[co-author: Bethany Pedder]
You may be a trading house with stakes in battery supply chains that cross continents, a commodities trader with worldwide investments and trading relationships, a mining company or investor with African assets, or have one among thousands of other resources market profiles, but it is always important to consider carefully how to balance control, certainty of revenue, and flexibility in your contractual arrangements, especially for those operating at multiple points in the value chain.
Transacting in a volatile commodity, in high-risk locations, against the backdrop of an everchanging global economic landscape brings with it risks and uncertainty, not least that counterparties may seek to avoid or to renegotiate the terms of their contracts to maintain what they perceive to have been the original bargain or to respond to other political or economic pressures. This has always been the case, but it has never been truer than at the present time, in particular given the volatile global sanctions and tariffs landscape.
Prior to entering any new arrangement, you will have done substantial due diligence on your contractual counterparty and identified material risks arising. You will also keep those risks under regular review at asset, national, regional and global levels. But the dynamic and sometimes unpredictable changes in the operating environment call for ever more careful consideration of the mechanisms at your disposal to control or at least to influence business partner behaviour and, if required, to exit or force your counterparty's exit from an arrangement.
Resources companies with international relationships should have at least two questions in consideration when negotiating contracts:
A. What rights does my company have within the contract to protect our position?
Companies can seek to alleviate and mitigate the risks identified above through carefully drafted contractual protections. These could include rights to:
- Provide you with a degree of positive or negative control over the activities of joint venture partners outside the immediate scope of your arrangements with them. For example, you might wish to restrict your counterparty from taking particular actions that you consider might affect security of supply of an essential commodity.
- Vary the contract price in light of changes in production costs, tariffs or regulation, and/or update long term price adjustment mechanisms, so that they remain fit for purpose.
- Protect against host state interventions such as licence cancellations, tax or royalty hikes, or windfall measures, through stabilisation provisions and change-in-law protections (as well as through appropriate structuring to benefit from available protections in investment treaties).
- React to evolving local content requirements.
- Ensure integrity against bribery and corruption, and alleviate sanctions risk.
- Procure that your counterparty adheres to your company’s values, principles and policies (for example in relation to community engagement and on-site health and safety).
You may also want the ability to:
- Require counterparties to “take or pay” commodities.
- Position yourself to resolve potential deadlocks within a joint venture favourably.
- Exercise put and call options over joint venture companies, or dilute other stakeholders’ interests.
- Seek financial assurance e.g. through performance bonds.
- Terminate existing contractual agreements, whether for breach or in a no-fault scenario, on favourable terms.
B. How do we ensure that there is an effective dispute resolution clause within the contract in case we need to take further steps to protect our contractual position?
In the middle of contract negotiations, the importance of dispute resolution provisions is often overlooked. However, agreeing an effective dispute resolution clause is essential to protect your interests and ensure you are best placed to protect and/or enforce your rights against other stakeholders.
When negotiating a dispute resolution clause, there are a number of key factors to consider:
1. Whether to provide for pre-action steps
Many disputes are ultimately settled before judgment or an arbitration award. However, this is often late in the process, after significant senior management time and costs have been incurred and the relationship with your contractual counterparty and potentially other commercial relationships – for example, third parties whose interests are affected if the disputed contract does not run smoothly – has suffered considerable damage.
It is, therefore, typically helpful to mandate some form of pre-action process so that the issues are addressed at a sufficiently senior level to provide a reasonable chance of resolving them without the need for formal proceedings. Relatively common pre-action processes include, for example:
- the escalation of disputes to senior executives, typically requiring them to meet to attempt to resolve the dispute (and also, to give the negotiations the best chance of succeeding, prohibiting the parties from (i) progressing to the next stage of the escalation process or (ii) starting formal proceedings, until a specified period of time has elapsed);
- early neutral evaluation i.e. where an independent third party (often a former judge or an arbitrator) provides a high-level assessment of the strengths and weaknesses of each party's position, which the parties can then use to inform their negotiations;
- mediation; and
- in appropriate circumstances i.e. typically in construction projects, dispute boards.
Although committing senior resource to an early attempt to resolve a dispute can seem an unnecessary imposition on busy people, it can lead to a substantial saving of time, cost and dislocation to relationships in the longer term, not least because the prospect of senior scrutiny in the short term sometimes encourages greater commercial rationality at the level where the issue arises.
It is also helpful, however, to have a dispute resolution mechanism with ‘teeth', so that an uncooperative counterparty will know that it cannot breach its obligations with impunity or purport to negotiate indefinitely. This may mean stipulating time periods for negotiations, after which formal proceedings can be commenced on any basis. In any event, it is always important to retain the right to start proceedings in a genuine emergency to protect your position or where the other side is clearly acting in bad faith.
2. How should formal proceedings be resolved?
Before drafting a dispute resolution clause for your contract, you need to consider where disputes arising under this contract will be best resolved. In particular, where cross-border disputes are concerned, is resolution through national courts necessary and, if not, is arbitration more likely to be in your interests? The answer may vary between contracts and between counterparties. We set out below some of the considerations to keep in mind when deciding upon your position.
Do you have a choice?
Depending on where parties are domiciled or where there are relevant assets, mandatory law in the relevant jurisdiction(s) may mean that certain types of disputes, for example administrative disputes (including issues relating to the grant of concessions or compliance with licence terms, taxes and royalties), disputes in relation to the registration of land or the ownership of shares, are not arbitrable as a matter of local law. If this is the kind of dispute that is reasonably likely to arise, a dispute resolution clause providing for litigation in the domestic courts may be appropriate. Alternatively, you may prefer to carve out certain types of issues from an arbitration agreement, although doing so with sufficient precision to avoid jurisdictional disputes can be a challenge, and it will be important to consider whether this is likely to be efficient in any event, or whether it would be preferable to be able to resolve all your disputes in a single set of proceedings. Circumstances in which you may prefer to arbitrate disputes to the extent possible include where you have a real concern about the ability of the local courts to deliver justice, either because your counterparty may have influence among decision-makers or because of the time that resolution through those courts will take.
Where might you need to enforce a decision, whether it is an injunction, award or judgment?
A key consideration is the enforceability of any injunction, judgment or award, and the jurisdiction(s) in which you may need to enforce them (or to resist enforcement). Parties wishing to enforce an injunction, award or judgment will have to apply to national courts to do so, as arbitral tribunals do not have the power to compel compliance with their awards.
Mandatory law, discussed above, will be among the factors you consider, as will the relative ease of enforcing a judgment or an award in the jurisdiction (or jurisdictions) where this is most likely to achieve your goals – typically because the other side has assets in that jurisdiction that are available for enforcement.
While judgments can be enforced in third party jurisdictions pursuant to bilateral or multilateral treaties or local procedural laws (typically where there is reciprocity), there are relatively few multilateral treaties with significant reach. Arbitration awards are usually more straightforward to enforce due to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The New York Convention provides a treaty obligation for national courts of the more than 170 contracting states to recognise and enforce an award made in another contracting state, subject only to limited exceptions. This is a factor in favour of choosing arbitration in international disputes, although you should ensure that the agreed seat of the arbitration (which is the jurisdiction in which the arbitration is legally based, as well as often being the venue for hearings) and the states where you are reasonably likely to wish to enforce an award are, indeed, New York Convention contracting states. That is not the only consideration – the courts of the seat should be supportive of the arbitral process rather than unduly interventionist and, where possible, have a track record of neutrality.
Procedural familiarity and flexibility
National courts often have extensive procedural rules, which determine how disputes are resolved, and typically require local lawyers to guide you through the process. In relation to some disputes and in some jurisdictions, the existence of clearly defined procedural rules can be advantageous, because it can lead to robust procedures being enforced. In other circumstances, however, disputes can become caught up in lengthy and opaque procedures that frustrate attempts to resolve the dispute reasonably promptly.
Arbitration, on the other hand, typically offers parties the opportunity to participate in the arbitrator selection process. This enables parties to nominate arbitrators with experience in resolving particular kinds of disputes and/or relevant legal or technical expertise, which can help the tribunal to shape an efficient process. In addition, it is relatively common for one party to be from a civil law jurisdiction, while the other is from a common law jurisdiction, and experienced arbitrators are used to deploying the many procedural tools that international arbitration has developed to ensure that the process involves an appropriate mix of both traditions.
Companies operating on a global scale (particularly in the resources sector) often favour the enforceability of an arbitration award, as well as the procedural flexibility of arbitration. This is particularly true in jurisdictions where companies are less familiar with the domestic legal system, or the domestic legal system may be ill-equipped to deal with disputes involving global companies.
To what extent is confidentiality likely to be important and/or helpful?
Whereas proceedings in many national courts are open to the public, arbitration proceedings are typically held in private and are often confidential, making it easier to maintain commercial confidentiality and relationships.
How many parties are likely to be involved or directly affected by any dispute?
Arbitration agreements can provide for multi-party and multi-contract situations, such as through consolidation of related arbitrations or joinder of third parties, either expressly or through the incorporation of institutional rules. However, unless the provisions are tightly drafted, there is often limited ability to compel consolidation or joinder, and there is usually a party which considers its strategic interests are best served by having its part in the dispute resolved separately. Litigation in the courts can be better suited to a situation where any dispute is likely to involve multiple parties in a contractual chain, for example to mitigate the risk of inconsistent judgments.
Are you reasonably likely to require interim measures?
A further factor to consider is whether, given the issues that typically arise under this type of contract, you are likely to need any interim relief before the dispute has been resolved. This could include seeking injunctions against your counterparty, for example a negative injunction prohibiting a counterparty from particular conduct (such as transacting with the national of a specific country) or a mandatory injunction to compel the counterparty to maintain supply of a commodity to you while the dispute is resolved. If so, you should consider whether an arbitral tribunal or national courts are more likely to be able to grant effective interim relief.
National courts will typically be open to granting interim relief in relation to their own proceedings (potentially including anti-suit relief to prohibit a party from bringing proceedings in another court). They will also, particularly if they are the courts of the arbitral seat, often be prepared to grant interim relief in support of arbitrations (including anti-suit relief to prohibit a breach of an arbitration agreement). In addition, many of the leading arbitration rules provide emergency arbitration mechanisms. Although institutional rules vary as to the remedies an emergency arbitrator may order, an emergency arbitrator typically has broad discretion to order the relief that appears appropriate. It is important to note, however, that an emergency arbitrator does not have the power to compel compliance with an emergency order or award. Instead, parties are reliant on the relevant national courts enforcing the emergency arbitrator's decision, and whether they will do so depends on the particular jurisdiction's arbitration laws.
How quickly might you need to be able to take effective steps to resolve a dispute?
Resolving disputes can be time-consuming and costly. In a fast-paced environment, you may well want your disputes to be resolved as quickly and efficiently as reasonably possible.
While many (although by no means all) national courts have summary procedures available to them and are comfortable using them, the availability of summary procedures is still developing in arbitration, and tribunals are sometimes cautious about making use of those procedures due to concerns about enforceability of their ultimate award.
Many of the leading arbitration institutions have developed procedures which allow disputes that do not exceed a specified value or complexity to be decided on an expedited basis. In drafting a dispute resolution clause, consider whether the chosen arbitral rules provide for an expedited procedure on an opt-in or automatic basis. Parties choosing to use an expedited procedure should be alive to the risks in doing so. For example, there may be limited rounds of written submissions, disputes may be decided on the basis of written submissions without an oral hearing, there may not be disclosure of all relevant and material documents, and the arbitrator may have to finalise the award within a very short period of time. In certain circumstances, particularly if there is (or appears to be) inconsistency between the terms of the arbitration agreement and the expedited procedure, or if the prospective enforcement jurisdiction is less arbitration-friendly, using expedited arbitration could even call into question the award's enforceability.
What substantive relief might you need?
The most common relief that a claimant seeks is an award of damages to reimburse it for the loss caused by a breach of contract or other wrong. Unsurprisingly, therefore, the appropriate calculation of damages is often a major area of debate, with issues including: the true value of the claimant's loss; where more than one currency is relevant to the calculation, the currency or currencies in which damages should be awarded, and the exchange rates that should be applied; and whether all, only some, or none of those losses are recoverable under the applicable law. Most national courts and arbitration tribunals are used to dealing with such issues, although some judges and arbitrators have considerably more expertise than others.
As noted earlier, however, certain types of disputes, for example in relation to the registration of land or the ownership of shares, may not be arbitrable as a matter of local law. This will depend on the mandatory law in the jurisdiction(s) where parties are domiciled or where there are relevant assets. In addition, where you consider that you might need to apply for final injunctive relief or specific performance, it is important to bear in mind that if you choose arbitration, you may need to have the award recognised and enforced and then ask one or more national courts to give effect to that relief, which may not always be straightforward.
Concluding thoughts
International trade is more dynamic than ever, but it is a dynamism coupled with volatility: volatility in geopolitics, volatility in law and regulation, and volatility across markets. Ensuring that you have substantive provisions in your contract that provide proper protection for your rights and interests, as well as dispute resolution provisions that enable you to rely on and, as necessary, enforce your substantive rights has never been more important.
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