[author: Louis-Alexis Bret]
Energy traders emerged from the progressive implosion of the integrated energy companies model and emergence of the energy spot market that began in the 1970s, and trading houses have kept a surprisingly low profile since then. Traders match energy supply and demand by purchasing, reselling, and moving commodities (crude oil and refined products, natural gas, coal, and even electricity) across the globe. Today, energy traders find themselves subject to increased public and regulatory scrutiny. This development appears to result from the traders’ recent strategy to move beyond their traditional market activities into the purchase and operation of high-profile productive and logistics assets. This evolution from mere middlemen to vertical integration is profoundly reshaping the industry, boosting profitability but also requiring massive capital investments and drastic changes in the trading houses’ business models.
Most importantly, the acquisition and operation of these productive assets also dramatically changes the types of disputes trading companies may face. As a result, they need to adapt and proactively manage their litigation strategies.
New Breeds of Commercial Disputes
Disputes involving commodity traders traditionally centered around their transactions as traders: individual contract claims, shipping and cargo disputes, and insurance claims. These disputes either settled commercially, or found their way to local courts (London courts becoming the epicenter of trading and shipping disputes) and specialized arbitral institutions. These institutions, direct heirs to the medieval trading guilds, suited closely-related, typically privately-held parties trading similar commodities in defined geographical areas. These specialized institutions range from the powerful and sophisticated (the Federation of Oils, Seeds and Fats Associations (FOSFA) or the Grain and Feed Trade Association (GAFTA) for instance) to the more anecdotal (the Chambre arbitrale des cafés et des poivres du Havre or the Cotton States Arbitration Board). The highly specific and relatively insular nature of these institutions progressively set them apart from mainstream forms of alternative dispute resolution.
The move into acquisition, ownership, and operation of large scale assets drastically altered the landscape of energy trading disputes, marked now by the emergence of increasingly varied and complex types of disputes: post-acquisition litigation, dissensions between joint-venture partners, conflicts related to operation of productive and logistics assets, and construction and engineering disputes, to name a few. The emergence of long-lasting relationships between geographically, commercially, and legally diverse parties has furthered the need for trading companies to select mutually agreeable dispute resolution fora, as well as to rethink their established dispute resolution strategies.
Energy traders should provide for the recourse to firmly established and universally recognized arbitral institutions and rules (in practice, ICC, LCIA, Stockholm Chamber, or UNCITRAL) when planning for these “new” types of disputes. Reliance on these institutions and rules requires the trading companies to overcome their long-held tendency to stick to more familiar courts or specialized arbitration bodies. It also represents the best way for traders to ensure a fair resolution of a dispute and to guarantee the efficient and universal enforcement of an award. Additionally, traders and their counsel need to become proficient in drafting arbitration clauses, including the so-called “complex” clauses, in order to tailor the plan for resolving future disputes and fully benefit from the advantages of the selected dispute resolution mechanism.
Traders dealing with a nascent commercial dispute should also not wait for it to become a full-fledged litigation before considering involving arbitration specialists. Early communications made in the course of commercial settlement attempts often yield unexpected consequences when litigation ensues. The time spent early on in strategically planning often proves crucial at later stages of a dispute, especially when the subject matter of the dispute extends outside the scope of a party’s core trading competence.
New Relationships with Sovereign Entities
Until recently, energy traders normally operated across the globe with minimal connection to sovereign countries. With a reduced corporate footprint often limited to Geneva, London, or Houston, energy trading companies had minimal exposure to the regulatory powers of most of the States touched by their activities. Rather, traders dealt with States as equal, sometimes even inferior, commercial partners. Conversely, ownership and operation of large-scale assets over the world result in an increased vulnerability to these countries’ sovereign prerogatives and regulatory activity. Traders, thus, need to protect themselves against potentially adverse governmental actions, particularly in emerging countries marked by political instability or weak legal frameworks, or judicial systems.
Energy traders have become prime candidates for investment arbitration or, more accurately, for relying on investment treaty mechanisms to protect their global investments. Energy trading companies can significantly limit the potential impact of adverse sovereign actions on their overseas assets by structuring their ownership of investments in order to take full advantage of the existing network of more than 3000 State-to-State international investment agreements. Meanwhile, investment arbitration increasingly protects energy traders’ productive assets and logistic activities. One of the most significant developments in that context, the continued expansion of the concept of “investment,” now not only encompasses physical or intangible assets, but also contractual rights, cargoes, and even charterparty activities.
The international regulatory framework surrounding energy trading also expanded considerably over recent years, particularly with regard to increased oversight of trading and derivatives activities, the fight against corruption, and liability for environmental damages and human rights violations. Preeminent energy traders recently found themselves dragged down in environmental and human rights controversies as a direct consequence of their investments abroad. Trading houses must adopt an increasingly proactive stance when dealing with these matters by engaging in thorough and repeated assessments of their potential liabilities worldwide and developing strategies aimed at minimizing them.