement, 1, (2005)

[12] See:  Heyman v Darwins Ltd [1942] AC 356 at 374 (Eng.) , and Peterson Farms Inc. v. C&M Farming Ltd [2004] L.R.Q.B 609 (Eng.) For discussions on the doctrine of seperability of the arbitration agreement

[13] Redfern, A., Hunter, M., Redfern and Hunter on International Arbitration, 85, (5^th ed. 2009), according to Hunter and Refern, however, this is unrealistic and goes to far as it attaches much importance on the agreement itself without regard for the system of laws within which the agreement exists

[14] These rules can be found in the United Nations Conference on International Commercial Arbitration, Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Article II, (New York, 10 June, 1958) [hereinafter NYC], the rules relating to requirements necessary for the validity of an arbitration agreement. and UNCITRAL Model Law on International Commercial Arbitration (1985), United Nations document A/40/17, Annex I [hereinafter Model Law], which most States use as a basis for their own national arbitration rules (lex arbitri)

[15] Mckendrick, E., Contract Law, 110, (8^th ed. 2009)

[16] NYC, supra note 16

[17] Though the ‘Model Law’ provides a more lenient approach to express written provisions, see: Article 7, Model Law, supra note 18

[18] in such a case multiple parties are involved in a commercial transaction but only some of them are party to the agreement containing the arbitration clause, any arbitral award would obviously be relevant to all of the parties involved

[19] Bamforth, R., Tymczyszyn, I., et. al, Joining Non-signatories to an arbitration: Recent Developments, 9, Dispute Resolution, Vol.2, (2007-08)

[20] Contract (Rights of Third Parties) Act, (c. 31) 1999 (entered into force 11 Nov. 1999)

[21] It is important to note at the outset however, that these exceptions do not mean that joining non-signatories imply that signatures are per se required for the creation of commitments to arbitrate, see: Park, W.W., Non-signatories and International Contracts: An Arbitrators Dilemma, 1.04,  Multiple Parties to International Arbitration, Oxford (2009)