A New Suggestion for Resolution of Energy Disputes through a Unified International Arbitration Court for Energy Disputes

Abstract

Recent trends have shown an escalated interconnection between the arbitration and energy sectors. The energy disputes arising out of investment projects and/or energy purchase or supply agreements have warranted the application of arbitration at one stage or the another. In the midst of all these developments in the energy sector, there lays a gray area of the institution dealing with all these disputes. This essay aims at highlighting this area by focusing on the legal sphere of international energy arbitration and the need of specific international arbitration court for energy disputes. The authors analyze the energy disputes within the ambits of commercial arbitration and investment arbitration along with the arbitration institutions dealing with them. Special deliberation has been made on the need for unification of the international mechanisms of arbitration suggesting the role of World Bank and United Nations in this regard.

Introduction

Day by day, the concepts of “Energy” and “Arbitration” are becoming more and more related to each other due to the international nature of most of the energy projects and the success in the resolution of these energy disputes through international arbitration.  Although the developments until today are very helpful and promising to solve the energy disputes through the neutral and independent international arbitration forums, due to the reasons mentioned in this essay, there may still be a need to establish a specific international arbitration court for energy disputes, to meet the specific needs of this industry.

The main purpose of this essay is to give general information about the concepts of “energy law”, “role of international arbitration in energy disputes” and the current legal system/practice in international arbitration, to solve energy-related disputes. Secondly, we give examples from existing energy arbitration centres such as the International Centre for Energy Arbitration [1] and WIPO Alternative Dispute Resolution for Energy [2]. Finally, we discuss further steps which can be taken, such as the creation of an arbitration court that has wide knowledge and expertise about energy and which only focuses on resolution of energy disputes (either commercial or investment) with its arbitration rules that are tailormade for these disputes under the auspices of one international institution such as World Bank or United Nations.

Energy Disputes and International Arbitration

In general, energy law itemises the governance of utilisation, modulation, conservation, and regulation of energy. The energy laws are structured for both, the consumers of energy and also the electrical appliances and electronics. Energy laws also blend in the taxation laws for the energy used.

Most of the energy projects require the involvement of more than one country and multinational energy companies. The construction of natural gas pipelines and nuclear power plants can be given as an example of these cross-border energy-related construction projects. For instance, one of the most important and recent natural gas pipeline projects is TurkStream which straight away connects the Russian gas reserves to gas network in Turkey, providing reliable energy to South, Southeast Europe and Turkey [3].

Similarly, nuclear power plants also require the involvement of more than one country and experienced energy companies from all around the world.  For instance, Akkuyu Power Plant in Mersin Turkey, which is currently under construction, is one of the most important nuclear power plant projects.  This project is also jointly realized by Turkish and Russian Energy Companies [4].

Apart from the natural gas pipeline and nuclear power plant projects, renewable energy projects such as wind and solar projects are also conducted by multinational companies through the investment contracts signed by the host States.

Therefore, the law which applies to these energy projects, having international characters, cannot be limited to the law of one country.  More importantly, the contracts signed concerning these energy projects generally contain dispute resolution forums requiring the resolution of the disputes between the host States and the energy companies through international arbitration.

Here, it may be worth noting that the nature of this international arbitration differs due to the characteristic of the dispute.  If this is a dispute which directly arose between the host state (where the investment was made) and the energy company (foreign investor), from an energy-related investment project, this dispute would generally be considered as an investment dispute and the relevant energy company may consider initiating an investment arbitration case against the host state.

On the other hand, if this dispute is about a revision of the long-term gas price and/or supply of gas or petroleum, between private or state companies, then commercial arbitration shall take place to solve this dispute.

In the following section, we will analyse the energy disputes within the scope of commercial arbitration and in the subsequent section, we will look at the energy disputes within the scope of investment arbitration.

a. Energy Disputes within the scope of Commercial Arbitration

One of the premier alternative method of dispute resolution is International Commercial Arbitration among private parties, emerging intercountry for the commercial transactions with the basic aim of avoidance of litigation in the national courts in their respective countries [5].

As stated above, energy-related disputes can also be subject to commercial arbitration. Most frequently, gas supply contracts between the countries, contain dispute resolution forums through international arbitration. These arbitration clauses generally refer to the disputes arising from the supply contracts to reputable international arbitration institutions, such as the Stockholm Chamber of Commerce, London Court of International Arbitration, or similar institutions.

Price review provisions (also called price reopener clauses) are the foremost components of long-term gas supply agreements entitling the parties to review the worth of the gas, during the entire life of the agreement. The magnitude of these clauses is contained in their inherent nature which is long-term which extends even to thirty years or more with the advancements and adjustments in the markets. The major hindrance is to foresee the circumstances and developments in the future. The arbitration comes into picture where the views of the parties on price revisions differ and all the settlements go futile [6].

On the other hand, price revisions may not be present under a gas supply agreement. Instead it may consist, the determination of the quality of the gas. Parties’ expectations for inexpensive and rapid solution are covered under the gas disputes in the way of determination of condition and quality. Dealing these cases with a sole arbitrator with advanced procedure would be more appropriate [7].

Apart from the above, many other disputes related to an energy activity can be subject to commercial arbitration, such as transportation of petroleum or other hydrocarbon sources or liquified natural gas. A dispute may arise between the parties due to the terms of transportation and/or quality and quantity of these energy products. Therefore, as explained below in detail, since these energy activities are increasing very rapidly, reputable international institutions such as United Nations may deliberate with its member States to establish a unique arbitration court, having suitable arbitration rules, to bring fast and correct solutions to these energy-related disputes.

b. Energy Disputes within the scope of Investment Arbitration

As mentioned above, energy disputes can also be subject to investment arbitration.  This is generally the case where a foreign energy company has invested in another country for an energy project.  Here the concept and scope of “investment” play an important role to determine whether the dispute in question can be subject to investment arbitration. In this regard and with the purpose of protection of energy investments around the world, the well-known multilateral treaty named Energy Charter Treaty (the “ECT”) has been signed in 1994 and came into force in April 1998. The ECT provides a multilateral framework for energy cooperation, that is unique under international law. It is designed to promote energy security through the operation of more open and competitive energy markets while respecting the principles of sustainable development and sovereignty over energy resources. Currently, there are fifty-three Signatories and Contracting Parties to the Treaty. This includes both the European Union and Euratom [8].

Article 1(6) of the ECT defines investment as “all types of assets, directly or indirectly controlled or owned by an investor. These assets include: (i) Tangible and intangible, and movable and immovable property, (ii) Any property rights, such as leases, mortgages, liens, and pledges, (iii)  A company or business enterprise, or shares, stock, or other forms of equity participation in a company or business enterprise, and bonds and other debt of a company or business enterprise,  (iv) Claims to money and to performance under a contract that has an economic value and is associated with an investment, (v) Intellectual property, (vi) Returns, and (vii) Any right conferred by law or contract or by any licences and permits granted by law to undertake energy sector economic activity.” Also, any change in the form of the assets invested does not affect their character as investments.

Besides, the definition of “investor” is also made under Article 1(7) of the ECT.  According to this, “an investor under the ECT is either: (i) A natural person having the citizenship or nationality of, or who is permanently residing in, a nation that is a member of the ECT, or (ii) An entity organised according to the law applicable to a nation that is a member of the ECT” [9].

One of the most important functions of the ECT is to enable the investors, having energy investments in one of ECT member States, to file an international arbitration case against this host State, in a case where a dispute arose from an investment within the scope of definition made by Article 1(6) of the ECT.

Article 26 enumerated in the Part III governs the Investor-state disputes. This provides that,  “an investor may, following a cooling-off period of three months, submit the dispute to resolution, at the investor’s option: (i) to the courts or administrative tribunals of the host state party to the dispute (ii) to another dispute settlement procedure previously agreed by the parties or (iii) to international arbitration.” As per Article 26(4) of the ECT, “the investors who choose to bring their disputes with a Contracting State to international arbitration may apply to (i) International Centre for Settlement of Investment Disputes “ICSID” arbitration (where both the host state and the investor’s state are a party to the ICSID Convention), (ii) Arbitration under the ICSID Additional Facility Rules (where either the host state or the investor’s state, but not both, are a party to the ICSID Convention), (iii) A sole arbitrator or ad hoc arbitral tribunal established under the UNCITRAL Arbitration Rules or (iv) Arbitration under the Arbitration Institute of the Stockholm Chamber of Commerce” [10].

Recently, there are lots of arbitration cases filed before ICSID (either under ICSID Convention or ICSID Additional Facility Rules) or before the Stockholm Chamber of Commerce or Ad Hoc arbitration tribunals under UNCITRAL Rules based on the relevant articles of ECT due to the energy disputes in all around the world.  For instance, one of the most famous energy arbitration cases which are based on ECT is the arbitration case filed against Russia by Yukos shareholders in which the Arbitration Tribunal has ordered Russia to pay USD 50 billion which is the highest compensation amount rendered with an arbitral award in the investment arbitration history [11].

Moreover, as to the disputes arising from renewable energy projects, it should be noted that due to the amendments made by some States such as Spain, Czech Republic, and Italy in their incentive regimes which apply to the renewable energy sources such as wind or solar (photovoltaic) energy, many arbitration cases were filed by the foreign investors against these States by relying upon the legal grounds of the ECT. For instance, as of August 2020, the 30 claims were filed against Spain by foreign investors before ICSID, along with cases still lingering under the rules of the United Nations Commission on International Trade Law (UNCITRAL) or the Stockholm Chamber of Commerce [12].

International Arbitration Centres Focusing on Energy Disputes

Several international arbitration centres were established to handle the disputes arising from energy projects and/or energy related activities, which provide arbitration services to meet the special needs of energy disputes.

One of them is the International Centre for Energy Arbitration (“ICEA”). ICEA was established in 2013 as an alliance or a joint venture between the Scottish Arbitration Centre and the Centre for Energy Petroleum Mineral Law and Policy at the University of Dundee.  Its mission is to render best practices in the dispute resolution in the energy sector.  ICEA promotes “(i) Scottish arbitration under the Arbitration (Scotland) Act 2010 for energy disputes, (ii) Such disputes being resolved in Scotland, and (iii) the Scottish Arbitration Centre as an appointing body in ad hoc arbitration” [13].

Another example is the World Intellectual Property Organisation (“WIPO”) Alternative Dispute Resolution for Energy. WIPO provides for the resolution of disputes in the energy sector by rendering world class advise and administration so that the parties do not need to resort to courts for resolution [14].  Although WIPO was mainly established with the aim of  preservation and protection of intellectual property rights and resolution of the disputes arising from intellectual property, since nowadays the energy-related projects are developed together with the intellectual property rights, WIPO also offers alternative dispute resolution services for specific sectors such as the energy sector.

The WIPO Mediation, (Expedited) Arbitration and Expert Determination Rules are carefully crafted for resolution of energy disputes. Flexibity provided them renders them applicable even to the energy disputes without limiting to the intellectual property rights. In its capacity as an administrator, the WIPO Centre maintains independence and impartiality. The WIPO Centre provides a comprehensive panel with experts, arbitrators and mediators specialising in energy law heading it. The parties are free to appoint them to represent them but they can surely choose their own arbitrators, mediators or experts [15].

In any case, there is yet to be a single international arbitration mechanism that can be conducted by a single international arbitration court, for energy disputes which has the widest jurisdiction to hear all international energy disputes regardless of whether the dispute is an investment or a commercial dispute. In the following section, we discuss the necessity of the foundation of such an international arbitration court for energy disputes.

Conclusion: Establishment of an International Arbitration Court for Energy Disputes under the Auspices of United Nations or World Bank 

Since, the energy sector is rapidly developing, it is a reality that, soon, we will come across a high number of complicated and cross-border energy disputes. Hence, we believe that there is a need for unification of the current international arbitration mechanisms since the different arbitration procedures, subject to different procedural and substantial rules, may result in problems concerning the enforcement of the arbitral awards in local jurisdictions.

For instance, while a final arbitral award rendered in an ICSID arbitration can be enforced in the territory of the member states to ICSID Convention as if it were a local court judgement without the need for another recognition and enforcement process in the relevant country [16], a final award rendered under the UNCITRAL Rules or the arbitration rules of Stockholm Chamber of Commerce is considered as a foreign arbitral award and there should be another recognition and enforcement process in the countries where it needs to be enforced following the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards [17].

Therefore, while accepting the valuable experiences of arbitration centres such as ICSID, LCIA, ICC or Stockholm Chamber of Commerce in the energy disputes and appreciating the existence of specific energy arbitration centres such as ICEA and WIPO Alternative Dispute Resolution for Energy, we believe that it may be the right time to consider the possibility of establishment of an international arbitration court for energy disputes, which may have the widest jurisdiction to hear the energy disputes with the most suitable procedural and substantial rules for energy-specific disputes. Moreover, it can be also possible to create an enforcement mechanism similar to Article 54 of the ICSID Convention for direct enforcement of the awards issued by this international arbitration court for energy disputes, which give these awards the legal force of the local court judgements and therefore, there may be no need for another step to recognise and enforce these awards in the relevant jurisdictions.

In terms of the legal structure of this international arbitration court for energy disputes, some previous examples can be taken into consideration such as the Court of Arbitration for Sport (“CAS”).  CAS was also established in 1984 with the aim of resolution of disputes arising out of sports. Headed by a Secretary General, the functioning of this court is assured by intercessors. A dispute can be resolved only if there is a valid arbitration agreement between the parties to refer to CAS [18].

Of course, to establish this arbitration court for energy disputes, first of all, there should be an international consensus between the States. Especially, the consensus of the developed and the developing countries, which are active in the energy sector, shall play a determinative role in this regard.

United Nations may deliberate the process of establishment of an arbitration court for energy disputes with the member states and subsequently, a multilateral treaty prescribing the authorities and duties of this arbitration court can be drafted by the member states of the UN. Here, it is also important to note that since there are already arbitration mechanisms prescribed under ECT for energy disputes, upon the conclusion of the multilateral treaty for the international arbitration court for energy disputes, necessary amendments should also be reflected for ECT to give full authority and jurisdiction to this new arbitration court for energy disputes.

Given the foregoing, to be able to handle very complicated international energy disputes, that may arise in the near future through a predictable, transparent, and unified arbitration mechanism, it would be very useful for the international institutions such as UN and/or World Bank to commence the deliberations, to establish an international arbitration court for energy disputes, and to consolidate the authorities and jurisdictions prescribed under the energy-related treaties such as ECT under this international arbitration court.

About the Authors

Mr. Ozcan graduated from Bahçeşehir University, Faculty of Law in 2005. He is admitted to Istanbul Bar Association in 2007. He is currently attending LL.M. Programme on International Dispute Resolution at the University of London.  He speaks English and Turkish. Mr. Özcan has been dealing with international arbitration for 10 years. His main practice areas are International Investment Arbitration, Public International Law and Energy Law. During this period of time, he has represented many Turkish investors in their ICSID arbitration cases filed against various countries such as Turkmenistan, Uzbekistan and Oman.  On the other hand, he was also involved in the teams representing Sovereign states such as Romania. Mr. Özcan currently leads the arbitration team representing the Republic of Turkey in two ICSID arbitration cases.

Dev Sareen is a 3rd Year Law Student at University School of Law and Legal Studies, New Delhi. He is also an Associate Editor at the Indian Journal of Projects, Infrastructure, and Energy Law (IJPIEL).

Editorial Team

Managing Editor: Naman Anand
Editors-in-Chief: Akanksha Goel & Samarth Luthra
Senior Editor: Aakaansha Arya
Associate Editor: Dev Sareen
Junior Editor: Muskaan Aggarwal

Preferred Method of Citation

Turgut Aycan Özcan and Dev Sareen, “A New Suggestion for Resolution of Energy Disputes through a Unified International Arbitration Court for Energy Disutes” (IJPIEL, 26 January, 2021).

https://ijpiel.com/index.php/2021/01/24/a-new-suggestion-for-resolution-of-energy-disputes-through-a-unified-international-arbitration-court-for-energy-disputes/?et_fb=1&PageSpeed=off>

Endnotes

[1] For more information about International Centre for Energy Arbitration: INTERNATIONAL CENTRE FOR ENERGY ARBITRATION (ICEA), http://energyarbitration.org/.

[2] For more information about WIPO for Energy Disputes: WIPO Alternative Dispute Resolution (ADR) in Research and Development/Technology Transfer, WORLD INTELLECTUAL PROPERTY ORGANIZATION, https://www.wipo.int/amc/en/center/specific-sectors/rd/.

[3] For more information about TurkStream: TURKSTREAM, https://turkstream.info/. There are also other important natural gas pipeline projects such as Nord Stream, new fresh gas pipeline spanning over the Baltic See from Europe to Russia: GAZPROM, https://www.gazprom.com/projects/nord-stream2/.  and Iran–Pakistan gas pipeline, WIKIPEDIA, https://en.wikipedia.org/wiki/Iran%E2%80%93Pakistan_gas_pipeline.

[4] World Nuclear News, Akkuyu construction formally starts, WORLD NUCLEAR NEWS (Dec. 12, 2017), https://www.world-nuclear-news.org/Articles/Akkuyu-construction-formally-starts.

[5] International Commercial Arbitration Research Guide, GEORGETOWN LAW LIBRARY, https://guides.ll.georgetown.edu/InternationalCommercialArbitration.

[6] Sandra De Vito Bieri, Arbitation clauses in Gas Supply Agreements, KLUWER ARBITRATION BLOG (May 15, 2014), http://arbitrationblog.kluwerarbitration.com/2014/05/15/arbitration-clauses-in-gas-supply-agreements/.

[7] Id.

[8] The Energy Charter Treaty, INTERNATIONAL ENERGY CHARTER. https://www.energycharter.org/process/energy-charter-treaty-1994/energy-charter-treaty/.

[9] Alejandro Lopez Ortiz, et. al., Investment arbitration under the Energy Charter Treaty, THOMSON REUTERS (2019).

[10] Id.

[11] Practical Law Arbitration, Majority shareholders in Yukos awarded US $50 billion, THOMSON REUTERS PRACTICAL LAW (Jul. 30, 2014), http://us.practicallaw.com/0-576-3965.

[12] Igor V Timofeyev, et. al., Investment Disputes Involving the Renewable Energy Industry under the Energy Charter Treaty, GLOBAL ARBITRATION REVIEW (Nov. 10, 2020), https://globalarbitrationreview.com/guide/the-guide-energy-arbitrations/4th-edition/article/investment-disputes-involving-the-renewable-energy-industry-under-the-energy-charter-treaty.

[13] INTERNATIONAL CENTRE FOR ENERGY ARBITRATION (ICEA), http://energyarbitration.org/#!/home.

[14] WIPO Alternative Dispute Resolution (ADR) for Energy, WORLD INTELLECTUAL PROPERTY ORGANIZATION, https://www.wipo.int/amc/en/center/specific-sectors/energy/.

[15] Id.

[16] Article 54(1) of the ICSID Convention: “Each Contracting State shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State. A Contracting State with a federal constitution may enforce such an award in or through its federal courts and may provide that such courts shall treat the award as if it were a final judgment of the courts of a constituent state.”

[17] The New York Convention, NEW YORK ARBITRATION CONVENTION, http://www.newyorkconvention.org/.

[18] History of the CAS, TAS/CAS, https://www.tas-cas.org/en/general-information/history-of-the-cas.html.