ARBITRATION: The Rules of Engagement

By Marcia Ashong

The Group of Companies Doctrine and Its Relevance for OG Disputes

One of the main avenues through which exceptions are given for the joining of non-signatories is by reference to the so called “group of companies doctrine’ (GCD) or other related doctrines.[1] The leading case on this was delivered by the International Chamber of Commerce (ICC) interim award of Dow Chemical.[2] In this case a claim was brought to the ICC tribunal by the Companies that had signed an original agreement (including Dow Chemical France) but also their parent company Dow US corporation (Dow US) a non-signatory.[3] In making its interim award on those non-signatories the tribunal concluded, that:

Dow US “exercised absolute control over its subsidiaries having either signed the relevant contracts or, like [Dow France] effectively and individually participated in their conclusion, their performance and their termination...the tribunal considered the group of companies to be one and the same economic reality”[4]

And so in making its decision the tribunal determined the scope of clause, as well as provisions providing for application of ICC rules and thereby reached its decision regarding jurisdiction by reference to GCD and the common intent of the parties.

Notwithstanding the fact that since the Dow Chemical award the GCD has been applied in several jurisdictions[5] and has been upheld by several national courts[6], some jurisdictions are still unwilling to accept it. Take for example, the recent decision of the English High Court in the case of Peterson Farms Inc.,[7] where an arbitral decision in which the tribunal following the principle espoused in the Dow Chemical case came to the same conclusion and led to the award of damages for both the principle signer and the non-signer affiliate- was annulled not just on the basis that the GCD formed “no part of English Law” but that the arbitration agreement as a separate agreement was deemed to be only determinable by the substantive rules applicable to it and not procedural rules as was the case with Dow Chemical, but in this case the applicable law was deemed by the Court to be English law the use of the GCD, was thus inaccurate because it constituted a law on its own.[8] The Judge concluded that:

“There was, therefore, no basis for the tribunal to apply any other law whether supposedly derived from the “common intent of the parties” or not. The common intent was indeed expressed in the Agreement: that is both English and Arkansas law [. . .]. The “law” the tribunal derived from its approach was not the proper law of the agreement nor even the law of the chosen place of arbitration but, in effect, the group of companies doctrine itself.”[9]

What Does the Mean for the IOGI (International Oil & Gas Industry)?

For the IOGI these decisions, especially those by the national courts themselves have several implications. Firstly, the choice of law of the arbitration agreement is of vital importance, because in all these cases, the rules pertinent to the agreement will decide whether an arbitration agreement may be extended to a third party affiliate or not. It seems the vital difference between Dow Chemical Inc and Peterson’s Farm Inc was that in Petersons the rules which were to be applied to the agreement itself were non-explicit. This has implications mainly at the drafting stage of the contract where such provisions need to be made clear, such as whether or not the signer intends to extend liability to its affiliates or not, and the relevant laws or rules they intend to apply to the agreement.[10] Secondly, there are no provisions as to whether the third party affiliates or subsidiaries need to be concerned with similar business, for instance for a company like Kosmos Energy LLC[11] which is largely made up of financial institutions, do those financial institutions as entities on their own come under this definition of group of companies, even though they operate in distinct sectors? Furthermore, it was made clear in the Peterson’s Farm Inc., case that even where the GCD were to apply, there had to be a clear indication that the companies involved were not merely in a buyer seller position, for English law purposes, this might have consequences where Shell Nigeria might sell its petroleum Products to Shell UK. It is unclear the extent of the English decision; does the relationship have to be purely a buyer seller relationship to exclude the doctrine or just partly? Nevertheless, when concluding such agreements the parties need to be aware of the potential liability they might be imposing to their affiliates, the benefits might not be as clear at the drafting stage as disputes cannot be foreshadowed. In either case from the English law perspective it is clear that for the provisions of GCD to apply it would have to have been expressly agreed to by the signatory parties.

Assignment of Contract

Another important area to consider is where a company assigns it rights, where for instance on a loan given on a project finance basis for the development of oil and gas, the lender requires as security the assignment of all contracts to it. Does the lender in this case assume liability with regards to the contracts assigned even though it is not a party to any arbitration agreement contained therein? Once again depending on the nature of the agreement and the relevant laws applicable to it, different jurisdictions will arrive at different conclusions; determining the relevant laws would also require examination of whether such laws permit assignment. German law makes clear provisions that an assigned contract takes with it the assignment of the arbitration agreement. New York and French laws on the other hand view assignment as mainly including duties and as such require express agreement by the assignee to produce effects.[12] English law has a similar effect, although it may be distinguished; as a matter of English law one can only assign a benefit, the burden, thus remains with the signor, this seems to follow the general rules of privity that a third party cannot be burdened by a contract made between A and B.[13] So if we assume for instance that an arbitration clause is assigned as part of a contract, the relevant question to be asked is whether this assignment confers a benefit or a burden to the assignee. But for the purposes of the arbitration process this might not be so clear at the outset. Consider for instance the Model AIPN Joint Operating Agreement (2002) which has provisions for “assignment”- section 13.6 states that:

“A withdrawing Party shall assign its Participating Interest free of cost to each of the non-withdrawing Parties in the proportion which each of their Participating Interests.....” [14]

In almost all cases these model provisions are adopted without consideration of the fact that in some jurisdictions the effect of the assignment may not be as envisaged. Whether the assignment is a burden or benefit can arguable only be determined when the arbitral award has been made. The practical effect this has on the IOGI is that where for instance a license is transferred to another company by assignment, any future liabilities with regards to the licence (example decommissioning) lies still with the assignor. The only provision under English law that deems both burden and benefits transferred is through novation,[15] but the reality here is that novation is a pre-contractual provision and may not necessarily be relevant post-dispute where the non-signer seeks to rely on it. Moreover novation requires consent by all the signer parties and in the OGI, any such transfer of rights, almost in all cases needs the approval of the State. The best approach perhaps is the Swedish position which stipulates that the arbitration agreement will be deemed to be assignable unless the parties themselves have agreed otherwise, and will operate as if it was assigned if that party has constructive knowledge of the fact.[16]

Rules of Agency

An agency relationship usually exists where one party is authorised by another, to negotiate and enter into contracts on its behalf. Under US law the courts have deemed “Ordinary principles of agency” to apply when the courts have to identify the parties to an arbitration agreement. It is also usually the case for an agreement to arbitrate to be enforced against a party where the agent had not disclosed to that party that he is an agent,[17] this is also similar under English law but only under certain limited circumstances. For the oil and gas industry the relevance of this rule is that with regards to arbitration the agent cannot in this case become an additional party, unless of course it is agent for the purposes of the arbitration. Agency rules therefore like all others are determined principally by the laws relevant to the agreement as determined by the court or tribunal, but the necessary difference in application may be the form with which the agency takes and whether that form would be allowed to prevail as per the law in question.

WHAT ABOUT OTHER PARTIES? WOULD THE AMICUS RULE HELP?

So far the discussion has been on how non-signatories may be added, but there are obvious limitations to the exceptions provided above. For instance, what happens to the contractor who has suffered loss as a result of State action against the OC (Oil Company) it contracted with? Knowing that under its contract with the OC such State action constitutes a force majeure? And knowing also that as a local company, recourse to investment arbitration is impossible? The contractor cannot rely on the GCD as it has no recourse to the OC nor would the rules of agency or assignment do him any good. Furthermore, what role would indigenous communities play in the exploitation of their resources especially where most petroleum licences these nowadays confer benefits to these communities?

The amicus curiae (friend of the court) developing in investment arbitrations[18] provides a starting point. Arbitrators in investment have increasingly shown willingness to allow third parties participation by way of written amicus briefs. But in most of these cases the interventions have been in order to provide just opinions and expert briefs on public policy to guide the dispute.[19] The justification is that the amicus curia “is in a position to provide the court or tribunal its special perspective or expertise in relation to the dispute,”[20] therefore they neither get to argue their case as claimant or respondent nor are they recipients of awards. So whereas the two scenarios offered above may prove beneficial to those third parties as they get to influence the direction of the case, where there has been loss or damage providing such a brief would go no way towards redress, except perhaps the brief was so influential as to provide an award that would in default reverse the fortunes of the amicus curiae, this is unlikely. Furthermore, as strict as the arbitration rules are, recent developments in amicus briefs have been largely restricted to investment arbitrations, where the public policy angle becomes emphasised due to State involvement, therefore for the contractor in the scenario above this process would prove futile.

Home Run

It is obvious that the rigorous rules attached to arbitration proceedings even with these few instances of third party intervention still hold sway. The system designed to respect the autonomy of parties to the arbitration, continues to resist attempts to undermine this process, but the reality is that in such a changing world, the IA process would need to accommodate, since even the system itself has been saddled with continuous regulations which further go against party wishes, so then in essence we can say that IA though still starkly different from the national court’s system, has evolved into a new dispute settlement mechanism which both embraces the autonomy of parties and understands the evolving nature of the international order.

This is evidenced by the increasing mechanisms being used today that allow third-party non-signatories to the proceedings. From the evidence here, however, parties in the OG sectors need to be aware that third party involvement rules are rarely straight forward. To protect oneself from being adversely impacted by an arbitral award, the various stakeholders need at the outset to assert their rights in the contractual documents, either expressly excluding or including themselves. It has been demonstrated that by understanding the impact arbitral decisions have on third parties in the IOGI, the justification would need to be made for the inclusion of non-signatories to the arbitral process as participants who as a matter of public policy need to be involved[21] or as parties whose involvement would be the only means on determining a case.

The truth is that in certain circumstances arbitration might in fact not be the best option, such as the scenario presented earlier of a local community being caused some level of damage; there are mechanisms in places for dealing with these issues of which IA might in fact be the least effective (This avenue might however be in danger of not being available after a recent Court ruling, see footnote for discussion).[22] Due to the nature of the current status IOGI, however, and the scarcity of resources, the likelihood it seems would be the development of an arbitration system unique to the industry which takes into account its unique contracts matrix.

NUTSHELL:

Marcia explores various principles of International Arbitration and examines a couple of cases with a view to outlining scenarios in which arbitration will be ideal and those in which arbitration will be less than desirable. It is also important for lawyers to discern which of these principles to look out for when pursuing contract negotiation and closure. One is tempted to ask however that, knowing the rules of engagement, what are some of the other complex issues faced in navigating the complex world of arbitration. Is it practical to pre-empt every adverse possibility by appropriately designing contracts?

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[1] Such as ‘piercing of the corporate veil’, ‘alter egos’, or even the use of ‘estoppel’

[2] Dow Chemical France v ISOBER Saint Gobain, ICC 4131/1982 (Interim Award) [hereinafter Dow Chemical], in Redfern, A., supra note 15, pg. 100

[3] Redfern, A., supra note 15, pg. 100

[4] Dow Chemical, supra note 25

[5] See cases: Sponsor AB v Ferdinand Louis Lestrande [1988] Revue de l’Arbitrage 153 (France), or Smith Enron v Smith Cogeneration International, 198 F3d 88 at 97-98 (1999) (US)

[6] See the Brazilian Court case: Trelleborg v. Anel, Sao Paulo State Court of Appeals, Appeal 267.450.4/6-00, Seventh Chamber of Private Law, (2006)

[7] Peterson Farms Inc. v C&M Farming Ltd [2004] All ER (D) 50 (Feb)

[8] Ibid, para 47

[9] Ibid

[10] Although depending on the court in question whether a clause makes it explicit that the entity is the only entity entering into the contract, as can be seen from the various decisions conduct also plays a big role, substance might prevail form

[11] An oil and gas exploration company

[12] Redfern, A., Hunter, M., Law and Practice of International Commercial Arbitration, 151, (4^th ed. 2004)

[13] Leading case in English law is: Tito and Others v Waddell and Others [1997]  2 WLR 496 (Ch.D)

[14] § 13.6,  AIPN Model Joint Operating Agreement (2002), at www.aipn.org [membership required], (last visited May 9, 2010)

[15] Where the original document is cancelled and substituted for an identical contract with similar rights and obligations but pertaining to different parties, novator and novatee

[16] Redfern, A., supra note 35

[17] Bamforth, R., et al, supra note 21, pg 10

[18]Rule 37(2),  ICSID Convention Regulations and Rules, ICSID/15 (2006), at http://icsid.worldbank.org/ICSID/StaticFiles/basicdoc/CRR_English-final.pdf (last visited 11, May 2010)

[19] See the Energy Charter Treaty Dispute of: AES Summit Generation Limited and AES-Tisza Erőmű Kft. v. Republic of Hungary, ICSID Case No. ARB/07/22, where the European Commission gained amicus curiae status to represent the EU’s interest

[20] Levine, E, Amicus Curiae in International Investment Arbitration: The Implications of an Increase in Third-Party Participation, 8,  Harv.E.U.L.A.W.P.S., (2010) at:

http://www.law.harvard.edu/students/orgs/hela/workingpaper2010.html

[21] Alqurashi, Z.A., International Oil and Gas Arbitration, Alexander’s Oil and Gas Connections Market Report, at http://www.transnational-dispute-management.com/news/news_detail.htm?v0=11 (Last visited, 13 May 2010)

[22] See: Bowoto v. Chevron Texaco Corp., 312 F. Supp. 2d 1229 (N.D. Cal. 2004) (US), and Doe I v. Unocal Corp. 395 F.3d 932 C.A.9 (Cal. 2002) (US), Cases involving indigenous communities suing oil companies as per the US Statute Alien Torts Act Claim, Ch. 20, § 9, 1 Stat. 73 (1789). A recent ruling, however, by the US Court of Appeals in Kiobel v. Royal Dutch Petroleum, cast doubt on this area of remedy, the Court ruled that transnational corporations could not be held liable for human rights violations, “The court said that the Alien Tort Statute, which has existed since 1789, does allow noncitizens to seek redress involving international law violations but that corporations were immune from liability,” future developments in the area would determine if the ruling stands or not,  See: http://ghanaoilonline.org/2010/09/u-s-court-denies-right-to-sue-corporations/