By Rudrani Ghosh
Legal Intern, H.K. Law Offices
The energy sector began to develop in the first half of the 20th century and grew rapidly ever since then. The energy sector is extremely crucial in the development of a country’s economy but is also a key contributor to global warming. Yet due to its commercial and economic significance, it isn’t uncommon to see neighboring countries get into dispute over energy resources and bilateral sharing agreements. Arbitration plays a huge role in combating such issues. In fact, according to the 2020 ICC Dispute Resolution Statistics, the energy sector has historically generated a significant number of ICC (ICC International Court of Arbitration) cases. In 2020 alone, the ICC registered 167 new cases related to the energy industry.[1]
In most countries, the energy sector is heavily regulated and mostly controlled by the State, however some countries also allow private players to participate in energy extraction and distribution processes. Given both government and private players, and the resource sharing agreements between several nations sharing common resources, it is likely that several disputes may arise. Energy disputes refer to all kinds disputes arising out of energy manufacturing, extracting, refining and distributing industries in sectors not limited to biomass, coal, gas, geothermal power, hydropower, nuclear, oil, solar energy, and wind energy. This is when arbitration comes handy as the interested parties themselves select a common moderator without compromising on any nation’s sovereign policies.
There are mainly three kinds of disputes in the energy sector. The first and the most significant is the dispute between the Private Sector and State. Usually private companies in the energy sector enter into agreements with the State or companies controlled by the State for exploration, production and distribution of natural resources. Such agreements usually contain an arbitration clause referring future disputes to arbitration.
Then there are treaty based disputes, these treaties may take the form of bilateral or multilateral investment treaties, providing for a unilateral offer from the sovereign States to arbitrate in the event of certain classes of disputes.[2] There are several regional trade agreements in place but the North American Free Trade Agreement (NAFTA) is of particular importance. It was concluded by the governments of Canada, Mexico and the United States of America in 1992 and provided standards of treatment that governments must afford investors from other NAFTA states. Since NAFTA entered into force, each of the contracting governments has been the target of several NAFTA arbitrations. But presently, the NAFTA has been replaced by the United States-Mexico-Canada Agreement as of July 2020. Another well-known treaty is the Energy Charter Treaty (ECT) that came into effect in 1994. It now includes more than 50 Member States, mostly in eastern and central Europe, and some other parts of the European Union. It is the only multinational treaty specifically dealing with investment issues in the energy industry. Its introduction explains that the “fundamental aim of the Energy Charter Treaty is to strengthen the rule of law on energy issues, by creating a level playing field of rules to be observed by all participating governments, thus minimising the risks associated with energy-related investments and trade.”[3] It ensures the protection of foreign energy investments based on the principle of non-discrimination. In the past years, some European countries have faced numerous claims under the ECT. Spain, for instance, has been a party to the most ECT arbitrations in the renewable sector.[4]
Another legal basis for claims in the energy sector is the domestic legislation of host States. Domestic laws and codes that aim to incentivize and encourage foreign investments may provide for unilateral consent by the host State to arbitrate. Different from treaty-based disputes, the offer to arbitrate in domestic legislations is not always subject to the nationality criterion.[5]
Arbitration is the most preferred method of dispute resolution in the energy industry. The advantages of arbitration include, access to a neutral forum, autonomy of the parties, flexibility, and the ability to choose arbitrators with the required expertise. In one of the longest-pending renewable energy arbitrations, the PV Investors case[6](filed in 2011), Spain allowed the claims made by investors in the photovoltaic sector to be determined by a single UNCITRAL arbitral tribunal.[7]
However, one issue that still lingers is whether foreign arbitration awards would be enforceable in India. To throw light on the matter, the Supreme Court of India in a recent judgment, in PASL Wind Solutions Private Limited v. GE Power Conversion India Private Limited[8], has affirmed that two Indian parties can validly select a foreign seat of arbitration and are equally entitled to apply to Indian courts for interim relief under Section 9 of the Arbitration Act.
Another significant case of arbitration in India involving a foreign energy company was the Cairn Energy PLC and Cairn UK Holdings Limited (CUHL) v. Government of India.[9] In this matter, Cairn Energy sold its majority stake in Cairn India to Vedanta Ltd, reducing its stake in the Indian company to about 10 per cent in the year 2011, but in 2014 the Indian tax department had demanded Rs 10,247 crore ($1.4 billion) in taxes over the periods 2006-07 for its internal reorganisation of Cairn’s India business. However, the three-member tribunal ruled that India’s claim of Rs 10,247 crore in past taxes over 2006-07 was not a valid demand and that India should pay the funds withheld along with the interest to the Scottish oil explorer for seizing dividend, tax refund, and sale of shares to partly recover the dues and that India had breached its obligations to Cairn under the UK-India Bilateral Investment Treaty.
Given that the energy sector ranges across many forms i.e. oil, gas, heat energy, wind energy, hydro power, nuclear power, etc and as it deals in many operations like extraction, manufacturing, refining and distributing, it is likely that many disputes will be expected in the near future. Moreover, as per a recent study, it is estimated that an investment of USD 48 trillion will be required to supply the world’s energy needs up to the year 2035.[10] According to the International Energy Agency, nearly two-thirds of this investment will take place in emerging economies.[11] And as India is a developing nation with the world’s second largest population, we can presume that our consumption of energy levels will be one of the world’s highest, and so we can expect more participation of the private sector in optimizing our energy usage. This would also mean more agreements between the private sector and the State, thus inviting a huge scope for arbitration based settlements.
We can potentially expect disputes arising out of joint venture agreements between the State and the private sector. We can expect disputes over energy resource prices, for example when oil and gas prices peak too high, arbitration may be a source of conciliation. The regulation of rates and services conditions are frequently at the heart of energy disputes. Disputes may also arise in the context of construction of energy infrastructure. In addition to disputes between the main stakeholders, disputes with third parties may also arise, such as disputes involving services providers, suppliers and subcontractors etc. And most popularly international boundary disputes between States, usually related to oil and gas fields in maritime waters and access to resources in oceanic areas is also expected. All the above disputes have a great scope of being resolved through arbitration, and so the field of arbitration in India seems quite bright.
However taking into consideration the recent Arbitration and Conciliation (Amendment) Bill, 2021 which seeks to amend the Arbitration and Conciliation Act, 1996 so as to enable automatic stay on awards in certain cases like when a contract is induced by fraud or corruption and which also aims to specify the qualifications, experience and norms for accreditation of arbitrators, this Bill may scare away foreign investments. India already lags behind when it comes to the enforcement of international contracts and agreements. The Bill can further hamper the spirit of the Make in India campaign and deteriorate its rankings in Ease of Doing Business Index. If India wants to be a hub for arbitration, more freedom must be given to both domestic and international arbitrators to make the process easier so that the country can move towards the path of economic development.
[1] ICC Dispute Resolution 2020 Statistics, p. 17
[2] S. Vorburger and A. Petti, Arbitrating Energy Disputes in M. Arroyo (ed.), Arbitration in Switzerland: The Practitioner’s Guide (2018), p. 1286.
[3] Introduction to the Energy Charter Treaty, available at http://www.encharter.org/fileadmin/user_upload/document/EN.pdf
[4] J. Adam, Renewable Energy in G. Alvarez, M. Riofrio Piché, et al. (eds.), International Arbitration in Latin America: Energy and Natural Resources Disputes (2021), p. 168
[5] S. Vorburger and A. Petti, Arbitrating Energy Disputes in M. Arroyo (ed.), Arbitration in Switzerland: The Practitioner’s Guide (2018), p. 1289.
[6] The PV Investors v. Spain, PCA Case No. 2012-14, https://www.italaw.com/cases/2119
[7] Luke Eric Peterson. Following PCA Decision, Czech Republic Thwarts Move by Solar Investors to Sue in Single Arbitral Proceeding Meanwhile Spain Sees New Solar Claim at ICSID, Im Ark Rep., 1 January 2014. Spain afterwards raised a jurisdictional objection to hearing claims that it considered to be unrelated in a ‘consolidated fashion.
[8] PASL Wind Solutions Private Limited v. GE Power Conversion India Private Limited, 2021 SCC OnLine SC 331.
[9] Cairn Energy PLC and Cairn UK Holdings Limited (CUHL) v. Government of India, PCA Case No. 2016-7
[10] International Energy Agency World Energy Outlook, 11 (2014), available via http://www.worldenergoutlook ont investment
[11] ibid
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