4.11 Disputes: Anticipating and Managing Them

negotiating experience) to negotiate the necessary agreements with well-resourced and experienced foreign investors, suppliers, and contractors. This is often due partly to difficulties in attracting or retaining qualified and experienced staff as a result of salary differentials with the private sector and a high staff turnover. As more countries make commercially viable discoveries, the demand for negotiating capacity (and support from third parties outside the country) increases. The abundance of suppliers of such skills among development organizations goes some way toward mitigating this problem.65

Given the complexity of the issues involved and their consequences in terms of revenue and other benefits, governments should place a premium on the development of internal negotiation capacity and access to knowledgeable external expertise. This is especially important given the considerable information, skills, and resources generally available to those on the other side of the negotiating table.

Two helpful tools are the availability of model contracts to the government side (see section 4.6) and the potential role of a state resource company. Such companies can “sustain a cadre of trained personnel with skills that can be deployed effectively in negotiations. By comparison, sector ministries are often ill-equipped to contend with the challenges of contract negotiations” (Land 2009, 170).

Governance issues can play a role in negotiations. In some cases, governments reject or not seek support in negotiations despite internal capacity shortcomings. The reasons may be a lack of coordination, a lack of resources, distrust, internal disagreements, or corruption. One study of ministry behavior noted, “Some ministries may want ownership over particular deals, and may therefore be reluctant to coordinate and collaborate with other ministries” (CCSI 2012, 9). Alternatively, the authority of a particular ministry within government or of a state resources company to manage the negotiations and approve the final terms may well be uncertain. Government officials may also seek quick, short-term solutions for political reasons. Where corruption is prevalent, officials prefer to retain maximum discretionary authority throughout the decision-making process. In such contexts, it is useful for the other organs of government such as parliament (and also civil society) to be aware of contract negotiation issues to function more effectively as a source of checks and balances in the domestic system. Governments may then be held accountable for the deals they have negotiated.

Renegotiation is a highly sensitive topic. Gas sales contracts typically contain price review clauses, but it is rare for a hydrocarbons or mining contract to envisage a renegotiation of the basic terms in a comparable way.

Inevitably, in a long-term relationship one of the parties may come to view the terms of the original contract as unfair, poorly drafted, or inappropriate to changed circumstances. For the government, an insistence on renegotiation (however justified it may see this action) will usually carry a high reputational cost and risk triggering international arbitration. Irrespective of any short-term benefits in a particular case, the impact on future investment may be negative, and if formal arbitration has resulted, the outcome in terms of legal costs, time spent, and reputational damage can be significant. A much more common approach in such circumstances is to seek discussions on an amicable basis with the investors, seeking a resolution away from the glare of publicity and minimizing its adversarial character. The investor too may seek to revisit its contractual obligations, perhaps seeking to reduce its work program in the light of unfavorable early results.

Sometimes it has been claimed that renegotiations have taken place under duress.66 The expression forced renegotiations has been used in media descriptions of investor-state negotiations in Latin America and some other regions. It underlines the importance of following good practice in any such negotiations. If duress has occurred, the outcomes are likely to be deemed null and void.

In the Aminoil case,67 the investor argued that it was threatened with a shutdown of its operations if it failed to agree to new terms offered by the Kuwaiti government after a significant oil price increase. The investor also argued that obtaining its consent in such circumstances rendered any decision invalid because it was obtained under duress. The presiding tribunal did not accept this claim.68 It set out four principles that should be followed if the negotiations were to be deemed fair: they had to be conducted in good faith and there had to be sustained negotiations over a period appropriate to the circumstances, an awareness of the interests of the other party, and a persevering quest for an acceptable compromise.69 If the investor was under financial pressure, this did not necessarily mean that an agreement reached between the parties was made under duress. There had to be some evidence of abuse by the other contracting party.

4.11 DISPUTES: ANTICIPATING AND MANAGING THEM

The likelihood of a dispute emerging at some point in a long-term EI project is high, and can even occur prior to any production of the deposit. With respect to oil and gas, a dispute may arise between the host government and/or its

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state resources company and the investor, among the parties to a joint venture, or between the host state and a neighboring state over a range of issues, such as ownership of land or seabed or the use of infrastructure such as pipelines. In the mining sector, it typically arises between the state and the title holder or applicant, between competing miners, or between a title holder or applicant and noncompeting parties. The range of issues may include revocation or suspension of a license, perhaps due to alleged lack of compliance with performance obligations; a dispute over environmental or social obligations during the development phase; or interpretation of issues relating to mine closure. For a foreign investor, a key question is whether such disputes are to be referred to the country’s normal courts and tribunals or a separate nondomestic agency such as an international tribunal.

Anticipation of this possibility of a dispute is essential. The appropriate time to prepare for it is during initial contract negotiations, prior to the commencement of EI operations. Every investor is aware of this need for preparation, partly because disputes can arise not only with the host state but also among the investors themselves, such as between parties to joint venture contracts as much as between the parties to a host-government agreement. It is important that the host state understands this risk too and identifies the responses it would be most comfortable with, not least because of the high public profile likely to attend on any such dispute with investors.

Prevention is the best cure. The downsides of a formal dispute (in terms of cost, time, reputation, and potential damage to the project) are usually greater than any benefits to the parties. Management of differences is therefore a highly desirable goal, and procedures should be put in place to try to resolve disputes at an early stage. Although precise evidence is lacking, due to confidentiality, it appears that many disagreements in oil, gas, and mining are settled prior to the triggering of formal legal processes, or if that occurs, they may be settled before they reach the stage of an arbitral award. This reflects the importance of both commercial realities and the need to preserve the long-term relationships between investors and host states.

There are commonly used ways for parties to settle their differences amicably and speedily (such as mediation, conciliation, or cooling-off periods). They can also include the use of stepped or multitiered approaches in the contract itself. In this way, parties are required to submit disputes to an increasingly rigorous and formal series of dispute resolution methods. This allows the parties to encourage and allow opportunities for an agreed settlement, either through mediation or (in the AIPN models) negotiation by senior executives on each side. It means that the parties retain control over their own destinies in the initial stages and also ensures that if these relatively informal efforts at a settlement fail, the next step will be one that allows a third party to render a binding decision. If a stepped approach is adopted, it is important that the transition from one step to another is made clear (to avoid challenges by one of the parties). The increasingly wide adoption of multitiered dispute resolution procedures makes them part of good practice in contract design.70

Failing these dispute prevention methods, one or both parties may choose to pursue formal and binding legal proceedings. This may require the dispute to be heard by the local courts, but often in the EI sector the parties will have agreed that in the event of a dispute they will submit their disputes to international arbitration: a form of private justice.71 Many governments would prefer to see their domestic courts settle disputes, but international arbitration will be keenly sought by most foreign investors to limit actual or perceived risk from local court processes; it is a concession many states have been prepared to make. The possibility of lengthy delays, open-ended proceedings, corruption, or lack of due process in local courts comprise some of the perceived risks by investors. Arbitration is unlikely to be quick, but once a decision is made, it provides finality about the dispute. Appeal is possible only in very limited circumstances and not on errors of law or fact.

Apart from international arbitration, there is another dispute settlement route for issues that have a technical, scientific, or accounting character: expert determination. The central idea is that a third-party expert should be appointed to evaluate the dispute. For example, a dispute concerning the specifications of a particular product used during operations could be resolved by an expert determination without having to commence arbitral proceedings.

There are important differences between determination by an expert and arbitration: there are usually no statutory provisions governing the former in contrast to the latter, and the legal requirements of an arbitration may be absent, with the parties not necessarily being required to present their case or to submit evidence. Whereas the courts may be used to assist in an arbitral process, by appointing arbitrators if necessary, by granting interim injunctions, and above all by enforcing awards (that is, like a court judgment) of the tribunal, there is no comparable role for the courts in the process of expert determination. Enforcement of the expert’s determination is a matter left to the contract itself, if it is enforceable at all. On the international level, this is

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