Mark Beeley, James L Loftis

Vinson & Elkins RLLP

Global Arbitration Review tasked the authors to prepare an 'up-to-date' survey on energy dispute resolution for the Asia-Pacific Arbitration Review. The idea of calling a third of the world and its people a 'region' seems odd. If anything is more diverse than this region's peoples and legal systems, it is their approaches to resolving international disputes. This topic alone could easily fill an entire book, but that book would be instantly out of date as soon as it was published. In fact, this topic could comprise an entire academic course of study.

That being said, a high-level look is possible if one skips certain fascinating discussions, such as the relative rates of enforcement of international arbitral awards by the district courts in Indonesia. To begin with, let's look at certain characteristics of the energy market in the Asia-Pacific region in 2007.

Explosive growth in Asia of regional energy markets, investment and trade The tremendous and sustained economic growth experienced in the region has led to explosive growth in the regional energy markets, in investment in energy development and distribution infrastructure, and in energy trade. But the phrase 'in Asia' misses half of the picture.

The expanding role of Asian investors worldwide in energy development

To complete the picture, we should note that Asian investors have now made significant investments in energy development in countries around the world. For many Asian companies, particularly for the foreign investment arms of certain state-owned companies, this is a novel experience. In many cases, it is the first time that they have dealt with the question of international dispute resolution from the investor perspective - up until now, the boot has been on the other foot. This 'second half of the picture' is catalysing significant changes in the use of international dispute resolution methods both in the region and worldwide.

Dramatic increase in energy-related international dispute resolution work in the region

These factors of explosive growth and worldwide expansion have led to a dramatic increase in international dispute resolution work in the region.

It is to the nature of that growth and the international dispute resolution methods and techniques that are being used that this article is directed, and it is presented in four sections:

• Trends: a discussion of certain relevant trends in the practice of international dispute resolution (IDR) including both the continuing development of a relatively effective IDR system and the use and growth of IDR in Asia • Troubles: including identification of certain obstacles to the full realisation of the benefits that IDR methods and techniques offer to parties • Techniques: some specific observations on practices we are currently seeing in the use of IDR in commercial agreements in and among Asian parties • Predictions: on how the IDR system will continue to evolve and how Asian practices may be influencing that evolution.

Trends

An evaluation of the use of IDR methods and techniques in a particular region requires the identification of the benefits that can be obtained through their use and an assessment of whether these benefits are being realised.

Looking at IDR as just a method of resolving disputes fails to acknowledge that there are positive macro- and micro-economic benefits that can be obtained through the use of the correct IDR methods and techniques. In particular, the IDR system permits commercial and state parties to plan and implement a proactive approach to the management of dispute risks and to maintain control of the dispute resolution process. These two areas constitute some of the riskiest aspects of major energy transactions, particularly long-term contracts.

In addition to assisting parties in managing these risks, the IDR process also provides important benefits to local and regional economies, as the accessibility of a neutral, respected system of dispute resolution serves as a catalyst for increased investments and thus economic growth. Nonetheless, many of these benefits are often misunderstood - accidentally or willfully - or are overcome by political concerns, often masquerading as concerns over 'public interest'.

Realisation of these benefits requires both a legal environment that will respect the parties' agreements and enforce the produce of the process, and the careful negotiation and tailoring of these agreements to specific risk management goals. Fortunately, domestic arbitral laws and international agreements on investment and trade increasingly support the binding use of IDR methods to resolve disputes.

Globally, arbitration is now the preferred method of resolving international commercial disputes. Statistics available from all arbitral institutions, both international and regional, indicate solid growth rates for cases filed and resolved. In addition to arbitration, mediation is gaining ground in the international IDR system. Asian parties are, generally speaking, much more familiar with mediation and its companion technique, conciliation, than are many western parties. Both of these forms, as well as hybrid forms of mediation, are gaining increased acceptance as important IDR techniques.

Turning to the use of IDR for international energy disputes, it is possible to identify certain global trends. Energy transactions have grown steadily in number and size, and have continued to increase in complexity. As these transactions have increased in complexity, so have the resulting disputes and the agreements created to resolve them. In the present day, for example, an LNG project will have literally dozens of parties and agreements, all of which are inter-related. To avoid conflicting results and a multiplicity of proceedings, the parties require - or at least, they should require - a single, coherent method of resolving disputes between parties on multiple levels of the project and from many different states.

There has also been a huge increase in the use of international agreements, such as bilateral investment treaties and the Energy Charter Treaty, as well as other extra-contractual methods of securing the parties' interests in a transaction. It is a subject of some debate as to whether these arrangements have increased or decreased the number of resulting disputes, and a case can be made for both, but they are a fact and they have led to a whole new range of potential disputes being adjudicated through the IDR system.

Both of the foregoing trends have resulted in an explosion in the use of IDR. As mentioned, the statistics from every major institution, as well as information on local enforcement, indicate that the majority of international energy disputes have now moved out of the courts and into private IDR proceedings.

This is in part an aspect of the emergence of a transnational 'IDR system'. This term describes a system of private justice, which has evolved over time as a result of several phenomena, each of which facilitates and influences the others:

• most importantly, the critical facilitation role of the New York Convention and other international and regional conventions on enforcement; • the rise in importance (ie, in caseloads) of the major arbitral institutions; • the emergence of IDR as a de facto legal specialty and, thus, of an international dispute resolution bar; • the recognition of a pool of professional, trained mediators and arbitrators; • the steady improvement in recognition and enforcement laws and practices around the world; and • the proliferation of international agreements consenting to arbitration as a means of resolving disputes. (Although these treaties alone have not dramatically affected the total number of cases, they have also helped lower barriers to IDR use in the countries that are parties to these treaties.)

IDR is now a recognisable system, with similarities around the world. To illustrate, an arbitration in Singapore over a natural gas offtake agreement between Chinese and Malaysian parties will look a lot like the arbitration of a dispute in Paris between Canadian and Bolivian parties. As a result, while there are many variations on the theme, many of which are important, nonetheless it is possible to predict with some degree of accuracy how a 'typical' energy dispute will unfold.

There are, of course, both positive and negative consequences of the emergence of such a system and the rapid growth in its use, although this discussion would be beyond the scope of this article. One perception problem faced by the proponents of the IDR system is that the positive benefits - like most good news - tend to go unreported, while the negative consequences never fail to draw interest from the media, particularly in politically-charged places and times.

Turning now to the Asia-Pacific region, we can also make certain observations about regional trends in the resolution of energy disputes. Again we run into problems when we try to describe Asia as a single block but, very generally speaking, until recently attitudes in Asia about arbitration could be described as being unconvinced about arbitration but receptive to less contentious methods, such as mediation.

Are the sources of this attitude cultural? Probably yes, but the further question - are these cultural attitudes social or commercial in origin? - is not as easily answered. It is commonplace in every discussion of dispute resolution in Asia to speak of the 'cultural affinity' for conciliation and of the preference for consensus as a cultural imperative, although certain sociologists would probably challenge this now trite maxim.

While the use of IDR is not a universal phenomenon throughout trans-border commerce in Asia, it is nearly universal for international energy transactions. It is now unusual to find a cross-border deal or a transnational energy contract that does not specify some form of IDR as the method of resolving disputes.

What is responsible for this trend? Certainly, foreign investors have long tended to seek - and in some places, to demand - the use of IDR instead of national courts. But we think that there are other reasons - reasons why IDR is now preferred and not merely accepted. These reasons include the increasing familiarity of Asian parties with IDR methods, particularly the more contentious methods, and a recognition that if properly designed and employed, IDR offers an efficient and fair method of resolving disputes. This has led to a greater willingness to use IDR methods as opposed to selecting a particular court or - as was often the case - simply ignoring the issue in the contract.

Another likely factor in the increase of Asian IDR usage is the development of a regional 'IDR infrastructure', which we will discuss later. Generally speaking, this refers to the increased familiarity and facility of regional practitioners and regional arbitral institutions with IDR methods and techniques - in other words, there is a supply-driven component to this growth.

Finally, and in our view, significantly, the tremendous increase in outbound investment from Asian companies has led them to appreciate the value of IDR in contracts in unfamiliar parts of the world where otherwise unfamiliar legal regimes would apply.

In addition to all of these trends, which are largely the result of agreements among private parties in the IDR system, there have been deliberate efforts by some states to promote the use of IDR and to reform supporting legislation. These positive efforts have had some success in spurring growth in IDR usage, in some cases significantly so. For example, Singapore has made a conscious, deliberate and well-publicised effort to make its courts and law hospitable to mediation and arbitration, all as part of its programme of promoting Singapore as an 'exporter of justice', much in the same way that the UK has done for most of the modern period.

Troubles

Nonetheless, there remain important obstacles, both actual and perceived, to a fully integrated, normalised use of IDR in the Asia-Pacific region. This means, in turn, that the region and its firm are not participating fully in the economic benefits offered by the system.

The obstacles to realising the full benefits of IDR methods and techniques in energy disputes can be loosely grouped into four categories. The first category is that of cultural obstacles. Not infrequently, scholars writing about the spread of arbitration - and particularly, the spread of Anglo-Americanised arbitration - ask the question 'is the IDR system compatible with Asian practices'? Are national commercial systems that are inherently adverse to outright contentious conduct (and anyone who has sat through a modern arbitration will tell you that they are highly contentious) at a disadvantage by inviting IDR methods and techniques? Mediation and conciliation have long been preferred methods of dispute resolution in the region, and those methods are surely available as part of the IDR tool box. Nonetheless, some western parties tend to treat international conciliation as 'roadblocks' or dilatory tactics on the road to resolving a dispute. This near-contempt for these processes, which the Asian party may have envisioned as primary methods of dispute resolution, can result in either an unprepared party or an unsuccessful dispute resolution process.

There also remain a number of legal obstacles to the successful use of IDR in Asian energy disputes. Most importantly, a number of states still have legal systems that are uncooperative - and occasionally hostile - to enforcing agreements to mediate or arbitrate or to enforcing awards.

In the past few years, a common topic of discussion among the IDR Bar has been the problem of enforcement of awards in certain Asian states. Without naming names, most practitioners working in Asia recognise that there were clearly two sides to the problems encountered by the host states in respect of the various power plant agreements in the mid-1990s. Nonetheless, the perception is firmly etched in the minds of many that these states were hostile to international commercial arbitration. This perception is now applied to a number of other countries in the region, some for good reasons and some for reasons that have little, if anything, to do with the reality of the domestic arbitral law or practice.

Still, it must be said that there are important barriers to the implementation of the IDR methods and techniques in many countries. Some contain rules that are highly restrictive as to who can be an arbitrator and when an arbitration can be conducted, others have erected significant barriers to the enforcement of arbitral awards, still others have made it difficult for arbitrations to occur in their territory by imposing a non-standard definition of what constitutes an 'international arbitration' or subjecting all arbitrations in their territory to domestic arbitration laws containing diverse or unusual grounds for the annulment of awards.

There also exist barriers to the efficient settlement of disputes, particularly 'fiscal responsibility' laws that provide powerful disincentives for employees of state enterprises to agree to settlements.

There are also institutional obstacles. Without spending too much time on them, there remain problems with judicial acceptance of IDR methods and techniques and cooperation in the implementation of parties' agreements to use them. In addition, there has been a regrettable trend recently towards the politicisation of any dispute involving a government or state enterprise.

Finally, we must ask whether existing legal structures can accommodate a truly transnational system such as the IDR system. Many Asian states do not have a judiciary or bar with extensive expertise or deep experience in IDR methods and techniques. Thus, while not actively hostile to these methods, they are unwilling or unable to provide the systems that the parties to these agreements need.

We see evidence, however, that this problem may be resolving itself. At the recent biannual Congress of the International Council on Commercial Arbitration, held in May 2004 in Beijing, Asian experts on mediation, conciliation and arbitration were a dominant force in the Congress's discussions. Equally, important regional institutions had begun to take their place among the major international institutions in the IDR systems. In particular, institutions in Singapore, Australia, Hong Kong and Korea have developed good reputations for the efficient implementation of IDR agreements.

To summarise the current state of IDR obstacles, we see three key lingering problems, which must be addressed in order for Asian companies to capture the full benefits of the IDR system. These are the enforcement of agreements or awards, the removal of barriers to settlement of disputes and the taking of steps to limit or prevent the politicisation of certain types of disputes.

Conversely, we see a number of key developments throughout the region. These include the accession to the New York Convention and the Washington (or ICSID) Convention by the great majority of states in the region.

Many of the states have also adopted the UNCITRAL Model Law or have adopted arbitration laws that, in largest part, track the provisions of the Model Law. Certain states that had received a reputation as being difficult with regard to enforcement have taken legislative action to speed the process.

China has implemented legislation that makes it difficult for local People's Courts to refuse enforcement of an arbitral award, as any decision to deny enforcement must be first recorded up to the Intermediate People's Court and, if necessary, to the Supreme People's Court. This insures that any decision not to enforce an award is made with due deliberation by the most experienced and learned judges in the country.

Perhaps the most important development is the emergence of an Asian IDR infrastructure - the increased awareness and experience of Asian practitioners and Asian institutions.

Techniques

Successful IDR inevitably requires attention to the following principles (if not always strict adherence). There is more or less universal agreement on the topics that every party considering an IDR agreement should write into their agreement or insure is dealt with by the rules of the institution chosen. These include:

• selection of mediators and arbitrators; • institutions and administered arbitration; • choice of law; • seat of the arbitration; • language; • disclosure; and • enforcement and challenge of awards.

Each of these issues can have a significant impact on the efficiency with which the dispute is resolved and, ultimately, on the outcome of that dispute. It is now common therefore for IDR agreements to deal in some form with each of these issues.

How are these principles and practices being implemented within the context of Asian IDR agreements? As has become a common practice through most of the energy industry, most Asian IDR agreements require the parties to have a period of executive consultation and formal mediation prior to institution of any contentious proceedings, such as arbitration.

In the implementation of these agreements by Asian companies, we observe that they are often much better equipped to make effective use of mediation. One hears the joke that western parties show up at a mediation with a blank pad, a pencil and a bad attitude. Some IDR practitioners now encourage our clients to use mediation as an affirmative opportunity to put the case directly to the other party's decision-makers, without going through the filter of their lawyers or subordinates.

A common feature of certain Asian arbitral laws is the opportunity for the arbitrators themselves to act as conciliators or mediators, sometimes with the consent of the parties and sometimes without. As a result, these types of agreements - often called 'Med-Arb' proposals - are sometimes found embodied in Asian IDR agreements. They have been resisted by western parties for a long time, although they are beginning to obtain acceptance in certain key markets, including the United Kingdom and the United States.

We also see an increase in the use of IDR institutions with a regional focus or competence. For a long time, many of the energy industry agreements called for IDR proceedings to take place in the usual locations, such as Paris or London, before the usual institutions. Certain Asian institutions have made significant inroads in this area. In addition, the larger international institutions, in particular the LCIA and ICC, have made the development of regional competence a key part of their marketing strategy.

Parties are also increasingly insisting on regional arbitral seats, such as Melbourne, Singapore or Hong Kong, in preference to the usual European locales. Both of these practices, if properly employed, can significantly assist the Asian party in successful resolution of its disputes.

As energy transactions have become more and more complex and comprehensive, parties have become less and less focused on the selection of applicable law. Sophisticated parties have begun to realise that other choices - of institution, seat and mediators and arbitrators - are more important in the great majority of cases than the applicable law. As a result, they have made strategic trades obtaining important benefits for themselves in return for agreeing to a neutral law.

Predictions

Finally, we come to the predictions, or more accurately, speculations, regarding the evolution of the IDR system in Asia. The last 15 to 20 years of IDR practice around the world has resulted in an amalgamated IDR system, blending elements of the Anglo-American and European civil law procedural systems together into the common 'IDR system' which we discussed earlier.

The explosion in IDR activity in Asia may ultimately drag the centre of gravity of the IDR world eastward. If the obstacles discussed above are addressed, one should expect to see Asian practices begin to influence the 'IDR system'. Although it is highly speculative, one could reasonably project that you will see Asian countries move continually towards the international norms with respect to arbitration, by increasingly adopting the arbitration laws and conventions that underlie the system. In contrast, we believe that the increased emphasis on mediation and conciliation in Asian IDR practice will begin to have an effect on practices across the world as parties begin to realise the efficiencies inherent in resolution achieved in mediation and conciliation. This is particularly true in the case of long term contracts, as the contentious arbitral system is not particularly well suited to the sorts of interim disputes that customarily arise in such contracts.