Three routes to resolving energy disputes in the Middle East

Three routes to resolving energy disputes in the Middle East
Published: 30 May 2019 - 6 a.m.
By: Shourav Lahiri, Reed Smith

The production of energy – be it fossil fuel, nuclear or renewable – is usually the preserve of the government of the country in which the energy producing resource is located and international companies are unlikely to be involved in disputes. However, several international oil companies (from the United States, United Kingdom, France and China) are active in the exploration and production of energy in this region either in a joint venture with national oil companies or as their contracting parties sharing in the risks and rewards of exploration.

Further, along the chain, international construction companies participate in the processing, refining and infrastructure required to extract and transport energy products which could be subject to disruptions such as procurement or delivery issues and consequently, potential disputes.

The three principal routes to resolution of these sorts of dispute are by litigation in the courts of the country, by international commercial arbitration or by investor-state dispute settlement processes.

Given that the underlying subject of disputes is the resources of the country, international companies remain reluctant to sign contracts without arbitration clauses allowing them to take any disputes of the purview of the local courts, which they perceive – sometimes without adequate justification – would favour the national companies. That said, certain types of disputes with nationals – such as those with an agent – remain the preserve of the local courts and cannot be taken to arbitration. Judgments obtained from a country’s courts in the GCC are easily enforceable within the country, and also within the region under the GCC Convention or the Riyadh Convention, though enforcement beyond this region is not as easy.

International commercial arbitration presents an arguably superior mode of resolution because of its neutrality and wider enforcement. However, the choice of seat of the arbitration is critical. The arbitration laws in the countries in the GCC are at various levels of sophistication. Dubai, and its free-zones DIFC and ADGM, lead the way in the development of arbitration jurisprudence, with the latter two centres’ law based on English common law. In countries like Saudi Arabia and Kuwait, arbitration law is under development and therefore international companies tend to choose as their seat of arbitration either one of the traditional arbitration powerhouses (London, Paris or Geneva) or the new strong centres (Dubai, Singapore or Hong Kong), using a variety of rules of arbitration that are ad hoc (UNCITRAL) or institutional (ICC, LCIA, DIAC, DIFC-LCIA or QICCA). Given the current political climate, issues that could give rise to disputes on energy projects in this region are the effect of sanctions or blockades; claims of force majeure, frustration of contracts and illegality in continuing performance in breach of sanctions might be argued. Awards resulting from international commercial arbitration seated in this region are easily enforceable across the region and internationally as all the Gulf states, and most of the countries in the wider Middle East region, are signatories to the United Nations Convention for the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention).

Finally, should the contractual bargain be affected by an act of a state or public authority, a further route to dispute resolution is available through investor-state arbitration under the aegis of a treaty between the country of the investor and the country of the investment. This treaty could be a bilateral investment treaty (BIT) – UAE has 45 currently in force and Iran has 58 – or a multilateral investment treaty (MIT) such as the Agreement on Promotion, Protection and Guarantee of Investments among the Member States of the Organisation of the Islamic Conference (the OIC Agreement) or the Unified Agreement for the Investment of Arab Capital in the Arab States (the Unified Agreement). Both the OIC Agreement and the Unified Agreement have had cases brought under them against signatory countries (Indonesia, under the OIC Agreement, and Tunisia, UAE, Egypt and Libya under the Unified Agreement). The treaty claims one might see whenever tensions rise, wherever that may be, the host state has expropriated the investor’s investment without compensation, or that it has denied the investor fair and equitable treatment. If there is an ‘umbrella clause’ in the treaty, contractual breaches could also be brought as a treaty dispute. Treaty disputes are resolved by arbitration (usually under the UNCITRAL Rules or the ICSID Rules) and, given that the awards are made public, compliance by sovereign nations is usually voluntary and enforcement measures are often not needed. Commercial entities with energy interests in the region ought to be aware that these sort of issues could arise in the Middle East and that there are options available to them for resolution of any disputes that result.


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