With changes in global markets, the international arbitration landscape in Asia has notably shifted over the last few years. This article explores the impacts of volatility in today’s energy markets, related contractual issues, and trends.

Project Structures

Large-scale energy projects, being capital intensive, frequently involve joint venture (JV) structures involving multiple investors. The relationship between these JV participants may be governed by a traditional shareholders’ agreement when the JV is incorporated, or by some form of participation agreement or joint operating agreement (JOA) when the JV is unincorporated, as is often the case in the oil and gas sector.

The project participants will also interact with a multitude of third-party contractors and suppliers via (1) engineering, procurement, and construction contracts, (2) operation and maintenance agreements, or (3) service agreements, transportation agreements, etc. The government of the project’s host country will also play a key role, especially in Asian jurisdictions where natural resources belong to the sovereign entity. The host governments will have various prerogatives to collect taxes and grant licenses. They can also directly participate in the project as stakeholders.

The wide array of contracts and stakeholders involved as a result of the complex structure of energy projects represents a potential source of disputes between the parties.

Project Challenges

The primary source of disputes in the energy sector involves the construction of energy assets, which tend to be large-scale and complex, meaning costs often change due to design changes and fluctuations in market conditions. There are often delays in construction due to adverse weather, permitting issues, labor issues, and unexpected technical challenges.

Another area causing tension is land acquisition. For example, in India, various infrastructure projects such as coal mines, power plants, and hydroelectric dams have run into difficulties due to protests regarding land acquisition, environmental impact, and the displacement of local communities.

The volatility of the energy market can be another source of conflict due to supply and demand factors involving geopolitical events, supply chain issues, and production disruptions.

Regarding renewable projects, remote greenfield locations that require a lot of space may make it difficult to obtain permits and approvals, which can lead to disputes. Renewable projects also require high levels of raw materials and components, which can be affected by supply chain issues.

Commercial and Investment Disputes

Disputes between project participants may be categorized as one of two types: commercial disputes or investment disputes.

Commercial disputes between JV participants or third-party contractors usually revolve around contractual breaches, pricing (such as fluctuating energy prices), or construction (such as material shortages). Some common JOA issues in Asia include disputes around the operator’s role and responsibilities and how this interacts with the prerogatives of the operating committee appointed by the co-investors. An example of this would be the approval of expenditures incurred by the operator on behalf of all parties.

Investment disputes are the main type of conflict between JV participants and the host government (in its capacity as a sovereign entity) and would usually involve issues around licensing, renewals, taxation, legal and regulatory changes, and cost recovery.

Role of International Arbitration

International arbitration is the preferred method of resolving cross-border energy disputes. There are three main reasons for this:

• Neutrality: Stakeholders in the energy sector want a neutral forum comprising an independent and impartial panel of adjudicators. This is important because such disputes usually involve parties from different jurisdictions and may even involve sovereign states. Energy disputes can also be highly politicized, which is why, for many stakeholders, local courts are perceived as being unsuitable. These perceptions tend to be prevalent in Asia.
• Expertise: Energy disputes tend to be complex because of the technical and legal issues that arise. Professional arbitrators are often renowned experts in highly technical areas, while local judges are less likely to be.
• Enforceability: An international arbitration award is recognizable and enforceable across most of the world thanks to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).

International arbitration for Asian energy and infrastructure projects usually takes place at the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA), or the Singapore International Arbitration Centre (SIAC). Investment disputes are governed by investment treaties, which are designed to provide a degree of protection for foreign investors.

Investment arbitrations are on the rise in Asia, and SIAC has developed a specialized set of rules that apply to international investment arbitration. Singapore has become an increasingly popular location for arbitrations due to the judiciary’s reputation, the pro-arbitration landscape, and the perceived political instability in Hong Kong, which was previously a popular destination for arbitration in Asia.

Trends

Projects in emerging markets feature political risks that should be taken into consideration when drawing up contracts. Investors should consider the ways in which they structure their investments, carry out a risk assessment of the country before investing, and look at the sectorial legislation to see if it is detailed enough or if it refers the parties to contractual negotiations on some subjects. In addition to a carefully drafted arbitration clause, investors should also have alternative dispute resolution mechanisms set out in their project agreements.

Increasing use of the latest technology in renewable energy production will likely trigger some conflict around defective technology or technology that is performing below expectations until these burgeoning technologies become “tried and tested.” In Europe and the United States, there have also been some environmental, social, and corporate governance–related claims, which will likely expand to Asia.

Opportunities for projects in the energy and renewables sector will likely continue to grow across Asia. By being aware of the appropriate requirements and potential challenges, private investors can structure their agreements with an eye toward avoiding commercial or investment disputes that need to be resolved with international arbitration.

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