The Guide To Energy Arbitrations: Global Arbitration Review

Global Arbitration Review
The Guide to
Energy Arbitrations
General Editor
J William Rowley QC
Editors
Doak Bishop and Gordon Kaiser
Second Edition
The Guide to Energy
Arbitrations
Second Edition
General Editor
J William Rowley QC
Editors
Doak Bishop and Gordon Kaiser
gar
Publisher
David Samuels
Senior Business Development Manager
George Ingledew
Senior Co-publishing Manager
Gemma Chalk
Editorial Coordinator
Iain Wilson
Head of Production
Adam Myers
Production Editor
Simon Busby
Copy-editor
Jonathan Allen
Published in the United Kingdom

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© 2017 Law Business Research Ltd
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Acknowledgements
The publisher acknowledges and thanks the following firms for their learned
assistance throughout the preparation of this book:
20 ESSEX STREET
ALLEN & OVERY LLP
BAKER McKENZIE
BENNETT JONES LLP
BENNETT JONES (GULF) LLP
DEBEVOISE & PLIMPTON LLP
DENTONS UKMEA LLP
DOUG JONES AO
EDISON SPA
FRESHFIELDS BRUCKHAUS DERINGER US LLP
FTI CONSULTING
GIBSON, DUNN & CRUTCHER LLP
GORDON E KAISER (JAMS)
HAYNES AND BOONE CDG, LLP
KING & SPALDING
PAUL HASTINGS LLP
SQUIRE PATTON BOGGS (US) LLP
THREE CROWNS LLP
WILMER CUTLER PICKERING HALE AND DORR LLP
i
Contents
Editor’s Preface�� vii

J William Rowley QC
Overview
The Breadth and Complexity of the International Energy Industry�� 1
Doak Bishop, Eldy Quintanilla Roché and Sara McBrearty
Part I: Investor-State Disputes in the Energy Sector

1 Expropriation and Nationalisation�� 17
Mark W Friedman, Dietmar W Prager and Ina C Popova
2 The Energy Charter Treaty�� 30

Cyrus Benson, Charline Yim and Victoria Orlowski
3 Investment Disputes Involving the Renewable Energy Industry Under the

Energy Charter Treaty�� 47
Charles A Patrizia, Joseph R Profaizer, Samuel W Cooper and Igor V Timofeyev
4 Of Taxes and Stabilisation�� 60

Constantine Partasides QC and Lucy Martinez
5 Utilities, Government Regulations and Energy Investment Arbitrations�� 77

Nigel Blackaby
6 The Role of Sovereign Wealth Funds and National Oil Companies in

Investment Arbitrations�� 88
Grant Hanessian and Kabir Duggal
iii
Contents
Part II: Commercial Disputes in the Energy Sector

7 Construction Arbitrations Involving Energy Facilities: Power Plants, Offshore
Platforms, LNG Terminals, Refineries and Pipelines��105
Doug Jones
8 Offshore Vessel Construction Disputes��122

James Brown,William Cecil and Andreas Dracoulis
9 Disputes Involving Regulated Utilities��133

Gordon E Kaiser
10 Arbitration Involving Renewable Energy��156

Gordon E Kaiser
Part III: Contractual Terms

11 The Evolution of Natural Gas Price Review Arbitrations��175
Stephen P Anway and George M von Mehren
12 Gas Price Review Arbitrations: Certain Distinctive Characteristics��185

Mark Levy
13 Destination Restrictions and Diversion Provisions in LNG Sale and Purchase

Agreements��194
Steven P Finizio
14 Gas Price Review Arbitrations: Changing the Indexation Formula��207

Marco Lorefice
iv
Contents
Part IV: Procedural Issues in Energy Arbitrations

15 Multi-Tier Dispute Resolution Clauses as Jurisdictional Conditions Precedent
to Arbitration��217
George M Vlavianos and Vasilis F L Pappas
16 Compensation in Energy Arbitration��232

Aimee-Jane Lee, Samantha J Rowe and Roni Pacht
17 Expert Evidence��249
Howard Rosen and Matthias Cazier-Darmois
18 Issue Estoppel in Gas Price Reviews��258

Liz Tout and Matthew Vinall
Conclusion
The Challenges Going Forward��268
Gordon E Kaiser
About the Authors��273

Contributing Law Firms’ Contact Details��289
v
Editor’s Preface to the Second Edition
Economic liberalisation and technological change over the past several decades have
altered the global economy profoundly. Businesses, and particularly those involved in the
energy sector, have responded to reduced trade barriers and advancement of technology
through international expansion, cross-border investments, partnerships and joint ventures
of every description.
The move to today’s ‘internationality’ of business and trade patterns alone would have
been sufficient to jet-propel the growth of international arbitration. But when coupled
with the uncertainties and distrust of ‘foreign’ court systems and procedures, the stage was
set for a move to processes and institutions more suited to the resolution of a new world
of transborder disputes.
Not surprisingly, the concept and number of international commercial arbitrations have
grown enormously over the past 20 years. Bolstered by the advantages of party autonomy
(particularly over access to a neutral forum and the ability to choose expert arbitrators),
confidentiality, relative speed and cost effectiveness, as well as near worldwide enforceability
of awards, the system is flourishing. And if a single industry sector can lay claim to parental
responsibility for the present universality of international arbitration as the go-to choice for
the resolution of commercial and investor-state disputes, it must be the energy business. It
is the poster boy of arbitral globalisation.
Led by oil and gas, the energy sector is marked by enormously complex, capital-intensive
international deals and projects. Transactions and partnerships often are long-term in
nature, and involve ‘foreign’ places and players. Political instability and different cultural
backgrounds characterise many of the sector’s investments. In short, the energy sector is a
natural incubator for disputes best suited to resolution through international arbitrations.
Indeed, over the past 50 years or so, following a rash of nationalisations in North Africa,
the Gulf States and in parts of Latin America, and the lesson learned in ‘foreign courts’,
there is scarcely a major energy sector contract (whether oil, gas, electric, nuclear, wind
or solar) that does not call for disputes to be resolved before an independent and neutral
arbitral tribunal.
vii
The experience and statistics of the major arbitral institutions bear out the claim that
the energy sector has driven, and continues to account for, major growth in international
arbitration. ICSID is illustrative, where 25 per cent of recent claims involve oil and gas
or mining, with other energy sectors, such as electricity, accounting for close to a further
15 per cent.
Although much of the evidence of the energy sector’s arbitral demand is anecdotal,
those arbitrators who are known in the field report growing demand and a steady increase
in enquiries as to availability. And having regard to the multi-faceted fallout from the oil
price crash of 2014, a revival of resource nationalism (which exacerbates the natural ten-
sion between energy investors and host states), together with Russia’s continuing economic
difficulties and a world where sanctions imperil contractual performance, the only realistic
expectation is for further reliance on arbitrators and arbitral institutions to cope with the
disputes that are surfacing daily.
Another driver towards arbitration is the fact that the number of substantive players
in the sector is relatively limited. These parties will invariably have multiple agreements,
partnerships and joint ventures with each other at the same time, many of which are long
term. These dynamics call for disputes to be resolved by decision makers who are known
to and trusted by all, and whose decisions are final. The simple fact about business is that
the economic uncertainty associated with an unresolved dispute overhanging a long-term
partnership is often considered to be more problematic than getting to its quick and defini-
tive resolution, even if the resolution is unfavourable in the context of the particular deal.
Against this backdrop, when Gordon Kaiser raised the question with me in the summer
of 2014 of producing a book that gathered together the thinking and recent experiences of
some of the leading counsel in the sector, it resonated immediately. Gordon was also more
than pleased when I suggested that we might try to interest Doak Bishop as a partner in
the project.
With Doak’s acceptance of the challenge, we tried, in the first edition, to produce a
coherent and comprehensive coverage of many of the most obvious, recurring or new
issues that are now faced by those who do business in the energy sector and by their legal
and expert advisers.
Before agreeing to take on the role of general editor and devoting serious time to the
project, we needed to find a publisher. Because of my longstanding relationship with Law
Business Research, the publisher of Global Arbitration Review, we decided that I should
discuss the concept and structure of our proposed work with David Samuels, GAR’s pub-
lisher, and Richard Davey, then managing director of LBR. To our delight, the shared view
was that the work could prove to be a valuable addition to the resource material now
available. On the assumption that we could persuade a sufficient number of those we had
provisionally identified as potential contributors, the project was under way.
Having taken on the task, my aim as general editor has been to achieve a substantive
quality consistent with The Guide to Energy Arbitrations being seen, in time, as an essential
desk-top reference work in our field. To ensure the high quality of the content, I agreed to
go forward only if we could attract as contributors colleagues who were among the inter-
nationally recognised leaders in the field. Now that the book is a reality, Doak, Gordon and
I feel blessed to have been able to enlist the support of such an extraordinarily capable list
of contributors.
viii
The second edition of The Guide to Energy Arbitrations has been expanded with five new
chapters. Two focus on evolving issues in price revisions in long term gas/LNG purchase
agreements. There is a new chapter on the Energy Charter Treaty, another on disputes
involving renewable energy and the fifth new topic deals with off-shore vessel construction
disputes.The remaining chapters have all been updated to reflect developments since 2015.
For the next edition we hope to fill in important omissions, such as the contours of fair
and equitable treatment; injunctions against and setting aside of awards; bribery and cor-
ruption; sovereign immunity and enforcement issues; force majeure and contractual alloca-
tions; and intellectual property and insurance disputes in the energy sector.
Without the tireless efforts of the GAR/LBR team this work never would have been
completed within the very tight schedule we allowed ourselves. David Samuels and I are
greatly indebted to them. Finally, I am enormously grateful to Doris Hutton Smith (my
long-suffering PA), who has managed endless correspondence with our contributors with
skill, grace and patience.
I hope that all of my friends and colleagues who have helped with this project have
saved us from error – but it is I alone who should be charged with the responsibility for
such errors as may appear.
Although it should go without saying, this second edition will obviously benefit from
the thoughts and suggestions of our readers, for which we will be extremely grateful, on
how we might be able to improve the next edition.
J William Rowley QC
May 2017
London
ix
Overview
The Breadth and Complexity of the International Energy Industry
Doak Bishop, Eldy Quintanilla Roché and Sara McBrearty1
This chapter will introduce the general nature and organisation of the international energy
industry, specifically as it relates to international arbitration practitioners. It is worth noting
that the international energy industry is the single largest user of international arbitration,
and thus it is of particular interest to arbitral practitioners. Many arbitral advocates and
arbitrators will be involved at some point in their careers with the industry. For its part,
given its breadth and complexity and the size of many controversies, the industry has need
of a truly international, neutral and tailored mechanism for resolving disputes, and that
need is addressed by international arbitration.
The breadth and complexity of the energy industry stems from its truly international
scope, the multitude of energy sources, transactions, actors and stakeholders, as well as from
its evolving nature. Traditional energy sources – oil, gas, coal, and nuclear power – have
been complemented recently with the expanding field of alternative energy (e.g., solar,
wind, geothermal, biomass, hydrogen and hydropower). The transactions involved in the
industry range from bidding arrangements to exploration, drilling, exploitation, transporta-
tion, marketing and many more.
Despite various mergers among private oil companies, the actors in the industry are
quite robust and diverse. The industry is no longer dominated by the ‘seven sisters’2 – the
original ‘major’ oil companies – but instead, independent and national oil companies are
strong players in the field. In fact, state oil companies today dominate the industry in
terms of reserves. Various oil-service companies are also important players in the industry.
Additionally, the economic viability of certain projects has changed dramatically, given the
level and volatility of oil prices. In turn, this has led in great part to the increased need to
1 Doak Bishop is a partner and Eldy Quintanilla Roché and Sara McBrearty are associates at King & Spalding.
2 Anglo-Persian Oil Company; Gulf Oil; Standard Oil of California; Texaco; Royal Dutch Shell; Standard Oil of
New Jersey; and Standard Oil Company of New York.
1
carry out decommissioning activities.3 The availability of new technologies for exploration,
exploitation and transportation have also altered the global oil and gas market. All of these
developments have spurred new laws and environmental policies regulating the industry.
While defining the breadth and complexity of the international energy industry is dif-
ficult, this chapter will outline some general background and areas of focus, although one
should note that the industry will inevitably change in the coming years.
Oil and gas: overview of the traditional energy sector

It is estimated that US$48 trillion of investment will be required to supply the world’s
energy needs up to the year 2035.4 According to the International Energy Agency, nearly
two-thirds of this investment will take place in emerging economies.5 And while most of the
energy resources are state-owned, private sector investment is essential to meeting energy
investment needs.6 This in turn requires foreign direct investment and the participation of
international petroleum companies.
The first half of the 20th century saw the development and rapid growth of the energy
sector. In the early years, many governments granted generous concessions to international
petroleum companies. Beginning in the 1950s and accelerating in the 1970s, numerous
concessions were expropriated or renegotiated, providing governments with a higher per-
centage of the revenues and greater control over production.7 Some commentators have
suggested that modifications and renegotiations are inevitable given the lengthy lifespan of
energy investments, emerging laws and changing political climates.8 But nevertheless, the
sanctity of contractual commitments and legal security remain critical to energy investments.
Most countries follow the regalian or dominial systems regarding ownership of sub-
surface minerals. Under these systems, subsurface minerals belong to, or are controlled by,
the sovereign.9 Thus, international petroleum companies need permission from the state
3 Decommissioning is the industry-preferred term for the works necessary to manage and dispose of oil and
gas infrastructure and to minimise or eliminate environmental footprint once a producing well or field is no
longer economically viable. The term ‘abandonment’ is also used to describe decommissioning activities. See
Flávia Kaczelnik Altit and Mark Osa Igiehon, Decommissioning of Upstream Oil and Gas Facilities, in Oil
And Gas, A Practical Handbook, Global Bus. Pub. (2009) at 257; Peter Cameron, Decommissioning of Oil & Gas
Installations: The Legal & Contractual Issues, AIPN (1998), p. 4.
4 International Energy Agency, World Energy Investment Outlook, 11 (2014), www.worldenergyoutlook.org/
investment.
5 Id.
6 See, e.g., Id. at 11-12.
7 R Doak Bishop, International Arbitration of Petroleum Disputes: the Development of Lex Petrolea, XXIII YB Com.
Arb. 1131, 1151 (1998).
8 See, e.g., Crina Baltag, The Energy Charter Treaty:The Notion of Investor, 25 Int’l Arbitration Law Library, 2
(2012) (stating that ‘the life span of energy investments often forces the modification of the terms of the
agreements between investors and governments’) (internal citations omitted); David W Rivkin, Sophie J
Lamb, Nicola K Leslie, The Future of Investor-State Dispute Settlement In The Energy Sector: Engaging
With Climate Change, Human Rights and The Rule Of Law, Journal of World Energy Law and Business, 2
(2015) (stating that investments in the energy industry are especially vulnerable to regulatory change and
political interest).
9 Patrick Wieland, Going Beyond Panaceas: Escaping Mining Conflicts In Resource-Rich Countries Through
Middle-Ground Policies, 20 NYU Envtl LJ 199, 208 (2012-2014); Thomas W Merrill, Four Questions about
Fracking, 63 Case W Res L Rev 971, 977 (2012-2013).
2
to operate in these countries.10 States define the conditions for investors to carry out their
activities, and these are ultimately reflected in a granting agreement (i.e., a legal instrument
by which the government directly, or through a state-owned company, grants the private
oil company the right to certain interests in the hydrocarbons within the country, either in
place or after production).11 The types of granting agreements vary depending on the host
country’s laws, economy, and social and political policies.
Generally, but certainly not invariably, one could categorise the granting instruments
geographically by saying that international petroleum companies enter into production
sharing agreements with governments in Asia and Africa, licences with governments in
Europe and service agreements (or risk service agreements) with governments in South
America.12 However, these geographic categorisations are not invariable, and these differ-
ent types of agreements are adopted by some countries in the other geographical areas as
well. Moreover, various elements of each of these types of agreements may be combined
in a hybrid contract.
A production sharing agreement often requires the participation in drilling and pro-
duction activities of a local, government-owned company, often including a carried interest
for any exploratory wells. Through the government-owned company’s participation in the
project, as well as royalties, bonuses and taxes paid to the government, the government’s
percentage ‘take’ of the total revenues of a project is often substantial.13 The percentage of
government ‘take’ will vary from country to country, depending on many factors such as
historical agreements, costs, and geological and financial risks. The government ‘take’ is an
important consideration for international oil companies in deciding whether to invest in
a given country, and at times it can be a matter of competition among governments for
hydrocarbon investments.
An international petroleum company entering into an agreement with a govern-
ment may act on behalf of a consortium of companies, which enter into a joint operating
agreement to define, among themselves, their rights and obligations in the venture. The
joint operating agreement will typically attach an accounting procedure to determine the
method of calculating the costs to be shared.14 The consortium usually acts through one
of its members, which serves as the operator, although the consortium’s decisions are usu-
ally made by a committee, with the operator carrying out the decisions. In order to fund
operations, the operator issues cash calls to the members, the prompt payment of which is
necessary to ongoing operations.
The evaluation, bidding, negotiation, and acquisition phases of a project may be gov-
erned among the consortium members by a participation agreement, a study and bidding
agreement, or a confidentiality agreement.15 Companies may agree to areas of mutual
interest in which they bind themselves to participate only with one another in acquiring
10 Thomas W Merrill, Four Questions about Fracking, 63 Case W Res L Rev 971, 977 (2012-2013).
11 Claude Duval, et al, International Petroleum Exploration and Exploitation Agreements: Legal, Economic & Policy
Aspects, 23 (2009).
12 R Doak Bishop, International Arbitration of Petroleum Disputes: the Development of Lex Petrolea, XXIII YB Com
Arb 1131, 1152 (1998).
13 Id.
14 Id.
15 Id.
3
future interests within a defined area. Drilling agreements must be negotiated among oil
companies and drilling companies. Many of these agreements today involve expensive
offshore drilling platforms or ships, and may involve extensive coordination with other oil
service companies. If the drilling is successful and production is economic (commercial),
offtake agreements will be entered into by the members of the consortium to set out the
method and procedure by which they will nominate and lift their share of the production
for shipping and export.16 If one consortium member takes more than its share in a given
period, balancing agreements may be necessary. Transportation agreements of various types
will also be necessary for shipment, generally by sea or by pipeline. Finally, crude oil sales
or exchange agreements will be negotiated by the companies to dispose of their product.
Each of these agreements, and each step of this chain, involves numerous issues that may
create a dispute and a need for international arbitration.17
International contracts not only deal with oil, but also with natural gas. Natural gas
is found in oil reservoirs (associated gas) or by itself (non-associated gas). The traditional
methods for natural gas exploration are the same as for oil.18 In the past, wells drilled for oil
that discovered only natural gas were often plugged because of the expense of transporting
the gas and the lack of a natural gas infrastructure in most countries.19 This has changed
due to innovations in extraction and transportation technologies, and the development of
gas infrastructures in many nations. These innovations have changed the landscape of the
oil and gas industry and created new international issues.
The increase in natural gas production has facilitated advancements in transportation
technology. In the past two decades, companies have become more willing to bear the
expense of facilities to transport natural gas by pipeline, to construct liquefied natural
gas (LNG) facilities, or to consume gas locally through power plants. Historically, many
contracts with host governments for oil exploration and production included only a short
provision stating that if non-associated natural gas was discovered in commercial quanti-
ties, then the parties would negotiate a new agreement for the exploitation of the gas. This
agreement to negotiate has raised challenges for the international petroleum industry.20
Horizontal drilling and hydraulic fracturing, or ‘fracking’, is yet another significant
technological advancement.21 Fracking allows access to oil and gas trapped in imperme-
able rock.22 It was pioneered in the United States and has returned the US to ‘the role
of energy-producing super-power’.23 Other countries are considering implementing this
16 Id.
Arb 1131, 1152 (1998).
Aspects, 182 (2009).
Arb 1131, 1152 (1998).
20 Id.
21 Thomas W Merrill, Four Questions about Fracking, 63 Case W Res L Rev 971, 972 (2012-2013); John M
Golden, Hannah J Wiseman, The Fracking Revolution: Shale Gas a Case Study in Innovation Policy, 64 Emory LJ
955, 957 (2014-2015).
23 John M Golden, Hannah J Wiseman, The Fracking Revolution: Shale Gas a Case Study in Innovation Policy,
64 Emory LJ 955, 957 (2014-2015). See also, Alexandra B Klass, Danielle, Meinhardl, Transporting Oil and
4
technology, including China, Argentina, Australia, Canada, Mexico and South Africa.24 This
is likely to require foreign investment and international partnerships among investors and
countries. Although fracking has proven successful for production, there are environmental
concerns that may slow down or prevent its implementation in several jurisdictions. Only
time will tell the scope and range of foreign investment that will take place in this area, but
a need for international arbitration is probable.
Other interests often intersect with the energy sector, such as environmental issues.
They have risen to prominence through efforts involving corporate responsibility, brand
management, environmental activism and changing regulations.25 Moreover, environmen-
tal legal norms have become increasingly internationalised.26 Indeed, there are now over
20 multilateral environmental treaties relating to the environment and at least the begin-
nings of the emergence of a customary international law on the subject.27 Environmental
issues are increasingly involved in international arbitration, and are occasionally raised as
counterclaims by respondent states in investment arbitrations.
Upstream, downstream and midstream

The energy industry is essentially divided into three segments: upstream, downstream
and midstream. These segments basically represent four main activities necessary to the
energy industry: producing, transporting, refining and selling at retail.28 Upstream refers to
exploring for oil and gas reservoirs, drilling wells and producing hydrocarbons, also known
as exploration and production.29 It is the largest segment of the industry.30 The downstream
segment entails refining, processing, distributing and marketing the oil and gas products.31
Midstream refers to the transportation of oil and gas in-between the initial production and
the end user of the hydrocarbons. Note that these three segments are governed by different
laws and are subject to different administrative and environmental regulations.32
Gas: US Infrastructure Challenges, 100 Iowa L Rev 947, 965 (2014-2015).

24 See, e.g., John M Golden, Hannah J Wiseman, The Fracking Revolution: Shale Gas a Case Study in Innovation
Policy, 64 Emory LJ 955, 1028 (2014-2015); Michael Klare, From Scarcity to Abundance:The Changing Dynamics
of Energy Conflict, 3 Penn St JL & Int’l Aff 10, 22 (2014-2015).
25 See, e.g., David W Rivkin, Sophie J Lamb, Nicola K Leslie, ‘The Future of Investor-State Dispute Settlement
in the Energy Sector: Engaging with Climate Change, Human Rights and the Rule of Law’, Journal of World
Energy Law and Business, 3-4 (2015).
26 Tseming Yang, Robert V Percival, ‘The Emergence of Global Environmental Law’, 36 Ecology Law Quarterly
615 (2009).
27 David W Rivkin, Sophie J Lamb, Nicola K Leslie, ‘The Future of Investor-State Dispute Settlement in the
Energy Sector: Engaging with Climate Change, Human Rights and the Rule of Law’, Journal of World Energy
Law and Business, 3 (2015).
28 Ernest E Smith, et al, International Petroleum Transactions, 54 (2d. Edition).
29 John Schumacher, ‘A Primer on the Oil and Gas Industry’, available at www.nala.org/Upload/file/PDF-Files/
FactsFindings/art-Schumacher.pdf.
30 See Diagram by the American Petroleum Institute, available at www.americanpetroleuminstitute.com/
oil-and-natural-gas-overview/wells-to-consumer-interactive-diagram.
31 John Schumacher, ‘A Primer on the Oil and Gas Industry’, available at www.nala.org/Upload/file/PDF-Files/
FactsFindings/art-Schumacher.pdf.
Aspects, 176 (2009).
5
Private energy companies are often classified as a ‘major’ or as an ‘independent’ com-

pany. To be classified as a major, a company must be an ‘integrated’ oil company, taking part
in producing, transporting, refining, and selling oil and gas products at retail.33 Independent
companies are those which engage in fewer of these four main activities.34 Initially, the
industry was controlled by private international oil companies. However, in recent decades
they have taken a backseat to national or state-owned oil companies.
The changing role of host states in the international energy industry

Oil and gas producing states are, of course, essential players in the energy industry. The
energy sector has long been considered essential to security, geopolitical and vital national
economic interests.35 This makes investments in the energy sector especially vulnerable to
regulatory change and political risk.36
As the international energy industry developed, host states evolved from being a ‘pas-
sive’ business partner (e.g., old concession contracts) to being active and controlling forces,
(e.g., nationalisation, production sharing agreements, state-owned oil companies and
regulation).37 States may participate in the energy industry through a national oil company
or through an energy ministry or other governmental agencies. This will vary depending
on the country’s national and legal culture. Many countries have hydrocarbon laws defining
governmental policies, organising the industry, and creating incentives and disincentives for
oil companies.
The position of a host state on various issues may shift over time, from imposing inflex-
ible contractual terms, to promoting investment-friendly conditions,38 to changing their
laws and regulations, often depending on popular sentiment or the need for investments
depending on oil prices and whether reserves or production are declining. Take the case of
Mexico, for example. In 1938, the Mexican government confiscated all foreign oil com-
panies’ concession rights within the country.39 This was seen as a patriotic achievement
and is still commemorated today.40 Since then, Mexico’s energy sector was monopolised
by its national energy company, Petroleos Mexicanos (Pemex). But 76 years later, in 2014,
declining production and the need for new technology pushed Mexico towards instituting
33 Ernest E Smith, et al, International Petroleum Transactions, 54 (2d Edition).

34 Id.
35 Michael Klare, From Scarcity to Abundance: The Changing Dynamics of Energy Conflict, 3 Penn St JL & Int’l
Aff 10, 11 (2014-2015).
36 See e.g., David W Rivkin, Sophie J Lamb, Nicola K Leslie, ‘The Future of Investor-State Dispute Settlement
in the Energy Sector: Engaging with Climate Change, Human Rights and the Rule of Law’, Journal of World
Energy Law and Business, 2 (2015).
Aspects, section IV-V (2009).
38 Id. at page 7.
Arb 1131, 1151 (1998).
40 It is commemorated on 18 March, on the anniversary of the issuance of the first order that expropriated the
assets of almost all of the foreign companies operating in Mexico. The order was issued by Mexican President
Lazaro Cardenas.
6
energy reforms.41 Mexico will now allow private investors to enter its market (especially
offshore and unconventional fields) and is in the process of instituting more legal reforms
to facilitate the transition.42
Additionally, host states not only play the role of ‘business partner’, they also fulfil a
regulatory role because they decide the energy and environmental policies that an inter-
national petroleum company must follow, and they interpret and apply those regulations.
The Organization of the Petroleum Exporting Countries

The creation of the Organization of the Petroleum Exporting Countries (OPEC) in 1960 was
a pivotal development in the energy industry. OPEC is a permanent, inter-governmental
entity currently consisting of its five founding states: Iran, Iraq, Kuwait, Saudi Arabia and
Venezuela, as well as joining members, Qatar, Libya, United Arab Emirates, Algeria, Nigeria,
Ecuador and Angola.43 It is based in Vienna, Austria.
OPEC was first created to prevent a precipitous drop in crude oil prices then affected
by the discovery of huge new reserves.44 Over time, OPEC’s role became more prominent,
and it became a vehicle for states to challenge international oil company’s stance regarding
ownership rights, to encourage the renegotiation of international oil agreements, and to
engage in cartel pricing of oil.45
National oil companies

Today, national oil companies play a fundamental role in the industry. Not only do they
own approximately 85 per cent of oil reserves,46 they also represent the majority of volume
growth in the industry.47 They were initially created in response to security and nationalistic
concerns as well as vehicles for state participation in the energy industry.48 But they are
now deemed by some to be the ‘true giants’ of the energy sector.49
Indeed, of the 20 companies ranked as the biggest in the industry in terms of ownership
of reserves of oil and gas, 16 of them are national oil companies.50 National oil companies
41 See, e.g., Gaurav Sharma, ‘Mexico’s Energy Sector Reform Worth the 76-Year Wait’, Forbes (15 August 2014),
www.forbes.com/sites/gauravsharma/2014/08/15/mexicos-energy-sector-reform-worth-the-76-year-
wait/; Gaurav Sharma, ‘Energy Market Reforms Keep Mexico’s Optimism High Despite Oil Price Slump’,
Forbes (11 March 2015), www.forbes.com/sites/gauravsharma/2015/03/11/energy-market-reforms-kee
p-mexicos-optimism-high-despite-oil-price-slump/.
42 See, e.g., Id.
43 List of OPEC member countries, available at www.opec.org/opec_web/en/about_us/25.htm.
Aspects, 48 (2009).
45 Id.
46 Id. at 101.
47 See Christopher Helman, ‘The World’s Biggest Oil and Gas Companies-2015’, Forbes (19 March 2015),
www.forbes.com/sites/christopherhelman/2015/03/19/the-worlds-biggest-oil-and-gas-companies/
48 Ernest E Smith, et al, International Petroleum Transactions, 58-59 (2nd Edition).
49 ‘National Oil Companies: Really Big Oil’, The Economist (10 August 2006), www.economist.com/
node/7276986.
50 Id; Christopher Helman, ‘The World’s Biggest Oil and Gas Companies-2015’, Forbes (19 March 2015),
www.forbes.com/sites/christopherhelman/2015/03/19/the-worlds-biggest-oil-and-gas-companies/.
7
are usually created by statute or decree. Generally, all of their ownership interest is held by
the state and they can vary in corporate form.51
National oil companies sometimes face issues that private companies don’t necessarily
face. For example, national oil companies may be subject to heightened political and social
pressure, or they may be required to pay higher wages or adopt inefficient production
methods to favour employment.52 Notwithstanding, the role of national oil companies has
grown from local participants to international players, often investing in oil reserves located
in other countries.
Natural gas
Natural gas has received separate treatment in the energy industry due to the difficulty and
expense associated with its transportation. Due to this, it has traditionally been produced
and marketed for domestic consumption,53 at least in those countries with a developed
infrastructure for using natural gas.Thus, cross-border transportation of natural gas was once
minimal in comparison with oil. But over the past few decades, the landscape has changed
due to energy demand, changes in oil prices, technological advances and environmental
considerations (since it is a cleaner form of energy).
Natural gas is abundant in comparison with other fossil fuels.54 However, it is difficult
to transport given its physical nature and volatility.55 These challenges led to the traditional
wasteful use of natural gas by flaring it (burning it) on-site.56
Many countries have now constructed a domestic infrastructure for using natural gas,
often by building gas-fired power plants. Thus, they make use of the natural gas locally
without having to transport it vast distances.
The most cost-effective way to transport natural gas is through high-pressure pipelines,57
but natural gas can also be transported in specialised ships once it has been liquefied (LNG).
This process requires the cooling of the gas to -160 degrees Celsius, storing it in insulated
tanks, transporting it in specialised ships and regasificating it at destination plants.58 This
requires the construction of multibillion-dollar LNG facilities. But the need for energy
sources and the desire to make use of natural gas discoveries have spawned a global market
for LNG.
51 Ernest E Smith, et al, International Petroleum Transactions, 58-59 (2nd Edition).

52 Id. at 62.
54 Ernest E Smith, et al., International Petroleum Transactions, 1025 (3rd edition).
55 Id. at 1032.
56 Id. at 1027.
57 It is calculated that transporting natural gas is four to five times more expensive than transporting oil. Ernest E
Smith, et al, International Petroleum Transactions, 1028 (3rd edition).
Aspects, 182 (2009).
8
The oil and gas contract

A granting contract typically forms the foundation of an international oil and gas project.59
These have evolved from concession contracts to production-sharing agreements, risk
service contracts and licences.60
The oldest of these is the concession contract.61 It derived from the contracts used in
the United States’ mining industry.62 A concession may refer to various types of contracts,
permits, licences or instruments, depending on the applicable legal system.63 Under the
early concession agreements, a host country would essentially concede control over its
energy resources to an international petroleum company.64 These early agreements had
certain common features:
• they granted title of the oil in place to the companies;
• the concession areas covered vast tracts of land;
• the term of the concession was often 60 years or more;
• the international oil company had control over the schedule and scale of operations
(exploration and production); and
• the government received a one-eighth royalty.65
Initially, concession agreements were negotiated on a case-by-case basis66 as international

petroleum companies attempted to discover reserves and operate in new host states.
The industry has generally shifted away from concession contracts in favour of produc-
tion sharing agreements (PSAs). To a significant extent, production sharing agreements
are representative of the changes that the petroleum industry has experienced since the
1970s.67 They were first popularised in Indonesia, but were quickly adopted by other coun-
tries.68 Under a production sharing agreement, the host country retains ownership and
the right to exploit resources while the international petroleum company is more akin to
a ‘contractor hired to perform the operations’,69 although this is not an entirely accurate
analogy since under many PSAs oil companies can report in their public filings (e.g., SEC
59 Paul Michael Blyschak, ‘Arbitrating Overseas Oil and Gas Disputes: Breaches of Contract Versus Breaches of
Treaty’, 27 Journal of Int’l Arbitration 6, 579 (2010).
Aspects, section IV-V (2009). These are the main (but not all) types of agreements in the energy industry.
61 Id. at 41.
62 Id.
63 Id. at 58.
Treaty’, 27 Journal of Int’l Arbitration 6, 579, 581 (2010).
Arb 1131, 1151 (1998).
67 R Doak Bishop, James Crawford, W Michael Reisman, Foreign Investment Disputes, Cases Materials and
Commentary, 219 (Kluwer Law) (internal citations omitted).
Aspects, 69 (2009).
69 Id. at 71.
9
filings in the United States) a percentage of the hydrocarbon reserves as their own.70 This
is particularly important to companies because their stock price may be driven, in part,
by their reserve profile. The contractor’s payment under a PSA involves an entitlement to
recover costs once operations are successful (commercial) and to a share of the production
as profit during a determinate amount of time.71 If the area under contract is unproductive,
the contractor receives no profit.72 Thus, the financial and geological risk of finding oil in
commercial quantities falls on the private oil companies. Typically, the company has a cer-
tain number of years to explore for oil in a defined geographic area and drill a minimum
number of wells, after which it must relinquish back to the state any area from which no
production will timely occur.
Some countries use risk service contracts, which are similar to production sharing agree-
ments. Under this type of agreement, the contractor usually provides the funds required for
exploring and developing petroleum resources. The host state will allow the contractor to
recover its costs through the sale of a certain percentage of the oil or gas once the project
is successful. The host state will also pay the contractor a fee based on a percentage of the
revenues. The state retains ownership of the resources and production.73
Other host countries – the United Kingdom, for example – use a licensing system.The
licences vary depending on the location (onshore, offshore) and the stage of the operation
(exploration or production).74 Licences essentially entitle a petroleum company to operate
in a specific geographical area in exchange for a royalty or fee.75 Generally speaking, the
government has ample policing powers over the licensee, and the licence can be revoked
for a number of reasons.76
The Association of International Petroleum Negotiators (AIPN) is a well-known, inde-
pendent, not-for-profit association for professionals involved in the energy industry.77 It has
developed a robust collection of model contracts, including virtually all of the categories
mentioned above, as well as certain commentaries. These can be found on its website and
provide a more detailed understanding of the various contracts’ clauses and differences.
Overview of energy-related investment disputes

A foreign investment dispute is a controversy between an investor from one state and
a foreign government relating to an investment in the host state.78 Foreign investment
Aspects, 71 (2009).
71 Id.
Commentary, 216 (Kluwer Law) (internal citations omitted).
73 Id. at 222.
74 Id. at 220.
Commentary, 220-221 (Kluwer Law) (internal citations omitted).
77 About AIPN, available at https://www.aipn.org/about-aipn/.
Commentary, 9 (Kluwer Law).
10
has been given protection through international treaties, conventions and by customary
international law, and over time a subset of international law regulating investment disputes
has emerged. Today, there are a sizeable number of international arbitral awards relating to
the petroleum industry.
Diplomatic protection
Under traditional international law, corporations and individuals did not have standing
to bring claims directly against governments. Diplomatic protection was the only remedy
available to a citizen of a state with a claim against a foreign government. Under this
regime, the foreign investor would bring grievances to the domestic courts of the host
state or to the officials of his own country. The investor’s government would then have the
discretion to espouse the claim against the foreign government and protect the investor’s
rights through an exchange of diplomatic notes, or more recently by bringing a claim
before the International Court of Justice.79
When the national governments of host states began to expropriate foreign-owned
projects in the 19th century, they purported to rely upon the international law principle of
territorial sovereignty. Local courts were often viewed as unsympathetic to foreign inves-
tors or were required to give effect to the local expropriating decree, leading the investors
to turn to their own governments for assistance. The investors’ governments, if they were
inclined to help their nationals, responded based on the international law principle of
nationality (in this context, the state’s interest in representing its nationals).80
Diplomatic protection proved inadequate for many reasons. For the investor, the avail-
ability of the remedy was unpredictable and subject to the government’s many other inter-
ests. For the government, it was an unwieldy instrument for dealing with foreign investment
issues. The intervention of the investor’s government inevitably created conflicts with the
host state. It also had the potential to affect relationships with other states. As the problems
that governments faced became more complex and governments developed larger organi-
sations to handle them, it became clear that more economical alternatives to diplomatic
protection and intervention were necessary. But an analogue to national adjudication was
not feasible, for international law at that time did not recognise natural or juridical persons
as proper subjects. Thus, the international community looked for instruments that could
provide an adequate forum and remedy.81
The ICSID Convention

In 1965, under the sponsorship of the International Bank on Reconstruction and
Development, the Convention on the Settlement of Investment Disputes between States
and Nationals of Other States was executed and came into effect in 1966 (the ICSID
Convention).The Convention created ICSID to administer arbitrations between contracting
governments and nationals of other contracting governments for disputes relating directly
to an investment. ICSID, in turn, promulgated sets of arbitral and conciliation rules.
79 Id. at 1-3.
80 Id. at 1-4.
Commentary, 1-4 (Kluwer Law).
11
ICSID was designed specifically to administer arbitrations of foreign investment disputes.82

Unlike other major arbitral institutions, ICSID has jurisdictional requirements.83 As of this
publication, 151 countries have ratified the ICSID Convention.84
Reports show that almost 40 per cent of all cases registered with ICSID (and its
Additional Facility) between 1972 and 2012 involved the energy sector, with oil, gas and
mining disputes representing 35 per cent of all ICSID claims in 2014.85
The New York Convention

The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral
Awards (the New York Convention) was adopted on 10 June 1958 and entered into force
on 7 June 1959. This treaty is the most significant contemporary legislative instrument
relating to international commercial arbitration.86 It provides a universal constitutional
charter for the international arbitral process and has proven to be an effective framework
for enforcing international arbitration agreements and arbitral awards.87 It is of relevance
in enforcing all non-ICSID investment arbitral awards; ICSID cases exclusively involve the
ICSID Convention.
The North American Free Trade Agreement

There are several regional trade agreements in place. But the North American Free
Trade Agreement (NAFTA) is of particular importance. NAFTA was concluded by the
governments of Canada, Mexico and the United States of America in 1992. It provides
standards of treatment that governments must afford investors from other NAFTA states.
As in bilateral investment treaties, the governments consent to international arbitration of
any investment disputes with qualifying private investors from the other contracting states.
Since NAFTA entered into force, each of the contracting governments has been the target
of several NAFTA arbitrations.88
The Energy Charter Treaty

The Energy Charter Treaty (ECT) first came into effect in 1994. It now includes more than
50 member states, mostly in Eastern and Central Europe, and the European Union and
Euratom.89 It is the only multinational treaty specifically dealing with investment issues in
82 Id. at page 5.
83 Id. at page 12.
84 See https://icsid.worldbank.org/apps/ICSIDWEB/about/Pages/Database-of-Member-States.bak.
aspx?tab=AtoE&rdo=CSO.
85 David W Rivkin, Sophie J Lamb, Nicola K Leslie, ‘The Future of Investor-State Dispute Settlement in the
Energy Sector: Engaging with Climate Change, Human Rights and the Rule of Law’, Journal of World Energy
Law and Business, 1 (2015).
86 Gary B Born, International Arbitration: Cases and Materials, 32 (2d Ed., Kluwer, 2015).
87 Id. at 27-35.
89 Id.; The Energy Charter Treaty, available at http://www.energycharter.org/process/
energy-charter-treaty-1994/energy-charter-treaty/.
12
the energy industry.90 The introduction to the ECT explains that the ‘fundamental aim of
the Energy Charter Treaty is to strengthen the rule of law on energy issues, by creating a
level playing field of rules to be observed by all participating governments, thus minimising
the risks associated with energy-related investments and trade’.91 It ‘ensures the protection
of foreign energy investments based on the principle of non-discrimination’.92 The treaty
also provides governmental consent to ad hoc international arbitration to resolve disputes
with foreign investors arising from their substantive obligations. More than 50 arbitrations
have been brought under the ECT.
Bilateral investment treaties

Modern bilateral investment treaties (BITs) were first adopted in the 1960s by European
countries seeking to protect their nationals’ investments abroad.93 The United States then
followed suit in the 1970s. The proliferation of BITs signalled an important landmark in
international relations and arbitration. To date, almost 3,000 BITs have been signed. They
contain similar provisions, leading some scholars to conclude that they may now express
the customary international law standards for foreign investment.94 These treaties create
actionable standards of conduct for governments in their treatment of foreign investment,
and typically provide for international arbitration to resolve disputes arising from allegations
of a violation of the treaty.
Conclusion
Over the past few decades, international tribunals have addressed many of the issues and
facets of the energy industry. These have included claims under bilateral and regional
treaties as well as customary international law dealing with expropriations, unfair and
unequal treatment, and denial of justice. This book will address them by dividing them
into eight sections, with each of section highlighting a different facet of the international
energy industry.
Hopefully, the reader will find in these pages a useful introduction and worthwhile
information concerning the arbitration of international energy disputes.
90 Crina Baltag, The Energy Charter Treaty:The Notion of Investor, 25 Int’l Arbitration Law Library, 8 (2012).
91 Introduction to the Energy Charter Treaty, available at www.encharter.org/fileadmin/user_upload/document/
EN.pdf.
92 Introduction to the Energy Charter Treaty, available at www.encharter.org/fileadmin/user_upload/document/
EN.pdf.
93 This occurred with the signing of the Germany–Pakistan bilateral investment treaty in 1959, which entered
into force in 1962. Rudolf Dolzer, Christopher, Schreuer, Principles of International Investment Law, 6-7 (Oxford
University Press 2012).
13
Part I
Investor-State Disputes in the Energy Sector
1
Expropriation and Nationalisation
Mark W Friedman, Dietmar W Prager and Ina C Popova1
Expropriation claims have been a perennial feature in energy disputes since the 1970s. At
that time, the nationalisation of US oil companies by a newly installed Gaddafi regime
gave rise to early energy cases such as TOPCO v. Libya2 and Libya American Oil Company
(LIAMCO) v. Libya.3 Over the years, we have seen developments in the mechanisms for
resolving energy disputes, such as the rise of investor–state arbitrations and the adoption
of the Energy Charter Treaty (ECT)4 in 1994, but the nature of energy disputes remains
fundamentally the same. It is no wonder that this is the case given the cyclical nature of
energy markets. In times of rising prices, energy resources represent easy opportunities to
capitalise on the upward trend for investors and governments alike.
In addition, investments in the energy sector differ from other sectors. States perceive
energy resources as central to economic policy and intimately tied to national sovereignty,
frequently making energy policy a high political priority. At the same time, investors in this
sector commit substantial financial resources in the hope of returning profits in the long
term, despite the risks associated with the venture and the volatile markets.When a dispute
arises over an energy investment, therefore, both investors and states stand to make signifi-
cant gains or incur significant losses depending on the outcome.
Energy disputes, particularly those involving expropriation claims, have thus often
prompted the development of international law. As of 31 December 2016, 42 per cent of
1 Mark W Friedman, Dietmar W Prager and Ina C Popova are partners at Debevoise & Plimpton LLP. The
authors are grateful for the assistance of Debevoise associates Fiona Poon, Nawi Ukabiala and Harold W
Williford in the preparation of this chapter.
2 Texaco Overseas Petroleum Co. & California Asiatic Oil Co. v. Libyan Arab Republic, Award, 17 I.L.M. 1 (1978)
[TOPCO v. Libya].
3 Libya American Oil Company (LIAMCO) v. Libyan Arab Republic, Award, 20 I.L.M. 1 (1981) [LIAMCO v. Libya].
4 The Energy Charter Treaty, 34 I.L.M. 360 (1995).
17
cases administered by ICSID arose from the energy sector, more than any other sector.5
Indeed, energy disputes involving expropriation claims have led to some of the largest dam-
ages awards ever issued in investor–state arbitration, including Yukos v. Russian Federation
(approximately US$50 billion)6 and Occidental v. Ecuador (approximately US$1.1 billion).7
Overview of expropriation
At its essence, an expropriation is the taking of private property by a government acting
in its sovereign capacity. Nationalisation, a form of expropriation, generally covers an
entire industry or geographic region.8 Nationalisations typically occur in the context of a
major social, political or economic change. While international law recognises that states
have the right to nationalise or expropriate,9 that right is subject to certain conditions
under customary international law and investment treaties. These conditions have led to
a distinction between ‘lawful’ and ‘unlawful’ expropriations, which can have consequences
for the standard by which damages for the expropriation are assessed.
As reflected in the TOPCO v. Libya case, under customary international law a ‘law-
ful’ expropriation must be, at a minimum, for a public purpose, non-discriminatory and
accompanied by appropriate or fair compensation.10 Investment treaties recognise a similar
standard and generally include the further requirement that expropriation be conducted
according to due process of law.11
5 See Int’l Ctr for Settlement of Inv’r Disputes, The ICSID Caseload–Statistics (Issue 2017-1), at 12 (2017).
6 Hulley Enterprises Limited (Cyprus) v. Russian Federation, PCA Case No. AA 226, Final Award (18 July 2014);
Veteran Petroleum Limited (Cyprus) v. Russian Federation, PCA Case No. AA 228, Final Award (18 July 2014);
Yukos Universal Limited (Isle of Man) v. Russian Federation, PCA Case No. AA 227, Final Award (18 July 2014)
[collectively, Yukos], ¶ 1827. The Yukos awards are currently being challenged in Dutch court. They were
set aside by the Hague District Court on 20 April 2016. Russian Federation v.Veteran Petroleum Limited,Yukos
Universal Limited and Hulley Enterprises Limited (C/09/477160/HA ZA 15-1, 15-2 and 15-112). An appeal of
that ruling is now pending in the Hague Court of Appeal.
7 Occidental Petroleum Corp. v. Republic of Ecuador, ICSID Case No. ARB/06/11, Decision on Annulment of
the Award ¶ 586 (2 November 2015) (reducing the initial award from approximately US$1.8 billion to
approximately US$1.1 billion) [Occidental v. Ecuador II].
8 Nicholas R Doman, Postwar Nationalization for Foreign Property in Europe, 48 Colum. L. Rev. 1125, 1125
(1948) (describing nationalisation as a ‘general, impersonal taking of the economic structure in full or in part
for the nation’s benefit’).
9 See TOPCO v. Libya, Award, 17 I.L.M. 1, ¶ 59 (1978) (stating ‘the right of a state to nationalise is
unquestionable today’).
10 Id. at ¶ 87 (citing Resolution on Permanent Sovereignty over Natural Resources, G.A. Res. 1803, U.N.
GAOR, 17th Sess., Supp. No. 17, at 15, U.N. Doc. A/5217 (1962)). The sole arbitrator in TOPCO relied on
the UN General Assembly’s 1962 Resolution on Permanent Sovereignty over Natural Resources as ‘reflect[ive
of] the state of customary international law existing in this field.’ Id. Like many principles of customary
international law the standard for lawful expropriation has historically been the subject of some dispute.
However, several other tribunals have similarly recognised the 1962 resolution as an accurate statement of
customary international law. See, e.g., Award In the Matter of an Arbitration between The Government of the
State of Kuwait and The American Independent Oil Company, 21 I.L.M. 976, 1032 (1982) (describing GA
Resolution 1803 as ‘[t]he most general formulation of the rules applicable for a lawful nationalisation.’).
11 See, e.g., Ioannis Kardassopoulos v.The Republic of Georgia, ICSID Case No. ARB/05/18, Award ¶¶ 394–404
(3 March 2010) (finding an illegal expropriation of rights in oil pipeline concession agreement under the
Energy Charter Treaty where the expropriation was not conducted with due process) [Kardassopoulos v.
Georgia]. The Energy Charter Treaty forbids expropriations unless they are: ‘(a) for a purpose which is in the
18
Expropriation can be direct or indirect. A direct expropriation typically occurs when

the state directly transfers legal title to the asset to the state, such as through nationalisa-
tion.12 Today, however, nationalisations have become infrequent. Expropriation claims more
frequently involve ‘indirect’ expropriation (i.e., a taking through measures tantamount to
expropriation).13 Most investment treaties explicitly address indirect expropriation as well
as direct expropriation. For example, Article IV(1) of the US–Argentina bilateral invest-
ment treaty (BIT) provides that ‘Investments shall not be expropriated or nationalized
either directly or indirectly through measures tantamount to expropriation or nationalization’.14
In evaluating a claim of indirect expropriation, the central question is whether the
investor has been substantially deprived of the value of the investment, even if not of
the entire legal interest. Determination of indirect expropriation is thus necessarily highly
fact-specific. Not every state measure reducing the value of an investment will amount to
an expropriation.
Tribunals have often looked to whether the alleged indirect expropriation affected
ownership rights. In Sempra v. Argentina, the ICSID tribunal gave the following examples of
measures that would rise to a substantial deprivation:
depriving the investor of control over the investment, managing the day-to-day operations of
the company, arresting and detaining company officials or employees, supervising the work of
officials, interfering in administration, impeding the distribution of dividends, interfering in the
appointment of officials or managers, or depriving the company of its property or control in
whole or in part.15
public interest; (b) not discriminatory; (c) carried out under due process of law; and (d) accompanied by the
payment of prompt, adequate and eﬀective compensation.’ The Energy Charter Treaty, 34 I.L.M. 360 Article
13(1) (1995). An almost identical standard is set forth in the United States-Peru Trade Promotion Agreement,
which states ‘No Party may expropriate or nationalize a covered investment either directly or indirectly
through measures equivalent to expropriation or nationalization (‘expropriation’), except: (a) for a public
purpose; (b) in a non-discriminatory manner; (c) on payment of prompt, adequate, and effective compensation;
and (d) in accordance with due process of law.’ United States-Peru Trade Promotion Agreement, Chapter 10,
Article 10.7(1), Signed 12 April 2006. Similarly, Article 6 of the Bolivia-Netherlands BIT proscribes takings
unless: ‘the measures are taken in the public interest and under due process of law;’ ‘the measures are not
discriminatory or contrary to any undertaking which the former Contracting Party may have given;’ and ‘the
measures are accompanied by provision for the payment of just compensation.’ Agreement on Encouragement
and Reciprocal Protection of Investments between the Kingdom of the Netherlands and the Republic of
Bolivia, Article 6, signed 10 March 1992.
12 See, e.g., Kardassopoulos v. Georgia, ICSID Case No. ARB/05/18, Award ¶ 387 (3 March 2010) (holding that
the termination of a concession over a major oil pipeline followed by the granting of rights contained therein
to a consortium of other oil companies presented ‘a classic case of direct expropriation’); Amoco Int’l Finance
Corp. v. Iran, 15 Iran-U.S. Cl. Trib. Rep. 189 (1987); TOPCO v. Libya, Award, 17 I.L.M. 1 (1978).
13 See, e.g., Occidental Petroleum and Production Co. v. Republic of Ecuador, LCIA Case No. UN 3467, Final Award,
¶ 85 (1 July 2004) (Expropriation need not involve the transfer of title to a given property, which was the
distinctive feature of traditional expropriation under international law.) [Occidental I].
14 Treaty with Argentina Concerning the Reciprocal Encouragement and Protection of Investment, Article IV,
14 November 1991, 31 I.L.M 124 (emphasis added).
15 Sempra Energy Int’l v. Argentine Republic, ICSID Case No. ARB/02/16, Award ¶ 284 (28 September 2007)
[Sempra v. Argentina]. See also Electrabel S.A. v.The Republic of Hungary, ICSID Case No. Arb/07/19, Decision
on Jurisdiction, Applicable Law, and Liability ¶ 6.62 (30 November 2012) (describing ‘the requirement
19
Similarly, in applying the substantial deprivation test, the ICSID tribunal in CMS Gas v.
Argentina considered whether the interference at issue deprived the investor of reasonably
expected economic benefits, affected the ‘fundamental rights of ownership,’ or prevented
‘the realization of a reasonable return on investments’.16
Tribunals addressing indirect expropriation under the ECT have looked to similar con-
siderations. In Plama v. Bulgaria, applying the ECT to the alleged indirect expropriation of
an investment in a Bulgarian oil refinery, an ICSID tribunal considered the following:
(i) substantially complete deprivation of the economic use and enjoyment of the rights to the
investment, or of identifiable, distinct parts thereof (i.e., approaching total impairment); (ii) the
irreversibility and permanence of the contested measures (i.e., not ephemeral or temporary); and
(iii) the extent of the loss of economic value experienced by the investor.17
In AES v. Hungary, the tribunal considered a claim of indirect expropriation based on a

series of price regulations issued by Hungary in response to public outrage over high profits
in the public utility industry.18 The tribunal explained that:
[A] state’s act that has a negative effect on an investment cannot automatically be considered
an expropriation. For an expropriation to occur, it is necessary for the investor to be deprived,
in whole or significant part, of the property in or effective control of its investment: or for its
investment to be deprived, in whole or significant part, of its value.19
The tribunal dismissed the claim for expropriation in that case, noting that the investors
‘retained at all times the control’ of the public utility plant and ‘continued to receive
substantial revenues from their investments’.20 More recently, the ICSID tribunal in
Mamidoil v. Albania concluded that indirect expropriation requires not only a showing that
‘the investment lost value and the investor was deprived of benefits, but also that these
effects resulted from a loss of one or several attributes of ownership.’21
under international law for the investor to establish the substantial, radical, severe, devastating or fundamental
deprivation of its rights or the virtual annihilation, effective neutralisation or factual destruction of its
investment, its value or enjoyment’) [Electrabel v. Hungary].
16 CMS Gas Transmission Co. v. Argentine Republic, ICSID Case No. ARB/01/8, Award ¶ 262 (12 May 2005).
17 Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Award ¶ 193 (27 August 2008).
18 AES Summit Generation Limited and AES-Tisza Erömü Kft v.The Republic of Hungary, ICSID Case No.
ARB/07/22, Award, ¶¶ 14.3.1–14.3.3 (3 September 2010).
19 Id. at ¶ 14.3.1.
20 Id. at ¶¶ 14.3.1–14.3.2.
21 Mamidoil Jetoil Greek Petroleum Products Societe S.A. v. Republic of Albania, ICSID Case No. ARB/11/24, Award
¶¶ 568–69 (30 March 2015) (‘expropriation describes a specific effect on property itself and not a damage
inflicted to property. The effect can be a direct taking as it can be an indirect deprivation of one or several of
its essential characteristics. These are traditionally defined by its use and enjoyment, control and possession, and
disposal and alienation. If one of these attributes is affected, the resulting loss of value and/or benefit may lead
to a claim for expropriation.’).
20
Circumstances giving rise to claims of expropriation in the energy sector

In the energy sector expropriations generally fall into three categories: nationalisations;
regulatory or fiscal measures tantamount to a taking; and cancellation of contractual
rights. This section considers how some of these issues have been addressed by various
international arbitration tribunals.
Nationalisations
Outright nationalisations are increasingly rare. When they do occur, the legal implications
are sufficiently well settled that the question of the existence of an expropriation is generally
not in dispute. For example, in Guaracachi and Rurelec v. Bolivia, Bolivia did not contest the
claimant’s allegation that its nationalisation of a power company was an expropriation.22
Rather, it argued that it was not required to pay compensation because the value of the
power company was less than zero at the time of expropriation. The tribunal rejected this
argument and awarded approximately US$35 million to the claimant.
In the nationalisation context the dispute is more likely to revolve around the ques-
tion of whether the expropriation was lawful. This was the case, for example, in Mobil v.
Venezuela23 and ConocoPhillips v.Venezuela.24
Regulatory measures
Given the immense public resources involved, as well as the economic, public health
and environmental interests implicated, the energy sector tends to be heavily regulated
by governments. In this context, regulatory measures of broad application can frequently
have an adverse effect on the rights of foreign investors. When such regulatory measures
effectively amount to a taking, the sovereign right to regulate in the public interest will
not absolve a state of its obligation to pay just compensation. For example, the tribunal
in El Paso v. Argentina rejected the notion that ‘regulatory administrative actions are per se
excluded’ from review and differentiated ‘between situations where a general regulation
can be considered tantamount to expropriation and situations where it cannot’.25
Some investment treaties recognise the right of the state to regulate without absolv-
ing it of its duty to pay compensation when such regulation substantially deprives an
investor of the value of its investment. For example, the Central American-Dominican
Republic Free Trade Agreement (CAFTA-DR) states that ‘Except in rare circumstances,
22 Guaracachi America, Inc. and Rurelec PLC v.The Plurinational State of Bolivia, UNCITRAL, PCA Case No.
2011-17, Award (31 January 2014).
23 Mobil Corporation,Venezuela Holdings B.V., Mobil Cerro Negro Holding, Ltd. Mobil Cerro Negro, Ltd., and Mobil
Venezolana de Petróleos, Inc. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB 07/27, Award ¶ 288
(9 October 2014) [Mobil v.Venezuela]. The Award in Mobil v.Venezuela was subsequently partially annulled
on other grounds. See Mobil v.Venezuela, ICSID Case No. ARB 07/27, Decision on Annulment ¶ 196
(9 March 2017).
24 ConocoPhillips Petrozuata B.V., ConocoPhillips Hamaca B.V. and ConocoPhillips Gulf of Paria B.V. v. Bolivarian
Republic of Venezuela, ICSID Case No. ARB/07/30, Decision on Jurisdiction and Merits ¶ 394
(3 September 2013) [ConocoPhillips v.Venezuela].
25 El Paso Energy International Company v.The Argentine Republic, ICSID Case No. ARB/03/15, Award ¶¶ 234–36
(3 October 2011) [El Paso v. Argentina].
21
nondiscriminatory regulatory actions . . . designed and applied to protect legitimate public

welfare objectives . . . do not constitute indirect expropriations.’26
Most treaties, however, do not seek to expressly draw the line between permissible reg-
ulation and impermissible indirect expropriation. This task has fallen largely to investment
tribunals. In several cases, tribunals have found that regulatory measures violated the fair
and equitable treatment standard but did not constitute an indirect expropriation where the
investor retained control over the investment. For example, CMS v. Argentina and Sempra v.
Argentina both arose out of a series of regulatory measures in the gas industry promulgated
by the Argentine government following the Argentine economic crisis.27 These measures
included the suspension of a tariff adjustment formula for gas transportation and the rede-
nomination of tariffs in pesos. In both cases, the tribunals rejected the expropriation claims
because, among other things, ‘the Government d[id] not manage the day-to-day operations
of the company; and [the claimant] retained full ownership and control of the investment.’28
Some tribunals have also considered the investor’s expectations regarding regulation in
the industry to be relevant to the question of indirect expropriation. In Methanex v. USA, a
Canadian corporation argued that California’s legislative ban of a gasoline additive methyl
tert-butyl ether effectively prohibited the sale of the product in violation of Article 1110 of
NAFTA.29 The NAFTA tribunal rejected Methanex’s expropriation claim, stating:
as a matter of general international law, a non-discriminatory regulation for a public purpose,

which is enacted in accordance with due process and, which affects, inter alios, a foreign investor
or investment is not deemed expropriatory and compensable unless specific commitments had
been given by the regulating government to the then putative foreign investor contemplating
investment that the government would refrain from such regulation.30
The tribunal noted that the claimant did not obtain specific commitments prior to investing
in a market known to be the subject of extensive government regulation.
Similarly, in Ulysseas v. Ecuador an UNCITRAL tribunal considered claims of tem-
porary and indirect expropriation based on changes to electricity sector regulations.31 In
dismissing the claim the tribunal explained that, prior to investing, the claimant was ‘well
aware of the State’s efforts to regulate the power sector’ and that ‘there was no guarantee of
26 The Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR), Ch. 10
Annex 10-C ¶ 4(b), signed 5 August 2004.
27 CMS Gas v. Argentina, ICSID No. ARB/01/8, Award (2005); Sempra v. Argentina, ICSID Case No. ARB/02/16,
Award (25 September 2007).
28 CMS Gas v. Argentina, ICSID No. ARB/01/8, Award ¶ 263 (12 May 2005). See also Sempra v. Argentina, ICSID
Case No. ARB/02/16, Award ¶ 285 (25 September 2007) (‘A finding of indirect expropriation would require
. . . that the investor no longer be in control of its business operation, or that the value of the business ha[d]
been virtually annihilated.’).
29 Methanex Corp. v. United States, NAFTA/UNCITRAL, Final Award (3 August 2005).
30 Id. at pt. IV, Chapter D, ¶ 7.
31 Ulysseas, Inc. v.The Republic of Ecuador, UNCITRAL, Final Award (12 June 2012).
22
profitability of the regulatory system’.32 The tribunal concluded that the regulations did not
amount to a substantial deprivation sufficient to support a claim of indirect expropriation.33
Fiscal measures
Arbitral tribunals have generally been reluctant to uphold claims of expropriation based on
fiscal actions adverse to a claimant’s interests. In most cases, tribunals have found that the
fiscal measure at issue did not rise to the level of a substantial deprivation.
Three cases involving fiscal measures imposed by Ecuador illustrate this point. In EnCana
Corporation v. Ecuador, an oil exploration company alleged that the inconsistent practice of
the Ecuadorian government in paying reasonably expected VAT refunds amounted to an
expropriation.34 The London Court of International Arbitration (LCIA) tribunal acknowl-
edged that, under the broad definition of investment contained in the Canada–Ecuador
BIT, the right to VAT refunds for past transactions was properly considered an investment
that could be subject to expropriation. As noted by the tribunal, the treaty contemplated
‘any kind of asset’ including ‘claims to money’ and ‘returns’.35 The tribunal then set forth
a framework for evaluating whether the violation of a statutory obligation to make a pay-
ment or refund is permissible, including whether ‘(a) the refusal is not merely wilful, (b) the
courts are open to the aggrieved private party, (c) the courts’ decisions are not themselves
overridden or repudiated by the State.’36 Considering these factors, the tribunal ultimately
rejected EnCana’s expropriation claim.
In Occidental I, a case arising out of the same fiscal measures, another LCIA tribunal
held that the withholding of VAT refunds did not affect the overall investment sufficiently
to amount to a substantial deprivation, in particular because the treaty at issue did not
expressly protect investment returns.37 However, the tribunal concluded that Ecuador’s
actions constituted violations of other protection standards.38
More recently, in Burlington v. Ecuador, a case arising under the US–Ecuador BIT, an oil
exploration company alleged expropriation based on Ecuador’s imposition of a ‘windfall
tax’ of 99 per cent of oil revenues above a low reference price.39 After concluding that the
BIT provided no guidance on the standard of expropriatory taxation, the ICSID tribunal
resorted to customary international law standards.40 According to the tribunal:
Customary international law imposes two limitations on the power to tax. Taxes may not be
discriminatory and they may not be confiscatory. Confiscatory taxation essentially ‘takes too
much from the taxpayer.’ The determination of how much is too much constitutes a fact specific
inquiry. Among the factors to be considered one counts first and foremost the tax rate and the
32 Id. at ¶ 187.
33 Id. at ¶ 200.
34 EnCana Corporation v. Republic of Ecuador, LCIA Case No. UN 3481, Award ¶ 194 (3 February 2006).
35 Id. at ¶ 117 and ¶ 182.
36 Id. at ¶ 194.
37 Occidental I, LCIA Case No. UN 3467, Final Award, ¶ 89 (1 July 2004).
38 Id. at ¶ 187.
39 Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Liability
(14 December 2012).
40 Id. at ¶ 392.
23
amount of payment required. If the amount required is so high that taxpayers are forced to
abandon the property or sell it at a distress price, the tax is confiscatory.41
The tribunal further reasoned that ‘When a measure affects the environment or conditions
under which the investor carries on its business, what appears to be decisive, in assessing
whether there is a substantial deprivation, is the loss of the economic value or economic
viability of the investment.’42 In order to meet that standard the tribunal stated that ‘[i]t must
be shown that the investment’s continuing capacity to generate a return has been virtually
extinguished.’43 Applying these principles, the tribunal dismissed the claim of expropriation
based on the windfall tax because, even though it ‘considerably diminished [the investor’s]
profits’, it did not render the investment ‘unprofitable or worthless.’44
An example of a successful argument of indirect expropriation through taxation is the
Yukos case. In the Yukos arbitrations, an UNCITRAL tribunal considered a series of fiscal
measures affecting an oil production facility in Russia.45 The claimant, a Cypriot oil com-
pany, alleged Russia had imposed tax reassessments, fines, VAT charges and asset freezes,
and had forced the sale of the facility in violation of the ECT. The tribunal concluded that
while Yukos could have expected an adverse reaction to what the tribunal characterised as
tax avoidance strategies, the measures taken by Russia were sufficiently extreme to amount
to an unlawful expropriation under Article 13 of the ECT. In the tribunal’s view, the fact
that the expropriation was in the interest of a state-owned oil company did not mean it
was in the public interest.46 Further, the tribunal concluded that the expropriation was not
‘carried out under due process of law’, because, among other things, in the prosecutions
against Yukos executives, the Russian courts ‘bent to the will of Russian executive authori-
ties to bankrupt Yukos, assign its assets to a State-controlled company, and incarcerate a man
who gave signs of becoming a political competitor.’47 The tribunal concluded that the fiscal
measures amounted to a ‘devious and calculated expropriation’ because they entailed the
‘complete and total deprivation of the Claimants’ investments’.48
Cancellation of contractual rights

International law has long recognised that contractual rights can be the subject of
expropriation. In the seminal Chorzów Factory case,49 the Permanent Court of International
Justice held that the expropriation of a factory also had the effect of expropriating the
contractual rights of another German company to operate the factory and exploit certain
41 Id. at ¶ 393.
42 Id. at ¶ 397.
43 Id. at ¶ 399.
44 Id. at ¶ 450.
45 Yukos Universal Ltd. v.The Russian Federation, UNCITRAL PCA Case No. AA 227, Final Award (18 July 2014).
As noted above, challenges to the Yukos awards are pending in Dutch national court. The Hague District
Court’s ruling, however, turned on jurisdiction under the ECT.
46 Id. at ¶ 1581.
47 Id. at ¶ 1583.
48 Id. at ¶ 1037.
49 Factory at Chorzów (Germ. v. Pol.), P.C.I.J. (ser. A) No. 17 (13 Sept. 1928) [Chorzów Factory].
24
patents and licences.50 Similarly, in Phillips Petroleum Co. Iran v. Iran,51 a case before the
Iran-US Claims Tribunal, the company successfully obtained compensation for the
expropriation of its rights to share in the oil produced and shareholder participation rights
under a joint structure agreement with the National Iranian Oil Company.52
In the investment treaty context, tribunals have consistently recognised that intangi-
ble interests like contractual rights are capable of expropriation.53 Reliance on customary
international law has become less important as treaties often contain very broad definitions
of ‘investment’ to expressly include contractual rights. For example, the Energy Charter
Treaty defines ‘investment’ as ‘every kind of asset, owned or controlled directly or indirectly
by an Investor and includes . . . any right conferred by law or contract or by virtue of any
licences and permits granted pursuant to law’.54
The standard that tribunals routinely apply remains the substantial deprivation test. It
is not the case, however, that any breach of contract automatically constitutes an expro-
priation of contractual rights by a state. An important factor is whether the state acted in
a commercial capacity as a party to the contract or in its sovereign capacity55 and whether
the state’s conduct implicated the exercise of sovereign powers.56
The Electrabel v. Hungary case involved an expropriation claim under the ECT by an
investor who had acquired a majority interest in a Hungarian electricity-generation com-
pany and obtained a power purchase agreement (PPA).57 After Hungary acceded to the
EU, it terminated its PPAs in the power generation sector to avoid violating EU competi-
tion law. The tribunal rejected the investor’s claim that the termination of its contractual
rights amounted to an expropriation because the PPA was only a part of the investor’s
interest in the electricity-generation company.58 Accordingly, the tribunal held that the
investor had not experienced a deprivation of its entire investment.59 On the other hand,
in Kardassopoulos v. Georgia, an ICSID tribunal upheld a claim of expropriation of con-
tractual rights.60 In that case, the tribunal held that the Georgian government’s issuance
of a decree terminating the investor’s rights in a 30-year concession agreement over an
oil pipeline ‘presented a classic case of direct expropriation’.61 Similarly, in Occidental II, an
50 Id. at 44.
51 Phillips Petroleum Co. Iran v.The Islamic Republic of Iran and The National Iranian Oil Company, 21 Iran-U.S.
C.T.R.79, Partial Award 425-39-2 (29 June 1989) [Phillips Petroleum Co. Iran v. Iran].
52 Id. at ¶ 88.
53 See, e.g., Southern Pacific Properties (Middle East) Ltd. v. Egypt, ICSID Case No. ARB/84/3, Award on the Merits
(20 May 1992); ICSID Rev.-FILJ 1993, 328, Bayindir Insaat Turizm Ticaret Ve Sanayi A.S¸ v. Islamic Republic
of Pakistan, ICSID Case No. ARB/03/29, Award (27 August 2009); CME Czech Republic B.V. v.The Czech
Republic, Partial Award (13 September 2001).
54 The Energy Charter Treaty, 34 I.L.M. 360 Article 1(6) (1995) (emphasis added).
55 August Reinisch, ‘Expropriation’, in The Oxford Handbook of International Investment Law 407 (Peter
Muchlinski, Federico Ortino, & Christoph Schreuer eds., New York: Oxford University Press 2008).
56 See, e.g., Siemens A.G. v.The Argentine Republic, ICSID Case No. ARB/02/8, Award ¶ 260 (17 January 2007).
57 Electrabel v. Hungary, ICSID Case No. Arb/07/19, Decision on Jurisdiction, Applicable Law, and Liability
(30 November 2012).
58 Id. at ¶ 6.58.
59 Id. at ¶ 6.63.
60 Kardassopoulos v. Georgia, ICSID Case No. ARB/05/18, Award ¶ 387 (3 March 2010).
61 Id. at ¶ 387.
25
ICSID tribunal held that Ecuador’s termination of the oil company’s participation con-
tract was a disproportionate response to the company’s violation of that agreement by
transferring an interest in the project to a Canadian investor without prior authorisation.
Accordingly, the tribunal concluded Ecuador’s conduct constituted a measure ‘tantamount
to expropriation’.62
Remedies for expropriation of energy investments

The remedy for expropriation is generally damages, since return of the investment itself
is often not possible or reasonable. In addition to the general principles of valuation of
damages, a specific question arises in this context about the distinction between lawful and
unlawful expropriations.
Limited availability of specific performance

Seeking return of the expropriated asset can be an attractive remedy in energy expropriations,
because typically the expropriation relates to an active, productive, long-term asset. Most
tribunals have, however, denied specific performance in practice, awarding monetary
damages instead.63 Tribunals have generally held that specific performance is not available
as it would either be impossible or impose a disproportionately heavy burden on the state.64
The tribunal in Occidental v. Ecuador II considered the availability of specific perfor-
mance as a remedy in connection with an application for provisional measures.65 The
claimants requested provisional measures to preserve their claim to specific performance
of their participation contract, which granted an exclusive right to explore and exploit
hydrocarbons in a specified area of the Ecuadorian Amazon. As a result, the tribunal had
to determine whether the claimants could establish they had a strongly arguable right to
specific performance as part of the application for provisional measures.66
Ultimately, the tribunal rejected the provisional measures application. In doing so, it
determined that the specific performance requested would impose a disproportionate bur-
den on the state and was materially impossible. For the disproportionality element, the
tribunal looked to the rights of both parties and concluded that requiring a state to rein-
state a concession after its termination constituted a disproportionate interference with
state sovereignty in comparison with the prejudice the claimant would suffer from only
receiving monetary compensation.67 Regarding impossibility, the tribunal observed it is
‘well-established’ that ‘where a State has, in the exercise of its sovereign powers, put an end
to a contract or a license . . . specific performance must be deemed legally impossible.’68
62 Occidental II, ICSID Case No. ARB/06/11, Award ¶ 455 (5 October 2012). The Occidental II award was
subsequently partially annulled on other grounds. Occidental II, ICSID Case No. ARB/06/11, Decision on
Annulment of the Award (2 November 2015).
63 See, e.g., LIAMCO v. Libya, 20 I.L.M. 1 (1981), BP Exploration Company (Libya) Limited v. Libyan Arab Republic,
52 I.L.R. 297 (1974), CMS v. Argentina, ICSID Case No. ARB/01/8, Award (12 May 2005).
64 See generally, Occidental II, ICSID Case No. ARB 06/11, Decision on Provisional Measures (17 August 2007).
65 Id.
66 Id. at ¶ 68.
67 Id. at ¶ 84.
68 Id. at ¶ 79.
26
Although the tribunal recognised that specific performance was granted in the well-known
TOPCO v. Libya case, which arose out of Libya’s nationalisation of its oil industry in the
1970s, it also noted that the case was ‘unique and fact specific.’69 The sole arbitrator in
TOPCO v. Libya declined to hold that specific performance was impossible because Libya
failed to appear and did not ‘bring forward information . . . to establish that there was an
absolute impossibility’.70 Subsequent claims for non-monetary relief – including in cases
arising under facts similar to those in TOPCO v. Libya71 – have generally not been successful.
Evaluation of damages for expropriation

Since monetary damages are the primary remedy awarded in expropriation claims, it is not
surprising that there are a number of recurring issues in the assessment of damages. One
issue that is specific to expropriation claims, however, is the effect of the state’s failure to
pay prompt and adequate compensation at the time of the expropriation on the standard
for assessing damages.
As explained above, international law permits expropriation that includes, among other
requirements, payment of prompt, adequate and effective compensation. Investment trea-
ties frequently articulate the kind of compensation a state must pay as part of a permitted
expropriation. The ECT, for example, requires payment of ‘the fair market value of the
Investment expropriated at the time immediately before the Expropriation or impending
Expropriation became known in such a way as to affect the value of the Investment’.72
However, treaties generally do not expressly stipulate a standard for compensation when
the expropriation does not meet the requirements for lawful expropriation. Tribunals turn
to customary international law for guidance – specifically, the full reparation standard as
articulated in the Chorzów Factory case.73 This principle, later codified in the International
Law Commission’s Articles on Responsibility of States for Internationally Wrongful Acts,
calls for compensation in the form of damages equivalent to restitution, which may in any
given case differ from the amount that a state is required to pay through a lawful expropria-
tion process.74
The question has therefore arisen whether a state’s failure to pay compensation renders
unlawful an expropriation that complies with all the other requirements for a lawful expro-
priation. Three recent cases arising out of Venezuela’s nationalisation of the oil industry –
ConocoPhillips, Mobil and Tidewater – addressed this issue but adopted different approaches.75
69 Id.
70 TOPCO v. Libya, Award, 17 I.L.M. 1 ¶ 112 (1978).
71 Occidental II, Decision on Provisional Measures ¶ 80 (17 August 2007).
72 The ECT, 34 I.L.M. 360, Article 13(1) (1995).
73 Chorzów Factory, P.C.I.J. (ser. A) No. 17 (13 September 1928), p. 47 (noting that the full reparation standard
should ‘as far as possible, wipe out all the consequences of the illegal act and re-establish the situation which
would, in all probability, have existed if that act had not been committed’).
74 Draft Articles on Responsibility of States for Internationally Wrongful Acts, in Report of the International
Law Commission, U.N. GAOR, 53rd Sess., Supp. No. 10, Article 31, U.N. Doc. A/56/10 (2001).
75 ConocoPhillips v.Venezuela, ICSID Case No. ARB/07/30, Decision on Jurisdiction and Merits
(3 September 2013); Mobil v.Venezuela, ICSID Case No. ARB 07/27, Award (9 October 2014); Tidewater Inc.,
Tidewater Investment SRL,Tidewater Caribe, C.A.,Twenty Grand Offshore, L.L.C., Point Marine, L.L.C.,Twenty
Grand Marine Service, L.L.C., Jackson Marine, L.L.C. and Zapata Gulf Marine Operators, L.L.C. v.The Bolivarian
27
The tribunal in ConocoPhillips v. Venezuela held that Venezuela had negotiated in bad
faith when it proposed to pay book value for the expropriation because the Netherlands–
Venezuela BIT required it to pay market value.76 Accordingly, the tribunal held the expro-
priation was unlawful, triggering the full reparation standard contained in Chorzów Factory.77
One year later, the ICSID tribunal in Mobil v. Venezuela held that ‘the mere fact that an
investor has not received compensation [at the time of the proceedings] does not in itself
render an expropriation unlawful.’78 The tribunal concluded that the claimant had not met
its evidentiary burden to show that Venezuela’s proposal of compensation was incompatible
with the treaty requirement of ‘just’ compensation and found that the expropriation was
not unlawful.79 In Tidewater v.Venezuela, a third ICSID tribunal surveyed numerous arbitral
awards and concluded that ‘expropriation only wanting fair compensation has to be con-
sidered as a provisionally lawful expropriation, precisely because the tribunal dealing with
the case will determine and award such compensation.’80 Thus, the nature of any offer of
compensation made by the state, as well as the state’s general conduct during negotiations,
may inform the tribunal’s analysis.
Practical considerations for energy investments

To maximise protection in the event of expropriation, several key practical considerations
should guide an investor considering an energy investment in a foreign country.
First, investors may structure energy investments to take advantage of investment pro-
tections. Each treaty is different. Even though many treaties contain some form of pro-
hibition of unlawful expropriation, the scope of this prohibition, as well as the extent of
an arbitral tribunal’s jurisdiction, can vary meaningfully across instruments. Some treaties,
including several treaties signed by the United States, contain a carve-out from certain
treaty protections for matters of taxation. For example, the US–Ecuador BIT at issue in
Occidental v. Ecuador stated that dispute settlement ‘shall apply to matters of taxation only
with respect to . . . expropriation’.81 Other treaties, including those concluded by former
Republic of Venezuela, ICSID Case No. ARB/10/5, Award (13 March 2015) [Tidewater v.Venezuela]. The
Tidewater Award was subsequently partially annulled on other grounds. See Tidewater v.Venezuela, ICSID Case
No. ARB/10/5, Decision on Annulment (27 December 2016).
76 ConocoPhillips v.Venezuela, ICSID Case No. ARB/07/30, Decision on Jurisdiction and Merits ¶ 394
(3 September 2013).
77 Id. at ¶¶ 337–343, 401.
78 Mobil v.Venezuela, ICSID Case No. ARB 07/27, Award ¶ 301 (9 October 2014). The compensation awarded
by the Tribunal for one of the expropriated properties was later vacated by the Annulment Committee based
on specific limitations on the property rights under Venezuelan law. See Mobil v.Venezuela, ICSID Case No.
ARB 07/27, Decision on Annulment ¶ 188 (9 March 2017).
79 Mobil v.Venezuela, ICSID Case No. ARB 07/27, Award ¶ 306 (9 October 2014).
80 Tidewater v.Venezuela, ICSID Case No. ARB/10/5, Award ¶ 142 (13 March 2015). The argument that the full
reparation standard is inapplicable where a finding of expropriation is based solely on the state’s failure to pay
compensation was also raised in Burlington Resources Inc. v. Ecuador, but the tribunal did not decide the issue
because it held the expropriation in that case did not meet other conditions of the treaty. Burlington Resources
Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Reconsideration and Award ¶ 176
(7 February 2017).
81 Treaty between the United States of America and the Republic of Ecuador Concerning the Encouragement
and Reciprocal Protection of Investment, signed on 27 August 1993, Article X.
28
Soviet states, may limit the disputes that can be submitted to arbitration to the ques-
tion of the amount of compensation for any expropriation. The BIT between the United
Kingdom and the USSR at issue in RosInvest Co. UK Limited v. Russian Federation82 is one
example. It restricted arbitration to legal disputes ‘either concerning the amount or pay-
ment of compensation under Article . . . 5 of this Agreement [Expropriation] or concerning
any other matter consequential upon an act of expropriation in accordance with Article
5 of this Agreement’.83 The tribunal in that case interpreted the clause as a limitation to its
jurisdiction such that it did not have jurisdiction over all aspects of an expropriation.84 In
treaty planning it is therefore important to consider available substantive protections as well
as the scope of a tribunal’s jurisdiction over any dispute.
The decision in Mobil v. Venezuela confirms that such treaty planning is not in and of
itself abusive if it occurs before the dispute arose.85 In 2005, in anticipation of a wave of
nationalisations in Venezuela, Exxon restructured its investments in Venezuela through
a Dutch holding company to gain the protection of the Venezuela–Netherlands BIT.
Venezuela nationalised Exxon’s oil and gas exploration projects in 2007 and Exxon com-
menced ICSID proceedings. The arbitral tribunal held that the restructuring did not
amount to an abuse of the treaty system.86
Second, investors should consider the availability of other substantive investment treaty
protections. When expropriation claims are limited by the applicable treaty, or the investor
is unable to establish expropriation, other substantive treaty protections such as fair and
equitable treatment may be available.87 This is demonstrated by CMS v. Argentina, Sempra v.
Argentina and Occidental II, where the arbitral tribunals dismissed the investor’s expropria-
tion claims but found a violation of fair and equitable treatment.88
Finally, even though treaty protections give investors some degree of comfort, they are
no substitute for contractual guarantees. Contractual protections can offer greater specific-
ity and certainty than treaty standards – even a standard as common as the prohibition on
unlawful expropriation. Stabilisation clauses, for example, can be a valuable contractual
safeguard in long-term investments like energy concessions, and can offer more robust
protection against unwelcome regulatory change than the substantial deprivation threshold
required for a successful expropriation claim.
82 RosInvest Co. UK Limited v. Russian Federation, SCC Case No V079/2005, IIC 315 2007, Jurisdiction Award
(5 October 2007) [RosInvest v. Russia].
83 Agreement between the Government of the United Kingdom and the Government of the USSR for the
Promotion and Reciprocal of Investments, signed in London on 6 April 1989, Article 8.
84 RosInvest v. Russia, Jurisdiction Award ¶¶ 110–12 (5 October 2007).
85 ICSID Case No. ARB/07/27 (10 June 2010).
86 Id. at ¶¶ 205–06.
87 See, e.g., El Paso v. Argentina, ICSID Case No. ARB/03/15, Award ¶ 230 (31 Oct. 2011); Sempra v. Argentina,
ICSID Case No. ARB/02/16, Award ¶ 300 (18 September 2007).
88 CMS Gas v. Argentina, ICSID No. ARB/01/8, Award (12 May 2005); Sempra v. Argentina, ICSID Case
No. ARB/02/16, Award (25 September 2007); Occidental II, ICSID Case No. ARB/06/11, Award ¶ 455
(5 October 2012).
29
2
Cyrus Benson, Charline Yim and Victoria Orlowski1
The development of the Energy Charter Treaty

Disputes arising in the energy sector have long been the subject of international adjudica-
tion. As global demand for energy increased, foreign investment became crucial to allow
the exploration and development of states with abundant energy resources that may not
otherwise have had the capital to do so. To encourage such foreign investment, as recog-
nised by the canon of bilateral and multilateral investment treaties, a stable framework
offering binding protections for foreign investors alongside a system of adjudicating dis-
putes became essential.
After the end of the Cold War and motivated in part by the desire to facilitate the devel-
opment of energy resources in former Soviet Union countries, promote energy security
and encourage economic integration, a collection of states met to establish a model for
energy cooperation.2 The result of these discussions was the European Energy Charter, a
non-binding declaration by which states confirmed their mutual objectives to cooperate
in energy-related trade, efficiency, environmental protection and other areas.3 The signa-
tories further agreed to negotiate in good faith a binding agreement to implement their
shared objectives.4
On this basis, states negotiated what would become the Energy Charter Treaty (ECT).
The ECT, which entered into force on 16 April 1998, is a multilateral treaty designed
to create a stable framework to stimulate economic growth and liberalise international
1 Cyrus Benson is a partner, and Charline Yim and Victoria Orlowski are associates, at Gibson, Dunn &
Crutcher LLP.
2 See Thomas Roe & Mathew Happold, Settlement of Investment Disputes Under the Energy Charter Treaty
(2011), pp. 8-9.
3 European Energy Charter, Title 1 (Objectives).
4 European Energy Charter, Title 3 (Specific Agreements).
30
investment and trade in the energy sector.5 At the time of writing, there are approximately
50 contracting parties to the ECT.6
The first international arbitration invoking the ECT, AES v. Hungary I,7 was registered
on 25 April 2001, three years after the ECT entered into force. The first award followed
in December 2003, in Nykomb v. Latvia.8 For several years the number of publicly known
arbitrations initiated under the ECT remained steadily within the range of one to four
per year.9 In 2013, however, the number of new arbitrations quadrupled from four initi-
ated in 2012 to 16, reaching a peak in 2015 with 25 cases.10 While this figure fell in 2016,
the ECT has remained the most frequently invoked investment agreement in interna-
tional arbitration cases.11 At the time of writing, there are now over 100 publicly known
ECT proceedings.12
With the passage of time and the increased utilisation of the ECT as the basis for inter-
national arbitration, the parties to and subject matter of ECT arbitrations have evolved.
While early cases frequently named central and eastern European states as respondents,
more recently the focus has shifted westwards, with a majority of cases initiated against
western European states.13 Recent cases have also tended to arise out of alleged defects
in or changes to regulatory frameworks encouraging the exploration and development of
renewable energy.14 Consequently, there has been a parallel shift in the nature of the parties
to the dispute and the underlying resources.The clearest representation of this trend can be
seen with Spain, which has been named as a respondent in over 30 ECT cases relating to
5 See Preamble and Article 2 (Purpose of the Treaty) (‘This Treaty establishes a legal framework in order to
promote long-term cooperation in the energy field, based on complementaries and mutual benefits, in
accordance with the objectives and principles of the Charter.’).
6 Signatories to the ECT agree in Article 45(1) to apply the treaty ‘provisionally pending its entry into force for
such signatory in accordance with Article 44, to the extent that such provisional application is not inconsistent
with its constitution, laws or regulations.’ However, states may file a declaration to the effect that it is unable to
accept the provision application of the ECT prior to ratification. This is addressed further below.
7 AES Summit Generation Limited v.The Republic of Hungary, ICSID Case No. ARB/01/04.
8 Nykomb Synergetics Technology Holding AB v. Latvia, SCC Case No. 118/2001, Arbitral Award,
16 December 2003 (Nykomb Arbitral Award). The parties in AES v. Hungary entered into a settlement
agreement and discontinued the arbitration proceedings. See generally Graham Coop, Energy Charter Treaty
20 Year Anniversary: 20 Years of the Energy Charter Treaty, ICSID Review,Vol. 29, No. 3 (2014), p. 516.
9 As reported by the United Nations Conference on Trade and Development (UNCTAD), and summarised by
the Energy Charter Secretariat: International Energy Charter, Investment dispute settlement, latest statistics
(updated as of 1 January 2017), available at http://www.energycharter.org/what-we-do/dispute-settlement/
cases-up-to-1-january-2017/.
10 Id.
11 Id.
12 Id. The Secretariat, reporting on the UNCTAD statistics, describes that from the 101 cases tabulated as of
1 January 2017, 60 are pending, 31 concluded with awards, 1 was discontinued, 1 was withdrawn, and 8 were
settled by the parties.
13 See Graham Coop, Energy Charter Treaty 20 Year Anniversary: 20 Years of the Energy Charter Treaty, ICSID
Review,Vol. 29, No. 3 (2014), pp. 516-17.
14 See Charles A. Patrizia, Joseph R. Profaizer, Samuel W. Cooper, and Igor V. T imofeyev, Investment Disputes
Involving the Renewable Ene rgy Industry Under the Energy Charter Treaty, Global Arbitration Review,
2 October 2015.
31
renewable energy, in particular arising from Spain’s reduction or elimination of incentives

offered to renewable energy producers.15
Anticipated developments in ECT arbitration are discussed further below. First, we
provide a basic overview of jurisdictional issues that frequently arise in ECT arbitrations as
well as the substantive protections the treaty affords to investors.
The jurisdiction of tribunals established pursuant to the ECT

Part V of the ECT addresses the resolution of ‘[d]isputes between a Contracting Party and
an Investor of another Contracting Party relating to an Investment of the latter in the Area
of the former, which concern an alleged breach of an obligation of the former under Part
II.’16 Pursuant to Article 26(1) of the ECT, the parties to the dispute shall, if possible, set-
tle a dispute amicably. If the dispute is not settled within three months from either party’s
request to settle a dispute amicably, the investor can choose between (1) the courts or an
administrative tribunal of the contracting party to the dispute; (2) any applicable, previ-
ously agreed dispute settlement procedure; or (3) international arbitration or conciliation
as specified in the ECT.17
The scope of an international arbitral tribunal’s jurisdiction derives from the parties’ con-
sent to arbitrate. By signing the ECT, ‘contracting parties’ (i.e., states or inter-governmental
organisations party to the ECT) provide their ‘unconditional consent’ to submit disputes
arising between a contracting party and an investor of another contracting party to inter-
national arbitration in accordance with the provisions of Article 26.18 This is subject to two
potential limitations: contracting parties may exclude their unconditional consent where
the investors had previously submitted their dispute to the courts of the contracting party
or in accordance with a previously agreed dispute settlement procedure;19 and contracting
parties may further exclude from their consent disputes arising from the last sentence of
Article 10(1), the ‘umbrella clause’ (discussed further below).20
Arbitration relies on mutual consent, and the ECT requires an investor to provide its
written consent to submit its dispute to arbitration which typically occurs in its request for
arbitration.21 An investor electing to proceed with international arbitration can submit its
dispute to the International Centre for Settlement of Investment Disputes (ICSID),22 a sole
arbitrator or ad hoc tribunal established under the Arbitration Rules of the United Nations
15 See International Energy Charter, List of all Investment Dispute Settlement Cases, available at http://www.
energycharter.org/what-we-do/dispute-settlement/all-investment-dispute-settlement-cases/.
16 Article 26(1).
17 Article 26(2).
18 Article 26(3)(a).
19 Article 26(3)(b)(i).
20 Article 26(3)(c); Article 10(1) (‘Each Contracting Party shall observe any obligations it has entered into with
an Investor or an Investment of an Investor of any other Contracting Party.’).
21 Article 26(4). See, e.g., Limited Liability Company Amto v. Ukraine, SCC Case No. 080/2005, Final Award,
26 March 2008 (Amto Final Award), §§ 45-47.
22 Article 26(4)(a).
32
Commission on International Trade Law (UNCITRAL),23 or an arbitral proceeding under

the Arbitration Institute of the Stockholm Chamber of Commerce.24
As is often the case, particularly in international arbitration proceedings brought against
states, issues relating to the proper jurisdiction of a tribunal have been some of the most
heavily contested and adjudicated in arbitrations invoking the ECT. The ECT’s juris
prudence reveals that objections to admissibility and jurisdiction in many respects parallel
those brought in the context of other bilateral and multilateral investment treaties.
Amicable settlement and the fork in the road

As referenced above, the ECT contains a standard cooling-off period of three months before
an investor can initiate international arbitration. While respondents have raised objections
on account of a claimant’s alleged failure to satisfy the three month amicable settlement
period, these efforts have generally been unsuccessful.25 Further, where a contracting party
has withheld its consent to allow an investor the option to submit to arbitration disputes
that have already been submitted to a local forum or alternative dispute resolution mecha-
nism, there is a fork-in-the-road provision.26 In other words, the investor can elect only one
avenue of dispute resolution set forth in Article 26(2), and is precluded from arbitrating the
dispute before alternative fora.To trigger this bar, ECT tribunals have required respondents
to establish that the dispute allegedly initiated elsewhere has the same parties, causes of
action and object (the ‘triple identity test’).27 In Charanne v. Spain, the tribunal observed that
evidence the companies were part of the same group was insufficient to establish that there
was a ‘substantial identity of the parties’ under the first part of the test.28
Protected investors and investments

A claimant’s qualification as a protected investor that has made a protected investment
for the purposes of the ECT has been frequently contested. The ECT’s definition of an
‘investor’ includes any natural person who is a citizen or permanently resides in a con-
tracting party in accordance with its applicable law or a company or other organisation
23 Article 26(4)(b).
24 Article 26(4)(c).
25 RREEF Infrastructure (G.P.) Limited and RREEF Pan-European Infrastructure Two Lux S.à r.l. v. Kingdom of
Spain, ICSID Case No. ARB/13/30, Decision on Jurisdiction (redacted), 6 June 2016 (RREEF Decision
on Jurisdiction), ¶ 231; Amto Final Award, § 58; Gabriel Stati, Ascom Group S.A.,Terra Raf Trans Trading Ltd
v. Kazakhstan, SCC Case No. 116/2010, Award, 19 December 2013 (Stati Award), ¶¶ 828-30. See also
Mohammad Ammar Al-Bahloul v.Tajikistan, SCC Case No.V (064/2008), Partial Award on Jurisdiction and
Liability (Al-Bahloul Partial Award), ¶¶ 155-56.
26 Article 26(3)(b)(i).
27 Charanne B.V. and Construction Investments S.A.R.L. v.The Kingdom of Spain, SCC Case No. 062/2012,
Final Award, 21 January 2016 (Charanne Final Award), ¶ 408; Hulley Enterprises Limited (Cyprus) v.The
Russian Federation, UNCITRAL, PCA Case No. AA 226, Interim Award on Jurisdiction and Admissibility,
30 November 2009 (Hulley Interim Award), ¶ 597; Yukos Universal Limited (Isle of Man) v.The Russian Federation,
UNCITRAL, PCA Case No. AA 227, Interim Award on Jurisdiction, 30 November 2009 (Yukos Universal
Interim Award), ¶ 598; Veteran Petroleum Trust (Cyprus) v.The Russian Federation, UNCITRAL, PCA Case
No. AA 228, Interim Award on Jurisdiction and Admissibility, 30 November 2009 (Veteran Petroleum Interim
Award), ¶ 609.
28 Charanne Final Award, ¶ 408.
33
incorporated in accordance with its applicable law.29 Several tribunals have refused requests
by states to look beyond incorporation and to pierce the corporate veil in assessing investor
status and to more generally add requirements that go beyond the wording of the ECT’s
definition.30 In Charanne, the tribunal rejected Spain’s invitation to lift the corporate veil
to find that the investors incorporated in the Netherlands and Luxembourg were in fact
Spanish nationals.31 The tribunal found that Article 1(7) requires only that the company be
organised in accordance with the laws of the applicable state, a condition that the tribunal
found was satisfied.32
The ECT’s definition of investment covers ‘every kind of asset, owned or controlled
directly or indirectly by an Investor’ and enumerates several categories of investments
protected by the ECT, including tangible and intangible property and property rights; a
company or business enterprise, equity participation and debt in a company or business
enterprise; claims to money or contractual performance having an economic value and
associated with an investment: intellectual property; returns; and rights conferred by law
or contract or by virtue of licences and permits.33 In addition, the last paragraph of Article
1(6), as explained by the tribunal in Electrabel v. Hungary, imposes the over-arching require-
ment that an investment must be ‘associated with an Economic Activity in the Energy
Sector’ (defined by Article 1(5)).34 The tribunal in Amto v. Ukraine considered that the
phrase ‘associated with’ demonstrates that ‘any alleged investment must be energy related,
without itself needing to satisfy the definition of Article 1(5).’35 Tribunals have taken note
of the broad language of this definition, and its non-exhaustive list of qualifying assets.36
In RREEF v. Spain, the tribunal described the ECT’s definition of investment as ‘open,
general and not restricted’, and rejected Spain’s request to apply ‘criteria . . . additional to
the definition contained in the ECT’ to qualify as a protected investment.37
Despite – or perhaps because of – its open language, the question of whether the cri-
teria for an investment have been satisfied has been regularly challenged. Perhaps the most
contentious disputes arising in this context relate to whether the right to be paid money
qualifies as a protected investment. Article 1(6)(c)’s subcategory of ‘claims to money and
29 Article 1(7).
30 Energoalians v. Moldova, UNCITRAL, Award, 23 October 2013 (Energoalians Award), ¶ 145; Charanne Final
Award, ¶¶ 414-18; Hulley Interim Award, ¶¶ 413-17; Yukos Universal Interim Award, ¶¶ 413-17; Veteran
Petroleum Interim Award, ¶¶ 413-17; Plama Consortium Ltd v. Bulgaria, ICSID Case No. ARB/03/24, Decision
on Jurisdiction, 8 February 2005 (Plama Decision on Jurisdiction), ¶ 128; RREEF Decision on Jurisdiction,
¶¶ 143-47.
31 Charanne Final Award, ¶¶ 413-14.
32 Charanne Final Award, ¶¶ 414-18.
33 Article 1(6). In addressing respondents’ objections that there was a qualifying investment, tribunals have
confirmed that the definition of investment includes the ownership of shares (regardless of whether the
investor was a beneficial owner or controller of the shares). See Hulley Interim Award, ¶¶ 429; Veteran Petroleum
Interim Award, ¶ 477; Yukos Universal Interim Award, ¶ 430; RREEF Decision on Jurisdiction, ¶¶ 159-60.
34 Article 1(4)-(6); Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable
Law and Liability, 30 November 2012 (Electrabel Decision on Jurisdiction), ¶ 5.47.
35 Amto Final Award, § 42.
36 Plama Decision on Jurisdiction, ¶ 125; RREEF Decision on Jurisdiction, ¶ 156; Stati Award, ¶ 806.
37 RREEF Decision on Jurisdiction, ¶¶ 156-57. The tribunal further rejected the same with respect to Article
25 of the ICSID Convention.
34
claims to performance pursuant to a contract . . . associated with an Investment’ has been

the subject of particular scrutiny, and tribunals have grappled with how to address the
phrase ‘associated with an Investment’.38 In Electrabel v. Hungary, the tribunal concluded
that this phrase should be read to mean an investment other than the one addressed in the
same sub-paragraph,39 and therefore an investment under this category ‘is dependent on the
overall investment.’40 The tribunal concluded that contractual rights under a PPA, including
claims to money and performance by a state-owned electricity supply company, qualified
as protected investments.41
In Petrobart v. Kyrgyzstan, the tribunal explained that while a contract itself is merely
a legal document that does not qualify as an investment, it may contain legal rights that
do.42 Observing that the ‘circular’ definition in Article 1(6)(c) created doubt as to its proper
interpretation, the tribunal instead relied on the Article 1(6)(f) category of ‘any right con-
ferred by law or contract . . . to undertake any Economic Activity in the Energy Sector.’43
Noting that the contract at issue conferred on Petrobart rights relating to the sale of gas
condensate, the tribunal found there was a qualifying investment.44
In State Enterprise Energorynok v. Moldova, the claimant alleged that its claim to money
arising from a court judgment awarding US$1.7 million against the Moldovan Ministry of
Energy was a qualifying investment in Moldova pursuant to the ECT.45 Observing that the
claimant was not a party to the underlying electricity supply agreement and did not play
any role in energy operations, the tribunal declined jurisdiction, stating that the claimant
failed to prove that it had any direct or indirect control over the underlying investment
to which its claim of money was related.46 The tribunal distinguished this situation from
Electrabel and Amto,47 noting that in those cases the claimant was a shareholder engaged in
economic activities constituting investments.48 The tribunal further distinguished Petrobart
on the basis that the claimant in that case delivered the gas condensate for which payment
was due and at all times had full control over its own sales and deliveries, thereby making
an investment in the Kyrgyz Republic.49
The qualification of a debt arising from a commercial contract as an investment (as
opposed to the more classic indebtedness represented by loans) will undoubtedly be the
subject of further scrutiny. In Energoalians v. Moldova, the tribunal by majority found that
the right to claim money for an unpaid debt for the supply of electricity was an investment
38 Electrabel Decision on Jurisdiction, ¶¶ 5.52-5.54; State Enterprise Energorynok v. Moldova, SCC Arbitration No.V
(2012/175), Final Award, 29 January 2015 (State Enterprise Final Award), ¶ 85; Petrobart Ltd. v. Kyrgyzstan, SCC
Case No. 126/2003, Arbitral Award, 29 March 2005 (Petrobart Arbitral Award), p. 72, ¶¶ VII.6.38-VII.6.30.
39 Electrabel Decision on Jurisdiction, ¶¶ 5.52-5.53.
40 Id. ¶ 5.53.
41 Id. ¶¶ 5.39, 5.52-5.59.
42 Petrobart Arbitral Award, p. 71, ¶ VIII.6.21.
43 Id. at p. 72, ¶¶ VIII.6.28-VIII.6.29.
44 Id. at pp. 71-72, ¶¶ VIII.6.29-VIII.6.30.
45 State Enterprise Final Award, ¶¶ 26, 54, 63, 80.
46 Id. ¶¶ 81-101.
47 In Amto, the claimant owned shares in a company which provided technical services to a company which
produced electrical energy. Amto, Final Award, § 43.
48 State Enterprise Final Award, ¶ 86.
49 Id. ¶¶ 83, 86-87.
35
pursuant to the ECT, citing what it found to be a relatively broad definition of investment
in the treaty and its stated purpose to promote cooperation and development in the energy
sector.50 The chairperson of the tribunal, Dominic Pellew, disagreed, considering that a
debt acquired under an electricity supply agreement was not a qualifying investment, and
issued a rare dissent as chairperson contending that the tribunal did not have jurisdiction.51
Concurring with the chairperson’s reasoning, in April 2016 the Paris Court of Appeal set
aside the award, finding that the tribunal lacked jurisdiction over the dispute.52
More generally, ECT cases have stimulated discussion on whether investments meeting
one or more of the definitions of investment in Article 1(7) must also satisfy independent
criteria such as contribution and risk. The weight of published awards suggests that such
independent requirements may not be read into the ECT.53 But this view is not uniform,
with Professor William Park expressing the view in Alapi v. Turkey (not adopted by the
other tribunal members where the majority declined jurisdiction) that ‘[t]o be an investor
a person must actually make an investment, in the sense of an active contribution.’54
Intra-EU disputes
A topic of increasing prominence in ECT arbitration has been the exercise of tribunals’
jurisdiction over intra-European Union (EU) disputes – namely claims brought by an
investor of one EU contracting party against another EU contracting party. T he European
Commission (the Commission) has been vocal in its opposition to intra-EU investment
treaties and considers them to be contrary to EU law. Similarly, respondents from EU
member states have raised a number of objections to an ECT tribunal’s jurisdiction on
this basis.
In Charanne, Spain (and the Commission as amicus curiae) argued that neither it nor the
investors’ home states (the Netherlands and Luxembourg) consented to submit intra-EU
disputes to international arbitration.55 First, Spain contested whether there was ‘diversity
of territories’ between the investor and the contracting party as required under Article
26 of the ECT, arguing that both territories were the EU.56 In rejecting this argument, the
tribunal emphasised that Spain’s position ignored that individual member states of the EU
have their own legal standing in an action based on the ECT.57 Second, Spain advanced an
argument made by the Commission that there was an ‘implicit disconnection clause for
intra-EU relations.’58 Dismissing this second defence, the tribunal stated that the terms of
the ECT are clear and contain no explicit or implied disconnection clause to disassociate
50 Energoalians Award, ¶¶ 225-52.

51 See Energoalians Award, Dissenting Opinion of Dominic Pellew.
52 Paris Court of Appeal, 12 April 2016, 13/22531.
53 See, e.g., Stati Award, ¶ 810; Hulley Interim Award, ¶ 431; Veteran Petroleum Interim Award, ¶ 488; Yukos
Universal Interim Award, ¶ 432.
54 Alapli Elektrik B.V. v.Turkey, ICSID Case No. ARB/08/13, Excerpts of Award, 16 July 2012 (Alapli Award),
¶ 350. See also Alapli Award, ¶¶ 349-61.
56 Id. ¶ 427.
57 Id. ¶ 429.
58 Id. ¶ 433.
36
EU member states from the terms of the ECT.59 Lastly, the tribunal dismissed Spain’s
contention that Article 344 of the Treaty on the Functioning of the European Union pro-
hibited the arbitration of the dispute.60 In RREEF, the tribunal considered similar objec-
tions raised by Spain,61 and in dismissing Spain’s objection was guided by the overarching
conclusion that the ECT is its ‘constitution’, which ‘prevails over any other norm . . . apart
from those of ius cogens’, including EU law.62 The RREEF tribunal observed that to the
extent possible, where two treaties are applicable, they must be interpreted in such a way as
not to contradict each other.63
It bears observing here that the findings of the RREEF tribunal stand in contrast to
those of the tribunal in Electrabel, which found that there is no general principle under
international law compelling the harmonious interpretation of different treaties64 (although
the tribunal found in the context of the ECT and EU law, various factors compelled that
these two legal orders be read in harmony).65 While the tribunal observed that the EU legal
order and the ECT are not inconsistent or contradictory,66 it nonetheless found that if there
were material inconsistencies, EU law would prevail over the ECT.67
The ECT’s substantive protections

The ECT provides several critical protections to investors of contracting parties well-known
in the investor-state framework. The most prominent among them are those generally
found in the canon of bilateral and investment treaties, including:
• fair and equitable treatment (FET) (Article 10(1));
• full protection and security (Article 10(1));
• the prohibition against unreasonable and discriminatory measures (Article 10(1)); and
• the prohibition against unlawful expropriation (Article 13).
Fair and equitable treatment

Article 10(1) obliges the contracting parties to accord fair and equitable treatment to pro-
tected investments. Specifically, it provides that:
‘[e]ach Contracting Party shall, in accordance with the provisions of this Treaty, encourage and
create stable, equitable, favourable and transparent conditions for Investors of other Contracting
Parties to make Investments in its Area. Such conditions shall include a commitment to accord at
all times to Investments of Investors of other Contracting Parties fair and equitable treatment.68
59 Id. ¶¶ 434-38.
60 Id. ¶¶ 441-45.
61 RREEF Decision on Jurisdiction, ¶¶ 37-56.
62 Id. ¶¶ 74-75. See also Id. ¶¶ 76-90.
63 Id. ¶ 76.
64 Electrabel Decision on Jurisdiction, ¶¶ 4.130, 4.173.
65 Id. ¶¶ 4.167, 4.146-4.166.
66 Id. ¶¶ 4.167, 4.172, 4.196.
67 Id. ¶¶ 4.189, 4.191.
68 Article 10(1).
37
While these two sentences may be read as separate provisions, tribunals have observed that
the standards of protection contained in Article 10(1) are closely related and manifest dif-
ferent components of the FET standard.69
There is a well-trodden and extensive debate surrounding the content of the FET
standard in international arbitration, and ECT disputes have proven to be no exception.
In broad strokes, tribunals considering the ECT’s FET protection have recognised, among
other components, a contracting party’s obligations to: act consistently and transparently,70
accord due process,71 refrain from arbitrary72 or discriminatory measures,73 and ensure sta-
ble and equitable conditions.74 Some tribunals have explained that to breach FET, the state’s
acts or omissions must be ‘manifestly unfair or unreasonable (such as would shock, or at
least surprise a sense of juridical propriety)’.75
Several tribunals have considered the role and relevance of an investor’s legitimate
expectations at the time of investment in considering alleged breaches of FET. In Electrabel,
the tribunal observed that ‘[i]t is widely accepted that the most important function of
the fair and equitable treatment standard is the protection of the investor’s reasonable and
legitimate expectations.’76 Other tribunals, while not as emphatic, have also recognised
the importance of legitimate expectations. In Charanne, the tribunal considered an inves-
tor’s legitimate expectations to be ‘a relevant factor’ to the determination of FET, linking
this factor to good faith principles under customary international law.77 The rationale, the
tribunal explained, is ‘that a State cannot induce an investor to make an investment gen-
erating legitimate expectations, to later ignore the commitments that had generated such
69 Al-Bahloul Partial Award, ¶¶ 175-79 (observing that these two ‘provisions of Article 10(1)’ can be treated
together as the bases for the ECT’s FET standard). See also Petrobart Arbitral Award, p. 76, ¶ VIII.8.20 (‘The
Arbitral Tribunal does not find it necessary to analyse the Kyrgyz Republic’s action in relation to the various
specific elements in Article 10(1) of the Treaty but notes that this paragraph in its entirety is intended to ensure
a fair and equitable treatment of investments.’); Plama Consortium Ltd v. Bulgaria, ICSID Case No. ARB/03/24,
Award, 27 August 2008 (Plama Award), ¶ 163; Amto Final Award, § 74.
70 Electrabel Decision on Jurisdiction, ¶ 7.74; Plama Award, ¶ 178; Al-Bahloul Partial Award, ¶¶ 183-84;
Mamidoil Jetoil Greek Petroleum Products Société Anonyme S.A. v. Albania, ICSID Case No. ARB/11/24, Award,
30 March 2015 (Mamidoil Award), ¶ 616. The Electrabel tribunal stressed that ‘the reference to transparency can
be read to indicate an obligation to be forthcoming with information about intended changes in policy and
regulations that may significant affect investments, so that the investor can adequately plan its investment and,
if needed, engage the host State in dialogue about protecting its legitimate expectations.’ Electrabel Decision on
Jurisdiction, ¶ 7.79.
71 Mamidoil Award, ¶ 613; Electrabel Decision on Jurisdiction, ¶ 7.74.
72 A measure will not be arbitrary if it is reasonably related to a rational policy. See Electrabel S.A. v. Hungary,
ICSID Case No. ARB/07/19, Award, 25 November 2015 (Electrabel Award), ¶ 179; AES Summit Generation
Limited and AES-Tisza Erömü Kft. v.The Republic of Hungary, ICSID Case No. ARB/07/22, Award,
23 September 2010 (AES II Award), ¶¶ 10.3.7-10.3.9. This includes the requirement that the impact of the
measure on the investor be proportional to the policy objective sought. See Electrabel Award, ¶ 179.
73 Electrabel Decision on Jurisdiction, ¶ 7.74.
74 Plama Award, ¶ 173; Mamidoil Award, ¶ 616.
75 AES II Award, ¶ 9.3.40; The AES Corporation and Tau Power B.V. v. Republic of Kazakhstan, ICSID Case No.
ARB/10/16, Award, 1 November 2013, ¶ 314.
38
expectations.’78 To demonstrate that there has been a breach of FET arising from an inves-
tor’s legitimate expectations, tribunals have considered (1) whether there were representa-
tions or assurances given by the host state to the investor at the time of investment; (2) upon
which the investor reasonably relied in making its investment; and (3) whether the state’s
conduct was contrary to these representations or assurances.79
The degree to which such legitimate expectations must arise from explicit represen-
tations has been the source of debate. While some tribunals have observed that legitimate
expectations can be based on the legal order or regulatory framework of the host state
or implicit assurances,80 others have looked for statements and commitments, potentially
in the form of a stabilisation clause, that a regulatory environment would not change.81
In Electrabel, the tribunal found that ‘[w]hile specific assurances given by the host State
may reinforce the investor’s expectations, such assurances are not always indispensable,’ and
rather will make a difference when assessing the investor’s knowledge and of the reason-
ability and legitimacy of its expectations.82 The tribunal added that in the absence of such
a specific representation, ‘the investor must establish a relevant expectation based upon
reasonable grounds.’83
Relatedly, the stability of the legal framework has also been considered a component of
the FET standard, although tribunals have balanced this element against the state’s ‘legiti-
mate right to regulate’.84 The state is not prohibited from enacting any and all changes to
the regulatory framework, and whether it has satisfied its obligations to accord FET will
depend on the circumstances of each case. In finding that Hungary had not breached its
obligation to provide a stable legal framework, the tribunal in AES v. Hungary II observed
that ‘[a] legal framework is by definition subject to change as it adapts to new circumstances
day by day and a state has the sovereign right to exercise its powers which include legisla-
tive acts.’85 Further ‘any reasonably informed business person or investor knows that laws
can evolve in accordance with the perceived political or policy dictates of the time.’86 In
Mamidoil v. Albania, the tribunal explained that an assessment of whether the state has sat-
isfied its obligation to provide a stable and transparent framework should be considered in
the specific context of what can be expected in that individual state (in this case Albania),87
and placed a level of responsibility on the investor to complete its due diligence and eval-
uate the circumstances of its investment.88
The denial of justice has also been treated as a component of the FET standard.89 In
Amto, the tribunal quoted the NAFTA tribunal in Mondev v. USA, to explain that when

79 AES II Award, ¶ 9.3.17; Plama Award, ¶ 176.
80 Al-Bahloul Partial Award, ¶ 202; Mamidoil Award, ¶ 731.
82 Electrabel Decision on Jurisdiction, ¶ 7.78; Electrabel Award, ¶ 155.
83 Electrabel Award, ¶ 155.
84 Plama Award, ¶ 177. See also Mamidoil Award, ¶¶ 616, 621; Electrabel Decision on Jurisdiction, ¶ 7.77.
85 AES II Award, ¶ 9.3.29.
86 Id. ¶ 9.3.34.
87 Mamidoil Award, ¶¶ 623-29.
88 Id. ¶¶ 630-34.
89 Amto Final Award, § 75.
39
considering whether a denial of justice has taken place, ‘the question is whether, at an
international level and having regard to generally accepted standards of the administration
of justice, a tribunal can conclude in the light of all the available facts that the impugned
decision was clearly improper and discreditable, with the result that the investment has been
subjected to unfair and inequitable treatment.’90 The impugned treatment can be consid-
ered cumulatively and as a whole (e.g., relating to various proceedings rather than a single
decision or act).91
In Energoalians, the tribunal found that Moldova had breached FET where the Court of
Accounts, a ‘quasi-judicial’ financial oversight body,92 issued a decree that found, contrary
to clear evidence, that the investor had not supplied electricity pursuant to certain con-
tracts; and ordered Energoalians to return money Moldtranselectro (the state-owned com-
pany responsible for the operation of Moldova’s power grids) allegedly paid to Energoalians
where there was no evidence that it had in fact ever been paid.93 The tribunal observed that
this decree amounted to a denial of justice and a breach of Moldova’s obligations under
Article 10(1).94
Claims relating to denial of justice have also been linked to the protection provided by
Article 10(12),95 which provides that ‘[e]ach Contracting Party shall ensure that its domes-
tic law provides effective means for the assertion of claims and the enforcement of rights
with respect to Investments, investment agreements, and investment authorisations.’96 This
provision has been interpreted to require ‘a legal framework that guarantees effective rem-
edies to investors for realisation and protection of their investments.’97 The tribunal in
Amto determined that this provision contains a dual requirement of law (legislation for the
recognition and enforcement of property and contractual rights) and the rule of law (rules
of procedure which allow an investor effective action in domestic tribunals).98 In Petrobart,
the Vice Prime Minister sent a letter to the Chairman of the Bishkek Court requesting
the postponement of the execution of a judgment entitling the claimant to money from
the state joint stock company KGM in payment for delivered gas condensate. A few days
later, KGM’s request for a stay was granted for three months and, before the stay ended,
KGM declared bankruptcy, making enforcement of the judgment impossible.99 The tri-
bunal concluded that this letter was an attempt by the government to influence a judicial
decision to Petrobart’s detriment, an intervention that failed to comport with the rule of
90 Amto Final Award, § 76 (citing Mondev International Limited v. United States of America, ICSID Case No.
ARB(AF)/99/2), ¶¶ 126-27).
91 Id. § 78.
92 Energoalians Award, ¶ 356.
93 Id. ¶¶ 350-55.
94 Id. ¶ 356.
95 See, e.g., Amto Final Award, § 75 (observing that the denial of justice ‘is a manifestation of a breach of the
obligation of a State to provide fair and equitable treatment and the minimum standard of treatment required
by international law. Denial of justice relates to the administration of justice, and some understandings of the
concept include both judicial failure and also legislative failures relating to the administration of justice (for
example, denying access to the courts).’).
96 Article 10(12).
98 Amto Final Award, § 87. See also Id. § 88.
99 Petrobart Arbitral Award, p. 75, ¶ VIII.8.11,
40
law in a democratic society, amounting to a violation of the Kyrgyz Republic’s obligation

to Petrobart under Article 10(1) and (12).100
Full protection and security

Article 10(1) further requires a contracting party to accord ‘the most constant protection
and security’ to an investor’s investment.101 ECT tribunals have observed that a key com-
ponent of the standard is an obligation of ‘due diligence’, which requires a state to create a
framework that provides security and protects the property of aliens from wrongful injury
or harassment.102 Further, ECT tribunals have recognised the potential for full protection
and security (FPS) protection to extend beyond physical security and include legal secu-
rity.103 However, tribunals considering alleged breaches of FPS have confirmed that this
obligation does not impose strict liability on the state to prevent all injury.104
At the time of writing, there is no publicly available decision in which a tribunal has
found a breach of FPS under the ECT.
Prohibition against unreasonable and discriminatory measures

While potentially overlapping with the obligation to accord FET, Article 10(1)’s provision
prohibiting ‘unreasonable and discriminatory measures’ has been read as a unique and sepa-
rate protection under the ECT. Measures that breach this provision, as identified by the
Plama tribunal, are those that are ‘not founded in reason or fact but on caprice, prejudice
or personal preference.’105 The tribunal in Electrabel observed that ‘a breach of this stand-
ard requires the impairment caused by the discriminatory or unreasonable measure to be
significant.’106
Discriminatory treatment occurs where ‘like persons [are] treated in a different man-
ner in similar circumstances without reasonable or justifiable grounds,’107 although there
need not be discriminatory intent on the part of the host state.108 In AES v. Hungary II,
the tribunal identified two elements to determine whether a state’s acts are unreasonable:
the existence of a rational policy, and the reasonableness of the state’s act relating to that
100 Petrobart Arbitral Award, pp. 75-77, ¶¶ VIII.8.11-VIII.8.13,VIII.8.20-8.22.

101 Article 10(1).
102 Electrabel Decision on Jurisdiction, ¶ 7.83 (citing El Paso Energy International Company v.The Argentine Republic,
ICSID Case No. ARB/03/15, Award, 31 October 2011, ¶¶ 522-23); Plama Award, ¶¶ 179-80; AES II Award,
¶¶ 13.3.2-13.3.3; Mamidoil Award, ¶ 821.
103 Plama Award, ¶ 180; AES II Award, ¶ 13.3.2. However, in Liman, the tribunal emphasised that the purpose
of this provision is ‘to protect the integrity of an investment against interference by the use of force and
particularly physical damage.’ Liman Caspian Oil BV and NCL Dutch Investment BV v. Republic of Kazakhstan,
ICSID Case No. ARB/07/14, Excerpts of Award, 22 June 2010 (Liman Award Excerpts), ¶ 289.
104 Electrabel Decision on Jurisdiction, ¶ 7.83; Plama Award, ¶ 181; AES II Award, ¶ 13.3.2; Mamidoil Award, ¶ 821.
105 Plama Award, ¶ 184.
107 Plama Award, ¶ 184; Nykomb Arbitral Award, ¶ 4.3.2.3.a.4; Electrabel Decision on Jurisdiction, ¶ 7.152; Mamidoil
Award, ¶ 788 (finding that a measure was not discriminatory as it was evenly applied to all importers).
41
policy.109 Reasonableness in this context requires ‘an appropriate correlation between the
state’s public policy objective and the measure adopted to achieve it.’110
Expropriation
The ECT’s prohibition against unlawful expropriation is contained in Article 13, and iden-
tifies the well-known standard under international law. Namely, it provides that expropria-
tion is unlawful unless the following four requirements are satisfied:
• it is done in the public interest;
• it is not discriminatory;
• it is carried out under due process of law; and
• it is accompanied by the payment of prompt, adequate and effective compensation.111
There have been only a handful of direct expropriation cases in the ECT context. For
example, in Kardassopoulous v. Georgia, the tribunal found that Georgia had committed ‘a
classic case of direct expropriation’ by taking away the claimant’s concession to distribute
oil and gas in Georgia, transferring them to a state-owned entity, and failing to provide
compensation or due process of law.112
Article 13 of the ECT contemplates cases of indirect expropriation, and includes in its
definition ‘a measure or measures having effect equivalent to nationalisation or expropri-
ation’.113 Thus, indirect expropriation claims are frequently considered by ECT tribunals,
who rely heavily on the jurisprudence established by international arbitral tribunals consid-
ering indirect expropriation claims arising from bilateral and other multilateral treaties. In
some of the most recent and well-known of these cases, controlling shareholders of OAO
Yukos Oil Company (Yukos) claimed that Russia breached Articles 10(1) and 13(1) of the
ECT by expropriating Yukos. They brought three related arbitrations that were submitted
to the same arbitral tribunal.114 The tribunal found that Russia’s primary objective regard-
ing its tax treatment of Y ukos was ‘not to collect taxes but rather to bankrupt Yukos and
appropriate its valuable assets.’115 Russia’s measures, the tribunal observed, were ‘in effect
a devious and calculated expropriation’.116 The tribunal concluded that while Russia had
not ‘explicitly expropriated’ Y
ukos or the holdings of its shareholders, these measures were
109 AES II Award, ¶¶ 10.3.7-10.3.8.

110 AES II Award, ¶ 10.3.9.
111 Article 13(1).
112 Ioannis Kardassopoulos and Ron Fuchs v.The Republic of Georgia, ICSID Case Nos. ARB/05/18 and ARB/07/15,
Award, 3 March 2010, ¶¶ 387-408.
113 Article 13(1).
114 Hulley Enterprises Limited (Cyprus) v.The Russian Federation (PCA Case No. AA 226); Yukos Universal Limited
(Isle of Man) v. Russian Federation (PCA Case No. AA 227); and Veteran Petroleum Limited (Cyprus) v. Russian
Federation (PCA Case No. AA 228).
115 Hulley Enterprises Limited (Cyprus) v.The Russian Federation, UNCITRAL, PCA Case No. AA 226, Final
Award, 18 July 2014 (Hulley Final Award), ¶ 756; Yukos Universal Limited (Isle of Man) v.The Russian Federation,
UNCITRAL, PCA Case No. AA 227, Final Award, 18 July 2014 (Yukos Universal Final Award), ¶ 756;
Veteran Petroleum Trust (Cyprus) v.The Russian Federation, UNCITRAL, PCA Case No. AA 228, Final Award,
18 July 2014 (Veteran Petroleum Final Award), ¶ 756. See also Hulley Final Award, ¶¶ 757-59, 1579; Yukos
Universal Final Award, ¶¶ 757-59, 1579; Veteran Petroleum Final Award, ¶¶ 757-59, 1579.
116 Hulley Final Award, ¶ 1037; Yukos Universal Final Award, ¶ 1037; Veteran Petroleum Final Award, ¶ 1037.
42
‘equivalent to nationalization or expropriation’ in breach of Article 13 of the ECT.117 The

tribunal awarded the former Yukos shareholders approximately US$50 billion – the highest
value in international arbitration awards known to date. While the Hague District Court
overturned the awards – a decision that is pending appeal – as discussed below, they were
overturned on the basis of the tribunal’s decision on its jurisdiction and not on the merits
of the tribunal’s finding that Russia breached Article 13 of the ECT.
The standard for indirect expropriation has been articulated in the ECT context in
various ways. In Electrabel, the tribunal required the claimant to prove that the effect of
Hungary’s acts were ‘materially the same’ as if the investment had been directly expropri-
ated,118 observing that international law requires that the investor ‘establish the substantial,
radical, severe, devastating or fundamental deprivation of its rights or the virtual annihi-
lation, effective neutralisation or factual destruction of its investment, its value or enjoy-
ment.’119 In Charanne, the tribunal explained that ‘indirect expropriation under interna-
tional law implies a substantial effect on the property rights of the investor,’ which requires
an effective deprivation of all or part of the assets constituting the investment or a loss of
value that could be equal in magnitude to a deprivation of the investment.120 In finding
that there was no indirect expropriation, the tribunal observed that while there was a
reduction in profitability as a result of Spain’s actions, the value of the investment was not
‘destroyed.’121 Consequently, the loss of value alone is insufficient to constitute indirect
expropriation. According to the tribunal in Mamidoil v. Albania, there must also be a loss of
an attribute of ownership.122
Additional considerations
Article 45 of the ECT provides that signatories agree to apply the treaty provisionally
pending ratification. As noted above, in July 2014, an arbitral tribunal seated in the Hague
rendered the highest-value arbitration awards known to date – ordering Russia to pay
more than US$50 billion to former majority shareholders of Yukos.123 In line with previ-
ous jurisprudence under the ECT, the arbitral tribunal found it had jurisdiction based on
Russia’s provisional application of the ECT, inclusive of the Article 26 arbitration provi-
sions.124 In 2016, the Hague District Court overturned the awards finding that the arbitral
tribunal did not have jurisdiction because dispute resolution through arbitration was at
odds with the Russian Constitution and therefore was not part of Russia’s provisional
117 Hulley Final Award, ¶¶ 1580-85; Yukos Universal Final Award, ¶¶ 1580-85; Veteran Petroleum Final Award,
¶¶ 1580-85. The tribunal did not go on to examine claims that Russia violated Article 10 of the ECT. Hulley
Final Award, ¶ 1449; Yukos Universal Final Award, ¶ 1449; Veteran Petroleum Final Award, ¶ 1449.
119 Id. ¶ 6.62.
120 Charanne Final Award, ¶ 461. See also AES II Award, ¶ 14.3.1.
122 Mamidoil Award, ¶¶ 566-72.
123 See generally Alison Ross,Yukos Investors Win Record Sum Against Russia, Global Arbitration Review,
15 August 2014.
124 Hulley Interim Award, ¶¶ 393-98; Yukos Universal Interim Award, ¶¶ 393-98; Veteran Petroleum Interim Award,
¶¶ 393-98.
43
application of the ECT; this decision is pending appeal.125 Earlier this year two arbitral tri-
bunals sitting outside of the Netherlands were not deterred by the Hague District Court’s
decision126 – each finding that it has jurisdiction under Article 45 of the ECT and rejecting
arguments that provisional application of Article 26’s arbitration provision is inconsistent
with Russia’s constitution.
Part III of the ECT provides several additional protections some of which are discussed
herein, including national treatment and most-favoured nation (MFN) protection,127 as
well as the free transfer of investments.128
Article 10(1) also contains a so-called ‘umbrella clause’ and states that ‘[e]ach Contracting
Party shall observe any obligations it has entered into with an Investor or an Investment of
an Investor of any other Contracting Party.’129 As referenced above, contracting parties may
withhold their unconditional consent to international arbitration with respect to disputes
arising out of this provision.130 In Khan v. Mongolia, the tribunal found in its decision on
jurisdiction that any violation of the domestic foreign investment law would constitute a
breach of the ECT’s umbrella clause.131 The tribunal found that Mongolia had breached a
provision of its foreign investment law prohibiting unlawful expropriation, thereby breach-
ing the umbrella clause in the ECT.132
Article 17 of the ECT also contains a ‘denial of benefits’ clause, which provides that a
contracting party ‘reserves the right to deny the advantages’ of the protections contained
in Part III (including the above) to a group of entities or investments which satisfy the
requirements of that Article.133 As observed by the tribunal in Libananco v.Turkey, the phrase
‘reserves the right’ has been scrutinised by other tribunals regarding how a contracting
party exercises its right and whether the denial is retrospective or prospective.134 In Plama
v. Bulgaria, the tribunal considered that such a right must in fact be exercised by the con-
tracting party (e.g., by notice),135 after which it has only prospective effect.136 Further,
125 Alison Ross,Yukos Shareholders Seek to Reinstate Award, Global Arbitration Review, 19 July 2016; The First
Hearing in the Yukos Appeal – GAR Reports Exclusively on the Arguments, Global Arbitration Review,
18 January 2017; Hague Court will Not Split Yukos Appeal, Global Arbitration Review, 23 January 2017.
126 Alison Ross, Second Wave Yukos Tribunal Rules on Provisional Application, Global Arbitration Review
16 February 2017.
127 Article 10(7).
128 Article 14(1).
129 Article 10(1).
130 Article 26(3)(c).
131 Khan Resources Inc. et al. v.The Government of Mongolia & MonAtom LLC, UNCITRAL, PCA Case No.
2011-09, Decision on Jurisdiction, 25 July 2012 (Khan Decision on Jurisdiction), ¶ 438; Khan Resources Inc.
et al. v.The Government of Mongolia & MonAtom LLC, UNCITRAL, PCA Case No. 2011-09, Award on the
Merits, 2 March 2015 (Khan Award), ¶¶ 295-96.
132 Khan Award, ¶ 366.
133 Article 17(1).
134 Libananco Holdings Co. Limited v. Republic of Turkey, ICSID Case No. ARB/06/8, Award, 2 September 2011,
¶ 550.
135 Plama Decision on Jurisdiction, ¶¶ 155-65. See also Hulley Interim Award, ¶ 455; Yukos Universal Interim
Award, ¶ 456; Veteran Petroleum Interim Award, ¶ 512; Liman Award Excerpts, ¶ 224.
136 Plama Decision on Jurisdiction,¶¶ 159-65. See also Khan Decision on Jurisdiction, ¶ 429; Hulley Interim
Award, ¶ 457; Yukos Universal Interim Award, ¶ 458; Veteran Petroleum Interim Award, ¶ 514; Liman Award
Excerpts, ¶ 225.
44
tribunals have found that Article 17 does not affect the dispute resolution provision con-
tained in Article 26 and therefore does not deprive a tribunal of jurisdiction pursuant to
that Article.137
Finally, Article 21(1) of the ECT excludes bona fide taxation measures from the ambit
of the ECT by providing that nothing in the ECT ‘shall create rights or impose obliga-
tions with respect to Taxation Measures of the Contracting Parties.’138 However, this tax
carve-out does not apply to taxes amounting to expropriation, and sets forth a mechanism
by which issues as to ‘whether a tax constitutes an expropriation or whether a tax alleged to
constitute an expropriation is discriminatory’ are referred to a competent tax authority for
resolution.139 In Plama, the tribunal observed that the investor must first exhaust this mech-
anism by referring the issue to the competent tax authority before submitting the issue to
arbitration.140 However, the tribunal in the Yukos cases concluded that the referral mecha-
nism in Article 21(5) of the ECT is not compulsory where referral to relevant authorities
would be an exercise in futility;141 or the measures at issue are not a bona fide exercise of
the state’s tax powers, in which case Article 21(1) does not apply.142 The tribunal concluded
that the carve-out did not apply to Russia’s measures as the tax assessments levied against
Yukos by Russia ‘were designed mainly to impose massive liabilities based on VAT and
related fines, and were essentially aimed at paralyzing Yukos rather than collecting taxes.’143
Trends in ECT arbitrations

The jurisprudential landscape under the ECT is developing and remains in flux. Significant
events that could have influenced the development of ECT jurisprudence – namely states
withdrawing from the ECT and a national court of first instance overturning the largest
arbitral awards known to date – have not yet proven to have meaningful impact. Contrary
to what appeared might be an emerging trend of states renouncing the ECT (led by Russia
in 2009 when it gave notice of its termination of its provisional application of the ECT
followed by Italy in a 2015 announcement that it would withdraw from the ECT) no
other states have renounced the ECT. Nor has the ECT lost its strategic importance.144
In 2016, the ECT was the most frequently invoked international investment agreement,
accounting for a total of ten cases including claims against Italy, Spain, Croatia, Bulgaria,
137 Plama Decision on Jurisdiction, ¶ 149; Khan Award, ¶¶ 411-12.

138 Article 21(1).
139 Article 21(5); Plama Award, ¶ 266 (finding that Article 21 ‘specifically excludes from the scope of the ECT’s
protections taxation measures of a Contracting States, with certain exceptions, one of which is that, if a tax
constitutes or is allege to constitute an expropriation or is discriminatory.’).
140 Plama Award, ¶ 266.
¶¶ 1421-29.
¶¶ 1430-40.
143 Hulley Final Award, ¶ 1444; Yukos Universal Final Award, ¶ 1444; Veteran Petroleum Final Award, ¶ 1444. The
tribunal’s analysis that these tax measures constituted expropriation is discussed above.
144 Alison Ross, What lies behind Italy’s ECT Exit, Global Arbitration Review, 29 July 2015.
45
Hungary, and Bosnia and Herzegovina.145 In December 2016, a group of German and
British-owned entities filed an arbitration against Italy.146 Similarly, on 23 March 2017,
Rockhopper Exploration, a British exploration company, announced that it commenced
an international arbitration against Italy based on the state’s refusal to award it a production
concession.147 Finally, as explained above, the Hague District Court’s decision to overturn
the Yukos awards did not deter arbitral tribunals from finding that they have jurisdiction
over disputes based on Russia’s provisional application of the ECT nor has it deterred some
national courts from maintaining enforcement orders in favour of the former majority
shareholders in Yukos.
As the push for transparency in investment treaty arbitrations continues through ini-
tiatives like the UNCITRAL Rules on Transparency in Treaty-based Investor-State
Arbitration (effective as of 1 April 2014) and the 2015 Mauritius Convention (which
comes into force in October 2017), we can expect the body of jurisprudence under the
ECT to continue to grow and evolve.
145 Lacey Yong, 2016 Investor-State Claims Focused on Spain, India and Colombia, Global Arbitration Review
9 February 2017.
146 The ECT has a 20-year sunset provision. Lacey Yong, Italy Faces Another Solar Claim, Global Arbitration
Review, 13 December 2016.
147 Douglas Thomson, Italy to Face New ECT Claim, Global Arbitration Review, 23 March 2017.
46
3
Investment Disputes Involving the Renewable Energy Industry
Under the Energy Charter Treaty
Charles A Patrizia, Joseph R Profaizer, Samuel W Cooper and Igor V Timofeyev1
The renewable energy sector often depends on large, upfront investments, which can only
be recouped over a long period. Given the substantial initial capital investment required,
many countries (particularly those in the European Union) have enacted schemes, such as
feed-in tariffs or other special rates, to encourage long-term investment. Investors in the
renewable energy sector have a strong interest in the stability of this regulatory regime –
including, significantly, the continuity of any incentive schemes for renewable energy over
the period of expected recovery – and protection from unwarranted government policy
changes that could amount to expropriation or a denial of fair and equitable treatment.
An important response to investors’ desire for assurances of stability is the Energy
Charter Treaty (ECT).2 Originally concluded in the aftermath of the Cold War to integrate
the former Soviet Union’s resource-rich energy sectors into the European market, the
ECT now provides an international legal framework for energy cooperation, particularly
in Europe.
The past decade saw a significantly increased level of investment, including foreign
investment as a result of international initiatives on the development of alternative energy
sources.3 Many countries have implemented government subsidies and support schemes to
encourage investment in renewable energy. These measures were designed to favour
1 Charles A Patrizia, Joseph R Profaizer, Samuel W Cooper and Igor V Timofeyev are partners at Paul Hastings
LLP. The authors are grateful to Fabio Cozzi and Diogo Pereira for their invaluable assistance in the research
and preparation of this article.
2 Energy Charter Treaty, 17 December 1994, 2080 U.N.T.S. 95 (entered into force on 16 April 1998).
3 See, e.g., Kyoto Protocol of 11 December 1997 and Directive 2003/87/EC (establishing the EU Greenhouse
Gas Emissions Trading Scheme). Both entered into force in 2005. The European Union in particular has
either required or encouraged its member states to set up support mechanisms for electricity generation
from renewable sources. See K. Talus, ‘Introduction: Renewable Energy Disputes in Europe and Beyond: An
Overview of Current Cases’, 12 Transnat’l Disp. Mgmt., May 2015, at 3-4.
47
Investment Disputes Involving the Renewable Energy Industry Under the Energy Charter Treaty
renewable resources over continued use of fossil fuels and to account for the significant
upfront expense associated with the new technologies.4
Pending renewable energy arbitrations under the ECT

As the favourable subsidies and support schemes resulted in significant investment in
renewables, and faced with a global financial crisis, many European countries scaled back
their original investment incentives. At times, these changes resulted from those countries’
obligations under EU law.
These regulatory changes, in turn, have sparked a considerable number of legal disputes,
including investor–state arbitrations under the ECT. Spain, the Czech Republic and Italy in
particular have found themselves facing disputes following changes in regulatory structures
for energy investment.5 Arbitration claims brought under the ECT have focused on two
protections: (1) the requirement that the host state extend fair and equitable treatment to
foreign investors, and (2) the prohibition on expropriation.
Spain
For over a decade, Spain had laws subsidising new investments in wind energy, solar energy
and waste incineration. The Spanish Promotion Plan for Renewable Energy, originally
promulgated in 2000 and revised in 2005, provided for grants, tax incentives, soft loans and
loan guarantees.These incentives attracted tens of billions of euros in investment in renew-
able energy assets from outside investors.6 As a result of these policies, Spain became one of
the largest markets for investments in ‘green energy’, with an estimated value of €13 billion
in renewable energy assets.7 One incentive offered by Spain was a feed-in tariff, which
permitted owners of renewable energy plants (particularly solar plants) to sell electricity at
a higher rate for the first 25 years and at a reduced rate for the plant’s remaining lifetime.8
Beginning in 2008, the Spanish government began to reduce these incentives to address
a significant ‘tariff deficit’ – the difference between the amounts collected from regulated
feed-in tariffs and those collected from access tariffs set on the open market – as revenue
from the state-subsidised prices failed to cover costs.9 By 2012, Spain had largely eliminated
4 See J.M. Tirado, ‘Renewable Energy Claims under the Energy Charter Treaty: An Overview’, 12 Transnat’l
Disp. Mgmt., May 2015, at 4-5.
5 An arbitration has also been commenced against Bulgaria. See ENERGO-PRO a.s. v. Bulgaria, ICSID Case
No. ARB/15/19; see also J. Dahlquist, ‘Bulgaria is Hit with Energy-Related ICSID Energo-Pro a.s.’, Inv. Arb.
Rep., 28 May 2015.
6 Arif Hyder Ali, ‘In the Eye of the Storm: Spain’s Nexus to Investment Disputes’, 18 Spain Arb. Rev. 5-36
(2013).
7 Id.
8 See Tirado, supra note 4, at 5 – 6. See also S. Mejia ‘The Protection of Legitimate Expectations and Regulatory
Change: The Spanish Case’, Spain Arb. Rev. 113-132 (2014).
9 See Tirado, supra note 4, at 6-7.
48
these incentives for new photovoltaic systems.10 The government also issued decrees impos-
ing a tax on power generation.11
In response, several groups of investors brought arbitration claims under the ECT. As
of 11 August 2016, foreign investors had filed at least 22 arbitration claims against Spain
at ICSID,12 with other cases pending before tribunals composed under the UNCITRAL
or the Stockholm Chamber of Commerce (SCC) rules.13 In one of the longest-pending
arbitrations – the PV Investors case – Spain allowed the claims made by investors in the
photovoltaic (solar) sector to be heard by a single UNCITRAL arbitral tribunal.14 The
PV Investors tribunal subsequently affirmed that it has jurisdiction over claims that Spain
breached its obligations under the ECT – reportedly the first jurisdictional ruling in any of
the renewable energy arbitrations brought against Spain.15
In January 2016, in Charanne, another UNCITRAL tribunal rendered the first award
in these disputes.16 As in the PV Investors case, the tribunal rejected Spain’s jurisdictional
10 Pablo del Rio & Pere Mir-Artigues, ‘A Cautionary Tale: Spain’s Solar PV Investment Bubble’, International
Institute for Sustainable Development (IISD) (February 2014); see also Tirado, supra note 4, at 6-7 (discussing
the Spanish Royal Decrees issued between 2008 and 2014, which ultimately abolished all preferential tariffs
and premiums for new projects and set a tax on the production and transfer of energy into the grid).
11 Ali, supra note 6, at 13 & n.35.
12 See OperaFund Eco-Invest SICAV PLC and Schwab Holding AG v. Spain, ICSID Case No. Arb/15/36; E.ON
SE, E.ON Finanzanlagen GmbH and E.ON Iberia Holding GmbH v. Spain, ICSID Case No. ARB/15/35;
Cavalum SGPS, S.A. v. Spain, ICSID Case No. ARB/15/34; JGC Corp. v. Spain, ICSID Case No. ARB/15/27;
KS Invest GmbH and TLS Invest GmbH v. Spain, ICSID Case No. ARB/15/25; Matthias Kruck, et al. v. Spain,
ICSID Case No. ARB/15/23; Cube Infrastructure Fund SICAV, et al. v. Spain, ICSID Case No. ARB/15/20;
BayWa r.e. Renewable Energy GmbH and BayWa r.e. Asset Holding GmbH v. Spain, ICSID Case No. ARB/15/16;
9REN Holding S.a.r.l v. Spain, ICSID Case No. ARB/15/15; STEAG GmbH v. Spain, ICSID Case No.
ARB/15/4; Stadtwerke München GmbH, RWE Innogy GmbH, et al. v. Spain, ICSID Case No. ARB/15/1;
RWE Innogy GmbH and RWE Innogy Aersa S.A.U. v. Spain, ICSID Case No. ARB/14/34; RENERGY S.à.r.l.
v. Spain, ICSID Case No. ARB/14/18; InfraRed Environmental Infrastructure GP Limited, et al. v. Spain, ICSID
Case No. ARB/14/12; NextEra Energy Global Holdings B.V. and NextEra Energy Spain Holdings B.V. v. Spain,
ICSID Case No. ARB/14/11; Masdar Solar & Wind Cooperatief U.A. v. Spain, ICSID Case No. ARB/14/1;
Eiser Infrastructure Ltd. and Energia Solar Luxembourg S.à.r.l. v. Spain, ICSID Case No. ARB/13/36; Antin
Infrastructure Services Luxembourg S.à.r.l. and Antin Energia Termosolar B.V. v. Spain, ICSID Case No. ARB/13/31;
and RREEF Infrastructure (G.P.) Limited and RREEF Pan-European Infrastructure Two Lux S.à.r.l. v. Spain, ICSID
Case No. 13/30; see also Talus, supra note 3, at 7;Tirado, supra note 4, at 17-19; Clovis Trevino, ‘An Update on
Renewable Energy Claims Against Spain’, Inv. Arb. Rep., 9 June 2015; Douglas Thomson, ‘New Solar Claim
Means More Pain for Spain’, Global Arbitration Review, 12 May 2015; Clovis Trevino, ‘Spain Round-Up:
Even as European Commission Throws up Red Flags, Two New Claims Land at ICSID, and Tribunal
Members Are Finalized in Another’, Inv. Arb. Rep., 27 January 2015.
13 See PV Investors v. Spain (UNCITRAL; commenced in 2011); Charanne and Construction Investments, et al. v.
Spain (SCC; registered in 2013); Isolux Infrastructure Netherlands B.V. v. Spain CSP Equity Investment S.à.r.l. v.
Spain (SCC; registered in 2013); CSP Equity Investment S.à.r.l. v. Spain (SCC; registered in 2013); see also Talus,
supra note 3, at 7;Tirado, supra note 4, at 15-17.
14 Luke Eric Peterson, ‘Following PCA Decision, Czech Republic Thwarts Move by Solar Investors to Sue in
Single Arbitral Proceeding; Meanwhile Spain Sees New Solar Claim at ICSID’, Inv. Arb. Rep., 1 January 2014.
Spain afterwards raised a jurisdictional objection to hearing claims that it considered to be unrelated in a
‘consolidated’ fashion. Id.
15 Luke Eric Peterson, ‘Intra-EU Treaty Claims Controversy: New Decisions and Developments in Claims
Brought by EU Investors vs. Spain and Hungary’, Inv. Arb. Rep., 24 December 2014.
16 Charanne and Construction Investments, et al. v. Spain (SCC; registered in 2013), Award, 21 January 2016.
49
objections.17 In a divided decision, however, the tribunal then dismissed the investors’
claims on the merits, finding that Spain’s actions did not constitute indirect expropriation
or deprive investors of fair and equitable treatment.18 The decision, however, only con-
cerned Spain’s modifications to its renewable energy investment regime enacted in 2010,
and not the more significant changes enacted in 2013.19
The Czech Republic

In 2005, the Czech Republic introduced a feed-in tariff for solar-generated electricity sold
directly to electrical grid operators, guaranteeing that the tariff could not be decreased by
more than 5 per cent a year. Subsequently, however, the Czech Republic sought to roll back
the payments required under the tariff, and in 2010 imposed a retroactive levy on revenues
from solar electricity, which was upheld by the Czech Constitutional Court.20 The Czech
government then passed legislation authorising faster reductions in the tariff rate.21
Foreign investors in the Czech photovoltaic power sector commenced several arbitra-
tion proceedings, arguing that the regulatory changes to the feed-in tariff violated the ECT
and intra-EU bilateral investment treaties (BITs), and breached investors’ legitimate expec-
tations. In May 2013, a group of ten German, UK and Cypriot investors, led by Antaris
Solar GmbH, commenced arbitration under the UNCITRAL rules, seeking damages in
the range of €50 million to €70 million.22 Because the Czech Republic objected to a con-
solidated proceeding, the arbitration continued before six different tribunals, though with
some overlap among arbitrators.23 A German energy company (JSW Solar) filed an addi-
tional arbitration in the latter half of 2013, also under the UNCITRAL rules.24 The claim-
ants, however, limited their claims to alleged violations of the Germany–Czech Republic
BIT, and eschewed invoking the ECT, possibly because of the limitations that Article 21 of
17 Id. para.450.
18 Id. para. 549. Arbitrator Guido Santiago Tawil dissented in part, and would have found that Spain’s
modification of its investment regime frustrated investors’ legitimate expectations and therefore breached
obligations of fair and equitable treatment. See infra.
19 The 2013 changes were at issue in Eiser Infrastructure Ltd. and Energia Solar Luxembourg S.à.r.l. v. Spain, ICSID
Case No. ARB/13/36, where an ICSID tribunal, in May 2017, rendered a unanimous award finding that
Spain had failed to accord fair and equitable treatment, and awarding the investors €128 million. See Tom
Jones, ‘Spain Suffers Loss in Solar Power Case’, Global Arbitration Review, 5 May 2017.
20 Jarrod Hepburn, ‘Czech Solar Arbitrations Set To Proceed, as Constitutional Court Upholds Retroactive
Levy’, Inv. Arb. Rep., 13 June 2012.
21 Luke Eric Peterson, ‘Brussels’ Latest Intervention Casts Shadow over Investment Treaty Arbitrations Brought
by Jilted Solar Energy Investors’, Inv. Arb. Rep., 8 September 2014; see generally Tirado, supra note 4, at 7-8 &
nn.35-39 (discussing regulatory changes in the Czech Republic).
22 See Antaris Solar GmbH, et al. v. Czech Republic (UNCITRAL; registered in 2013); see also Luke Eric Peterson,
‘Solar Investors File Arbitration Against Czech Republic, Intra-EU BITs and Energy Charter Treaty at Center
of Dispute’, Inv. Arb. Rep., 15 May 2013.
23 See Antaris Solar GmbH, et al. v. Czech Republic (UNCITRAL; commenced in 2013); see also Luke Eric
Peterson, ‘Solar Investors File Arbitration Against Czech Republic, Intra-EU BITs and Energy Charter Treaty
at Center of Dispute’, Inv. Arb. Rep., 15 May 2013.
24 See Jürgen Wirtgen, Stefan Wirtgen & JSW Solar GmbH & Co. KG v. Czech Republic (UNCITRAL; commenced
in 2013); see also Luke Eric Peterson, ‘In Shadow of Mass Solar Claims, Another UNCITRAL BIT
Arbitration Quietly Moves Forward Against Czech Republic’, Inv. Arb. Rep., 10 January 2014; Sebastian Perry
& Kyriaki Karadelis, ‘Sun Rises on Czech Energy Claims’, Global Arbitration Review, 19 February 2014.
50
the ECT places on claims related to taxation measures.25 As of December 2016, those seven
solar-related arbitrations appear to be pending, with the Czech Republic receiving two
additional notices of disputes.26
Italy
A feed-in tariff was similarly at the heart of Italy’s support scheme for renewable energy
sources. The tariff was originally enacted in 2003 by Legislative Decree No. 387/2003.27
The feed-in tariff contributed to a significant growth of the Italian renewable energy sec-
tor, and the photovoltaic market in particular.
The incentives system, however, was costly, and eventually became unaffordable.
For instance, the three-year €6.7 billion scheme approved in June 2012 was completely
exhausted by July 2013.28 That same year, Italy ceased to grant incentives to new plants.
Moreover, in 2014, the Italian government adopted the ‘spalma incentivi’ (‘incentive spread-
ing’) decree, which retroactively mandated a reduction in the feed-in tariff for photovoltaic
plants larger than 200kW. Investors were required to select one of the following new incen-
tive regimes: (1) tariffs granted for 24 years instead of 20, but subject to gradual reductions
throughout the term; (2) reduced incentives for the initial period of the investment, in
exchange for higher incentives for the subsequent period on the basis of percentages estab-
lished by the competent authority; or (3) an annual decrease in the incentives by 6–8 per
cent (depending on the plants’ peak power) for the remainder of the incentives’ duration.29
The Italian Constitutional Court upheld the changes to the incentive regime on
7 December 2016. The court rejected investors’ arguments that the 2014 decree arbitrarily
and unreasonably interfered with existing long-term contracts, in a breach of their legiti-
mate expectations.30
Like the Spanish and Czech cases, foreign investors in Italy’s renewable energy sector
challenged the changes to the investment incentive regime in arbitration under the ECT.
The first arbitration was commenced in 2014, and there are currently six arbitrations filed
25 Peterson, ‘In Shadow of Mass Solar Claims’, supra note 24; Tirado, supra note 4, at 20.
26 Luke Eric Peterson, ‘Czech Republic: Govt Releases Cache of BIT Awards, Strives to Collect Costs Orders,
and Currently Faces Eleven Pending Treaty Claims’, Inv. Arb. Rep., 24 February 2015. For an overview of the
claims pending against the Czech Republic as of May 2015, see Tirado, supra note 4, at 20; Luke Eric Peterson
‘Czech Republic Round-up: German Co. files $125 mil BIT Claim; Finance Ministry says that Russian
Investor has yet to file threatened notice; updates on status of other cases’, Inv. Arb. Rep., 6 December 2016.
27 For a detailed analysis of the Italian renewable energy legal framework, see Z. Brocka Balbi, ‘The Rise and
Fall of the Italian Scheme of Support For Renewable Energy From Photovoltaic Plants’, 12, Transnat’l Disp.
Mgmt., May 2015 and S.F. Massari, ‘The Italian Photovoltaic Sector in two Practical Cases: How to Create an
Unfavorable Investment Climate in Renewables’, 12 Transnat’l Disp. Mgmt., May 2015.
28 Massari, supra note 27.
29 Article 26, Legislative Decree no. 91 of 24 June 2014.
30 Italian Constitutional Court Judgment no. 16/2017, issued on 7 December 2016, published on
24 January 2017.
51
against Italy at ICSID,31 with other cases pending before the SCC.32 As of March 2017,
none of these arbitrations has been decided yet.33
On 31 December 2014, Italy announced its withdrawal from the ECT, effective
1 January 2016. Although the Italian government justified its decision by the desire to
reduce the costs of participating in international organisations, the risk of further disputes
under the ECT (and potential adverse decisions) may have influenced the withdrawal.34
Nevertheless, pursuant to the ECT’s sunset clause in Article 47, the treaty’s protections
continue to apply to investments made before January 2016 for 20 years.35
Key legal issues in the pending renewable energy arbitrations

The ECT offers a variety of broad protections to foreign investors in the energy sec-
tor. These are similar to protections typically found in BITs, such as fair and equitable
treatment, constant protection and security, non-discrimination, most-favoured nation, ful-
filment of commitments, prohibition against expropriation, and compensation of losses.
While the renewable energy arbitrations brought under the ECT are generally confidential,
several legal issues are likely to be central to these proceedings.36 These issues centre on the
31 See VC Holding II S.a.r.l. and others v. Italy, ICSID Case No. ARB/16/39; ESPF Beteilingungs GmbH, ESPF Nr.
2 Austria Beteilingungs GmbH, and InfraClass Energie 5 GmbH & Co. KG v. Italy, ICSID Case No. ARB/16/5;
Eskosol S.p.A. in liquidazione v. Italy, ICSID Case No. ARB/15/50; Belenergia S.A. v. Italy, ICSID Case No.
ARB/15/40; Silver Ridge power BV v. Italy, ICSID Case No. ARB/15/37; Blusun SA, Jean-Pierre Lecorcier and
Nichael Stein v. Italy, ICSID Case No. ARB/14/03.
32 See Greentech Energy Systems and Novenergia v. Italy (SCC; registered in 2015). For other cases filed at the SCC,
see Lacey Yong, ‘Italy faces another solar claim’, Global Arbitration Review, 13 December 2016.
33 See e.g., Blusan S.A., Jean-Pierre Lecorcier and Michael Stein v. Italian Republic, ICSID Case No. ARB/14/3;
registered in 2014; Silver Ridge B.V. v. Italian Republic, ICSID Case No. ARB/15/37; registered in 2015),
reportedly as a result of the changes to Italy’s solar energy incentive regime. See Tirado, supra note 4, at
21;Talus, supra note 3, at 7 & n. 30; Kyriaki Karadelis, ‘Italy Risks Claims over Solar Subsidies’, Global
Arbitration Review, 8 December 2014; Tom Jones, ‘Italy and Spain Feel the Heat’, Global Arbitration Review,
17 August 2015. (Greentech Energy Systems and Novenergia v. Italy (SCC, registered in 2015)) filed with the
Stockholm Chamber of Commerce (SCC) by investors in Italy’s photovoltaic (solar) sector. See Tom Jones,
‘Italy and Spain Hit with New Solar Claims’, Global Arbitration Review, 10 August 2015.
34 Gaetano Iorio Fiorelli, ‘Italy withdraws from Energy Charter Treaty’, Global Arbitration Review, 6 May 2015;
Lorenzo Parola, Francesca Petronio and Fabio Cozzi, ‘Italy Withdraws from Energy Charter Treaty: What
Next?’, Law360, 30 April 2015.
35 Parola, supra note 34.
36 One procedural issue deserves mentioning. Spain, the Czech Republic and Italy have opted for the exception
under Article 26(3)(b)(i) of the ECT, refusing their consent to international arbitration where the investor
has previously submitted the dispute to the host state’s courts or administrative tribunals, or to any previously
agreed dispute-settlement procedure. See ECT Annex ID. This ECT exception is known as the ‘fork in the
road’. Arbitral tribunals, however, usually take a narrow view of this provision, strictly applying the so-called
‘triple identity test’. Under this test, the fork-in-the-road provision is triggered only where there is continuity
in the identity of the parties, cause of action and object of the dispute. See, e.g., Hulley Enterprise Ltd. (Cyprus)
v. Russian Federation – PCA Case No. AA 226,Award, 18 July 2014. Indeed, the Charanne tribunal rejected
Spain’s fork-in-the-road objection that was based on a prior unsuccessful challenges to the 2010 regulatory
change brought before the Spanish Supreme Court and the European Court of Human Rights (ECtHR). The
tribunal held that, ‘even under a flexible interpretation of the triple identity test,’ Spain failed to demonstrate
‘a substantial identity’ between the arbitration claimants and the prior challengers through evidence that
claimants controlled the challengers’ decision-making or that the corporate structure was designed to evade
52
question of whether the regulatory and legislative changes to the renewable energy incen-
tive regimes breached the ECT’s guarantee of fair and equitable treatment or constituted
an indirect expropriation.37
Fair and equitable treatment and investors’ reasonable expectations

Article 10(1) of the ECT contains one of the most frequent bases asserted in investor–state
disputes – the fair and equitable treatment requirement (FET). Under Article 10(1), each
ECT signatory promised to:
encourage and create stable, equitable, favourable and transparent conditions for Investors of
other Contracting Parties to make Investments in its Area. Such conditions shall include a
commitment to accord at all times to Investments of Investors of other Contracting Parties fair
and equitable treatment. Such Investments shall also enjoy the most constant protection and
security and no Contracting Party shall in any way impair by unreasonable or discrimina-
tory measures their management, maintenance, use, enjoyment or disposal. In no case shall
such Investments be accorded treatment less favourable than that required by international law,
including treaty obligations.
The FET standard is ‘one of the most actively debated concepts in investment protection
law’,38 and arbitral tribunals and commentators have offered varied constructions of its
requirements.39 The FET requirement is part of most BITs and multilateral agreements
(such as NAFTA), and has been addressed in many investor–state arbitration disputes.
The FET standard commonly contains the following requirements:
• the host state must act in a transparent manner;
• the state is obliged to act in good faith;
• the state’s conduct cannot be arbitrary, grossly unfair, unjust, idiosyncratic, discrimina-
tory, or lacking in due process; and
• the state must respect procedural propriety and due process.40
the ECT’s fork-in-the-road prohibition. Charanne, supra note 16, paras. 405-08. The tribunal also noted that
proceedings before the ECtHR fall outside the scope of ECT’s Article 26.
37 In addition, the ECT contains an ‘umbrella clause’, which requires a host state to ‘observe any obligations it
has entered into with an Investor or an Investment of an Investor’. ECT Article 10(1).The clause serves to
bring any contractual agreements between the investor and the state under the ‘umbrella’ of the ECT, thus
making contractual rights enforceable under the treaty. Depending on the specific agreement between the
investor and the host state, this clause may form the basis for additional claims. See A. Reuter, ‘Retroactive
Reduction of Support for Renewable Energy and Investment Treaty Protection from the Perspective of
Shareholders and Lenders’, 12 Transnat’l Disp. Mgmt., May 2015, at 42.
38 See C.F. Dugan, D. Wallace Jr., N.D. Rubins, B. Sabahi, Investor-State Arbitration 502 (2008).
39 See, e.g., R. Dolzer, ‘Fair and Equitable Treatment: Today’s Contours’, 12 Santa Clara J. Int’l L. 7, (2014);
P. Dumberry, ‘The Protection of Investors’ Legitimate Expectations and the Fair and Equitable Treatment
Standard under NAFTA Article 1105’, 31 J. Int’l Arb., 47- 73 (2014); C. Schreuer, ‘The Fair and Equitable
Treatment in Arbitral Practice’, 6 J. World Inv. and Trade 3 (June 2005); C. Schreuer, ‘Fair and Equitable
Treatment (FET): Interactions with Other Standards’, in G. Coop & C. Ribeiro, Investment Protection and
the Energy Charter Treaty, 66 and ff (2008).
40 See, e.g., Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon Hizmetleri A.S. v. Kazakhstan, ICSID Case No.
ARB/05/16; see generally Dolzer, supra note 39, at 17-19.
53
The Spanish, Czech and Italian renewable energy arbitrations are likely to focus on whether
the host state acted with consistency, transparency and reasonableness in modifying (or
eliminating) the existing incentive regime, and, above all, whether investors had reasonable
and legitimate expectations that were breached as a result of the state’s actions. There is no
universally applicable standard as to when investors’ expectations deserve treaty protection
under the FET requirement; any evaluation will depend on the facts.
There are two acknowledged approaches to determining when investor expectations
are reasonable so as to warrant treaty protection. The first approach requires the host state
to have made clear assurances to the investor regarding the specific business relationship.
Under the second, more permissive approach, ‘expectations could be created based on
assurances provided in generally applicable laws of a country, and more generally, upon the
existing framework at the time of the investment’.41 Thus, as the Tecmed arbitral tribunal
explained, the host state should act ‘consistently, transparently, and in a predictable and
rational manner’, so as not to ‘affect the basic expectations that were taken into account
by the foreign investor to make the investment’.42 The tribunal in CMS v. Argentina – an
influential decision with respect to determining when a change in the host nation’s legal
framework constitutes a breach of the FET – similarly observed that the stability and pre-
dictability of the legal and regulatory environment is an important component of fair and
equitable treatment.43
The FET analysis balances numerous considerations, including the host state’s right to
regulate, which may involve changing previous regulations, where necessary. As the tribunal
in EDF (Services) Limited v. Romania noted, the FET requirement cannot mean ‘the virtual
freezing of the legal regulation of economic activities, in contrast with the State’s normal
regulatory power and the evolutionary character of economic life’.44 Accordingly, arbitral
tribunals have emphasised, in rejecting claims based on an alleged breach of the FET: ‘No
investor may reasonably expect that the circumstances prevailing at the time the investment
is made remain totally unchanged’. Rather, a determination ‘whether frustration of the for-
eign investor’s expectations was justified and reasonable’ requires consideration of ‘the Host
State’s legitimate right subsequently to regulate domestic matters in the public interest’.45
41 See Dugan, supra note 38, at 513.

42 See Tecnicas Medioambientales Tecmed S.A. v. Mexico, ICSID Case No. ARB (AF)/00/2.
43 CMS Gas Transmission Company v. Argentina, ICSID Case No. ARB/01/8; see also Dugan, supra note 38, at
516 (discussing the CMS tribunal’s analysis of the FET requirement); Occidental Exploration & Production Co.
v. Ecuador, LCIA Case No. UN3467, Final Award, 1 July 2004 (concluding that an unforeseen change in the
interpretation of existing laws constituted a breach of the FET standard).
44 See EDF (Services) Ltd. v. Romania, ICSID Case No. ARB05/13, Award (noting that otherwise investors could
‘rely on a bilateral investment treaty as a kind of insurance policy against the risk of any changes in the host
State’s legal and economic framework’).
45 See, e.g., Saluka Investments B.V. v. Czech Republic, Permanent Court of Arbitration, Partial Award,
17 March 2006; see also Parkerings-Compagniet AS v. Lithuania, ICSID Case No. ARB/05/8,
Award,11 September 2007; BG Group plc v. Argentina, Final Award, 24 December 2007; Plama Consortium Ltd.
v. Bulgaria, ICSID Case No. ARB/03/24,Award, 27 Aug 2008; Continental Casualty Co. v. Argentina, ICSID
Case No. ARB/03/9, Award, 5 September 2008; El Paso Energy International Co. v. Argentina, ICSID Case No.
ARB/03/15, Award, 31 October 2011.
54
A tribunal is more likely to find a breach of the FET requirement where the host state,
implicitly or explicitly, made specific representations, commitments, assurances or promises
on which the foreign investor relied in making the investment.46 Absent a specific com-
mitment from the host state, an investor may face a steeper burden, especially when relying
on ‘legislation or regulation of a unilateral and general character’.47 As the tribunal in Total
v. Argentina stressed, the investor is only entitled to the host state’s ‘regulatory fairness’ or
‘regulatory certainty’, which provides limited protection against regulatory changes that
impair the recovery of operation costs, the amortisation of investments and the achieve-
ment of a reasonable return.48 Unlike the France–Argentina BIT, which was at issue in
Total, however, the ECT expressly references, in Article 10(1), the host state’s duty to create
‘stable’ and ‘transparent’ conditions for foreign investments, as well as the ‘commitment to
accord at all times . . . fair and equitable treatment’ to such investments, giving particular
weight to long-term stability. As some commentators have suggested, this provision could
serve as the basis for affording the legitimate expectations of investors operating in the
energy field comparatively greater protection against regulatory changes.49
A change in the host state’s regulatory framework will not necessarily lead to a find-
ing of a breach of the FET guarantee. Indeed, in Charanne – the first renewable energy
arbitration that resulted in an award – the tribunal concluded that Spain did not breach its
FET guarantee under the ECT. As the tribunal noted, ‘in the absence of a specific com-
mitment, an investor cannot have a legitimate expectation that existing rules will not be
modified.’50 The tribunal then observed that Spanish law pre-dating the investment allowed
Spain to modify its solar energy regulations (and so such changes were objectively foresee-
able), and that Spain’s commitments to investors were not ‘sufficiently specific’ to create an
expectation of a frozen legal environment.51 The tribunal also rejected the investors’ claim
(which relied on CMS v. Argentina) that Spain’s regulatory changes operated retroactively
and therefore breached their acquired rights to operate under the initial incentive regime.
Distinguishing CMS as involving a specific contractual commitment, the tribunal viewed
the retroactivity argument as simply a restatement of the unsuccessful argument that inves-
tors had a legitimate expectation in the original regulatory framework.52
46 Arbitral tribunals applying Article 1105 of NAFTA have generally followed this approach, inquiring whether
the expectation is reasonable and justifiable by considering the representations (or conduct) of the host
state, whether the investor actually relied on those representations, and whether the state failed to respect
the expectations created. At times, as in the Glamis case, the tribunals applied even stricter requirements,
demanding that the investor’s expectations be based on definitive, unambiguous and repeated specific
commitments or assurances by the host state that ‘purposely and specifically induced the investment.’ See
P. Dumberry, supra note 39, at 43-47 (discussing Glamis Gold Ltd. v. United States, UNCITRAL, Award,
8 June 2009).
47 See Total S.A. v. Argentina, ICSID Case No. ARB/04/1, Decision on Liability, 27 December 2010.
48 Id. paras. 310–12; A. Reuter, supra note 37, at 24.
49 See Reuter, supra note 37, at 24 and 30.
50 Charanne, supra note 16, para. 499.
51 Id. paras. 497, 504-08. Arbitrator Tawil dissented on this point, viewing Spain’s commitments as sufficiently
specific and aimed at a limited number of potential investors to create an objective legitimate expectation on
the part of those investors that the regulatory regime would not be altered without adequate compensation.
Id., Dissenting Opinion of Prof. Guido Santiago Tawil, paras. 5-12.
52 Id. paras. 545-46.
55
In examining the ECT’s guarantee of fair and equitable treatment, subsequent tribunals
are also likely to assess whether investors had legitimate expectations in the immutability of
the state’s original incentive regime.This inquiry would examine the reasonableness of such
expectations in light of the specificity of the state’s commitments and the foreseeability that
the existing regime may be altered.53
Indirect expropriation
Another legal issue likely involved in pending arbitrations concerning renewable energy
incentive schemes is a claim of indirect expropriation. The ECT does not have a specific
provision addressing indirect expropriation, but the treaty’s Article 13 prohibits expropria-
tion of investments unless ‘justified by public interest purposes, carried out under due pro-
cess of law and accompanied by a prompt, adequate and effective compensation.’
In Nykomb v. Latvia, the tribunal addressed claims of indirect expropriation under the
ECT, and construed such expropriation narrowly.54 There, the investor entered into an
agreement with the Latvian state energy distributor to produce energy from a cogenera-
tion plant. According to the rules applicable at the time, the investor would have received a
double tariff for eight years. Just before the plan commenced operation, Latvia revoked this
favourable treatment and introduced retroactively a significantly lower tariff.55 The investor
argued that the withdrawal of the original tariff constituted ‘indirect’ or ‘creeping’ expro-
priation, because it rendered the enterprise not ‘economically viable’ and the ‘investment
worthless’.56 The arbitral tribunal disagreed and concluded that the loss of the economic
value of the investment did not, by itself, constitute expropriation, because the state did not
take possession of the enterprise or its assets, or interfere with the shareholders’ rights or
management control.57
53 The analysis of the legitimacy of investors’ expectations may also be influenced by such issues as the impact, if
any, of the EU rules on state aid, which may require the EU member state to terminate or adjust its renewable
energy incentive regime. See Reuter, supra note 37, at 31-41; infra text under ‘The European Commission’s
role in ECT renewable energy arbitrations’; see also Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19,
Decision on Jurisdiction, Applicable Law and Liability, 30 November 2012, para. 7.75; El Paso Energy Int’l Co. v.
Argentina, ICSID Case No. ARB 03/15, Award, 31 October 2011, para. 348.
54 Nykomb Synergetics Technology Holding AB (Sweden) v. Latvia, SCC - Case No. 118/2001, Arbitral Award,
16 December 2003.
55 Id. para. 1.2.
56 Id. para. 4.3.1.
57 Id. para. 4.3.1. The Nykomb decision has been questioned as adopting an unwarrantedly narrow view
of indirect expropriation and failing to consider the economic effects of the government’s actions. See
R.A. Nathanson, ‘The Revocation of Clean-Energy Investment Economic-Support Systems as Indirect
Expropriation Post-Nykomb: A Spanish Case Analysis’, 98 Iowa L. Rev. 863,888-89, 899-901 (2013). Indeed,
tribunals that addressed investors’ claims under NAFTA and BITs found indirect expropriation where
‘measures are taken by a State the effect of which is to deprive the investor of the use and benefit of his
investment even though he may retain nominal ownership of the respective rights being the investment’.
Middle East Cement Shipping & Handling Co. S.A. v. Egypt, ICSID Case No. ARB/99/6, Award, 12 April 2002.
These tribunals considered whether the host state measures were proportional to the public interest, see
Tecnicas Medioambientales Tecmed S.A. v. Mexico, ICSID Case No. Arb (AF)/00/2, Award, 29 May 2003, and
whether the host state acted in the normal exercise of its regulatory powers in a non-discriminatory manner,
see Saluka Investments B.V. v. Czech Republic, Permanent Court of Arbitration, Partial Award, 17 March 2006.
56
The Charanne tribunal likewise rejected the investors’ argument that Spain’s modifica-
tion of the incentive regime constituted indirect expropriation because it affected their
returns for the investment. Adopting the standard articulated in such decisions as CMS and
Electrabel (as well as other decisions in arbitrations brought under NAFTA or BITs), the
Charanne tribunal observed that indirect expropriation ‘implies a substantial effect on the
property rights of the investor,’ including ‘a loss of value that could be equal by its magni-
tude to a deprivation of the investment.’58 The tribunal, however, observed that the inves-
tors’ plant remained operational and profitable, and held that, ‘although the profitability of
[the plant] could have been seriously affected,’ a reduction in profitability (and any resulting
decrease in the value of the shares) in itself does not amount to indirect expropriation.59
Although the Charanne tribunal rejected the expropriation claim, it adopted the broader
definition of indirect expropriation applied by tribunals that addressed investors’ claims
under NAFTA and BITs, rather than the more narrow definition made in Nykomb. It
therefore remains to be seen what approach other arbitral tribunals will adopt when deter-
mining whether the reductions of a feed-in tariff or, more broadly, the roll-back of the
renewable energy investment incentive regimes, deprive investors of the use and benefit of
their investment to such an extent to constitute an indirect expropriation under the ECT.
As the Charanne award indicates, such decisions will likely examine closely the specific
facts and circumstances of each case. As with the question of whether a state’s action con-
stitutes a breach of the FET obligation, these tribunals are also likely to balance protection
of investors’ expectations with the state’s right to change the legal framework and pursue
new policies.
The European Commission’s role in ECT renewable energy arbitrations

A final issue of note is the European Commission’s efforts to participate as amicus curiae
in renewable energy arbitrations under the ECT.60 The Commission’s participation raises
several complex issues regarding the interaction between the ECT and EU law, includ-
ing possible defences based on EU state-aid rules or jurisdictional objections to intra-EU
investor disputes.
The Commission’s first involvement as amicus curiae in an ECT arbitration came in
Electrabel, where the tribunal permitted it to participate to discuss the relationship between
EU law and the ECT.61 Similarly, in Charanne the tribunal acknowledged the Commission’s
amicus brief and, while specifying that only the arguments of the parties would be
58 Charanne, supra note 16, para. 461 (citing arbitral decisions).

59 Id. paras. 462-65.
60 See, e.g., Eiser Infrastructure Ltd. and Energía Solar Luxembourg S.à r.l. v. Spain, ICSID Case No. ARB/13/36;
Masdar Solar & Wind Cooperatief U.A. v. Spain, ICSID Case No. ARB/14/1; NextEra Energy Global Holdings
B.V. and NextEra Energy Spain Holdings B.V. v. Spain, ICSID Case No. ARB/14/11; InfraRed Environmental
Infrastructure GP Ltd., et al. v. Spain, ICSID Case No. ARB/14/12; RENERGY S.à r.l. v. Spain, ICSID Case No.
ARB/14/18.
61 Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability,
30 November 2012; see also Carlos Gonzalez-Bueno & Laura Lozano, ‘More than a Friend of the Court:
The Evolving Role of the European Commission in Investor-State Arbitration’, KluwerArbitrationBlog.com
(16 January 2015).
57
addressed, noted that it will consider them in light of the Commission’s ‘reflection’.62 Since
Charanne, the Commission sought to submit amicus briefs in some of the pending renew-
able energy arbitrations in Spain; however, the tribunals rejected those requests, view-
ing the Commission’s participation as premature (but leaving open the possibility of the
Commission’s participation in future stages of the proceedings).63 The Commission simi-
larly has sought to participate in some of the Czech renewable energy arbitrations.64
The Commission’s involvement implicates two substantive issues. The first involves a
possible defence by the host state against investors’ claims based on EU rules on state aid.
Thus, in the Czech cases, the Commission reportedly has taken the position that EU law
may prohibit some of the original solar investment incentives the Czech Republic offered
to investors, and therefore required their elimination.65 Such arguments would be consist-
ent with the position that the Commission adopted in prior ECT arbitrations. Thus, in
Electrabel, it argued that Hungary did not breach its treaty obligations because the changes
to Hungary’s regulatory regime were created to comply with EU law.66
The second issue would be whether, given the Commission’s position that the ECT does
not apply to intra-EU disputes, the treaty permits arbitrations between EU-based investors
and EU member states.67 The Charanne tribunal, for instance, rejected the Commission’s
(and Spain’s) argument that the EU’s status as a signatory of the ECT destroyed Article 26’s
diversity-of-nationality requirement. The tribunal stressed that the EU’s status as a party
to the ECT does not mean that EU member states ‘ceased to be’ parties to the ECT as
well.68 Applying a contextual inquiry, the tribunal observed that the asserted claims were
‘not based on EU actions,’ but on those of Spain, and were directed against Spain, and not
the EU.69
In the Czech renewable energy arbitrations, the Commission reportedly argued that,
while the ECT does not contain an explicit disconnection clause that would render it inap-
plicable in intra-EU disputes, such restriction should be inferred from the treaty’s context,
purpose and drafting history.70 In 1998, in a statement submitted to the Secretariat of the
Energy Charter, the Commission invoked the ECT’s Article 26(3)(b)(ii) (which provides
for the possibility of a partial disconnection clause) to argue that the Commission has not

63 See Gonzalez-Bueno & Lozano, supra note 61; Luke Eric Peterson, ‘European Commission Wades into
Solar Arbitrations Against Spain, Intervening in One Case a Week Before Final Hearings’, Inv. Arb. Rep.,
17 November 2014; RREEF Infrastructure (G.P.) Limited and RREEF Pan-European Infrastructure Two Lux S.á.r.l.
v. Kingdom of Spain (ICSID Case No. ARB/13/30), paras. 31-32.
64 Luke Eric Peterson, European Commission, supra note 63; Luke Eric Peterson, ‘Investigation: In Recent Briefs,
European Commission Casts Doubt on Application of Energy Charter Treaty to Any Intra-EU Dispute’, Inv.
Arb. Rep., 8 September 2014.
65 Id.; see also Talus, supra note 3, at 10-13.
66 Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19, supra note 61, at IV-27. The EC did not make this
argument in the Charanne arbitration, possibly because the EC’s review of whether Spain’s original incentive
regime for renewable energy complied with the state aid rules was still pending. Charanne, supra note 16, paras.
448-49.
67 Luke Eric Peterson, Investigation: In Recent Briefs, supra note 64.
69 Id. para. 431.
70 Id.
58
assented to arbitration under the ECT with regard to any case brought by EU nationals
because (the Commission stated) ‘the Communities’ legal system provides for means’ of
resolving such disputes.71 It is unclear, however, whether this statement (which was issued
only on behalf of the Commission) creates international legal obligations for the EU mem-
ber states, either by itself or by operation of EU law.72
Moreover, it is unclear to what extent the EU’s legal system provides a viable option
to resolve investors’ claims.73 Consequently, as some commentators argued, EU nation-
als remain eligible to bring international arbitration claims under the ECT against other
member states – an option that may be more attractive to investors.74 This approach finds
its support in the decision of the Charanne tribunal, which rejected the argument that the
ECT contained any implicit disconnection clause, finding no conflict between the ECT
and EU law.75 It remains to be seen whether forthcoming decisions in other renewable
energy arbitrations will adopt the same reading of the ECT and EU law.
Conclusion
As discussed above, the arbitral tribunals in the pending renewable energy claims have lit-
tle direct precedent to examine under the ECT, and will seek guidance in decisions ren-
dered in other investor–state investment disputes. The Charanne decision – the first award
rendered in these arbitrations – appropriately relied to a significant extent on the general
principles of fair and equal treatment and the prohibition against indirect expropriation
elaborated by international arbitral tribunals. As further renewable energy disputes progress
to their resolution, these arbitrations will further define the parameters of the host states’
regulatory powers with respect to renewable energy investments, as well as the intersection
between the ECT and EU law.
71 See Statement submitted by the European Communities to the Secretariat of the Energy Charter pursuant to
Art. 26(3)(b)(ii) of the Energy Charter Treaty, 1998 O.J. (L 69) (115); see also Markus Burgstaller, ‘European
Law and Investment Treaties’, 26 J. Int’l Arb. 208-09 (2009).
72 Burgstaller, supra note 71, at 208.
73 Id. at 209.
74 Id. at 209-10.
75 Charanne, supra note 16, paras. 433-39.
59
4
Of Taxes and Stabilisation
Constantine Partasides QC and Lucy Martinez1
How can an investor take the risk of concluding a long-term contract with a state counter-
party that has the power at any time to change the legal regime applicable to its contract?
And how can a state party reassure an investor counterparty sufficiently to take such a
risk? The answer to both questions, in a word, is ‘stabilisation’. Clauses that ensure stability
are, as a consequence, of great value to all participants (investors and state parties alike) in
long-term upstream contracts. And nowhere do stabilisation clauses play a more important
role than in the field of taxation: the area of government lawmaking power in which a state
can most easily change the fiscal regime of a contract that it (or a state entity) has signed.
The ultimate balance struck between the investor and the host state (or state entity) on
issues of stabilisation and taxation in a particular contract will, of course, depend on the
identity of the participants, the nature of the project, and the particular legal, economic and
political history of the relevant state. But certain trends have emerged, both in the terms of
stabilisation clauses that investors and state parties are including in their contracts, and the
way in which such clauses have been interpreted and applied by international tribunals over
the years. This chapter identifies such trends, with a particular focus on stabilisation clauses
specifically in the context of taxation.2
1 The authors practise international arbitration at Three Crowns LLP in London. The authors wish to thank
Sonja Sreckovic, Stephen Bartels and Matteo Angelini for their research assistance in relation to this chapter.
2 Generally in relation to stabilisation clauses, see, e.g.: Redfern, Hunter, Blackaby and Partasides, Redfern and
Hunter on International Arbitration, 6th edn, 2015, pp. 193-195; R. Doak Bishop et. al. (eds), Foreign Investment
Disputes: Cases, Materials and Commentary, Kluwer, 2014, pp. 213–280; Katja Gehne and Romulo Brillo,
Stabilization Clauses in International Investment Law: Beyond Balancing and Fair and Equitable Treatment,
Working Paper No. 2013/46, Swiss National Centre of Competence in Research, January 2014 (Gehne
& Brillo); Deloitte, Stabilisation Clauses in International Petroleum Contracts: Illusion or Safeguard?, 2014;
Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law, 2nd edn, 2012 (Dolzer
& Schreuer), pp. 82–85; Peter D. Cameron, International Energy Investment Law:The Pursuit of Stability,
2010 (Cameron); Andrea Shemberg, Stabilization Clauses and Human Rights, IFC/SRSG Research Paper,
60
First, we define our terms: the phrase ‘stabilisation clause’ is used to cover a broad
spectrum of contractual language of varying nature and effect, and the different subspecies
deserve to be distinguished. We then briefly summarise the key historical jurisprudence on
stabilisation clauses from the 1930s through to the 1990s, much of which involves the effect
of a stabilisation clause in the event of a full expropriation. We then turn to more recent
jurisprudence dealing with value-eroding tax measures, particularly Duke Energy v. Peru.3
And we conclude by drawing together the strands and making some general observations
about the law and practice of stabilisation clauses today.
Before we begin, a word on scope: this chapter addresses stabilisation clauses and taxa-
tion in the context of international commercial arbitration grounded in contracts. We do
not consider the undoubted intersection of contract and investment treaty claims so far as
they relate to changes in law, through umbrella clauses, fair and equitable treatment clauses
or otherwise.4
Definitions: the spectrum of stabilisation clauses

As the name suggests, a stabilisation clause aims to ‘stabilise’, and thus to a greater or lesser
extent fix, the fact or effect of the legal and regulatory regime applicable to the subject
matter of the contract at the time of contracting.5 From this general point of departure,
stabilisation clauses can be organised into four different categories.
Freezing clauses, stabilisation clauses stricto sensu – classic stabilisation clauses

As defined in the seminal case of Amoco v. Iran, ‘freezing clauses’ freeze ‘the provisions of a
national system of law chosen as the law of the contract as to the date of the contract in
27 May 2009 (Shemberg); Lorenzo Cotula, Regulatory Takings, Stabilization Clauses and Sustainable
Development, OECD Global Forum on International Investment 2008 (Cotula); Piero Bernardini,
Stabilization and adaptation in oil and gas investments, (2008) Vol. 1, No. 1, Journal of World Energy Law
& Business, pp. 98-112 (Bernardini); J. Nna Emeka, Anchoring Stabilization Clauses in International
Petroleum Contracts, (2008) Vol. 42, No. 4, The International Lawyer, pp. 1317-1338; Abdullah Al Faruque,
Validity and Efficacy of Stabilisation Clauses: Legal Protection vs. Functional Value, (2006) Vol. 23 Issue
4, Journal of International Arbitration, pp. 317-336; Zeyad A. Al Qurashi, Renegotiation of International
Petroleum Agreements, (2005) Vol. 22 Issue 4, Journal of International Arbitration, pp. 261-300; R. Doak Bishop,
International Arbitration of Petroleum Disputes: The Development of a Lex Petrolea, XXIII Yearbook Comm.
Arb’n 1131 (1998), pp. 1158-1160; Thomas W. Walde and George Ndi, Stabilizing International Investment
Commitments: International Law Versus Contract Interpretation, 31 Texas Int’l L. J. 215 (1996).
3 Duke Energy International Peru Investments No. 1, Ltd. v. Republic of Peru, ICSID Case No. ARB/03/28, Award,
18 August 2008 (Duke Energy v. Peru).
4 On this issue, see, e.g., Occidental Petroleum Corp. & Another v. Republic of Ecuador, ICSID Case No. ARB/06/11,
Award, 5 October 2012; Burlington Resources Inc. v. Ecuador, ICSID Case No. ARB/08/5 (Burlington v.
Ecuador), Decision on Jurisdiction, 2 June 2010, Decision on Liability, 14 December 2012, and Decision on
Reconsideration and Award, 7 February 2017; AES Summit Generation Limited & Another. v. Hungary, ICSID
Case No. ARB/07/22, Award, 23 September 2010; Parkerings-Compagniet AS v. Lithuania, ICSID Case No.
ARB/05/8, Award, 11 September 2007; LG&E Energy Corp. & Others. v. Argentina, Decision on Liability,
3 October 2006, ICSID Case No. ARB/02/1; CMS Gas Transmission v. Argentina, ICSID Case No. ARB/01/8,
Award, 12 May 2005; Link-Trading Joint Stock Company v. Department for Customs Control of the Republic of
Moldova, UNCITRAL, Award, 18 April 2002.
5 See, e.g., Cotula, supra note 2, pp. 5-6; Dolzer & Schreuer, supra note 2, p. 82.
61
order to prevent the application to the contract of any future alterations of this system’.6 In
other words, such clauses incorporate into the agreement, as the applicable law, the law of
the host state as it stands at a specific time, such as the law valid when the contract entered
into force.7 There are varying degrees of freezing clauses, with some, for example, limiting
stability to a key fiscal element such as royalty or income tax.8
Freezing clauses were common in the early wave of contracts negotiated in the 1970s
and 1980s, but are less common now given the extent to which they are seen as imped-
ing a state’s sovereign ability to develop its own law. That is not to say that such clauses
are extinct; partial forms of freezing clauses are still seen today in contracts awarded by
host states including Angola, Cambodia, Guyana, Iraq, Kazakhstan (with exceptions), Malta,
Poland and Tunisia.9
A typical example of a freezing clause can be found in the 1989 Tunisian Model
Production Sharing Contract:
The Contractor shall be subject to the provisions of this Contract as well as to all laws and
regulations duly enacted by the Granting Authority and which are not incompatible or con-
flicting with the Convention and/or this Agreement. It is also agreed that no new regulations,
modifications or interpretation which could be conflicting or incompatible with the provisions of
this Agreement and/or the Convention shall be applicable.10
An example of a freezing clause limited to taxation appears in a Liberian minerals develop-

ment agreement:
[T]he CONCESSIONAIRE and its Associates shall be subject to taxation under the provi-
sions of the Minerals and Mining Law and the Code and all regulations, orders and decrees
promulgated thereunder, all interpretations (written or oral) thereof and all methods of implemen-
tation and administration thereof by any agency or instrumentality of the GOVERNMENT
(the Code and all such regulations, interpretations and methods of implementation collectively,
the ‘Tax Corpus’), in each case as in effect as of the date of this Agreement [...].
For the avoidance of doubt, any amendments, additions, revisions, modifications or other
changes to the Tax Corpus made after the Amendment Effective Date shall not be appli-
cable to the CONCESSIONAIRE. Furthermore, any future amendment, additions, revi-
sions, modifications or other changes to any Law (other than the Tax Corpus) applicable to
the CONCESSIONAIRE or the Operations that would have the effect of imposing an
6 Amoco International Finance Corporation v.The Government of the Islamic Republic of Iran & Ors, 15 Iran-US CTR
189, Case No. 56, Partial Award No. 310-56-3, 14 July 1987 (Amoco v. Iran), p. 239. This case is considered
further below.
7 Dolzer & Schreuer, supra note 2, p. 83; see also Cameron, supra note 2, p. 70 (‘such a clause prohibits the host
state from changing its laws, and in a sense ‘handcuffs’ the host state so that it cannot exercise its sovereign
rights to change its laws. In this way the investor creates an enclave arrangement for itself.’); Gehne & Brillo,
supra note 2, p. 2.
8 Cameron, supra note 2, p. 70.
9 Id., pp. 71-72.
10 Tunisian Model Production Sharing Contract, Article 24.1, quoted in Cameron, supra note 2, p. 71.
62
additional or higher tax, duty, custom, royalty or similar charge on the CONCESSIONAIRE
will not apply to the CONCESSIONAIRE to the extent it would require the
CONCESSIONAIRE to pay such additional tax, duty, royalty or charge.11
Extending the stabilised regime expressly also to encompass ‘interpretations’ is particularly

interesting, and is considered further in the discussion of the decision in Duke Energy v.
Peru below.
Intangibility/inviolability clauses – prohibition on unilateral changes

Intangibility clauses prohibit the unilateral modification of the parties’ contract, and only
permit changes by agreement of all parties. In this way, changes in the law of the host state
that might have the effect of changing the terms of the parties’ contract will not apply to
that contract.12 This is a subcategory of freezing clauses, but instead of ‘freezing’ the law,
they focus their freeze on the contract.13 As Professor Cameron notes, the advantage of this
approach is ‘that it establishes a procedural mechanism for discussion (and probably nego-
tiation) between the parties about the future of the agreement’.14 An example of such a
stabilisation clause is in the concession agreement at issue in the famous arbitration Texaco
v. Libya,15 discussed in detail in the next section.
The Government of Libya will take all steps necessary to ensure that the Company enjoys all
the rights conferred by this Concession. The contractual rights expressly created by this conces-
sion shall not be altered except by mutual consent of the parties.
This Concession shall throughout the period of its validity be construed in accordance with
the Petroleum Law and the Regulations in force on the date of execution [...] Any amendment
to or repeal of such Regulations shall not affect the contractual rights of the Company without
its consent.16
Economic equilibrium/balancing/adaptation/rebalancing of benefits clauses

Economic equilibrium clauses, also known as balancing or adaptation clauses, do not freeze
the legal regime applicable to a contract. Rather, they attempt to deal with the conse-
quences of change by providing for the negotiation of amendments to the contract to rein-
state the initial economic balance of the contract.17 Such clauses vary widely, both in terms
of defining the change that triggers the protection (a formal change in law, or a broader
11 Mineral Development Agreement between the Government of the Republic of Liberia and Mittal Steel
Holdings NV dated 17 August 2005 and the Amendment thereto dated 28 December 2006, quoted in
Cameron, supra note 2, pp. 70-71.
12 Dolzer & Schreuer, supra note 2, p. 83.
13 Cameron, supra note 2, p. 74.
14 Id.
15 Texaco Overseas Petroleum Company, et al. v.The Government of the Libyan Arab Republic, Award on the Merits,
19 January 1977, 17 Int’l Legal Materials 1 (Texaco v. Libya).
16 Id., ¶¶ 3, 70. For other examples of intangibility clauses in contracts involving India,Yemen and Mozambique,
see Cameron, supra note 2, p. 74.
17 Cameron, supra note 2, pp. 59, 75; Gehne & Brillo, supra note 2, p. 2.
63
change in the application of existing law), and the nature and extent of protection offered
(monetary compensation or compensatory revision of the underlying contract).
An example of such a stabilisation clause can be found in the 1997 Model Production
Sharing Agreement for Petroleum Exploration and Production in Turkmenistan:
Where present or future laws or regulations of Turkmenistan or any requirements imposed

on Contractor or its subcontractors by any Turkmen authorities contain any provisions not
expressly provided for under this Agreement and the implementation of which adversely affects
Contractor’s net economic benefits hereunder, the Parties shall introduce the necessary amend-
ments to this Agreement to ensure that Contractor obtains the economic results anticipated under
the terms and conditions of this Agreement.18
Similarly, the tax stabilisation clause at issue in Burlington v. Ecuador (a treaty claim, and thus
publicly available), reads as follows:
Modification to the tax system and to the employment contribution: In the event of a modifica-
tion to the tax system, the employment contribution or its interpretation, which have an impact
on the economics of this Contract, a correction factor will be included in the production sharing
percentages to absorb the increase or decrease in the tax.This adjustment will be approved by the
Administrative Board on the basis of a study that the Contractor will present to that effect [...]
Contract amendments: There shall be negotiation and execution of contract amendments, with
prior agreement of the Parties, particularly in the following cases: [...] (c) When the tax sys-
tem [...] applicable to this type of Contract in the country is modified, in order to restore the
economy of the Contract.19
In drafting such clauses, the parties should consider defining: the change of circumstances
triggering the clause; the effect of the change on the contract; the objective of and proce-
dure for the renegotiation; and the solution in case of failure of the renegotiation process.20
Allocation of burden clauses

A variation on economic equilibrium clauses are ‘allocation of burden’ clauses. These pro-
vide that, rather than requiring the parties to negotiate revisions to the terms of the con-
tract in order to restore the economic equilibrium, a state entity (or the state itself) will
indemnify the foreign investor for any loss or damage resulting from a change in legisla-
tion.21 An example of this is in the Kurdistan Regional Government Model PSA:
18 Model Production Sharing Agreement for Petroleum Exploration and Production in Turkmenistan 1997,
Article 16.1, available at faolex.fao.org/docs/texts/tuk81989e.doc (accessed 22 July 2015). For other examples
involving Kurdistan, Nigeria, Egypt,Vietnam, Russia, Mozambique and Kazakhstan, see Cameron supra note 2,
pp. 75–80.
19 Burlington v. Ecuador, supra note 4, Decision on Liability, ¶¶ 328-329. This is a treaty claim, as opposed to a
contract claim, and thus is not discussed further herein.
20 See Bernardini, supra note 2, p. 103.
21 See id, p. 102; Cameron, supra note 2, pp. 80-81.
64
[T]he GOVERNMENT shall indemnify each CONTRACTOR Entity upon demand

against any liability to pay any Taxes assessed or imposed upon such entity which relate to
any of the exemptions granted by the GOVERNMENT under this Article 31.1, and under
Articles 31.4 to 31.11 [exempting the investor from certain taxes].22
Comment
These four types of stabilisation clauses are neither exclusive nor mutually exclusive, and
may be combined in different forms in one agreement. A 2008 study found that stabilisation
clauses freezing all laws were only common in contracts relating to projects in, or investors
from, East Asia and the Pacific, the Middle East and North Africa, and most of sub-Saharan
Africa. Such freezing clauses were less common in projects in countries that are members
of the Organisation for Economic Co-operation and Development (OECD),23 where con-
tracts tended to include different forms of economic equilibrium clauses.24
In recent years, some such clauses have also been subject to express carve-outs in rela-
tion to laws protecting health, the environment or human rights. One high-profile example
is the ‘Human Rights Undertaking’ of the Baku-Tbilisi-Ceyhan pipeline (BTC Pipeline)
consortium, regarding the contract’s stabilisation clause:
[The BTC Pipeline consortium] shall not seek compensation under the ‘economic equilibrium’
clause or other similar provisions [...] in such a manner as to preclude any action or inaction by
the relevant Host Government that is reasonably required to fulfil the obligations of that Host
Government under any international treaty on human rights (including the ECHR), labour
or HSE (health, safety, environment) in force in the relevant Project State from time to time to
which such Project State is then a party.25
Stabilisation clauses: the jurisprudence of international tribunals over time

Stabilisation clauses have a long heritage that stretches back to the early 20th century. At
least one tribunal in the 1930s, and subsequently a number of tribunals in the 1970s and
1980s, have had occasion to interpret various stabilisation clauses in long-term energy con-
tracts, although usually in the context of nationalisations as opposed to taxation changes.
These key cases are briefly summarised in this section, as a historical backdrop to the mod-
ern application of stabilisation clauses.
22 Available through www.krg.org. For other examples involving Egypt, Algeria and Azerbaijan, see Cameron,
supra note 2, pp. 80-81.
23 Shemberg, supra note 2, p. 19.
24 Id. See also Dolzer and Schreuer, supra note 2, p. 85 (noting that the recent trend is towards economic
equilibrium clauses as opposed to freezing clauses).
25 Quoted in Gehne & Brillo, supra note 2, pp. 5–6. The Undertaking also excludes more generally claims
against host State measures that are based on human rights, health, safety and environmental aspects, provided
that domestic regulation is ‘reasonably required by international labor or human rights treaties to which the
Host Government is a party’ and that ‘domestic law is no more stringent than the highest of European Union
standards [...]’. Id.
65
Lena Goldfields, Ltd v. USSR (1930)26

In 1925, the government of the USSR granted Lena Goldfields (Lena) exclusive exploring
and mining rights over ‘vast areas’ of the Soviet Union, for 30 to 50 years.27 The conces-
sion agreement contained a simple stabilisation clause: Lena was to submit to all existing
and future legislation only ‘in so far as special conditions are not provided in this agree-
ment’ (Article 75). For its part, the government undertook ‘not to make any alteration in
the Agreement by Order, Decree, or other unilateral act or at all except with Lena’s con-
sent’ (Article 76). The result of Articles 75 and 76, as understood by the arbitral tribunal
(consisting only of Dr Otto Stutzer and Sir Leslie Scott, after the government’s appointee,
Dr S B Chlenov, failed to participate), was ‘completely to protect Lena’s legal position – i.e.,
to prevent the mutual rights and obligations of the parties under the contract being altered
by any act of the Government, legislative, executive, or fiscal, or by any action of local
authorities or trade unions’.28
Nevertheless, in 1929, the Soviet government famously adopted its ‘Five-Year Plan’, the
effective result of which was ‘to deprive the company of available cash resources, to destroy
its credit, and generally to paralyse its activities’.29 The tribunal found this new government
policy, and associated legislation, ‘necessarily meant, when measured in terms of contractual
obligation, the breach by the Government of many of the fundamental provisions, express
and implied, of the Concession Agreement’, and awarded compensation.30
Texaco v. Libya (1977)31

Between 1955 and 1966, Texaco signed a number of petroleum concession agreements
with the government of Libya. The contracts included ‘intangibility clauses’, which pro-
vided as follows:
The Government of Libya will take all steps necessary to ensure that the Company enjoys all
the rights conferred by this Concession. The contractual rights expressly created by this conces-
sion shall not be altered except by mutual consent of the parties [...]
This Concession shall throughout the period of its validity be construed in accordance with
the Petroleum Law and the Regulations in force on the date of execution [...]. Any amendment
to or repeal of such Regulations shall not affect the contractual rights of the Company without
its consent.32
26 Lena Goldfields, Ltd v. USSR, Award, 3 September 1930, 36 Cornell Law Quarterly 31 (1951) (Lena Goldfields
v. USSR). In an interesting historical footnote, Professor Albert Einstein was considered as the presiding
arbitrator (‘super-arbitrator’, probably mistranslated from German to Russian to English) in this case. See V.V.
Veeder, The Lena Goldfields Arbitration: The Historical Roots of Three Ideas, (1998) 47 International &
Comparative Law Quarterly 747, pp. 759 (fn. 35), 774. While some arbitrators, in the authors’ experience,
can behave as if they are ‘Einsteins’ in their own right, it must have been interesting for the parties and
counsel alike to behold Albert Einstein’s actual name on a list of possible arbitrators.
27 Lena Goldfields v. USSR, supra note 26, p. 44.
28 Id., p. 46.
29 Id., p. 50.
30 Id., pp. 46-47.
31 Texaco v. Libya, supra note 15.
32 Id., ¶¶ 3, 70.
66
In the 1970s, Libya nationalised its oil industry, leading Texaco and others to launch arbitra-
tion proceedings in search of compensation.
In Texaco v. Libya, relying, inter alia, on the intangibility clause, the sole arbitrator,
René-Jean Dupuy, concluded that Libya had breached the concession agreements:
The effect is [...] to ensure to the private contracting party a certain stability which is justified
by the considerable investments which it makes in the country concerned. The investor must in
particular be protected against legislative uncertainties, that is to say, the risks of the municipal
law of the host country being modified, or against any government measures which would lead
to an abrogation or rescission of the contract. Hence, the insertion, as in the present case, of
so-called stabilization clauses: these clauses tend to remove all or part of the agreement from the
internal law and to provide for its correlative submission to sui generis rules [...] or to a system
which is properly an international law system [...]
[A] State cannot invoke its sovereignty to disregard commitments freely undertaken through
the exercise of this same sovereignty and cannot, through measures belonging to its internal order,
make null and void the rights of the contracting party which has performed its various obliga-
tions under the contract [...]
Thus, in respect of the international law of contracts, a nationalization cannot prevail over
an internationalized contract, containing stabilization clauses, entered into between a State and
a foreign private company.33
Revere Copper v. OPIC (1978)34

In 1967, Revere Copper entered into an agreement with the government of Jamaica in
relation to the financing, construction and operation of a bauxite mining plant. The con-
tract contained a stabilisation clause providing for security of investment, and also stated
that ‘[n]o further taxes [...] burdens, levies [...] will be imposed [...]. For the purposes of
taxation and royalties the provisions of this Agreement shall remain in force until the expiry
of twenty five years’.35 In 1974, the government introduced a bauxite levy and increased
the royalties to be paid by Revere, while also forcing Revere to renegotiate the contract. In
1975, Revere was forced to shut down its plant ‘for economic reasons’.36 In 1976, Revere
unsuccessfully sued the government in the Supreme Court of Jamaica on the basis that the
bauxite levy was a breach of the agreement.37 The Jamaican Supreme Court declared the
contractual prohibitions against increased taxes and royalties void ab initio.38
Revere then commenced AAA arbitration under a related political risk insurance con-
tract with Overseas Private Investment Corporation (OPIC), alleging that the government
had committed ‘expropriatory actions’ as defined in the OPIC contract.39
33 Id., ¶¶ 45, 68, 73.

34 Revere Copper and Brass, Inc. v. Overseas Private Investment Corporation, AAA, Award, 24 August 1978, 17 ILM
1321 (1978).
35 Id., pp. 5, 23, 33.
36 Id., p. 11.
37 Id., p. 16.
38 Id., p. 18.
39 There were four weeks of hearings on liability issues, during which ten witnesses were heard. Id., p. 16.
67
The majority of the AAA tribunal, consisting of G W Haight, Carroll R Wetzel and
Francis Bergan (dissenting), noted the ‘contractual prohibitions against increasing taxes and
royalties’ and the silence of the contract on the issue of applicable law.40 In the absence of
party agreement on the applicable law, the tribunal accepted the application of:
Jamaican law for all ordinary purposes of the Agreement, but we do not consider that its applica-
bility for some purposes precludes the application of principles of public international law which
govern the responsibility of States for injuries to aliens.We regard these principles as particularly
applicable where the question is, as here, whether actions taken by a government contrary to and
damaging to the economic interests of aliens are in conflict with undertakings and assurances
given in good faith to such aliens as an inducement to their making the investments affected
by the action.41
The majority further found that the international character of the contract arose from
the fact that the contract was ‘part of a contemporary international process of economic
development, particularly in the less developed countries’.42 On this basis, the majority
upheld the legality and binding nature of the clause, noting that under ‘international law
the commitments made in favour of foreign nationals are binding notwithstanding the
power of Parliament and other governmental organs under the domestic Constitution to
override or nullify such commitments [...] To suggest that for the purposes of obtaining
foreign private capital the Government could only issue contracts that were non-binding
would be meaningless’.43
AGIP v. Congo (1979)44

In 1965, AGIP began oil distribution activities in the People’s Republic of the Congo. In
1974, the government nationalised the oil products distribution sector in the Congo, affect-
ing all companies except for AGIP, which 10 days earlier had signed an agreement with
the government. This agreement provided for AGIP to sell 50 per cent of its shares to the
government, but AGIP would otherwise continue to operate as a limited liability company
under private law.45 Articles 4 and 11 of this contract included stabilisation clauses pursuant
to which the government undertook not to apply certain laws and decrees as well as ‘any
other subsequent law or decree that aims to alter the Company’s status as a limited liability
corporation in private law’, and ‘that if changes are made in the law concerning companies,
appropriate measures will be taken to ensure that such changes do not affect the structure
and composition of the organs of the Company as provided in the Agreement and in the
40 Id., pp. 8, 20.

41 Id., p. 20.
42 Id., p. 21.
43 Id., pp. 43-44. The dissenting arbitrator concluded that international law ‘is not the standard, and indeed is
quite irrelevant, to the rules of law which should guide this arbitration [against OPIC] to which neither [the
local Revere entity] nor Jamaica is a party.’ Id., p. 102.
44 AGIP Company v. People’s Republic of the Congo, Award, 30 November 1979, 21 ILM 726 (1982).
45 Id., ¶¶ 17-18.
68
Company’s statutes, which fix its duration at 99 years’.46 The contract also provided for
ICSID arbitration to resolve disputes.47 In 1975, Congo nationalised the company.
An ICSID tribunal consisting of Jørgen Trolle, René-Jean Dupuy (the sole arbitrator
in Texaco v. Libya) and Fuad Rouhani, considered the compatibility of the nationalisation
decree with the contract’s stabilisation clause (providing for ‘stabilization of the Company’s
legal status’48), and concluded as follows:
Congo had a contractual relationship with AGIP which under Congolese law obliged it not to
alter the company’s status unilaterally [...]. It cannot be denied that the measures taken [...]
ignored the obligation of the contracting State to perform the contract [...].
The unilaterally-decided dissolution [...] represented a repudiation of these stability clauses,
whose applicability results not from the automatic play of the sovereignty of the contracting State
but from the common will of the parties expressed at the level of international juridical order.
These stabilization clauses, freely accepted by the Government, do not affect the principle of
its sovereign legislative and regulatory powers, since it retains both in relation to those, whether
nationals or foreigners, with whom it has not entered into such obligations, and that, in the
present case, changes in the legislative and regulatory arrangements stipulated in the agreement
simply cannot be invoked against the other contracting party [...].
It is sufficient to focus the examination of the compatibility of the nationalization with
international law to the stabilization clauses. It is in fact in regard to such clauses that the prin-
ciples of international law supplement the rules of Congolese law.The reference to international
law is enough to demonstrate the irregular nature, under this law, of the act of nationalization
which occurred in this case. Consequently, the Government must compensate AGIP for the
damage it suffered from the nationalization [...].49
Kuwait v. Aminoil (1982)50

In 1948, Aminoil was granted a concession for the exploration and exploitation of petro-
leum and natural gas in Kuwait for a period of 60 years. Article 17 of the concession agree-
ment contained a stabilisation clause in the following terms:
The Shaikh shall not by general or special legislation or by administrative measures or by any
other act whatever annul this Agreement except as provided in article 11 [relating to early
termination by the Shaikh due to Aminoil’s actions]. No alteration shall be made in the terms
of this Agreement by either the Shaikh or the Company except in the event of the Shaikh and
the Company jointly agreeing that it is desirable in the interest of both parties to make certain
alterations, deletions or additions to this Agreement.51
46 Id., ¶¶ 18, 69-70.

47 Id., ¶ 1.
48 Id., ¶ 48.
49 Id., ¶¶ 76-77, 85-88.
50 The Government of the State of Kuwait v.The American Independent Oil Company (AMINOIL), Final Award,
24 March 1982, 21 ILM 976 (1982).
51 Id., pp. 990-991 and 1020, quoting Article 17 of the contract.
69
The concession agreement was supplemented and amended on numerous occasions. In

1974, OPEC countries adopted the ‘Abu Dhabi formula’, which effectively raised taxes on
the oil that Aminoil was producing. In 1977, the state nationalised the project and termi-
nated Aminoil’s contract. In 1979, the parties agreed to submit the dispute to arbitration,
to resolve various issues relating to alleged payments due from each party to the other.52
Following long-running arbitral proceedings, a majority of the tribunal rejected Aminoil’s
argument that a ‘straightforward and direct reading of [the stabilisation clause] can lead to
the conclusion that they prohibit any nationalisation’,53 holding instead that:
It seems fair to say that what the Parties had in mind in drafting the stabilisation clauses [...]
was anything which, by reason of its confiscatory character, might cause serious financial preju-
dice to the interests of the Company [...].
No doubt contractual limitations on the State’s right to nationalise are juridically possible,
but what that would involve would be a particularly serious undertaking which would have
to be expressly stipulated for, and be within the regulations governing the conclusion of State
contracts; and it is to be expected that it should cover only a relatively limited period [...].
A limitation on the sovereign rights of the State is all the less to be presumed where the
concessionaire is in any event in possession of important guarantees regarding its essential inter-
ests in the shape of a legal right to eventual compensation.
Such is the case here, – for if the Tribunal thus holds that it cannot interpret [the stabilisa-
tion clause] as absolutely forbidding nationalisation, it is nevertheless the fact that these provi-
sions are far from having lost all their value and efficacity on that account since, by impliedly
requiring that nationalisation shall not have any confiscatory character, they re-inforce the neces-
sity for a proper indemnification as a condition of it.54
In his separate opinion, Gerald Fitzmaurice QC disagreed with the majority as regards the
effect of the stabilisation clause, finding, inter alia, that compensation alone was not what a
company seeks but rather that the breach not occur in the first place:
It is an illusion to suppose that monetary compensation alone, even on a generous scale, neces-
sarily removes the confiscatory element from a take-over, whether called nationalisation or some-
thing else. It is like paying compensation to a man who has lost his leg. Unfortunately it does
not restore the leg. When a Company such as Aminoil procures the insertion in its Concession
of a clause like Article 17 [the stabilisation clause], its aim is not to obtain money if the Article
is breached, but to guarantee if possible that it is not breached.What the Company wants is to
be able to go on operating its Concession for the agreed term, not to be compensated for having
to cease doing so against its will [...].
In consequence, [...] [I] conclude that although the nationalisation of Aminoil’s undertak-
ing may otherwise have been perfectly lawful, considered simply in its aspect of being an act of
52 Id., p. 979.
53 Id., p. 1020. The majority consisted of Professors Paul Reuter and Hamed Sultan.
54 Id., pp. 1022–1023.
70
the State, it was nevertheless irreconcilable with the stabilization clauses of a Concession that
was still in force at the moment of the take-over.55
Amoco v. Iran (1987)56

In 1966, Amoco and the Iranian National Petrochemical Company (NPC) entered into a
contract forming a joint venture company, Khemco Chemical Company Limited (Khemco)
for the building and operating of a plant for the production and marketing of sulphur, natu-
ral gas liquids and liquefied petroleum gas derived from natural gas. The contract provided
that ‘[m]easures of any nature to annul, amend or modify the provisions of this Agreement
shall only be made possible by the mutual consent of NPC and Amoco’.57 In 1979, NPC
effectively terminated Amoco’s involvement in Khemco.
The Iran-US Claims Tribunal, consisting of Michel Virally, Charles N Brower and
Parviz Ansari Moin, followed Aminoil in concluding that a stabilisation clause in a contract
should only be understood as a renunciation on the part of the host state of its right to
expropriate a concession in limited circumstances.58 However, the Amoco tribunal ulti-
mately concluded that the clauses in this contract were not true stabilisation clauses.59 In
particular, the tribunal found that while the clause bound NPC, it did not bind the Iranian
government, which was not a party to the agreement. As such, the clause did not restrict
the Iranian government from enacting legislative or regulatory measures. Moreover, even
if the clause did bind the Iranian government, the clause did not expressly prohibit nation-
alisation of the contract.60
LETCO v. Liberia (1989)61

In 1970, Liberian Eastern Timber Corporation (LETCO) and the government of Liberia
entered into a 20-year concession contract for the exploitation of timber reserves in Liberia.
The contract included the following stabilisation clause:
Except as otherwise provided in this Agreement, no amendment or repeal of any law or regu-
lation governing this Agreement or any part thereof shall affect the rights and duties of the
CONCESSIONAIRE without its consent.62
After signing the agreement, in 1970, 1971 and 1977, the government withdrew por-
tions of LETCO’s concession. In 1979, the government requested a renegotiation of the
55 Id., pp. 1052–1053. See also Id., p. 1052, fn. 7, discussing the history of stabilisation clauses and their
introduction ‘into concessionary contracts, particularly by American Companies in view of their
Latin-American experiences, and for the express purpose of ensuring that Concessions would run their full
term, except where the case was one for which the Concession itself gave a right of earlier termination’.
56 Amoco v. Iran, supra note 6.
57 Id., ¶ 168.
58 Id., ¶ 179.
59 Id., ¶¶ 172–173.
60 Id., ¶ 180.
61 Liberian Eastern Timber Corporation (LETCO) v. Government of the Republic of Liberia, Award, 31 March 1989,
ICSID Reports, 1989 Volume 2, pp. 343-396.
62 Id., p. 368.
71
concession and in 1980, unilaterally halved the concession area ‘with immediate effect’.63
LETCO ultimately suspended its operations because ‘we have no forest to operate’, and
commenced ICSID arbitration against the government.64
The LETCO tribunal, consisting of Bernardo Cremades, Jorge Gonçalves Pereira and
Alan Redfern, observed that stabilisation clauses, such as the one before it, are ‘commonly
found in long-term development contracts and [...] [are] meant to avoid the arbitrary
actions of the contracting government.This clause must be respected, especially in this type
of agreement. Otherwise, the contracting state may easily avoid its contractual obligations
by legislation’.65 The tribunal held that:
By its failure to follow the procedure laid down in the Concession Agreement [in relation to
revoking the agreement for cause], as well as by its subsequent actions, the Government of
Liberia has acted in plain breach of the terms of the Concession Agreement. Its breach of the
Agreement entitles LETCO to the recovery of damages.66
Comment
Surveying this body of case law as a whole, Professor Cameron has offered the follow-
ing insight:
The failure of early stabilization clauses to act as a deterrent in the oil nationalizations in the
Middle East and North Africa led to the emergence of more pragmatically designed stability
mechanisms [...].Yet a striking feature of the jurisprudence and scholarly writing on this subject
is the extent to which it has continued to rely upon the generation of awards made following the
events of the 1970s and 1980s [...]: that is, a series of awards issued before such innovations
[in the form of economic equilibrium clauses] were widely used. The reason for this historical
focus is not hard to discern: until very recently, the only awards that tested contractual stabiliza-
tion clauses were the ones that followed the wave of unilateral state actions of that period. The
more flexible, ‘modern’ clauses have not yet been the subject of review by arbitral tribunals, even
though they constitute one of the principal ways in which energy investors prepared for another
wave of anti-investor sentiment among host states [...].67
Stabilisation clauses today

Against this historical backdrop, we now turn to an analysis of more recent arbitral inter-
pretations of stabilisation clauses. These remain few and far between and, avoiding com-
ment on cases that the authors have personally been involved in involving stabilisation pro-
visions in Kazakh, Nigerian and East Timorese state contracts, we focus on the important
2008 award in Duke Energy v. Peru.
63 Id., p. 344.
64 Id.
65 Id., p. 368.
66 Id., p. 369. The tribunal noted that the laws of Liberia had not been changed so as to affect the Concession
Agreement. Id., p. 368.
67 Cameron, supra note 2, pp. 59–60 (emphasis in original).
72
In 1996, the Republic of Peru entered into a number of legal stability agreements
(LSAs) in relation to an electricity generation project, Egenor. The LSAs were concluded
as part of a broader push by the government to promote and protect foreign investment in
Peru.68 Under the LSAs, Peru guaranteed legal stability as follows:
By virtue of this Agreement, [...] the STATE guarantees legal stability for DUKE ENERGY
INTERNATIONAL, according to the following terms:
Stability of the tax regime with respect to the Income Tax [...] in effect at the time this
Agreement was executed, according to which dividends and any other form of distribution of
profits, are not taxed [...].
This Legal Stability Agreement shall have an effective term of ten (10) years as from the
date of its execution. As a consequence, it may not be amended unilaterally by any of the parties
during this period, even in the event that Peruvian law is amended, or if the amendments are
more beneficial or detrimental to any of the parties than those set forth in this Agreement.69
In 1999, Duke Energy acquired a stake in Egenor, and executed additional foreign investor
LSAs relating to the project.70 At this time, the government’s taxation regime, as inter-
preted and applied by Peru’s tax authority, SUNAT, granted various benefits to Egenor and
its owners.
In 2000, SUNAT initiated a tax audit of Egenor, and in 2001, SUNAT imposed a tax
liability on Egenor on the basis of alleged tax underpayments, plus interest and penalties.71
There were two bases for this tax assessment: (1) a 1996 merger was a sham transaction
concluded solely to take improper advantage of tax benefits provided for under the Merger
Revaluation Law (merger revaluation assessment); and (2) Egenor should have depreciated
the assets transferred to it during privatisation using a special decelerated rate rather than
the general statutory rate (depreciation assessment).72 In 2001, Egenor filed administrative
complaints with SUNAT, and these were rejected in 2002. Egenor then appealed to the Tax
Court, but these appeals were at least partially rejected.73
In 2003, in addition to its local administrative challenges, Duke Energy commenced
ICSID arbitration in accordance with the dispute resolution clause of the LSAs.74 Duke
Energy alleged that Peru had breached, inter alia, the guarantee of tax stabilisation in the
LSAs, along with various other guarantees.75
The LSA did not specify the applicable substantive law, and thus the ICSID tribunal
applied Peruvian law together with international law.76
The tribunal, comprising Yves Fortier, Guido Tawil and Pedro Nikken, found by major-
ity that Peru was not liable for the depreciation assessment, but was liable for the merger
68 Duke Energy v. Peru, supra note 3, ¶¶ 37–44.

69 Id., ¶¶ 186–187, quoting Clauses 3 and 5 of the LSA.
70 Id., ¶¶ 53–54, 65, 72.
71 Id., ¶ 128.
72 Id., ¶¶ 129-130.
73 Id., ¶¶ 132, 137.
74 Id., ¶ 63.
75 Id., ¶¶ 138–139.
76 Id., ¶ 144.
73
revaluation assessment, because this was in breach of the guarantee of tax stabilisation under
the LSA.77
The issue before the ICSID tribunal was ‘whether legal stability covers not only the
formal text of the laws and regulations that were in place at the time the Egenor LSA was
executed, but also their specific interpretation and application at that time’.78
The tribunal’s treatment of this interesting question is worth quoting in full:
The Tribunal begins its analysis of this difficult question with the principle that its jurisdiction
does not include the power to review the correctness of SUNAT’s decisions and assessments or
of the Tax Court’s decisions as a matter of Peruvian tax law [...]. [The Tribunal] does not sit
as the appellate division of the Tax Court.
The Tribunal’s jurisdiction, under this particular guarantee, is limited to determining
whether the relevant decisions or interpretations of SUNAT and/or the Tax Court, be they
right or wrong, are consistent with the tax regime stabilized for Claimant in the [...] LSA.The
Tribunal’s standard is therefore comparative in nature, rather than absolute. In other words, the
Tribunal does not opine on the correctness of the relevant decision or interpretation, but only
determines whether such decision of SUNAT or of the Tax Court in the present case represents
a change from their respective decisions prior to the entry into force of the [...] LSA.
This comparative exercise is reasonably straightforward for legislation and regulations, where
a change is objectively demonstrable. Claimant establishes an actionable change by proving (i)
the existence of a pre-existing law or regulation (or absence thereof) at the time the tax stability
guarantee was granted, and (ii) a law or regulation passed or issued after the LSA that changed
the pre-existing regime.
The exercise is considerably more difficult where the Tribunal must analyze changes in the
interpretation or application of a law or regulatory instrument, which could give rise to a finding
of breach of the stability guaranteed by the Respondent.79
The ICSID tribunal found that in this ‘more difficult’ scenario, the claimant must prove:
(i) a stable interpretation or application at the time the tax stability guarantee was granted, and
(ii) a decision or assessment after the LSA that modified that stable interpretation or application.
Thus, if, at the time when the guarantee was granted, the application of the existing rules
resulted in a consistent interpretation, such interpretation must be deemed to be incorporated
into the guaranteed stability. In a broad sense, stability is the standard by which the legal order
prevailing on the date on which the guarantee is granted is perpetuated, including the consistent
and stable interpretation in force at the time the LSA is concluded. The Tribunal is convinced
that the maintenance of such stable interpretations of the law, existing at the time the LSA was
executed, is part of ‘the continuity of the existing rules’.80
77 Id., ¶¶ 142, 300.

78 Id., ¶ 210.
79 Id., ¶¶ 215–218.
80 Id., ¶¶ 218–219 (emphasis in original).
74
The tribunal emphasised that the burden was on the claimant to prove both the laws
and regulations in force on a given date, and ‘the prevalence of a particular, consistent
and stable interpretation’ based on ‘compelling evidence’ such as ‘[c]lear case law and/or
well-established practice’ or ‘generally accepted legal doctrine’.81
But the Duke Energy tribunal went further. It also held that where there had been ‘argu-
ably insufficient time for the development of stable interpretations or applications of the
relevant law and regulations’, a tribunal ‘may depart from a strictly comparative analysis’ and
will evaluate the decision or assessment ‘against a reasonableness standard’, based on local
law alone.82 The tribunal emphasised that, in doing so, it would avoid acting as a Peruvian
court of appeal, and thus:
[I]n order to preserve the proper balance of fairness between the parties in this arbitration, it must
be demonstrated, absent a demonstrable change of law or a change to a stable prior interpreta-
tion or application, that the application of the law to DEI Egenor was patently unreasonable
or arbitrary.83
The tribunal summarised its conclusions as follows:
[T]ax stabilization guarantees that: (a) laws or regulations that form part of the tax regime at
the time the LSA is executed will not be amended or modified to the detriment of the investor,
(b) a stable interpretation or application that is in place at the time the LSA is executed will not
be changed to the detriment of the investor, and (c) even in the absence of (a) and (b), stabilized
laws will not be interpreted or applied in a patently unreasonable or arbitrary manner.84
Thus, the tribunal found that not only the text of the law but also the interpretation of it
was effectively frozen by the stabilisation clause. For his part, Dr Tawil issued a partial dis-
senting opinion, indicating that he would have gone further and adopted a broader view of
the tribunal’s scope to construe Peruvian law and review the correctness (as opposed to the
reasonableness) of the decisions and assessments of SUNAT and the Tax Court.85
In this way, the tribunal in Duke Energy v. Peru recognised that there are different meth-
ods by which a state party can erode the stability of a contract. While it is not an arbitral
tribunal’s mission to sit as a tax appeals court, it can take notice of a change in interpretation
of a tax law that can have the same effect on an investor as a formal change in legislation.
Indeed, the tribunal went further still, and indicated that a clear misapplication of local tax
law, in departing from the provisions of the stabilised regime, in and of itself can amount
to an actionable change. Such a view has compelling logic: if a state has undertaken to stay
faithful to a stabilised legal regime, why should it face the consequences of its actions when
81 Id., ¶ 220.
82 Id., ¶¶ 222–224.
83 Id., ¶ 226.
84 Id., ¶ 227.
85 Id., Partial Dissenting Opinion of Arbitrator Dr. Guido Santiago Tawil, ¶¶ 1, 8-9, 16, 26. Dr. Nikken also issued
a separate partial dissenting opinion on the issue of estoppel.
75
formally amending the law, but remain immune when it takes the arguably easier step of
simply misapplying its existing law?86
Conclusions
Stabilisation clauses have a long and distinguished provenance. Rather than amounting to a
forgoing of sovereignty, they have been recognised as an important example of the exercise
of sovereignty by states that have a self-interest in offering undertakings that will encourage
investors to make long-term commitments to challenging projects in their territory.
As to the form that such stabilisation undertakings take, the modern trend appears in
some places to favour economic equilibrium clauses over classic freezing clauses. State par-
ties are less willing today to bind themselves not to develop their own law, than to undertake
to compensate investors one way or the other for the consequences of such development.
As to the approach taken by international tribunals to the interpretation and application
of such clauses, the first observation to make is trite, but no less important for this: such
clauses are applied on their precise terms, which vary in almost all contracts. Stabilisation
clauses are not boilerplate clauses, and tribunals rightly approach their interpretation with
very careful regard to the precise language agreed by the parties.
The second observation is that, in determining the legality and binding nature of such
clauses, international tribunals will look beyond local legal standards. Intended to protect an
investor in the event of a change in law, international tribunals rightly look with scepticism
at any local law arguments to the effect that such clauses were – or have become – illegal
as a matter of local law.
The third and final observation is that, in applying such clauses and determining whether
a change has happened, tribunals are less and less likely to allow state participants in the
international economy to benefit from undue formalism. Whether the change is effected
by a new tax law, or a new interpretation of an existing law, or most simply by a clear misap-
plication of existing law, state parties who have given stability undertakings should expect
international tribunals now to require them to shoulder the contractual consequences.
86 In December 2008, Peru applied to annul the award, on the bases that, inter alia: (1) the tribunal’s analysis of
the tax stabilisation issue was ‘wholly unaccompanied by reasons or explanation’; and (2) the ‘absence of any
reference’ to applicable Peruvian law meant that the tribunal’s analysis on this issue had been developed ‘ “from
whole cloth”, and not by the application of law’. Duke Energy v. Peru, Decision of the Ad Hoc Committee,
1 March 2011, ¶¶ 61-62. An ad hoc committee (Professor Campbell McLachlan QC, as president, and
Judge Dominique Hascher and Judge Peter Tomka) dismissed Peru’s annulment application in its entirety,
finding that the part of the award dealing with tax stability had been ‘adequately reasoned’ and was ‘arrived
at after consideration of the evidence of Peruvian law’. Id., ¶ 221. Although the tribunal had not cited ‘legal
authorities or passages from the expert evidence in support of its reasons’, the committee stressed that the
tribunal ‘was, in large measure, engaged in a process of logical reasoning which did not require citation of
authority’. Id., ¶¶ 217-218.
76
5
Utilities, Government Regulations and Energy Investment
Arbitrations
Nigel Blackaby1
Investment in international utilities: volatility, risk and public interest

Utilities are undergoing dramatic changes all over the world in response to demand fluc-
tuations, regulations and new technology.2 Rapid economic growth has sparked a soaring
demand for energy in emerging economies in Latin America and Asia.3 China has sur-
passed most of the industrialised countries to become the world’s second-largest energy
consumer after the United States.4
Meanwhile, according to the International Energy Agency, more than two-thirds of
the population in sub-Saharan Africa – 620 million people – have no electricity. The
International Energy Agency’s executive director has described the situation as an ‘energy
poverty crisis’.
In addition to the ever-changing landscape of supply and demand, and new opportu-
nities for investment globally, the structures underlying the utilities industries have seen
fundamental transformation through privatisation programmes. Whereas in the past, large
state-controlled monopolies controlled utilities from power generation to retail distribu-
tion and supply, many countries have dissolved state-controlled structures in favour of
privatised services subject to government regulation. Such privatisations have been under-
taken for a number of reasons: whether to swell public coffers from privatisation proceeds,
1 Nigel Blackaby is a partner at Freshfields Bruckhaus Deringer US LLP. The author would like to thank his
former colleague Ruth Teitelbaum, who coauthored a previous version of this article, and senior associate
Natalia Zibibbo, who assisted with this revised version.
2 David Blumental, ‘Sources of Funds and Risk Management for International Energy Projects’, 16 Berkeley J.
Int’l Law 267 (1998), available at: http://scholarship.law.berkeley.edu/bjil/vol16/iss2/6.
3 Handel Lee et al, ‘Preparing Itself for the Next Century’, 65 Petroleum Economist 19 (1998).
4 Maria van der Hoeven, ‘Opening Remarks’, World Energy Outlook 2014 Special Report: Africa Energy
Outlook, 13 October 2014. See also Editorial, ‘Looking Ahead: The Top Ten Energy and Natural Resources
Issues in 2015’, Journal of Energy & Natural Resources Law,Vol. 33, No. 1, 1-9, p. 2.
77
Utilities, Government Regulations and Energy Investment Arbitrations
increase investment and improve the quality of public services, or relieve the public purse
from unsustainable debt burdens.5
Foreign investors in utilities face unique problems of regulatory risk and government
interference. Privatisation does not cause governments to relinquish intervention. For
example, utilities require the long-term government administration of safety and quality
standards and pricing formulae that do not have a counterpart in competitive industries.6
The privatisation of utilities also presents a host of challenges for governments since
utilities control the public’s access to such fundamental needs as heating, cooking and elec-
tricity. Governments must therefore grapple with a potential wave of political unrest due
to concerns that private operators – who are not accountable to the public in the same
way as a government – will look to their own profit rather than the public good and thus
charge higher prices for public services supplied at lower standards.7 In these battles, a
foreign investor is an easy scapegoat for a government, particularly where the privatisation
programme was the project of an earlier (often politically adverse) government.
Private investors in the utilities sector normally enter into long-term contracts – indeed,
it is not uncommon to see 30 or even 50-year concession contracts for transport or distri-
bution of gas or electricity. This timescale recognises the need for long-term amortisation
of heavy up-front investments often needed from private investors to bring a utility back
from decades of under-investment by the state. The way in which foreign investors and
host governments identify and allocate business and regulatory risk during the life of these
contracts thus becomes essential, particularly where the host state of the investment faces
political and economic instability.8
Managing risk through contractual protections

To plan the scope and size of investments, investors need a degree of regulatory stability.
They will base their investment decisions on a particular regulatory regime. Any material
change to that regime can have a devastating impact on the economics of the contract.Yet
governments often change their minds about the framework governing privatised utilities.
The investors have usually made the heavy investment costs in the first years of a conces-
sion and are particularly vulnerable to regulatory changes once the investments have been
made. Governments in turn see privatised utilities as a cheap and easy target to garner pop-
ular support from measures such as tariff freezes or reductions with limited or no cost to the
state exchequer. Separately, there may be legitimate regulatory changes for environmental,
public health and safety or social reasons that may impact the economics of a contract.
Ideally, to protect against regulatory interference, an investor will negotiate specific
contractual protections with a government or government-owned entity known as
5 Id.
6 Id.
7 H. Woss, A. San Román Rivera, S. Dellepiane, ‘Damages in International Arbitration Under Complex
Long-Term Contracts’ (2014), Chapter 3, The Nature of Complex Long-Term Contracts, p. 37.
8 See, e.g., Ben Holland & Phillip Spencer Ashley, ‘National Gas Price Reviews: Past, Present and Future, Journal
of Energy’, Natural Resources & Environmental Law, 30 (No. 1), 2012, p. 29. See also, William W. Park, ‘The
Predictability Paradox: Arbitrators and Applicable Law, in the Application of Substantive Law by International
Arbitrators’, Dossier XI of the ICC Institute of World Business Law (ICC Publication No. 753E), p. 67.
78
stabilisation clauses. These will either exempt an investment from a change in the regula-
tory regime or, more commonly, compensate the investor for such changes so as to retain
the ‘economic equilibrium’ of the contract. Investors may also negotiate the possibility of
a modification to certain prices or tariffs based on an agreed formula triggered by certain
events. The use of such risk allocation mechanisms for future regulatory changes is thus
an important means of mitigating regulatory risk. These contractual commitments may
provide the foundation for a ‘legitimate’ expectation which, if breached, may establish the
basis of a claim for breach of the ‘fair and equitable treatment’ standard present in most
investment treaties.
One example of this allocation of risk is the right in certain gas supply contracts for
a party to seek arbitration to establish a new gas price where certain economic changes
have occurred.9 Other contractual arrangements may protect against devaluation of local
currency by providing that tariffs are to be calculated in a hard currency such as US dollars
even if charged in local currency at the applicable exchange rate.10 Other clauses link tariffs
or prices to the periodic evolution of certain price indices thus maintaining the value of
the revenue stream in real terms. Other undertakings are less precise and simply indicate
that the investor will have the right to make a ‘reasonable rate of return’.
The limits of arbitrators’ authority in commercial arbitration against a state

A commercial contract between an investor and the state or a state-owned company does
not always contemplate the types of measures that a government will take during periods of
volatility, economic downturn or political change. While arbitrators in commercial arbitra-
tion may fill in gaps with resort to general principles of law, or apply principles of municipal
law that are common to international law11 they may be constrained by the limits of the
contract – and the governing law of the contract – from which they derive their authority.
The following scenario illustrates the potential limits of an arbitrator’s authority based
on contract. Let us imagine that an investor has entered into a long-term commercial
contract with a government or government entity that contains a tax stabilisation clause
subject to the governing law of that state. The state begins imposing abusive tax audits in
bad faith, claiming that the investor has been evading taxes, and demanding criminal penal-
ties. Arbitrators whose authority is limited to the contractual undertakings in a commercial
relationship will have to determine whether their contractual authority extends to evaluat-
ing the lawfulness of a state’s use of its criminal laws. In this scenario, arbitrators will likely
9 This was the case in electricity and gas distribution contracts signed by Argentina following privatisation of
those utilities in the early 1990s.
10 See Robert B. von Mehren and P. Nicholas Kourides, ‘International Arbitrations between States and Foreign
Private Parties: The Libya Nationalization Cases’, 75 A JIL 504.
11 In the BP arbitration, Judge Lagergren applied a detached system of general principles of law. BP Exploration
Company (Libya) Limited v.The Government of the Libyan Arab Republic, Award dated 10 October 1973, 53 ILR
297 (1973). In the TOPCO and LIAMCO arbitrations, sole arbitrators Dupuy and Mahmassani applied a
system of municipal law, i.e., principles of Libyan law on the basis of their commonality with principles of
international law. Texaco Overseas Petroleum & California Asiatic Oil Co. (TOPCO) v.The Government of the Libyan
Arab Republic, Award dated 19 January 1977, 17 ILM 1 (1978) and Libyan American Oil Company (LIAMCO) v.
The Government of the Libyan Arab Republic, Award dated 12 April 1977, 20 ILM 1 (1978).
79
want to avoid injustice and will therefore apply general principles of law such as good faith,
pacta sunt servanda, estoppel or unjust enrichment.12
In Duke Energy v. Peru, the tribunal, whose jurisdiction derived from a contract, applied
principles of estoppel and good faith in rejecting a narrow reading of a tax stability pro-
vision and concluded that not only changes in law triggered Peru’s obligations, but also,
changes in the way in which a tax was calculated or applied.13
Nevertheless, where the contractual bargain is governed by the law of the host state,
the host state may simply change the law to avoid its contractual obligations. For example,
it may pass a law holding that tax stabilisation measures are unlawful and unenforceable. In
that case, while there are arguments based on legal concepts such as fait du prince that would
empower a tribunal to compensate an investor for such legal changes, the arbitral tribunal
may feel constrained by the provisions of domestic law. In such circumstances, reference to
international law as an additional source of legal rights is helpful.
Investment treaty arbitration: ensuring a stable framework for investment

under principles of international law
In contrast to this tension that exists in commercial arbitration, investment treaties provide
a means for arbitrators to evaluate the sovereign acts of states through the lens of inter-
national law. The ability of investment treaty arbitral tribunals to judge the sovereign acts
of states (including the modification of its own laws and regulations) is the reason why
investment treaty arbitration is controversial.14 It is also the reason why it is critical for the
protection of foreign investment.15
12 In the Lena Goldfields case, where the arbitrators derived their jurisdiction from a mining concession between
a British investor and the Soviet Union, the tribunal applied principles of unjust enrichment to award damages
for what was an unlawful confiscation. The Arbitration between the Lena Goldfields, Ltd and the Soviet Government,
Award dated 3 September 1930, 36 Cornell Law Quarterly 31, 51 to 52 (1950).
13 Duke Energy v. Peru, ICSID Case No. ARB/03/28, Award dated 18 August 2008, para. 227. In particular, the
tribunal found that Peruvian law encompassed obligations of good faith, which had not been met by Peru in
this case.
14 See, e.g., The Backlash Against Investment Arbitration, Balchin, Chung, Kaushal, Waibel, 2010; see also Gus Van
Harten, Investment Treaty Arbitration and Public Law, Oxford University Press, 2007.
15 See Michael Reisman, ‘Fifteenth Annual Grotius Lecture Response’, American University International Law
Review 29 no. 5 (2014): 1003- 1008 at 1004. Professor Reisman observed that interference with sovereignty is
the reason why international tribunals such as investment treaty tribunals and human rights tribunals exist.
80
Arbitrators examining the rights of foreign investors under investment treaties will
examine the contractual bargain as well as principles of the host state’s law as a factual
matrix from which the tribunal will determine whether a state has breached an applicable
investment treaty. As observed by a tribunal in a dispute concerning Bolivia’s electricity
sector, the issue is often to measure whether a modification of rules amounts to a breach of
applicable international standards:
First, as regards the claim relating to spot price, the Tribunal is not expected to determine the
price that should be applied to generators, but rather to determine whether the modification by
Bolivia of the regulatory framework in relation to spot prices frustrated the Claimants’ legitimate
expectations in breach of the fair and equitable treatment standard ….16
Determining whether a modification to a regulatory framework breaches international law

requires an understanding of the way in which a foreign investor and a host state have allo-
cated risk and the objective expectations that a government has fostered in order to obtain
the foreign investment in the first place.
Material changes to the regulatory regime: undermining legitimate

expectations in breach of fair and equitable treatment
The protection of legitimate expectations is often cited as a key component of fair and
equitable treatment.17 Even under the most narrow (and controversial)18 view of the fair
and equitable treatment standard, a violation occurs through ‘the creation by the State of
objective expectations in order to induce investment and the subsequent repudiation of
those expectations.’19
States create objective expectations to induce investment when they seek to attract
investment based on specific promises or a specific legal framework.The CMS v. Argentina20
tribunal considered that the embodiment of certain conditions of the Argentine legisla-
tive framework (such as the Gas Law), in the investor’s licence gave rise to a legitimate
expectation on the part of the investor that those conditions would be respected. The
tribunal observed that it was ‘not a question of whether the legal framework might need
to be frozen as it can always evolve and be adapted to changing circumstances, but nei-
ther is it a question of whether the framework can be dispensed with altogether when
16 Guaracachi America Inc. and Rurelec PLC v. Bolivia, UNCITRAL Award dated 31 January 2014, para. 253.
Available at www.italaw.com/cases/518. (dictum).
17 According to the Generation Ukraine tribunal, ‘the protection of [legitimate expectations] is a major concern of
the minimum standards of treatment contained in bilateral investments treaties.’ Generation Ukraine v. Ukraine,
ICSID Case No. ARB/00/9, Award dated 16 September 2003, para. 20.37, 44 I LM 404 (2005). Also available
at: www.italaw.com/cases/482. See also Saluka v. Czech Republic, Partial Award dated 17 March 2006, para. 309,
available at www.italaw.com/cases/documents/963.
18 See Michael Reisman, ‘“Case Specific Mandates” versus “Systemic Implications”: How Should Investment
Tribunals Decide? - The Freshfields Arbitration Lecture’, 29(2) Arb. Int’l 131 (2013).
19 Glamis Gold, Ltd. v. United States of America, Award dated 8 June 2009 at para. 22. Available at www.state.
gov/19.s/l/c10986.htm.
20 CMS Gas Transmission Company v.The Republic of Argentina, ICSID Case No. ARB/01/8, Award dated
12 May 2005, 44 I LM 1205. Also available at www.italaw.com/cases/288.
81
specific commitments to the contrary have been made. The law of foreign investment and
its protection has been developed with the specific objective of avoiding such adverse legal
effects.’21
Similarly, in EDF v. Argentina,22 the dispute concerned a regulatory framework for the
electricity sector designed to attract private investment. The promises of the legislative
framework were part and parcel of the contractual commitments given by the state to the
investor. The EDF tribunal concluded that because Argentina enacted emergency meas-
ures that altered critical currency and cost-adjustment clauses for electricity tariff rates
enshrined in the legislative framework and licence and because Argentina failed to renego-
tiate or remedy these changes once the 2001-2002 economic crisis calmed, Argentina was
liable for a breach of fair and equitable treatment for having fundamentally altered the legal
framework upon which the investor had relied when making its investment.
The ‘roller-coaster’: failure to afford a rational or stable investment framework

Tribunals have also found that a state’s failure to afford an investor a stable and rational frame-
work for investment may give rise to a breach of the fair and equitable treatment standard.
PSEG v.Turkey23 concerned a failed electricity project marked by changes in the regula-
tory framework. As a result of the growing demand for electricity in Turkey in the 1980s,
the Turkish government passed laws authorising private companies to establish facilities for
the generation of electricity which they could sell to the state. Turkey provided a number
of incentives, including a treasury guarantee and long-term energy sales agreements. In
1994, PSEG was granted an authorisation to conduct a feasibility study into the building of
a coal-fired power plant and an adjacent coal mine. It signed an implementation contract
and a concession contract with Turkey. A dispute arose between the parties as to whether
the concession contract included a final agreement on key commercial terms. The parties
also disagreed about the scope and content of the commercial terms, and the appropriate
corporate structure for implementation of the project, a factor which carried important tax
consequences.While those disagreements were brewing, changes occurred to Turkey’s legal
framework, including a new law that eliminated the possibility for the investor to obtain a
treasury guarantee for the project. Although construction on PSEG’s proposed coal mine
and power plant never commenced, the company claimed to have expended millions of
dollars on an initial feasibility study, follow-up studies and several rounds of negotiations
with government agencies based upon its reasonable reliance on the regulatory framework.
The tribunal found that Turkey was responsible for breaching the fair and equitable
treatment provisions of the Treaty arising from its failure to conduct negotiations in a
proper way and other forms of interference by the Turkish state.24 The tribunal observed
that ‘[s]tability cannot exist in a situation where the law kept changing continuously and
endlessly, as did its interpretation and implementation. . . . In this case, it was not only the
21 Id, para. 277.

22 EDF International S.A. et al. v. Argentina, ICSID Case No. ARB/03/23, Award dated 11 June 2012, available at
www.italaw.com/cases/372.
23 PSEG Global et al v. Republic of Turkey, ICSID Case No. ARB/02/5, Award dated 4 June 2004, 44 I LM 465
(2005).
24 Id.
82
law that kept changing but notably the attitudes and policies of the administration.’25 The
tribunal described the legislative changes that occurred in Turkey as having a ‘roller-coaster’
effect on the investment.26
In Total v. Argentina,27 Total argued that Argentina’s ‘abandonment of [a] uniform spot
price in the electricity sector’ so altered the legal regime relating to electricity spot prices
that Argentina’s conduct violated the fair and equitable treatment standard of the underly-
ing investment treaty.28 The Total tribunal agreed with the investor, finding that Argentina
had failed to provide a stable framework for investment with respect to power genera-
tion. While the tribunal observed that the Electricity Law did not constitute a ‘guarantee’
of stability, Argentina’s actions breached the treaty’s fair and equitable treatment standard
because they were incompatible with basic principles of economic rationality, public inter-
est, reasonableness and proportionality, and violated Total’s reasonable expectations on the
system’s guiding principles.29
According to the tribunal in Total, even in the absence of a specific contractual under-
taking, a host state may violate fair and equitable treatment through the imposition of
an unreasonable framework that undermines objective notions of fairness and rationality.
Principles of the host state’s own law on utilities may also be taken into account when
determining what is reasonable and fair under international law.
In Windstream v. Canada30 the dispute concerned a 20-year contract for the develop-
ment of an offshore wind energy project in Lake Ontario, which according to the inves-
tor was unfairly cancelled when the Ontario government announced a moratorium on
offshore developments in February 2011 based on scientific concerns. The tribunal did
not find that the decision to impose a moratorium on offshore wind development, or the
process that led to it, were in themselves wrongful.31 However, the tribunal determined
that the government had done ‘little to address the legal and contractual limbo in which
Windstream found itself after the imposition of the moratorium’. In particular, in the tri-
bunal’s opinion the government had failed to clarify the situation, either by promptly com-
pleting the required scientific research on offshore and establishing the appropriate regula-
tory framework for offshore wind and reactivating Windstream’s contract, or by amending
the relevant regulations so as to exclude offshore wind altogether as a source of renewable
energy and terminating Windstream’s contract in accordance with the applicable law. As
a result, the tribunal found that Canada’s conduct towards Windstream during the period
following the imposition of the moratorium was unfair and inequitable.32
These decisions echo the observation by the late Ian Brownlie that a foreign inves-
tor ‘cannot be expected to accept a distorted and unforeseeable manipulation of the legal
25 Id, para. 254.

26 Id, para. 250.
27 Total S.A. v.The Argentine Republic (ICSID Case No. ARB/04/1), Decision on Liability, 27 December 2010.
Available at www.italaw.com/cases/documents/1106.
28 Id, paras. 325–327.
29 Id, para. 333.
30 Windstream Energy LLC v. Government of Canada (PCA Case No. 2013-22), Award, 27 September 2016,
available at: http://www.italaw.com/cases/1585#sthash.T3MS2aJz.dpuf.
31 Id, para. 376.
32 Id, para. 379.
83
procedures of the host State’.33 Whether events may be deemed ‘foreseeable’ business risks
may depend on the nature of investment and the type of commitments given by a host
state.34 Where promises are made or objective expectations of a reasonable framework for
investment are fostered by a state, they acquire a status under international law that cannot
simply be extinguished through a host state’s domestic law.
Expropriation risk
Utilities face some unique problems of exposure to expropriation risk as well as chal-
lenging questions of valuation when that occurs. Investments in the utility sector require
massive up-front investments usually made in the initial years of the licence or concession.
This gives rise to opportunistic incentives on the part of governments to expropriate, par-
ticularly where political interests and public pressures are in play.35 Governments have the
incentive to expropriate sunk assets because the direct costs of doing so may be offset by
the short-term political benefit of reducing the costs of a public service.36
As observed by Bergara, Henisz and Spiller:
[I]ncentives for expropriation of sunk assets should be expected to be largest in countries where
there are no formal or informal government procedures required for regulatory decision making;
where regulatory policy is centralized in the administration; where the judiciary does not have
the tradition or power to review administrative decisions; and where the government’s horizon
is relatively short.37
A number of the factors described above were at the heart of the parties’ dispute in
Guaracachi America Inc and Rurelec PLC v. Bolivia.38 Bolivia had argued that the expropriation
of Empresa Eléctrica Guaracachi SA (EGSA) was lawful because Bolivia had assessed the
value of the assets it expropriated, but had found that EGSA had a negative value.Therefore,
according to Bolivia, because EGSA had a negative value at the time of the taking, no com-
pensation was due, and the expropriation was lawful. The tribunal disagreed, finding that
33 Ian Brownlie, Treatment of Aliens: Assumption of Risk and the International Standard in International Law
and Economic Order: Essays in Honour of F.A. Mann on the Occasion of his 70th Birthday on August 11,
1977 at 319. Professor Brownlie made this statement as a ‘provisional expression of view’ in the context of an
essay concerning whether aliens may be said to assume certain risks under international law. He observed that
‘[i]t may be the case – this is a very provisional expression of view – that the principle of assumption of risk
does not apply to cases of dolus or abuse of rights.’ Id.
34 It should be noted, however, that tribunals also expect investors to exhaustively analyse the applicable
framework before they make their investment as part of their due diligence in a highly regulated industry
such as energy. Charanne BV and Construction Investments SARL v. the Kingdom of Spain, SCC Arbitration No.
062/2012, Award dated 21 January 2016, para. 507, available at http://www.italaw.com/sites/default/files/
case-documents/italaw7047.pdf.
35 Mario E. Bergara, Witold J. Henisz and Pablo T. Spiller, Political Institutions and Electricity Investment: A
Cross Nation Analysis, California Management Review,Vol. 40, No. 2, Winter 1998, pp. 19-20.
36 Id, p. 20.
37 Id, p. 20, citing D. Salant, ‘Behind the Revolving Door: A New View of Public Utility Regulation’, Rand
Journal of Economics, 26/3 (1995), inter alia.
38 Guaracachi America Inc. and Rurelec PLC v. Bolivia, UNCITRAL Award dated 31 January 2014, para. 441,
available at www.italaw.com/cases/518.
84
compensation was indeed due and Bolivia had expropriated the investment unlawfully by
failing to provide ‘just and effective’ compensation as required under the UK–Bolivia BIT.
The tribunal observed that:
[A]ny State which carries out an expropriation is expected to accurately and professionally
assess the true value of the expropriated assets. Bolivia did not actually compensate (or intend
to compensate) Rurelec as it did not make an accurate assessment of EGSA’s value at the
time. In fact, it did quite the opposite, and if the Tribunal finds the valuation to be ‘manifestly
inadequate’, this is Bolivia’s responsibility. As will be explained further below, this is in fact the
case, and the expropriation was therefore illegal.39
The Rurelec case thus stands for the notion that an uncompensated expropriation is per
se illegal where it is objectively clear that compensation is owed. It also demonstrates the
critical need for independent valuation of expropriated assets by neutral arbitral tribunals
in the context of foreign investment disputes.
What the future holds for utilities arbitrations: greater regulatory scrutiny
and concern over the public interest
Utilities necessarily implicate the public interest and government regulation. They raise
concerns over safety, the environment and national security. Nuclear plants still operate
under the shadow of the Three Mile Island, Chernobyl and more recently, the Fukushima
nuclear disasters. Japan, Germany and Switzerland have recently called for a phase-out of
nuclear power. The European Council agreed in October 2014 to commit the EU to a
target of 27 per cent of energy consumed by 2030 to come from renewables.40 Cases are
already arising from these new sectors. For example, government incentives to encourage
the installation of renewable energy sources such as solar power in Spain recently backfired
when they resulted in oversupply. Subsequent retroactive withdrawal of the incentives has
given rise to a wave of investment claims.41
In addition to an increased focus on cleaner energy and the environment, governments
throughout the world are concerned over the possibility of cyberattacks on energy grids.42
39 Id, para. 441.

40 European Council, Conclusions 23 and 24 2 014, EUCO 169/14, CO EUR 13 C OCL 6, www.consilium.
europa.eu/uedocs/cms_data/docs/pressdata/en/ec/145397.pdf; See also Editorial, ‘Looking Ahead: The Top
Ten Energy and Natural Resources Issues in 2015’, Journal of Energy & Natural Resources Law,Vol. 33, No.
1, 1-9, p. 2.
41 See, e.g., Masdar Solar & Wind Cooperatief U.A. v. Kingdom of Spain (ICSID Case No. ARB/14/1),
case details available on ICSID’s website at https://icsid.worldbank.org/apps/icsidweb/cases/Pages/
casedetail.aspx?caseno=ARB/14/1. See also, Leo Szolnoki, ‘Spain sees new solar claim at ICSID’, Global
Arbitration Review, 27 May 2014, available at http://globalarbitrationreview.com/article/1033418/
spain-sees-new-solar-claim-at-icsid.
42 See, e.g., Stephen Heifetz and Michael Gershberg, ‘Why Are Foreign Investments in Domestic Energy
Projects Now Under CFIUS Scrutiny?’ Harvard Business Law Review OnLine,Volume 3 (2013),
available at http://www.hblr.org/2013/05/why-are-foreign-investments-in-domestic-energy-proje
cts-now-under-cfius-scrutiny/ discussing the United States’ regulation of Chinese investment in U.S. utilities
and concerns over cyber-security.
85
Questions of how private investors will remain accountable to the public will thus con-
tinue to be critical for utilities investments.
All of these developments will result in new technology, regulations, players and risks
in an already complex landscape. International arbitration will continue to play an impor-
tant role in settling complex utilities disputes peacefully under contracts and investment
treaties. Nevertheless, international arbitration is at a critical juncture. The backlash against
investment treaty arbitration, arising out of concerns over the potential chilling effect that
international arbitration has on the regulatory state,43 are likely to result in changes to
arbitration procedure. We are already seeing an increased focus on the ethics of arbitrators
through soft law,44 amendments to arbitration rules as well as significant changes to the
standards of investment treaties.
Demands for greater transparency are particularly acute when public services are in
question. These demands have already resulted in a number of important developments,
including the amended ICSID Rules of 2006, which provide for the possibility of amicus
curiae participation. More recently, UNCITRAL’s 2013 Transparency Rules and the United
Nations Convention on Transparency in Treaty-based Investor-State Arbitration (New
York, 2014) (the Mauritius Convention on Transparency)45 together allow states to opt
in to apply rules of greater transparency, including public access to pleadings and hearings
in investment treaty arbitration. In some cases, the investor and the state have voluntarily
agreed to apply best practice transparency standards irrespective of the terms of the under-
lying treaty. This type of agreement on transparent practice occurred in Rurelec v. Bolivia,
where all pleadings were published on the website of the Permanent Court of Arbitration.
Calls for increased transparency in investment arbitration are spilling over into com-
mercial arbitration. At a recent ICCA conference in Hong Kong, participants discussed the
need for commercial arbitration to follow investment arbitration’s lead by becoming more
transparent and publicly accessible.46
In today’s modern age of rapid access to information, the decentralised and confidential
nature of international arbitration creates concern. The concerns over a democracy defi-
cit in international arbitration,47 that have been aired in the context of the Trans-Pacific
43 See, e.g., The Backlash Against Investment Arbitration, Balchin, Chung, Kaushal, Waibel, 2010; see also Gus Van
Harten, Investment Treaty Arbitration and Public Law, Oxford University Press, 2007.
44 See, e.g., IBA Guidelines on Conflicts of Interest in International Arbitration (2014), available at http://www.
ibanet.org/Publications/publications_IBA_guides_and_free_materials.aspx. The IBA Arbitration Committee is
soon to launch a committee on soft law, to regulate all the Guidelines and Rules promulgated by the IBA.
45 The United Nations Convention on Transparency in Treaty-based Investor-State Arbitration has only been
ratified by Mauritius and Canada so far. It will enter into force once it has been ratified by three signatory
states. See the list of states that have signed and ratified this Convention at http://www.uncitral.org/uncitral/
en/uncitral_texts/arbitration/2014Transparency_Convention_status.html.
46 See Kyriaki Karadelis, ‘Hong Kong summit focuses on south-south trade’, Global Arbitration Review,
14 May 2015, available at http://globalarbitrationreview.com/article/1034459/hong-kong-summit-
focuses-on-south-south-trade.
47 See, e.g., letter dated 30 April 2015 by Professor Laurence Tribe, Nobel Laureate Joseph Stiglitz and others
to Majority Leader McConnell, Minority Leader Reid, Speaker Boehner, and Minority Leader Pelosi
concerning the dangers of investor-state arbitration, available at www.citizen.org/documents/letter-senio
r-legal-experts-oppose-isds.pdf.
86
Partnership negotiations, are particularly relevant for utilities disputes in light of their
impact on public needs and the environment.
Determining whether a government’s regulatory exercise is abusive or legitimate is a
significant challenge for all arbitral tribunals. The new generation of investment treaties,
in addition to providing for more public access to the arbitration procedure itself, setting
out more reservations and exclusions that purport to limit the types of claims that may be
arbitrated. For example, some modern treaties exclude the possibility that good faith envi-
ronmental measures constitute an indirect expropriation.48 These exclusions will result in
unique fact-finding challenges to determine a state’s motive in regulating utilities.49
48 See, e.g., Annex 10. 11 of the Canada–Honduras Free Trade Agreement concerning indirect expropriation,
which provides in section (c) that ‘except in rare circumstances, such as when a measure or series of measures
is so severe in light of its purpose that it cannot be reasonably viewed to have been adopted and applied in
good faith, a non-discriminatory measure of a Party that is designed and applied to protect legitimate public
welfare objectives, such as health, safety and the environment, does not constitute an indirect expropriation.’
49 One of the best-known investment arbitrations concerning the motive of a state when issuing a regulatory
measure is the Methanex case. There the tribunal explored whether the claimant’s inferences could be
reasonably supported by testing the claimant’s theory against concrete facts, including scientific expert reports.
The tribunal found that the expert testimony went to the heart of the question of whether the USA’s
measures, as alleged by Methanex, constitute[d] a ‘sham environmental protection in order to cater to local
political interests or in order to protect a domestic industry’. Methanex v. USA, Final award on jurisdiction and
merits dated 3 August 2005, para. 41, 44 I.L.M. 1345.
87
6
The Role of Sovereign Wealth Funds and National Oil Companies
in Investment Arbitrations
Grant Hanessian and Kabir Duggal1
Investments by sovereign wealth funds (SWFs) and national oil companies (NOCs) have
reached unprecedented heights in recent years.2 Although SWF and NOC investments
have generated some controversy – some host states have raised national security concerns
– commentators have noted the relatively limited attention that has been devoted to SWFs
and NOCs in investment arbitration law.3 This chapter attempts to shed some light on
critical issues relating to SWFs and NOCs in the international investment regime.
This chapter discusses and explains SWFs and NOCs and the impact that they have had
on the investment regime. It then deals primarily with jurisdictional issues relating to the
standing of SWFs and NOCs as potential claimants in investment arbitration. Subsequently
it looks at the substantive protections that might be available to SWFs and NOCs under
investment treaties.
1 Grant Hanessian is a partner and Kabir Duggal is a senior associate at Baker McKenzie LLP. The opinions
expressed herein are those of the authors and do not represent the views of Baker McKenzie LLP or its clients.
2 See, e.g., Wouter P F Schmit Jongbloed, Lisa E Sachs and Karl P Sauvant, Sovereign Investment: An Introduction,
in Sovereign Investment: Concerns and Policy Reactions (Sauvant et al, eds) (Oxford University Press 2012), p. 4:
‘Sovereign wealth funds are not a new phenomenon, yet their number and the resources available to them
have risen dramatically in recent years. Despite the multifarious impact of the Western financial crisis, eleven
new SWFs were established in 2009, more than in 2006, the heyday of international finance. SWFs controlled,
as of March 2011, a little over US$4 trillion in assets, nearly twice the amount controlled by hedge funds.
Some observers predict that this amount could reach US$15 trillion or even US$20 trillion by 2020.’
3 See, e.g., Paul Blyschak, ‘State-Owned Enterprises and International Investment Treaties: When are
State-Owned Entities and Their Investments Protected?’, 6 Journal of International Law and International Relations
2 (2011), p. 2: ‘The lack of scholarship on this point deserves remediation.’
88
The Role of Sovereign Wealth Funds and National Oil Companies in Investment Arbitrations
Understanding SWFs and NOCs, and their significance in the

investment regime
Although SWFs and NOCs qualify as state-owned entities in international law, there are
key differences between them.4
Understanding SWFs and NOCs

SWFs are investment vehicles established by governments to earn higher returns on the
excess of their foreign exchange reserves.5 The earliest SWF was established in Kuwait in
the 1950s. A number of countries now maintain such funds, including Abu Dhabi, Algeria,
Brazil, China, Libya, Norway, Russia, Saudi Arabia and Venezuela.6 Considering the wide
range of forms a SWF can take, international institutions have found it difficult to arrive
at a precise definition that would encompass all the features of an SWF.7 The Organisation
for Economic Co-operation and Development (OECD) has not provided a definition. In
2008, however, the International Working Group of Sovereign Wealth Funds (IWG), in
coordination with the IMF, developed guiding principles relating to SWFs. These are often
referred to as the ‘Santiago Principles’ and, although they are not binding, they do provide
guidelines and best practices regarding SWFs. Appendix I of the Santiago Principles defines
an SWF as follows:
SWFs are defined as special purpose investment funds or arrangements, owned by the general
government. Created by the general government for macroeconomic purposes, SWFs hold, man-
age, or administer assets to achieve financial objectives, and employ a set of investment strategies
which include investing in foreign financial assets. The SWFs are commonly established out of
balance of payments surpluses, official foreign currency operations, the proceeds of privatizations,
fiscal surpluses, and/or receipts resulting from commodity exports.8
4 See, generally, Edwin M Truman, ‘Do the Rules Need to be Changed for State-Controlled Entities? The
Case of Sovereign Wealth Funds’, in Sovereign Investment: Concerns and Policy Reactions 404 (Sauvant et al, eds.)
(Oxford University Press 2012).
5 See Mark Gordon and Sabastian V Niles, Sovereign Wealth Funds: An Overview, in Sovereign Investment: Concerns
and Policy Reactions (Sauvant et al, eds) (Oxford University Press 2012), p. 25: ‘SWFs are investment vehicles
established by governments to invest a portion of their excess foreign exchange reserves in search of higher
returns than are typically earned on official reserves. They are generally invested in safe, low-return instruments
such as U.S. Treasury bonds . . . SWFs are managed separately from other government assets and state-owned
enterprises, but remain subject to some degree of government control or management.’
6 See, e.g., Paul Blyschak (n 3), p. 5; Meg Lippincott, ‘Depoliticizing Sovereign Wealth Funds Through
International Arbitration’ 13 Chicago Journal of International Law 2 (2013), p. 645.
7 See, e.g., Sonia Yeashou Chen, ‘Positioning Sovereign Wealth Funds as Claimants in Investor-State Arbitration’,
6 Contemporary Asia Arbitration Journal 2 (2013), p. 303: ‘SWF, due to its diversity and lack-of-transparency, is
difficult to be precisely and uniformly defined.’; Meg Lippincott (n 6), p. 655: ‘The diversity of SWFs makes
any definition difficult to arrive at complex.’
8 Sovereign Wealth Funds: Generally Accepted Principles and Practices: ‘Santiago Principles’, International Working
Group of Sovereign Wealth Funds, October 2008, Appendix I, paragraph 2.
89
SWFs have grown in size and influence since their inception,9 and now possess huge
amounts of investment capital. In 2007 and 2008, capital available to the four largest SWFs
was estimated as follows: ‘[T]he Abu Dhabi Investment Authority, Norway’s Government
Pension Fund, Saudi Arabia’s SAMA Foreign Holdings, and China’s SAFE – are believed to
be worth US$627 billion, US$445 billion, US$431 billion, and US$347 billion of capital,
respectively.’10 These amounts place SWFs in a unique category as foreign investors in the
investment regime.
NOCs, on the other hand, are state-owned or controlled entities typically involved in
oil and gas exploration, production and distribution.11 NOCs control most of the world’s
oil and gas reserves and have therefore become pivotal players in the investment regime.12
In recent years, NOCs have been increasing investments outside their home countries and
have entered into several joint venture projects.13
Concerns relating to investments by SWFs and NOCs

Investments by SWFs and NOCs have raised certain concerns, particularly in host coun-
tries. Critics point to the fact that these entities are not purely commercial entities and
might therefore be inclined to promote ideological goals rather than purely commercial
9 See, e.g., Wouter P F Schmit Jongbloed, Lisa E Sachs and Karl P Sauvant (n 2), p. 4.
10 Mark Gordon and Sabastian V Niles (n 5), p. 26.
11 Different Types of Oil and Gas Company, Planete Energies, 12 June 2015, available at www.planete-energies.
com/en/medias/explanations/different-types-oil-and-gas-company (last accessed 25 June 2015): ‘Most of the
leading producing countries have a national oil and gas company, majority-owned by the government, that
is responsible for managing production and defending their national interests in the oil and gas sector. In the
OPEC countries and in some non-OPEC countries, national oil companies have exclusive or near exclusive
control of oil production.’
12 See, e.g., ‘The Role of National Oil Companies in the International Oil Market’, CRS Report For Congress,
21 August 2007, pp. 3-4: ‘These values suggest that the ten largest reserve holding companies, largely state
owned, will be major forces in the world oil market about seven times as long as the five major international
oil companies. In a market where reserve position is likely to translate into production and pricing power,
the state oil companies are in a dominant position, and the international oil companies are likely to continue
to play a lesser role. It is also not likely that the reserve positions of the companies will change in favor of
the international oil companies in the future.’; Jorge Leis, John McCreery and Juan Carlos Gay, ‘National Oil
Companies Reshape The Playing Field, Bain & Company’ (10 October 2012), available at www.bain.com/
publications/articles/national-oil-companies-reshape-the-playing-field.aspx (last accessed 25 June 2015):
‘The rise to prominence of national oil companies (NOCs) has shifted the balance of control over most of
the world’s oil and gas reserves. In the 1970s, the NOCs controlled less than 10% of the world’s oil and gas
reserves; today, they control more than 90%.’; Paul Blyschak (n 3), p. 7: ‘Thirteen separate NOCs control more
reserves than does ExxonMobil, the world’s largest private oil company. Some NOCs have grown so large
they have been termed ‘states within states’ at times capable of so dominating national politics that, rather than
defending governmental interests, their agendas have come to direct governmental affairs.’
13 See generally, Jared Anderson, ‘Foreign Investors, NOCs Involved in World’s Largest Recent Oil & Gas
Deals, Breaking Energy’ (9 April 2013), available at www.breakingenergy.com/2013/04/09/foreign-investor
s-nocs-involved-in-world-s-largest-recent-oil-and/ (last accessed 25 June 2015).
90
goals.14 Others have expressed concerns regarding the lack of transparency in the manage-
ment of SWFs and NOCs or the fact that they might not be as efficient as private entities.15
Other critics go further, raising national security concerns, highlighting, in particu-
lar, large investments that are made by SWFs or NOCs in politically sensitive sectors.16
For example, the potential acquisition of several ports in the US in 2007 by Dubai Ports
World, owned by the Government of Dubai, gave rise to national security concerns in the
US Congress.17 Similarly, national security concerns regarding the potential acquisition of
Unocal, a US oil company, by the China National Offshore Oil Corporation led the US
House of Representatives to pass a resolution requesting the US President to conduct a
‘thorough review’ of the transaction.18 The resolution stated, in particular:
Whereas oil and natural gas resources are strategic assets critical to national security and the
Nation’s economic prosperity; . . .
Resolved,That it is the sense of the House of Representatives that–
(1) the Chinese state-owned China National Offshore Oil Corporation, through control of
Unocal Corporation obtained by the proposed acquisition, merger, or takeover of Unocal
Corporation, could take action that would threaten to impair the national security of the
United States; and
(2) if Unocal Corporation enters into an agreement of acquisition, merger, or takeover of Unocal
Corporation by the China National Offshore Oil Corporation, the President should initi-
ate immediately a thorough review of the proposed acquisition, merger, or takeover.19
14 See, e.g., Paul Blyschak (n 3), pp. 7–8: ‘Chief among these considerations is that in conducting their business,
SOEs might consider subjugating market interests to political goals.’; H. Marjosola, ‘Sovereign Wealth
Funds, Foreign Investment Policies and international Investment Law – A Comment on Compatibility’,
7 Transnational Dispute Management 4 (2010), p. 3: ‘The fact that SWFs are owned and at least indirectly
controlled by governments has raised many political concerns.’; Mathias Audit, ‘Is the Erecting of Barriers
Against Foreign Sovereign Wealth Funds Compatible with International Investment Law’, SIEL Working
Paper No. 29/08, p. 2: ‘Regardless of the search of financial return, SWFs could be used by their home
governments to achieve international policy goals. As such, host countries may frown upon SWFs’ investments
on their soil.’;Yvonne C L Lee, ‘The Governance of Contemporary Sovereign Wealth Funds’, 6 Hastings
Business Law Journal 1 (2010), p. 201: ‘Two key concerns about SWF investments, the lack of transparency
and ominous investment strategy, have been raised by politicians in recipient countries such as the US’;
Sonia Yeashou Chen (n 7), pp. 305-306: ‘The government control of SWFs has raised broad policy concerns,
including the lack of transparency and the potential use of SWF capital for strategic or political purpose.
A lack of transparency undermines the theory of efficient markets of economic systems, and SWFs may be
driven by geopolitical interests in addition to financial interest.’
15 See generally, Mark Gordon and Sabastian V Niles (n 5), pp. 31–36.
16 Meg Lippincott (n 6), p. 651: ‘SWFs also pose a unique national security challenge for policymakers due to
concerns about their legitimacy and integrity as investors. SWFs could potentially be used to promote the
political goals of their sovereign owners and threaten the political and economic security of states in which
they invest.’; Wouter P F Schmit Jongbloed, Lisa E Sachs and Karl P Sauvant (n 2): ‘The most important and
prevalent concern about SCE investment relates to the issue that such investments may have detrimental
impacts on host countries’ national security. In particular, sovereign investment in strategic industries has raised
numerous concerns, including, for instance, about foreign access to sensitive technologies or of foreign control
over natural resources, key industrial complexes or critical infrastructure.’
17 Paul Blyschak (n 3), p. 8.
19 See House of Representatives Resolution 344, 109th Congress (2005-2006) (emphasis added).
91
We discuss below whether such measures might breach investment treaty obligations.
Jurisdictional issues relating to SWFs and NOCs

There are three jurisdictional issues of particular relevance to SWFs and NOCs. The first
concerns an issue of jurisdiction ratione materiae: whether pre-admission screening of pro-
posed investments of SWFs or NOCs breaches treaty obligations. The second and third
concern issues of jurisdiction ratione personae: whether SWFs or NOCs qualify as for-
eign investors under bilateral investment treaties and under the International Centre for
Settlement of Investment Disputes (ICSID) Convention, since the ICSID Convention does
not permit arbitration between states. Each of these questions raises interesting legal issues.
Pre-admission review of SWFs/NOCs and breaches of investment treaties

Considering the political sensitivity involved, many countries have established pre-screening
procedures applicable to SWF and NOC investments; this is typically done pursuant to a
domestic statute that empowers national government agencies to review potential invest-
ments by foreign persons to determine the effect of these investments on, inter alia, national
security. In the United States, for example, the Committee on Foreign Investment in the
United States (CFIUS) was created in 1975 by an executive order to deal with data col-
lection, analysis of inbound investment and to screen potential foreign investments for
national security purposes.20 The US Department of Treasury describes the role of CFIUS
in the following manner:
CFIUS is an inter-agency committee authorized to review transactions that could result in con-
trol of a U.S. business by a foreign person (‘covered transactions’), in order to determine the effect
of such transactions on the national security of the United States. CFIUS operates pursuant
to section 721 of the Defense Production Act of 1950, as amended by the Foreign Investment
and National Security Act of 2007 (FINSA) (section 721) and as implemented by Executive
Order 11858, as amended, and regulations at 31 C.F.R. Part 800.21
Similar procedures have been developed in France, China, Canada, Japan, Korea, Russia and
Germany.22 The question arises whether they violate obligations under an investment treaty.
Considering that there is a wide array of options with respect to bilateral investment
treaty (BIT) drafting styles, there appear to be three prevalent approaches to pre-admission
review of investments.Table 1, below, describes these approaches and highlights what might
be the potential consequence under each.
20 Paul Blyschak (n 3), p. 11. See also, Clay Lowery, ‘The U.S. Approach to Sovereign Wealth Funds and the Role
of CFIUS’, in Sovereign Investment: Concerns and Policy Reactions 413 (Sauvant et al, eds.) (Oxford University
Press 2012).
21 See ‘The Committee on Foreign Investment in the United States (CFIUS), U.S. Department of Treasury:
Resource Center’, available at www.treasury.gov/resource-center/international/Pp./Committee-o
n-Foreign-Investment-in-US.aspx (last accessed 25 June 2015 (emphasis added).
92
Table 1: Different approaches to pre-admission review

Issue Approach 1 Approach 2 Approach 3
Treaty BIT is silent on issue. India-Kazakhstan BIT, Article 2012 US Model BIT, Article
provision 3(1):‘Each Contracting 3(1): ‘Each Party shall accord
Party shall encourage and to investors of the other
create favourable conditions Party treatment no less
for investors of the other favorable than that it accords,
Contracting Party to make in like circumstances, to its
investments in its territory, own investors with respect to
and admit such investments the establishment, acquisition,
in accordance with its laws expansion, management,
and policy.’ conduct, operation, and
sale or other disposition of
investments in its territory.’
Potential Typically, BIT protection This approach is referred to National treatment is
consequence would extend only to as the ‘admissions’ model. guaranteed to investors
admitted investments and States must create favourable pre-investment. If the
therefore, pre-admission conditions, however, the claimant can establish it was
reviews would be outside actual admission of an in ‘like circumstances’ and
the scope of the treaty’s investment is conditional on not given equal treatment
protection.23 host state laws and policy.24 to domestic investors, there
Only if there is breach of could be a breach of the BIT.
these requirements, would Commentators sometimes
there be a breach of the BIT. refer to this as the ‘pre-
establishment’ model.25
23 24 25
23 See, e.g., Mihaly International Corporation v. Democratic Socialist Republic of Sri Lanka, ICSID Case No.
ARB/00/2, Award, 15 March 2002, paragraph 60: ‘The Claimant has not succeeded in furnishing any
evidence of treaty interpretation or practice of States, let alone that of developing countries or Sri Lanka
for that matter, to the effect that pre-investment and development expenditures in the circumstances of the
present case could automatically be admitted as ‘investment’ in the absence of the consent of the host State
to the implementation of the project.’; William Nagel v.The Czech Republic, SCC Case No. 49/2002, Award
(9 September 2003), p. 326: ‘the basic undertaking in the Cooperation Agreement was that the parties should
work together for the purpose of obtaining a GSM licence. There was not, and could not be, a guarantee that
a licence would in fact be obtained. That would depend on the Government, and the Government had made
no undertaking in this regard.’
24 See, e.g., Anna Joubin-Bret, Admission and Establishment in the Context of Investment Protection, in
Standards of Investment Protection (Reinisch ed.) (Oxford University Press 2008), pp. 11-12: ‘Treaties following
the admission model encourage the parties to promote favourable investment conditions between them,
but leave the conditions of entry and establishment up to the discretion of each country, ie to the laws and
regulations of each country. . . . This approach also means that the laws and regulations relating to entry of
foreign investment may change over time and there is no commitment as to a level of liberalization of entry
conditions or to remove any restriction or eliminate discriminatory legislation affecting the establishment of
foreign investment (unless the BIT states otherwise).’
25 Andrew Newcombe and Lluís Paradell, Law and Practice of Investment Treaties: Standards of Treatment (Kluwer Law
International 2009), pp. 120-121: ‘Under customary international law, states have the sovereign right to control the
admission of foreign investors and investments into their respective territories. A state is not required to admit foreign
investors or investments, or otherwise allow foreigners to engage in commercial activities in its territory unless it has
made an express commitment to do so. However, after admission, a host state is required to treat foreign investors
and investments in accordance with local laws and the customary international law minimum standard of treatment.’;
Anna Joubin-Bret (n 24), p. 13: ‘Treaties using the pre-establishment model grant foreign investors a positive right to
national treatment and MFN treatment not only once the investment has been established, but also with respect to
the actual entry and establishment of the investment.’
93
The traditional, prevailing approach appears to be that pre-admission screening of a poten-

tial investor or investment would not be prohibited under international law or under most
investment treaties.26 Therefore, as a general matter, a state could review any potential
investment and decide whether to admit it or not. States can, however, waive this right by
expressly providing for pre-admission protection,27 which can be afforded in a variety of
ways. Some treaties, such as the India–Kazakhstan BIT, envision a best-efforts obligation
in admitting investments and an effort, on the part of the states, to ‘encourage’ and ‘create’
favourable conditions.28 However, they are not ‘hard’ obligations wherein a state is obligated
under all circumstances to admit the investment in its territory. In contrast, other treaties,
such as the 2012 US Model BIT, go further. This Model envisions national treatment pro-
tection even at the stage of admitting investments. Under this approach, an investor can
invoke a substantive breach of the treaty protection if a domestic investor, which is in a
like circumstance, is afforded preferential treatment. However, finding an investor that is
‘in like circumstances’ might not be a simple task. The problem was explained by Professor
Sornarajah as follows:
There is the possibility that the national treatment standard is violated where a state refuses to
permit acquisition of shares by a SWF of a state with which it has an investment treaty granting
pre-entry rights of investment. . . . However, for violation of the national treatment standard,
as seen above, it must be shown that the discrimination was in a situation where there were
‘like circumstances’. The test requires comparison. The identification of a national ‘comparator’
is important. Such a comparator would be difficult to find, as it is unlikely that any national
investor would have the ‘deep pockets’ of the SWF, its association with a foreign state, or possess
motivation by national as well as commercial interests.29
26 Paul Blyschak (n 3), p. 16: ‘Most [international investment treaties] afford protection only to post-investment
activities. This means that, generally speaking, the decision made by national investment authorities screening
proposed inbound foreign investment by SWFs and [state-owned corporations] will not be subject to review
by investment arbitration tribunals.’
27 M Sornarajah, ‘Sovereign Wealth Funds and the Existing Structure of the Regulation of Investments’, 1 Asian
Journal of International Law 2 (2011), p. 274: ‘Another preliminary point to remember is that the entry of
foreign investment can be prohibited by the host state. This is a matter of sovereign prerogative. . . . The right
to prevent entry may, however, be surrendered by an investment treaty which recognizes a pre-entry national
treatment standard.’
28 See, e.g., ‘Identification of Common Features and Differences of Existing International Investment
Instruments from the Perspective of the European Community and its member States (including Rights and
Obligations of Home and Host Countries and of Investors and Host Countries)’, WTO Working Group
on the Relationship Between Trade and Investment, WT/WGTI/W/30 (27 March 1998), paragraph 1.1:
‘The Bilateral Investment Treaties concluded in great number by the member States of the Community are
similar in structure, but vary in legal detail. They do not affect the right to regulate the admission of foreign
investors. Typically, admission (or ‘promotion’) clauses are best effort clauses encouraging admission, and are
often qualified by provisions such as ‘according to each Party’s laws’, or ‘subject to’ or ‘in exercise of its powers
conferred by law’. Neither do these BITs provide for the same right that national companies have for making
investments (national treatment).’
29 M Sornarajah (n 27), pp. 281–282 (emphasis added).
94
If pre-admission protection is provided, as in the 2012 US Model BIT, states can still agree
to carve out exceptions in other parts of the treaty. In the absence of any such exception,
an investor will be entitled to invoke breach of any substantive protection that is granted,
unless the state can raise a defence under customary international law.
Jurisdictional issues under BITs

The next jurisdictional issue that arises is whether the SWF or NOC qualifies as an ‘inves-
tor’ under the applicable BIT, and the tribunal therefore has jurisdiction ratione personae.
SWFs and NOCs differ from traditional private corporations in that they are state-owned
and, in the usual case, state-controlled.The question that arises from this situation is whether
BITs envision such entities as falling within the scope of the treaty. Different treaties have
addressed this in different ways, and Table 2, below, describes three common approaches, as
well as the potential consequences of these approaches.
Table 2: Different approaches to state entities

Issue Approach 1 Approach 2 Approach 3
Treaty NAFTA, Article 201(1): Ghana-China BIT, Article India-Turkmenistan BIT,
provision ‘“enterprise” means any 1(b): Article 1(a):
entity constituted or
organized under applicable ‘The term “investor” means: ‘(a) “Companies” means: . . .
law, whether or not for profit, . . . In respect of Ghana:. . .
and whether privately-owned (ii) in respect of
or governmentally-owned, (ii) state corporations and Turkmenistan, every juridical
including any corporation, agencies and companies person, associations, firms,
trust, partnership, sole registered under the laws of companies and other societies
proprietorship, joint venture Ghana which invest or trade or unions with the rights of
or other association.’ abroad.’ a juridical entity founded
in accordance with the
legislation of Turkmenistan
and located on its territory.’
Potential The definition of enterprise The definition of investor Since the BIT itself does not
consequence expressly includes entities for a Ghanaian company specify whether State entities
that are ‘governmentally- expressly includes ‘state are included, a tribunal
owned’ and, therefore, SWFs corporations’. This is a is likely to adopt a plain
or NOCs would fall within question of domestic law but meaning analysis to see if
scope of the treaty. if NOCs or SWFs have been SWFs or NOCs would fall
set up as ‘state corporations’, within the scope of the treaty.
they would expressly fall
within the definition of
‘investor’.
30
Some treaties, like NAFTA and the Ghana–China BIT, make clear that state entities
fall within the definitions of enterprise or investor, and are therefore entitled to treaty
30 Paul Blyschak (n 3), p. 24 (‘where an [international investment treaty] definition of “investor” speaks solely of any or
all ‘legal entities’ it is reasonable to conclude that this should include both privately and publically held companies.’).
95
protection.31 But many older treaties, like the India–Kazakhstan BIT, are silent on whether
governmentally-owned entities, such as SWFs or NOCs, fall within the treaty’s scope. In
such a case, an investment tribunal is likely to adopt an interpretative exercise under the
Vienna Convention on the Law of Treaties.32 If an SWF or NOC meets the criteria under
such a BIT (e.g., which requires only that an investor be incorporated or have its seat in
the territory of a contracting party)33 it would fall within the scope of the treaty protection.
Jurisdictional issues under the ICSID Convention

The ICSID Convention also requires a claimant to meet the requirements of the ICSID
Convention itself, which outlines the outer limits for a tribunal’s jurisdiction.34 Keeping this
in mind, the next question to be considered is whether SWFs or NOCs meet the objec-
tive requirement under Article 25(2) of the ICSID Convention, which defines ‘National
of another Contracting State.’35 This question is significant because the ICSID Convention
does not permit arbitration between two or more states.36 Aron Broches, general coun-
sel to the World Bank and a founding father of ICSID, in his 1972 Hague Academy of
International Law lectures on the ICSID Convention, stated that companies that are owned
by governments would not be disqualified under Article 25(2) of the ICSID Convention,
unless they were acting as an agent for the government; and they were discharging an
essentially governmental function. This is commonly referred to as the ‘Broches test’ and is
described as follows:
31 See also ‘Asean Comprehensive Investment Agreement’, dated 26 February 2009, Article 4(e): ‘“juridical
person” means any legal entity duly constituted or otherwise organised under the applicable law of a Member
State, whether for profit or otherwise, and whether privately-owned or governmentally-owned, including
any enterprise, corporation, trust, partnership, joint venture, sole proprietorship, association, or organization.’
(emphasis added).
32 Article 31(1) of the Vienna Convention on the Law of Treaties: ‘1. A treaty shall be interpreted in good faith in
accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light
of its object and purpose.’
33 See, e.g., ‘Agreement on Encouragement and Reciprocal Protection of Investments between the Kingdom of
the Netherlands and the Republic of Ghana’, signed on 31 March 1989, entered into force on 7 July 2000,
Article 1(b)(ii): ‘legal persons constituted under the law of that Contracting Party.’; ‘Treaty Concerning the
Promotion and Mutual Protection of Investments between the Federal Republic of Germany and Bolivia’,
signed on 23 March 1987, entered into force on 9 November 1990, Article 1(4)(a): ‘Any juridical person as
well as any commercial or other company or association with or without legal personality having its seat in
the German areas of application of this Treaty, irrespective of whether or not its activities are directed at profit.’
34 H Marjosola (n 14), p. 6: ‘The outer limits of the ICSID’s jurisdiction ratione personae are set by negative
requirements: ICSID does not solve pure commercial disputes between private parties nor does it allow states
to access the Centre in the capacity of investor’s.’
35 Article 25(2)(b) of the ICSID Convention: ‘any juridical person which had the nationality of a Contracting
State other than the State party to the dispute on the date on which the parties consented to submit such
dispute to conciliation or arbitration and any juridical person which had the nationality of the Contracting
State party to the dispute on that date and which, because of foreign control, the parties have agreed should be
treated as a national of another Contracting State for the purposes of this Convention.’
36 See Article 25 of the ICSID Convention.
96
I shall speak at some length about the determination of nationality in the light of the provi-
sions of Article 25(2). But there is another question which is not dealt with by the Convention,
namely whether an entity in order to qualify as a ‘national of another Contracting State’
must be a privately owned entity. . . . There are many companies whose shares are owned by
the government, but who are practically indistinguishable from the completely privately owned
enterprise both in their legal characteristics and in their activities. It would seem, therefore, that
for purposes of the Convention a mixed economy company or government-owned corporation
should not be disqualified as a ‘national of another Contracting State’ unless it is acting as an
agent for the government or is discharging an essentially governmental function. I believe it is
fair to say that there was a consensus on this point among those participating in the preparation
of the Convention.37
The Broches test has been discussed and applied by investment arbitral tribunals. One of
the earliest cases discussing the application of the Broches test was the CSOB v.The Slovak
Republic case.38 In its objection to jurisdiction in that case, the Slovak Republic argued that
the claimant, CSOB, was a ‘state agency of the Czech Republic rather than an independent
commercial entity’, and therefore the ‘real party’ in the dispute was the Czech Republic.39
Since the ICSID Convention does not permit arbitration between two states, the mat-
ter necessarily fell outside the purview of the tribunal’s jurisdiction. The tribunal noted
respondent’s submission that more than 65 per cent of CSOB’s shares were owned by the
Czech Republic and an additional 24 per cent were owned by the Slovak Republic.40 The
tribunal, however, rejected these arguments, noting that the fact that CSOB is a public sec-
tor entity rather than a private sector entity did not address the ‘crucial issue’.41
Instead, the tribunal stated that the Broches test was appropriate to determine whether
a state-entity’s activities fall outside the scope of the ICSID Convention and concluded
that, even though CSOB was owned by the state, its activities were primarily commercial:
It cannot be denied that for much of its existence, CSOB acted on behalf of the State in facili-
tating or executing the international banking transactions and foreign commercial operations
the State wished to support and that the State’s control of CSOB required it to do the State’s
bidding in that regard. But in determining whether CSOB, in discharging these functions,
exercised governmental functions, the focus must be on the nature of these activities and not their
purpose.While it cannot be doubted that in performing the above-mentioned activities, CSOB
was promoting the governmental policies or purposes of the State, the activities themselves were
essentially commercial rather than governmental in nature.42
37 Aron Broches, ‘The Convention on the Settlement of Investment Disputes between States and Nationals
of Other States’, 136 Recueil des Cours (1972), pp. 354-355 (emphasis added); see also Mark Feldman, ‘The
Standing of State-Owned Entities under Investment Treaties’, in Yearbook on International Investment Law &
Policy 2010-2011 (Sauvant, ed.) (Oxford University Press 2012), p. 622.
38 Ceskoslovenska Obchodni Banka, A.S. (CSOB) v.The Slovak Republic, ICSID Case No. ARB/97/4, Decision on
Jurisdiction, 24 May 1999.
39 Ibid, paragraph 15.
40 Ibid, paragraph 18.
41 Ibid.
42 Ibid, paragraph 20 (emphasis added).
97
The tribunal therefore dismissed respondent’s objection. Some commentators have criti-
cized the ‘inadequate reasoning’ of this tribunal, particularly since it did not consider the
second prong of the Broches test (i.e., the question whether CSOB was acting as an agent
for the government).43 Notwithstanding such objections, the CSOB v. Slovak Republic case
is the first application of the Broches test.
Another application of the Broches test was the CDC v. Seychelles case. The claimant,
CDC, a UK public company, was described by the tribunal as a ‘governmental instrumentality
for investing in developing countries [that was] wholly owned by the UK Government, but
acted on a day-to-day basis without Government instruction or operational involvement’.44
The Republic of Seychelles had initially raised an objection to jurisdiction, but eventually
withdrew its objection and did not contest the tribunal’s jurisdiction.45 However, the tribu-
nal, in its award, made clear that CDC’s activities were commercial and not governmental:
CDC’s activities are commercial in substance and nature. CDC’s investments in the Seychelles
related to the expansion of the capacity of the Baie Ste Anne Power Station on the Island of
Praslin and the upgrading of Victoria A Power Station on the Island of Mahé. These invest-
ments were made on a commercial basis.46
Thus, the tribunal examined whether the entity was essentially acting in a commercial or
in a governmental capacity – much like in CSOB.
A related question that arises when considering this issue is whether the Broches test
would also apply to situations where there is control by the State or only to situations con-
cerning ownership by a state. Commentators have suggested that the Broches test should
apply to both situations of ownership and control.47 The issue of investments that might
be partially commercial and partially governmental has not been explored in the jurispru-
dence at this stage, and it does not appear that any investment tribunal has refused jurisdic-
tion on this ground so far.
SWFs and NOCs must, of course, meet all other jurisdictional requirements, including
the criteria for determining the existence of an ‘investment’ under the ICSID Convention.
A common formulation for this was developed by the tribunal in the Salini v. Morocco case
and one of the criteria relates to the contribution made to the economic development of
43 Paul Blyschak (n 3), pp. 31-41.

44 CDC Group plc v. Republic of the Seychelles, ICSID Case No. ARB/02/14, Decision on Annulment,
29 June 2005, paragraph 2.
45 CDC Group plc v. Republic of the Seychelles, ICSID Case No. ARB/02/14, Award, 17 December 2003,
paragraph 6.
46 Ibid, paragraph 17 (emphasis added).
47 Paul Blyschak (n 3), p. 42: ‘This conclusion – that the Broches test should be engaged by government
controlled entities as well as government-owned entities – is also generally supported by related investment
law and investment arbitration state case law.’
98
the host state.48 Many investments by SWFs are of course in financial instruments49 that
may not satisfy the ICSID Convention’s ‘investment’ requirement.50
Substantive protections available to SWFs and NOCs

If a tribunal ultimately determines that it possesses jurisdiction, the next questions to
arise concern the substantive protections available to SWFs and NOCs under investment
48 Salini Costruttori S.P.A. and Italstrade S.P.A. v. Kingdom of Morocco, ICSID Case No. ARB/00/4, Decision
on Jurisdiction (16 July 2001), paragraph 42: ‘The doctrine generally considers that investment infers:
contributions, a certain duration of performance of the contract and a participation in the risks of the
transaction. In reading the Convention’s preamble, one may add the contribution to the economic
development of the host State of the investment as an additional condition’ (internal citations omitted). Not
all tribunals agree with the criteria developed by the Salini tribunal, more particularly on the contribution
to the economic development of the host state. See, e.g., Philip Morris Brand Sàrl (Switzerland), Philip Morris
Products S.A. (Switzerland) and Abal Hermanos S.A. (Uruguay) v. Oriental Republic of Uruguay, ICSID Case No.
ARB/10/7, Decision on Jurisdiction (2 July 2013), paragraph 207: ‘Of its constitutive elements, the most
controversial one has been held by some tribunals to be the contribution to the economic development
of the host State due to the subjective character of this element and the resulting difficulty to ascertain its
presence in a given investment. In order to determine whether an investment, at the time it is made, is capable
of contributing to the economic development of the host State a tribunal would be required to conduct
an ex post facto analysis of a number of elements that, considering also the time elapsed, ‘can generate a
wide spectrum of reasonable opinions’. See also Matthew Weiniger and Harry Ormsby, ‘Treaty Column:
Contrasting Approaches to “Contribution”’, Global Arbitration Review (7 April 2014).
49 See, e.g., Mark Gordon and Sabastian V Niles (n 5), p. 25: ‘[SWFs] are generally invested in safe, low-return
instruments such as U.S. Treasury bonds’.
50 Tribunals have considered whether investments involving purely financial instruments were actually invested
in the host country and contributed to the economic development of the host country. See, e.g., Fedax N.V. v.
The Republic of Venezuela, ICSID Case No. ARB/96/3, Decision of the Tribunal on Objections to Jurisdiction
(11 July 1997), paragraph 41: ‘While it is true that in some kinds of investments listed under Article l(a) of
the Agreement, such as the acquisition of interests in immovable property, companies and the like, a transfer
of funds or value will be made into the territory of the host country, this does not necessarily happen in a
number of other types of investments, particularly those of a financial nature. It is a standard feature of many
international financial transactions that the funds involved are not physically transferred to the territory of
the beneficiary, but put at its disposal elsewhere. In fact, many loans and credits do not leave the country of
origin at all, but are made available to suppliers or other entities. The same is true of many important offshore
financial operations relating to exports and other kinds of business. And of course, promissory notes are
frequently employed in such arrangements. The important question is whether the funds made available are
utilized by the beneficiary of the credit, as in the case of the Republic of Venezuela, so as to finance its various
governmental needs. It is not disputed in this case that the Republic of Venezuela, by means of the promissory
notes, received an amount of credit that was put to work during a period of time for its financial needs.’;
Abaclat and Others v. Argentine Republic, ICSID Case No. ARB/07/5, Decision on Jurisdiction and Admissibility
(Majority Opinion) (4 August 2011), paragraph 374: ‘With regard to an investment of a purely financial
nature, the relevant criteria cannot be the same as those applying to an investment consisting of business
operations and/or involving manpower and property. With regard to investments of a purely financial nature,
the relevant criteria should be where and/or for the benefit of whom the funds are ultimately used, and not
the place where the funds were paid out or transferred. Thus, the relevant question is where the invested funds
ultimately made available to the Host State and did they support the latter’s economic development? This is
also the view taken by other arbitral tribunals.’
99
treaties. The jurisprudence concerning SWFs and NOCs has been fairly limited to date.51
With regard to SWFs, this could be in part attributed to the fact that there has only recently
been a growth in direct foreign investment by SWFs, and that the contribution of SWFs is
still fairly limited.52 However, once jurisdiction has been established, it would seem that the
SWFs and NOCs would be entitled to all the protections that are available to any foreign
investor under the applicable treaties.
Discrimination
Considering the political sensitivities involved, it is likely that SWFs or NOCs might have
additional requirements imposed on them by host states, and this could potentially breach
the discrimination, national treatment (NT) or most-favoured nation treatment (MFN)
protections under a treaty. As a commentator has opined, ‘claims arising from NT and
MFN could be the most likely cause of action, since most of the time the reason why an
SWF investment is prohibited is because it is government-controlled. This could result in
discriminatory treatment.’53 As discussed above, the need to find a comparator in ‘like cir-
cumstances’ could be essential for any breach of NT.54
Fair and equitable treatment, legitimate expectations, and expropriation

SWFs or NOCs could also be subject to treatment that violates the fair and equitable
treatment standard or their legitimate expectations.55 Indeed, the OECD has noted that
‘[e]xisting OECD principles call for fair treatment of SWFs.’56 If host state measures have
had a severe, lasting impact on an investment, the measure might also potentially breach
the expropriation provision in the treaty.57 The Ras al-Khaimah Investment Authority
(the investment authority for one of the seven UAE emirates) reportedly has initiated an
approximately US$50 million claim under the UNCITRAL arbitration rules against India
51 M Sornarajah (n 27), pp. 278-279: ‘The assessments that have been made in some commentaries regarding
investment treaties may be stating the case in optimistic terms. There have been no cases yet resulting
from breaches of treaty obligations owed to SWFs. The earlier treaties were not made with SWFs in mind.
However, as stated above, it may be a sound preliminary view that, since SWFs are operated as private interests,
they are to be treated as private foreign investors and hence entitled to treaty protection.’
52 See generally, Sonia Yeashou Chen (n 7), pp. 317–318.
53 Sonia Yeashou Chen (n 7), p. 310.
54 M Sornarajah (n 27), p. 284: ‘In the absence of a comparator, it would be difficult to allege discrimination.
The comparator must have some similar characteristics and operate in the same sector. The SWF is essentially
different from other foreign investors and this in itself sets it apart from others in the field as investors.’
55 Sonia Yeashou Chen (n 7), p. 311: ‘Legitimate expectations of the FET is a likely raised claim. As in other cases,
the regulatory changes may fail to protect SWFs’ legitimate expectations.’
56 See ‘Sovereign Wealth Funds and Recipient Country Policies’, OECD Investment Committee Report
(4 April 2008).
57 M Sornarajah (n 27), pp. 284–285: ‘The fair and equitable standard has emerged in recent arbitral
jurisprudence as the most productive of the causes of action as its scope has been expanded through
interpretation. . . . The new scope created for it may throw open avenues for relief for SWFs that have been
affected by governmental measures by the host state.’
100
for termination of a supply agreement by an Indian state.58 This case has been initiated pur-
suant to the UAE–India BIT and is the only case known to the authors in which an SWF
has relied on a BIT.
Potential defences by the host state

The SWFs or NOCs must be prepared to deal with the likely objection that a host
State might raise in the face of alleged breaches due to expropriation: the public policy/
national security defence.59 Further, the question arises whether such a defence might be
self-judging would depend on the actual language used in the BIT.60 Some BITs expressly
state that the guarantees under a treaty are subject to host state laws. In such cases, if the
measure in question is a consequence of a law, the SWFs or NOCs would have an addi-
tional hurdle to overcome.
Conclusion
The increasing prominence of SWFs and NOCs in recent years has raised a number of unre-
solved legal questions in investment arbitration. On the jurisdictional side, pre-admission
screening of SWFs and NOCs poses a unique problem, particularly concerning reviews
conducted under domestic law dealing with national security concerns. The recent trend
in extending some investment protection to the pre-investment phase, as adopted by the
US in the 2012 Model BIT, might have implications for such review. Beyond that, SWFs
and NOCs are likely to fall within the scope of most treaties’ definitions of ‘investor,’ unless
expressly excluded from a treaty’s protection. Further, they would also need to satisfy the
ICSID Convention, and to do so, the Broches test.
On the substantive side, although the jurisprudence appears to be very limited, it is
likely that the primary case for SWFs or NOCs would be a claim for discrimination or
breach of a treaty’s FET provision.
As SWFs and NOCs continue to grow in prominence, negotiators of future invest-
ment treaties may consider whether to focus more attention on their unique character and
develop specific rules applicable to their investments.
58 ‘UAE Investment Authority Takes on India’, Global Arbitration Review (13 January 2017). The Sovereign Wealth
Fund Institute (SWFI) notes that the RAK Investment Authority has assets valued at US$1.2 billion. See
RAK Investment Authority, Sovereign Investment Authority Institute, available at http://www.swfinstitute.
org/fund/rak.php (last accessed 1 March 2017).
59 Sonia Yeashou Chen (n 7), p. 312.
60 M Sornarajah (n 27), p. 285: ‘If the national security exception is regarded as self-judging, as indeed it must be
if it is expressly stated to be so in a treaty, then measures taken on that basis against a SWF would conclude the
issue of responsibility under the investment treaty. There are many other defences that could be pleaded under
the newer treaties as well as under customary international law.’
101
Part II
Commercial Disputes in the Energy Sector
7
Construction Arbitrations Involving Energy Facilities: Power Plants,
Offshore Platforms, LNG Terminals, Refineries and Pipelines
Doug Jones1
The mounting need for energy in a modern technologised and industrialised world has led
to a rapid rise in the construction of energy infrastructure. Between 1971 and 2014, total
energy consumption across the globe has more than doubled.2 This has been driven by
both organic growth in developed countries and new developments in emerging regions.3
Asia is one area that has seen significant growth in demand and usage, particularly given the
industrial boom in China since the turn of the 21st century.4 The relative use of different
energy sources has also evolved, often cyclically, but over the long-term having witnessed
the primacy of oil, rise of natural gas and the stagnation and decline of coal. Regardless
of which fuel source is utilised, there is a constant need to construct new energy facilities
capable of extracting fuel sources, converting them into energy and distributing them to the
end user. Mentioned in the title of this chapter are power plants, offshore platforms, LNG
terminals refineries and pipelines. By this I would not wish to so confine the relevance of
1 Doug Jones AO is an independent international arbitrator. The author gratefully acknowledges the assistance
provided in the preparation of this paper by his legal assistants, Jason Corbett and William Stefanidis.
2 International Energy Agency, Key World Energy Trends (2016), 6.
3 See e.g., OECD and Internationals Energy Agency, Comparative Study on Rural Electrification Policies in
Emerging Economies (2010), reporting at p. 11: ‘Since the G8 Gleneagles Summit in 2005, the International
Energy Agency’s (IEA) Networks of Expertise in Energy Technology (NEET) Initiative1 has sought to
encourage further involvement of major emerging economies in the IEA Technology Network comprising
international energy technology and R&D collaborative programmes. Missions and workshops when
feasible have been organised in the so-called ‘Plus-Five’ countries, namely Brazil, China, India, Mexico and
South Africa. These outreach efforts have been geared towards identifying areas of mutually desirable and
potential future collaboration between experts of these major emerging economies and the IEA Technology
Network including the Committee on Energy Research and Technology (CERT), Working Parties (WP) and
Implementing Agreements (IA).’
4 International Energy Agency, Key World Energy Trends (2016), 8 (Figure 35).
105
Construction Arbitrations Involving Energy Facilities:
Power Plants, Offshore Platforms, LNG Terminals, Refineries and Pipelines
this chapter. Recent times have seen the rise of renewable energies and the construction of
new types of solar, wind and hydropower infrastructure, particularly across Europe.
There is no question that commercial arbitration has emerged as the primary forum for
the resolution of disputes in projects for the construction of energy facilities. International
enforceability provides a key advantage in an industry that frequently brings together for
each project a vendor and a range of specialist contractors from different parts of the world.
Procuring the expertise of an experienced energy industry practitioner to preside over a
dispute neutralises the risks associated with resolving highly technical disputes in fora that
are unsophisticated in international commercial matters. Its prevalence has increased also
owing to the inclusion of arbitration clauses in leading standard form contracts, such as the
FIDIC Conditions of Contract for Construction (Red Book), Contract for EPC/Turnkey
Projects (Silver Book) and Contract for Plant and Design-Build (Yellow Book) (parts of
the FIDIC Suite).5
There are unique commercial considerations that apply to energy projects. These
include pre-construction considerations and post-construction uses and demands that are
unique to energy facilities. These considerations also encompass political factors that can
influence legal and economic policy, such as terms of trade, subsidies and taxes. What these
projects all have in common, however, is the core need for the mobilisation of resources and
expertise for the design and construction of facilities, albeit with risk-allocation provisions
that account for these additional risks.
Accordingly, when disputes arise, they are concerned with the usual array of contractual
clauses and legal principles that are common to construction disputes. The purpose of this
chapter is to provide a broad overview of these issues of risk and the laws and issues of con-
tract that underline disputes between energy project participants when they do arise. It is
hoped that this will serve as a guide that familiarises readers with the landscape in this area.
The issues that arise in construction arbitrations involving energy projects are explored
across five key themes: (1) time; (2) cost; (3); quality; (4) scope; and (5) political, economic
and social risk. For each theme, this chapter firstly explores issues of risk and the manner
in which these can be addressed through contract drafting, and secondly explores the issues
of legal and contractual principle that frequently arise in contentious arbitration disputes.
This paper is concerned with commercial arbitrations between participants in con-
struction projects for energy facilities, as opposed to investor–state claims arising from such
projects, which are covered comprehensively in other chapters in this book.
Time
Time-related risk
It is often said that time is everything in construction. The adverse effects and losses that
flow from delay in a project’s completion are often wide-ranging and severe. They can
include an increase in costs for the contractor; lost production and revenue for the owner;
adverse effects on the payback of loans to financiers; cash flow and subsequent solvency
issues of the project; knock-on delays in multi-phase projects; negative publicity, particu-
larly in government funded public projects; and breaches of ancillary arrangements to the
5 See clause 20.6 of these contract forms.
106
original contract upon which the project’s viability depends (e.g., offtake agreements, con-
tracts for inputs).This final category is highly significant in construction projects for energy
facilities. Facility owners will more often than not have entered into a binding offtake
agreement to supply energy at a specified level to an offtake partner from the date of project
completion, and will become liable to liquidated damages and other claims in the event that
they are unable to timely meet this commitment. The resulting liability is often sizeable.
Time-related risks are generally allocated to the contractor. A detailed project schedule
will establish the milestones that a contractor must meet (in addition to a more general
project schedule that is developed at an earlier stage of the project).6 The detailed project
schedule will encompass key milestones including a ‘notice to proceed’ date, phase mile-
stones, a ‘practical completion’ date, dates and targets for commissioning activities, and ulti-
mately ‘final completion’.The critical path of activities will be evident from this schedule, as
will be the level of float available to absorb some delay in the project’s performance. Where
critical delay to a project occurs, the contractor will find itself subject to an owner’s claim
for general and liquidated damages.
Despite this default position, delay to a project can equally be a result of neutral events
or events the responsibility of the owner. A contractor may find themselves aggrieved, and
the project hindered, as a result of an owner’s acts of prevention, which may include active
obstruction of the site; failure to provide designs, materials or other obligations that a con-
tractor needs to perform its scope of works; or imposing variations or change orders on
the contractor. The contractor may seek a range of remedies against the owner, including
extensions of time and damages.
Finally, neutral delays in the form of force majeure fall to the contract in accordance
with the default position under the common law. By contrast, the FIDIC Suite confers
upon the contractor a right to seek an extension of time in respect of neutral delay events
(clause 19). The characterisation of an event as ‘force majeure’ can form the subject of
heated contention.
Time-related disputes
Owner claim for liquidated delay damages
Construction contracts often include a liquidated damages clause as the principal (or exclu-
sive) remedy available to compensate an owner for a contractor’s failure to achieve timely
completion. Such a remedy levies from the contractor an agreed monetary sum that scales
per daily/weekly period, subject to an agreed cap fixed at a percentage of the contract price
(often 10 per cent - 20 per cent). This sum represents a genuine pre-estimate of the losses
that an owner will suffer as a result of delayed completion, and is compensatory rather than
punitive in nature. The main rationale behind liquidated damages clauses is to avoid the
complex and costly task of proving losses resulting from delay individually in accordance
with general principles of contract recovery.
The categories of loss that may be compensable through a liquidated damages clause
include those listed in the immediately preceding section of this chapter. In a number of
recent landmark decisions, there has been judicial recognition of a broad range of losses,
6 FIDIC Suite clause 8.2; NEC3 clause 30.1.
107
both monetary and non-monetary in nature, that may be taken into account when calculat-
ing the rate of liquidated damages payable for delay. The concept of protectable ‘legitimate
interests’ was introduced in Cavendish.7 The approach of the Australian High Court in
Paciocco8 was broadly consistent with this.
Penalties and prevention

Claims for liquidated delay damages are, however, subject to two key limitations; the doc-
trine of penalties and the prevention principle.
Under the common law, the doctrine of penalties dictates that where a liquidated dam-
age clause stipulates an amount wholly disproportionate to the value of the construction
contract such that it takes the form of a payment in terrorem, courts will not enforce the
clause.9 The test for what constitutes an in terrorem clause differs substantially across each
common law jurisdiction.10 The fundamental proposition of law is that a liquidated dam-
ages clause must be compensatory and not punitive. By contrast, in civil law jurisdictions, a
liquidated damages clause that is disproportionate to actual losses suffered is not struck out
as void, but rather, civil courts will adjust the sum stipulated in the clause to accord with
the actual losses suffered. This position is perhaps less arbitrary, though it circumvents to
some degree the objective of liquidated damages clauses, being to avoid having to calculate
actual losses.
The prevention principle states that an owner will not be entitled to claim liquidated
damages against a contractor for a period of delay which is infected with delays that are
the responsibility of the owner. For instance, where a project falls ten days behind schedule,
seven of which fall to causes that are the responsibility of the contractor, and three to causes
that are the responsibility of the owner, the owner will altogether lose the right to claim
liquidated damages in respect of the full ten-day period. Any apportionment of this delay
is inimical to the common law prevention principle. The results of this principle may at
time seem arbitrary, and contrast with the approach taken by civil courts who apportion
delay losses.The severe consequences for an owner are further magnified where the parties’
agreement specifies that liquidated damages are an exclusive remedy for delay, which may
preclude a party from claiming general damages in the alternative.11
This scenario is frequently overcome by an owner by granting an ‘extension of time’
to the contractor in respect of periods of owner-caused delay. Such an extension must be
sourced within the contract documentation, and will often involve a regime that requires a
contractor to give notice of owner-caused delays, often within specified time limits, which
are then assessed and granted or declined by the relevant umpire (either the project owner,
or a site engineer).
7 Cavendish Square Holding BV v.Talal El Makdessi; ParkingEye Limited v. Beavis [2015] UKSC 67.
8 Paciocco & Anor v. Australia and New Zealand Banking Group Limited [2016] HCA 28.
9 Clydebank Engineering and Shipbuilding Co v. Don Jose Ramos Yzquirdo y Castaneda [1905] AC 6; Dunlop
Pneumatic Tyre Co Ltd v. New Garage Motor Co Ltd [1915] AC 79.
10 For an in-depth consideration of the penalties doctrine across jurisdictions, see my paper ‘The Penalties
Doctrine in International Construction Contracting: Where to from here?’ accessible on my website
at <http://www.dougjones.info/wp-content/uploads/2006/10/Penalties-Lecture-New-Zealan
d-SCL-Final-Website-Version.pdf>.
11 Baese Pty Ltd v. RA Bracken Building Pty Ltd (2989) 52 BLR 130, 139 (Giles J).
108
In civil law jurisdictions, there is no explicit equivalent of the prevention principle.

Instead civil courts rely on the principles of good faith and fair dealing to give effect to the
universal principle that one shall not benefit from their own wrongdoing. Some countries,
such as China and South Korea, provide codified authority for courts to better apportion
any liquidated damages amounts between the loss caused by the owner’s preventing con-
duct and the contractor’s delay.12 Others, such as Germany and France, provide authority
that a party will not be liable for non-performance or delay where it resulted from an
external cause not attributable to that party.13 Any failure to do so may disentitle the con-
tractor to an extension entirely or permit the contract administrator to reduce the period
of extension accordingly.14
Contractor claim for disruption

Disruption disputes are concerned with a contractor’s loss of productivity as a result of
some form of disturbance by the employer. These disputes will commonly centre around
the ‘uneconomic working’ of the contractor as a result of the employer’s conduct.15
A contractor will be entitled to claim damages only in respect of disruption caused by
the project owner.The right of claim may be defined by contract or, absent express contrac-
tual provisions, as a breach of an implied term of contract that the owner will not prevent
or hinder the contractor in the execution of its work.16 The SCL Protocol comments that
‘[m]ost standard forms of contract do not deal expressly with disruption’.17
Contractors making disruption claims are required to demonstrate a connection between
the alleged disruptive event and the increased costs associated with their loss of productiv-
ity or ‘uneconomic working’. This will generally require a comparison between the tender
schedule and delivery mechanisms, and the adapted schedule and mechanisms as a result of
the disruption. There are a variety of methods by which disruption and productivity costs
can be calculated, and the law is not prescriptive of any one method over another.
A common approach taken by contractors is the ‘measured mile’ approach in which the
contractor will compare their rate of productivity in an undisrupted part of the project to
the rate of productivity in the disrupted part of the project. Productivity in this approach is
measured by the number of hours taken to produce a unit of work. This approach may be
impracticable where a project has been disrupted from its inception, meaning that there is
no baseline productivity from which to measure the disruption. As an alternative, the tender
will usually specify an expected level of productivity, and a loss of productivity is realised
where the actual productivity rate is less than the planned productivity rate.
12 Contract Law of the People’s Republic of China (Adopted at the Second Session of the Ninth National
People’s Congress on 15 March 1999 and promulgated by Order No. 15 of the President of the People’s
Republic of China on 15 March 1999) Art. 114; Korean Civil Code Art. 398-2.
13 German Civil Code (BGB) s. 280(1); French Civil Code art. 1147.
14 Buildability Ltd v. O’Donnell Developments Ltd [2010] BLR 122; Ho Pak Kim realty Co Pte Ltd v. Revitech Pte Ltd
[2010] SGHC 106.
15 Baulderstone Hornibrook Pty Ltd v. Qantas Airways Ltd [2003] FCA 174, [100]; Kay Lim Construction & Trading Pte
Ltd v. Soon Douglas (Pte) Ltd [2012] SGHC 186, [72].
16 See The Society of Construction Law, Delay and Disruption Protocol (2002), [1.19.4].
17 Ibid.
109
Claimants should also be wary that when selecting baseline periods of undisrupted
work to compare with disrupted work, there must be a reasonable degree of comparabil-
ity between the specific work and surrounding circumstances at both ends of the pro-
ject. The value of any comparison is otherwise substantially diminished. For example, the
undisrupted laying of foundation cannot be used a measurement for the disrupted piping
fabrication of a project.
Contractor claim for prolongation

Prolongation disputes involve contractor claims for costs associated with delay as a result of
owner-based action. They can comprise a broad range of overhead costs, opportunity costs
and additional direct costs incurred as a result of the delay. These are often determined by
reference to the tender schedule and, importantly, any express provisions contained in the
construction contract setting out terms of recovery of prolongation costs.
A contractor asserting a claim for prolongation costs will need to firstly prove the causa-
tion of delay and form of the prolongation. In arbitrations involving energy facilities, this
frequently requires the engagement of programming experts to analyse and identify the
delay (often through a schedules-analysis approach), and then a quantum expert to particu-
larise the various cost items to substantiate the prolongation claim.
Cost items that are often claimed as prolongation costs include direct costs associ-
ated with additional performance days, such as labour costs, utility expenses and security
expense; indirect home office overheads incurred by the contractor’s corporate manage-
ment, job site and engineering support personnel costs; idle equipment costs; and mitiga-
tion costs.18
Suspension of works by contractor

Primacy is given to contract for matters concerning the suspension of works by a con-
tractor. The contractor’s right to suspend is generally tied to financial concerns, namely
non-payment or a failure by the owner to show evidence of its financial arrangements.19
A contractor has no common law right to suspend work.20 An exception occurs where
the non-payment may be characterised as repudiatory conduct or in breach of an essential
term of the contract, in which case the contractor may accept the repudiation of the con-
tract and terminate.21
In the event of a dispute, there will often be allegations of ‘wrongful suspension’ and
claims for damages to compensate losses flowing therefrom. The liability that may follow
may be substantial and can include costs to complete (considered later in this chapter). A
contractual right to suspend works must therefore be exercised with caution.
18 Wiley R Wright III and Mark Baker, ‘Damages in Construction Arbitrations’ in John A Trenor (ed) The Guide
to Damages in International Arbitration (Law Business Research, London, 2016).
19 FIDIC Suite, clause 16.1.
20 Carillion Construction Ltd v. Felix (UK) Ltd [2001] BLR 1, [34]; Longyuan-Arrk (Macao) Pte Ltd v. Show and Tell
Productions Pte Ltd [2013] SGHC 160, [75].
21 Wui Fu Development Co Ltd v.Tak Yuen Construction Co Ltd [1999] HKCFI 93.
110
Termination of contract and consequences

The right to terminate arises both contractually22 and at common law. In general, a party may
not unilaterally terminate without lawful reason. The main causes for termination include
repudiation, anticipated repudiation, serious breach, frustration, illegality, statutory conferral
of the right, or where contractually allowed. The burden of proving lawful termination lies
on the party purporting to terminate the contract.23
The consequences of termination may be defined by the parties’ contract, but will oth-
erwise be subject to the common law principles described below.
Where a contractor accepts termination at common law for the owner’s conduct, for
example by repudiation, non-payment or serious breach, there are three avenues of recovery
available to them: damages, quantum meruit, and a debt action for amounts payable at the time
of termination. A contractor is entitled to recover losses flowing from termination of the
contract in order to put the contractor in the position they would be in had the contract
been performed, including reliance and expectation losses in accordance with general prin-
ciples of the recoverability of damages for breach of contract.
Alternatively, a contractor may seek to recover in quantum meruit, that is, on restitution-
ary principles that a contractor is entitled to reasonable payment for work completed to the
point of termination.24 A quantum meruit claim is, however, subject to limitations prescribed
in the contractual agreement,25 relinquishes a contractor’s ability to claim loss of profits on
the remainder of work,26 and requires the contractor to choose between making a claim for
damages or quantum meruit.27
Where an owner accepts termination at common law for conduct of the contractor,
they are usually entitled to recover damages flowing from the termination. For example,
if the owner engages a new contractor to complete works, the owner is generally able to
claim any increase in project costs associated with the new contractor against the defaulting
contractor by way of contractual rights, or first-limb damages under Hadley v. Baxendale.28
The owner is still under a duty to mitigate its losses. A contractual power to terminate will
usually dictate the rights of owners and contractors, or where a clause does not prescribe the
consequences of termination, claims for direct losses are usually implied into the contract.29
Insofar as liquidated damages, or second-limb Hadley v. Baxendale damages, are concerned,
an owner’s right to liquidated damages in general is valid until the point of termination.30
The parties may, of course, alter this right by agreement in the terms of the contract. On
restitution grounds, and therefore separate to damages, an owner may be entitled to recover
22 See FIDIC Suite, clause 15 (Termination by Employer) and clause 16.2 (Termination by Contractor).
23 Urban I (Blonk Street) Ltd v. Ayres [2013] EWCA Civ 816, [55].
24 Heyman v. Darwins Ltd [1942] AC 356; Len Lichtnauer Developments Pty Ltd v. James Trowse Constructions Pty Ltd
[2005] QCA 214; Sopo v. Kane Constructions Pty Ltd (No. 2) [2009] VSCA 141, [5].
25 Heyman v. Darwins Ltd [1942] AC 356.
26 As a quantum meruit claim acts as an alternative to a damages claim.
27 United Australia Ltd v. Barclays Bank Ltd [1941] AC 1, 29-30.
28 [1854] EWHC J70.
29 McNab NQ Pty Ltd v.Walkrete Pte Ltd [2013] QSC 128, [29].
30 Bluewater Energy services BV v. Mercon Steel Structures BV [2014] EWHC 2132 (TCC), [526].
111
overpayment to the contractor provided the contractor has totally failed to deliver any con-
sideration for such overpayment.31
A contract may also be terminated on mutual terms, either by agreement or abandon-
ment. Where a contract is terminated by mutual agreement, the procedure for doing so is
dictated by the contractual terms, however, parties may need to evidence some form of
deed or consideration.32 Where a contract is terminated by mutual abandonment, however,
it is necessary to show one party has indicated it will not proceed with the contract (in
some cases non-performance by both parties over a period is sufficient), with the consent
of the other.33
As the right to termination appears both in contract and in common law, it is critical
that the parties make clear which route of termination is being pursued. While the broad
effect of termination under both routes will align, the legal consequences and procedures
that accompany the termination will invariably differ.
Relief for force majeure

A contractor may seek an extension of time on the grounds of force majeure34 under most
standard form contracts for major construction works. The elements for a successful claim
for relief will include that an event occurred that was unforeseeable and beyond the reason-
able control of either party. The party seeking relief will often be required to comply with
notice requirements, and mitigate the impact of the neutral delay events on the project.
Specific examples of force majeure events that may impact energy projects include sudden
shortages in the supply of labour or materials, labour strikes, weather conditions, economic
events and government actions. As mentioned earlier, a contractor’s entitlement to relief for
force majeure is founded solely in contract. The default allocation of neutral risks at com-
mon law falls against the contractor.35
Cost
Cost-related risk
The need to complete work within budget is known as the cost risk. Projects for the con-
struction of energy facilities generally adopt a lump-sum fixed price contract structure,
which naturally places cost risk on the shoulders of the contractor.This fee will be based on
careful negotiation and cost-assessment. Nonetheless, cost overruns will eat directly into the
contractor’s profit margin.
There are two categories of exceptions to this default position. The first category com-
prises cost overruns that the law mandates will not be borne by the contractor. This may
include costs overruns flowing from an owner’s acts of prevention or breach of contract.
The second category comprises cost overruns arising from neutral events for which the
31 DO Ferguson & Associates v. Sohl (1992) 62 BLR 95.

32 Commodore Homes WA Pty Ltd v. Goldenland Australia Property Pty Ltd [2007] WASC 146 [32].
33 Eastgate Properties Pty Ltd v. J Hutchinson Pty Ltd [2005] QSC 196, [52]; Letizia Building Co Pty Ltd v. Redglow
Asset Pty Ltd [2013] WASC 171, [116].
34 A supervening act or event beyond the control of the parties, also referred to as an ‘Act of God’.
35 See foundational case of Company of Proprietors of the Brecknock and Abergavenny Canal Navigation Co v. Pritchard
(1796) 6 TR 750.
112
contractor is not responsible according to the terms of the relevant contract. The parties are
free during the negotiation of the terms of the contract to allocate risk for neutral delays in
whatever manner they see fit.
Additional costs incurred as a result of increases in the scope of works are dealt with
separately further below. Leaving scope changes aside, there are a multitude of issues that
can arise over the course of the project that result in inflated costs, some of which arise
from intentional conduct, others from factors that were completely unforeseeable. Explored
immediately below are some of the common claims and issues that arise in this context.
Cost-related disputes
General damages
General damages seek to restore an aggrieved contractual party to the position he or she
would have been in had the contract been properly performed.36 They are compensatory
in nature.
The seminal case of the modern understanding of general damages is the English High
Court case of Hadley v. Baxendale.37 So far as calculating damages are concerned, the court
established what is today referred to as the ‘two limbs’ of damages; direct losses, or those that
arise naturally out of the breach, and indirect losses, or those losses as a result of breach that
are said to be within the contemplation of both parties at the time of the contract’s inception.
These foundational principles provide the basis for a range of claim types, including for
costs of ‘disruption’, ‘acceleration’, ‘prolongation’ as well as costs to correct or complete the
works, or both.They are, however, subject to the aggrieved party’s obligation to take reason-
able measures to mitigate its losses.38
Contractor global and total cost claims

A contractor who suffers cost overruns as a result of events that are the responsibility of the
owner may seek to recover these costs using the total-cost method.39 This allows causation of
the various heads of loss to be proved collectively, where it would otherwise be impracticable
to disentangle them.40 The principles of law governing total cost claims as espoused by the
courts are many.41 There have emerged four elements in Canadian jurisprudence:42
• the contractor’s tender was reasonable;
• the actual cost is fair and reasonable;
• the overruns resulted from the changes or overruns; and
• lack of another practical method available to quantify the damages.
36 Robinson v. Harman (1848) 154 ER 363, 365; Clark v. Macourt [2013] HCA 56, [7]; Bunge SA v. Nidera BV
[2015] UKSC 43, [14]; MFM Restaurants Pte Ltd v. Fish & Co Restaurants Pte Ltd [2010] SGCA 36, [54]-[56].
37 [1854] EWHC J70.
38 Lagden v. O’Connor [2004] 1 AC 1067, 1077-1088.
39 For a detailed analysis of total cost claims see Steven Stein and Yelena Archyan, ‘the Total Cost Method: Is it
Dead Yet? A Cross-Jurisdictional Comparative Analysis’ [2016] ICLR 430.
40 Golden Hill Ventures Ltd. v. Kemess Mines Inc. [2002] BCSC 1460.
41 Walter Lilly and Company Ltd v. Giles Patrick Cyril Mackay [2012] EWHC 1773 (TCC).
42 Eco-Zone Engineering Ltd v. Grand Falls-Windsor (Town) [2005] NLTD 197, [238].
113
Formulations of the requirements in Australia,43 the US44 and the UK45 are broadly consist-
ent with this position. In all these jurisdictions there is also an extremely high threshold
to be met before a total-cost claim will succeed. Accordingly, it will be preferable in the
majority of cases for a contractor to particularise and separately prove its heads of loss.
Acceleration damages
Acceleration claims arise where the contractor has incurred additional costs for expediting
construction pursuant to the owner’s instruction. The question of whether the contractor
is entitled to acceleration costs is ultimately one of contract interpretation, and depends on
whether the contractor or the owner is responsible for the need to accelerate.
In general, acceleration costs claim the total cost of performing the work in the ‘accel-
erated’ manner, less the costs of performing the work at the rate specified in the contract.
It has been recognised that the specific costs that may be incurred by a contractor acceler-
ating construction may include premium pay, costs of additional tools, equipment, labour,
and overtime.46 Therefore it is critical that the contractor record all relevant costs incurred
during the ‘accelerated’ period, such as the cost of additional resources and amount of
overtime worked.
There is currently no consensus among relevant consultants, contractors and employ-
ers concerning how acceleration claims should be calculated. Possible methods include a
global- or total-cost approach, a time–impact methodology;and formulaic approaches (as
specified in the contract).47
Contractor claims for latent conditions

A range of neutral issues lead to cost overruns (and delay). A few include unforeseen physi-
cal ground conditions that are common given the exotic locations where energy facilities
are often built.
The time- and cost-risk associated with hidden ground conditions falls by default to
the contractor. However, the allocation of risk for latent defects under several standard
forms including the FIDIC suite will instead be subject to an objective test of whether the
condition was reasonably foreseeable by an ‘experienced contractor’.48 This is a complex
question that may require the expertise of an arbiter with an astute technical understand-
ing to resolve.49
43 DM Drainage & Constructions Pty Ltd v. Karara Mining Ltd [2014] WASC 170, [99].
44 Baldi Bros Constructors 50 Fed CL, 80.
45 Walter Lilly and Company Ltd v. Giles Patrick Cyril Mackay [2012] EWHC 1773 (TCC); William Clark
Partnership Ltd v. Dock St PCT Ltd [2015] EWHC 2923 (TCC).
46 Overton Currie, ‘Avoiding, Managing and Winning Construction Disputes’ [1991] ICLR 344, 369.
47 Davison, P.R. 2008. ‘Evaluating Contract Claims’. Oxford (Blackwell).
48 For a detailed discussion of latent conditions, see Gordon Smith, Latent Conditions and the Experienced Contractor
Test [2016] ICLR 390
49 Recent UK cases on latent conditions include Obrascon Huate Lain SA v. Her Majesty’s Attorney General for
Gibraltar [2014] EWHC 1028 (TCC); Van Oord UK Ltd and SICIM Roadbridge Ltd v. Allseas UK Ltd [2015]
EWHC 3074.
114
Limitation and exclusion clauses

Limitation and exclusion of liability clauses are often featured in construction con-
tracts in order to protect a party from incurring excessive liability for delayed or defec-
tive performance.
A popular limitation or exclusion clause is that which limits or excludes the recover-
ability of indirect or consequential losses.50 An aggrieved contractor may thereby be limited
to claiming direct losses.51 The characterisation of losses as ‘direct’ or ‘indirect’ will often
form a point of contention between disputing parties, and so astute contract drafters will
often be explicit in what type of loss is not recoverable, for example, by listing ‘loss of earn-
ings’ as an excluded or limited loss.
Exclusion-of-liability clauses will be given the ordinary meaning, but in the event of
ambiguity, will be interpreted contra proferentem.52
Quality
Quality risk
A further fundamental risk in construction relates to defects in the contractor’s performance
or in the ultimate facility under construction. The risks associated with quality fall broadly
into two categories: (1) the risk that performance does not comply with express contractual
stipulations for materials and workmanship (commonly by reference to accepted industry
standards, for example the internationally recognised ISO standards); and (2) the risk that
the ultimate facility is not fit for purpose (i.e., suitable to meet targets and earn revenue
upon completion). These involve technical inquiries that are often within the purview of
an independent ‘project engineer’.
Underlying these risks most commonly are issues in designs, materials and work
manship. More subtle factors that are also relevant to consider include the risk that a poorly
conceived delivery structure will cause challenges in delivering a compliant facility; as well
as cultural differences between the parties that can have an impact from the time of parties
meeting at the negotiating table, through to activities at the site and thereafter (language
barriers, business culture clashes, legal customs and heritage).
The adverse consequences of sub-quality construction of energy facilities are
wide-ranging. Where defects result in output falling short of production targets, this can
result in third-party liability on the part of the project owner to an offtake-partner or
financier. Where major projects for national infrastructure are involved, the risks can be
magnified and shortfalls in power or water supply may have repercussions for local industry
and communities. The owner may seek indemnities from the contractor, or otherwise pur-
sue a claim for damages against him or her in respect of third-party liabilities.
50 FIDIC Suite, clause 17.6.

51 Aquatec-Maxcon Pty Ltd v. Barwon Region Water Authority [2006] VSC 117 [103].
52 Elvanite Full Circle Ltd v. AMEC Earth & Environmental (UK) Ltd [2013] EWHC 1191 (TCC), [297].
115
Quality-related disputes
Breach of contractual standards or ‘fitness for purpose’
Where a contract includes a fitness-for-purpose obligation, the contractor must ensure that
the completed works will be fit for their intended purpose. In construction projects where
the contractor was also procured to undertake the design phase, such a quality standard is
usually implied into the contract.53 To avoid ambiguity, best practice dictates that the owner
should specify expressly in clear terms the essential requirements for the ultimate project
facility. Some desired purposes are capable of definite assessment – examples being having
a ‘design life’ of a certain number of years,54 or particular outputs from the construction
of a power plant. In other cases, however, the contract may require the project to have the
capacity to achieve certain results in a range of conditions.
Determinations that materials or workmanship breach specified contractual standards,
on the other hand, entail a comparison against a fixed baseline. This is a technical inquiry
of fact in the first instance, but the issue of remedies for breaches of building and design
standards involves additional questions of contract and law that are addressed below.
Project engineer or contract administrator

The project engineer is frequently the neutral arbiter called upon to resolve disputes over
quality at the project site, armed with the power to issue certificates as to time, cost and
quality.The status of that certificate will be determined in the first instance by contract, but
also in accordance with applicable rules of law. Important aspects of the project engineer’s
role include the following:
• First, the duty of independence and impartiality.This manifests both in various standard
form contracts, and at common law. It is a quintessential duty of a decision-maker to
avoid conflicts of interest and associations that might give rise to bias or the appearance
of bias. A breach of these requirements can have the effect of invalidating certificates for
payments, certificates as to the achievement of milestones or certificates as to the quality
of works.
• Second, acting in accordance with procedural fairness, by affording due process and a
right to be heard to each party interested in the outcome of a decision. This right may
however be curtailed or eliminated where the contract so provides.
• Third, the potentially final and binding nature of certificates. The character of engi-
neer’s certificates is a question of interpretation of the contract terms, and specifically,
whether the parties intended the engineer’s or administrator’s certification to be a final
and binding determination of quality of work (or other contractual milestones). If
indeed this is found to be the case, grounds for challenging the quality of works will
depend on a party’s ability to overturn the certificate on one of several narrow grounds
of appeal, which may include a manifest error, fraud, bad faith, or gross negligence.
Parties may wish to specify in their contracts the grounds on which the certificate may
53 McKone v. Johnson [1966] 2 NSWR 471, 472-3; Jurong Towen Corp v. Sembcorp Engineers & Constructors Pte Ltd
[2009] SGHC 93, [7].
54 Although this has been interpreted as an approximate lifetime following MT Højgaard A/S v. E. On Climate &
Renewables UK Robin Rigg East Ltd [2015] EWCA Civ 407.
116
be revoked. Where a final and binding certificate protects the engineer from challenge
by the contractor, the owner may still be entitled to claim damages against the engineer
for breach of contract or in negligence for careless errors in the certification process.
The above three points provide fertile grounds for challenges to certificates as to the qual-
ity of works.
Defects liability period

A common feature in construction contracts is a ‘defects liability/notification period’,55
within which the owner can direct the contractor to remedy any defects in the work
brought to the contractor’s attention. The contractor will need to comply with a properly
made request in order to avoid breaching the contract.
The right of an owner to have the contractor cure defects within this period is subject
to such notice requirements as may be specified in the contract, and to principles of waiver
and estoppel that may preclude an owner from directing the contractor to correct defects
to which the owner has previously, by words of conduct, acquiesced.
Latent defects
A latent defect, as the name suggests, is a hidden defect that could not have been discovered
at the time of the project’s handover with reasonable inspection. Such a defect may mani-
fest itself many years down the track, and thus demonstrate an earlier breach of contract by
the contractor. The defects liability period will have concluded and so the owner does not
have a right to require the contractor to remedy the works under the relevant contractual
clause. The owner may nonetheless pursue a claim for damages in tort or contract, subject
to potential time bars under statutes of limitations.
Overview of remedies for defective work

Subject to applicable terms of contract, the following remedies are available to an owner in
respect of defective construction services:
• Damages amounting to the cost of rectifying the defective work are the primary rem-
edy available to an owner. An important qualification on this remedy is that awarding
damages in the sum of rectification costs would not be unreasonable having regard to
the cost and benefit of undertaking the work. This inquiry into reasonableness affords
the arbiter a broad discretion to take into account all relevant circumstances, but will
require consideration of whether the aggrieved party suffers real loss, and whether the
cost of remedial works is disproportionately large compared to the cost of the original
works.56 Importantly, it requires an inquiry into ‘reasonableness in relation to the par-
ticular contract and not at large’.57
• Specific performance, as a remedy reserved for the exceptional circumstances where
an award of damages would be inadequate (for example, where urgent repair work is
55 See for example, FIDIC Suite, clause 11.

56 Scott Carver Pty Ltd v. SAS Trustee Corporations [2005] NSWCA 462, [46].
57 Ruxley Electronics Ltd v. Forsyth [1996] AC 344, per Lord Jauncey.
117
needed and the contractor is the only party capable of performing the work within the
required time).58
• Other categories of damages may be sought for losses and liabilities incurred as a result
of the contractor’s defective performance grounded in ordinary principles of recovery
for breach of contract. This may include delay claims and claims for additional costs, as
covered earlier in this chapter.
Also relevant are the laws of waiver and estoppel as they apply to potential acquiescence by
the owner to defects in the contractor’s work, by words or conduct.
Scope
Scope risk
The scope of works that the contractor is required to complete is generally conceived
prior to the bid-phase of a project. At this stage, the task entails the selection of a procure-
ment methodology and the specification of core functions and performance criteria for
the end-use facility. In projects for the construction of energy facilities, this will gener-
ally require designation of a design and construct or turnkey methodology, identification
of the key features and layout, and specification of required output capacity (e.g., mega-
wattage generated by a power plant; or barrels produced by oil platforms and pipelines).
These criteria will then be formalised, in as much detail as the owner desires, in the final
contract documentation. In the FIDIC and ICC standard forms, these are known as the
‘Employer’s Requirements’.
A risk trade-off occurs at this point: more detail in the employer’s requirements results
in less flexibility for the contractor in performance and therefore a greater risk of change
orders. The less detail in the employer’s requirements, the less likelihood of change orders
but the greater risk that the contractor in performing will produce an ultimate work that
does not quite fit the owner’s desired facility.59
To whom does the risk of changes in work scope fall? A perfunctory response might
be that the risk in a fixed-fee turnkey project lies entirely with the contractor to take such
steps as are necessary to timely complete the facility for the agreed sum.That might be true
in the hypothetical scenario where an employer perfectly defines the scope of work in the
technical documents. The position is, however, complicated where there are inconsisten-
cies, shortcomings or deficiencies in the designs or other specifications provided by the
owner, as is often the case.
These issues are addressed through risk-allocation provisions and contractual clauses
that facilitate ‘variations’ and ‘change orders’ where necessary. The risk of scope changes
arising from shortcomings in the technical information provided by the owner can be
allocated in one of three ways:
• strictly against the contractor, as occurs under the FIDIC Silver Book, which requires
the contractor to warrant that it has scrutinised the employer’s requirements and is
58 Taylor Woodrow Construction (Midlands) Ltd v. Charcon Structures Ltd (1982) 7 Con LR 1 (CA).
59 For a discussion of the risk trade-off in defining the employer’s requirements, see Eric Eggink, ‘Correct
scoping of Employer’s Requirements: the Prevention of Change Orders?’ [2017] ICLR 4.
118
responsible for the accuracy of information in them (except for such information as it
is not possible for the contractor to verify) (clause 5.1).
• strictly against the owner, who is held responsible for errors in design and data, there-
fore granting the contractor a right to added time and payment for the scope change
(as is the case under the JCT Design and Building Contract, clause 2.1).
• balanced so that a contractor may point out errors in the employer’s design and data and
will have a contractual mechanism to seek additional time and payment for additional
work (as is the case under the FIDIC Yellow Book, clauses 5.1 and 13).60
Scope-related disputes
If the owner denies a proper claim by a contractor for additional time and payment for
out-of-scope work, an arbitrator may grant the following remedies in the context of a
later dispute:
• the contractor may claim sums for the cost of the work and an allowance for profit in
quantum meruit; and
• where the contract has an extension of time clause, the contractor will be granted an
extension in respect of the delay resulting from the out-of-scope works (thereby reduc-
ing the contractor’s liability for delay-related damages); or
• where the contract does not have an extension of time clause; the variation may be
construed as an act of prevention by the owner that will disentitle it altogether from
claiming liquidated damages for delay (see earlier discussion regarding the operation of
the prevention principle).
The quantum of out-of-scope works and the amount of time required to complete such
work can form points of contention in construction disputes. They often need to be
resolved with the assistance of evidence from experts in matters of quantum and construc-
tion scheduling. The pricing of additional out-of-scope work is generally done by refer-
ence to either the agreed rates for work used for tender pricing; or another schedule of
rates agreed between the parties for the works. Alternatively, the contractor may be entitled
to a ‘fair valuation’ of its costs ‘if reasonably and properly incurred’.61
Political, economic and social

Political, economic and social factors can have a financial impact on parties to energy pro-
jects, owner and contractor alike. These factors are closely intertwined. Political decisions
are made based on economic and social considerations leading to legal changes. Three
manifestations of these risks that arise from time to time in energy projects, and are accord-
ingly considered, are:
• Risk 1 – changes in applicable laws: including changes in subsidies or tax arrangements,
local content requirements, local labour laws, tariffs and other terms of trade.
60 A comprehensive work on variations to the scope of works is Michael Sergeant and Max Wieliczko,
‘Construction Contract Variations’ (Informa Law from Routledge, 2014).
61 Weldon Plant Ltd v. Commission for the New Towns [2001] 1 All ER (Comm) 264, [15].
119
• Risk 2 – contractor price risk arising from changes in the market for supplies needed
for construction.
• Risk 3 – owner price risk arising from changes in the market price of the energy com-
modity to be produced.
Recovery for losses flowing from these risks will only be possible where a contractual
right of recovery or contract price adjustment has been negotiated and agreed between the
parties.This requires a commercial decision by the parties: whether risk from political, eco-
nomic and social factors should be left to lie where it falls or be allocated between them.62
The parties’ interests are best served where the performance of the project remains a
viable and profitable endeavour for both. This ensures timely completion to the requisite
standard. Over a multi-year period for major projects, there is a substantial risk of adverse
changes to local laws that may create an imbalance in a contract that when negotiated,
achieved a fair outcome for both sides. Often it will be the wish of the parties that such
risk not be left to chance. The risk will be allocated so that a contractor will benefit from
an increase in the contract price to account for additional costs resulting from changes
in applicable laws. In return, the contractor will account for part of any windfall result-
ing from a beneficial change in the law. Thus both parties’ interests are protected and the
uncertainty associated with change of law is hedged. This same approach applies to risks of
adverse changes in tax rates, tariffs and subsidies.
This allocation can be achieved in two ways: through a general provision of risk transfer;
or a risk-specific clause.
The first type is a general provision protecting against an adverse change in applicable
laws. This leaves open to potential dispute whether the change is a change of ‘applicable
law’, which will depend on the definition of ‘applicable law’. This often raises questions of
whether a change is a change of mere ‘policy’, a change in a private agreement between a
project party and a government agency, or a genuine change in the law. Another element
that can arise is whether the change in law was foreseeable and therefore expected by the
parties at the time the contract was negotiated and agreed.
The second type consists of specific provisions that protect against these risks. One
example is a change in local content requirements.63 Local content requirements require
international companies to use a minimum level of local labour (or otherwise no more
than a maximum percentage of foreign labour). This seeks to preserve local social stand-
ards and economies, and achieve sustainability. Local content may be cheaper or more
expensive than imported labour. There are a multitude of other risks of legislative change
62 The first and second of these risks arise from express policy decisions by the government of the jurisdiction
where the project is located. Accordingly, changes in policy that adversely impact project participants may be
the subject of an investor–state claim under an applicable investment treaty. As stated earlier, this chapter is not
concerned with the potential investor–state implications, but rather the significance of these issues between
contracting parties seeking to achieve an optimal allocation of risk between them.
63 For a discussion of local content laws in Africa, see e.g., Ibironke T. Odumosu-Ayanu, ‘Foreign Direct
Investment Catalysts in West Africa: Interactions with Local Content Laws and Industry-Community
Agreements’ (2012) 35(1) North Carolina Central Law Review 65; Bartrand Montembault, ‘State Sovereignty
in International Projects Takes on a New Luster’ (2013) International Business Journal 288, 299-300.
120
that the parties may specifically wish to include in their allocation of risk. This avoids sur-
prises down the track that may jeopardise the financial viability of the project for one of
the parties.
As to risks 2 and 3, price risk will by default lie where it falls. Again however, if the
parties wish to eliminate this element of uncertainty, they can hedge the risk through con-
tract drafting. Part of any windfall or loss to a party can be shifted to the other to maintain
a balanced final outcome in a multi-year project. The need for the parties to manage this
risk becomes more clearly pronounced in projects whose performance spans many years.
The volatility of market prices for materials, equipment and commodities if left unchecked
has the potential to throw the commercial terms of the negotiated contract out of balance.
There are a number of ways this can be addressed. In some contracts a schedule of prices
may be set out with provision made for adjustments in the contract price for movements
in excess of a certain limit. Alternatively, a contract may make more general provision for
economic rebalancing of a contract at a later date.
Conclusion
As is clear, the issues that arise in construction arbitrations concerning energy facilities
consist of the same fundamental claims, contractual issues and legal principles as the broader
world of construction disputes.The energy industry brings with it additional complexity in
the form of international players and risks, economic and political forces at an international
level, and strict production-driven scheduling and performance. This chapter has sought to
provide a brief introduction to many of these issues and the associated commercial risks.
121
8
Offshore Vessel Construction Disputes
James Brown, William Cecil and Andreas Dracoulis1
It was not until the late 1970s that deep-water offshore oil and gas exploration became
significantly viable.The driver was the ever increasing demand for oil and gas products that
provided the opportunity to raise the capital necessary to design and then build the incred-
ibly complex floating assets needed to explore for and then to produce oil and gas in such
hostile environments.
Today, it is not unusual for oil and gas drilling and production to be undertaken in
depths in excess of 10,000 feet of water. The units that undertake such work are incredibly
complex feats of engineering and may take up to three years to construct. Certainly at the
peak of the market, the most complex and technologically advanced units cost in excess of
US$1 billion to construct.
The offshore oil and gas industry today, however, requires more than merely the deploy-
ment of drilling units for its operation. The industry now requires a full range of vessels to
support it including FPSOs (floating production storage offloading), FSUs (floating storage
units), accommodation vessels (floatels), heavy-lift vessels, pipe-laying vessels, and myriad
support vessels.
Perhaps unsurprisingly it is the largest and most sophisticated commercial ship
building yards that have moved into the construction of offshore oil and gas floating units.
Incentivised by the potentially lucrative nature of building such assets, in recent years it
has tended to be the shipyards of South Korea, China and Singapore that have been the
pre-eminent builders.
Being a development from commercial shipbuilding, the projects tend to be undertaken
on similar contractual terms and to incorporate aspects of both construction and sale of
goods contracts.
Currently the market for the construction of such units is significantly depressed. The
sudden and sustained crash in the oil price that began from mid 2014, which caused oil to
1 James Brown, William Cecil and Andreas Dracoulis are partners at Haynes and Boone CDG, LLP.
122
fall from well over US$100 per barrel to a low of around US$30 per barrel, has (despite
recent increases to around US$55 per barrel at the time of writing) significantly impacted
on the appetite for the construction of such units pursuant to newbuilding contracts.
Recent years have been characterised by a wave of disputes arising in respect of ongo-
ing projects for the construction of such vessels (typically, in respect of orders placed before
the oil price collapse for units nearing their delivery date). As detailed below, the trend
is one of buyers seeking to exit their contracts lawfully because they expect significantly
reduced cash generating potential in light of the significant fall in day rates over recent years
coupled with the chronic oversupply of offshore units in the market.
This chapter will provide an overview as to why arbitration is the typical method of
dispute resolution related to newbuilding projects, the types of disputes that commonly
arise and how they are usually resolved, and it considers some common strategies for their
successful resolution by arbitration.
While there are currently some glimmers of hope for the market owing to efforts
by OPEC to seek to address the worldwide glut in the supply of oil to encourage price
rises, expectations are tempered by the continued oversupply of drilling units. Demand
will have to pick up significantly before there is a marked increase in newbuild projects.
Circumstances will, however, change, and when they do arbitration will inevitably remain
the tool chosen by most parties for the resolution of offshore unit construction disputes.
Why parties choose to arbitrate

Ease of enforcement
That disputes should be resolved by way of arbitration2 is usually a simple choice for
the parties.
With the builder and the buyer of the unit that is to be constructed usually in separate
countries, and agreeing for their disputes to be resolved in the forum of a neutral third
country, the ease of enforcing a legal determination made in one country against the assets
of the other party in another will be at the forefront of the parties’ minds when negotiat-
ing their contract. Arbitration will therefore usually be the preferred method of dispute
resolution given the simplicity by which awards can be enforced between contracting states
to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards
1958 (the New York Convention).
Confidentiality
A belief that arbitration provides for a confidential method of dispute resolution is usually
a further important factor in the parties’ decision to choose it as their method of dispute
resolution.This is particularly relevant where the matters in dispute are commercially sensi-
tive, which is often so in the context of offshore construction disputes.
As a matter of English law, an English court will uphold the implied duty on the par-
ties to treat the arbitration as confidential, unless there are valid reasons not to, for example
because disclosure is in the interests of justice. However, parties will often wish to make
2 The contract may sometimes specify, however, for preliminary steps of alternative dispute resolution, for
example meetings of senior managers, or mediation, before arbitration.
123
express provision for the extent to which the process is to be confidential, and the circum-
stances in which the outcome of an arbitral process may be disclosed to others (e.g., provid-
ing for the outcome of the proceedings to be disclosed to the parties’ bankers or auditors).
Parties should, however, recognise the limits on the confidentiality of the arbitral pro-
cess. Failure to adhere to the terms of an award will usually permit the other party to have
the award recognised as a court judgment, with confidentiality being lost.
Ability to choose the members of the tribunal and the procedure

Specifying arbitration will also, usually, allow the parties to provide for the qualifications
and characteristics of the person or persons who will determine their disputes, and the
manner in which they will do so. We consider these issues below as part of our discussion
of the terms promulgated by the London Maritime Arbitrators Association (LMAA).
London arbitration (under the LMAA Terms) is the jurisdiction of choice, and English
law is often the governing law of choice, for these type of disputes owing to a number of
reasons but best summarised as follows. First, historically London is the pre-eminent forum
for international maritime (including shipbuilding) disputes and it has, more recently,
developed a strong reputation in international construction disputes. This is in no small
part due to the advent of the Arbitration Act 1996, which provides an effective framework
for the conduct of international arbitrations with limited scope for court interference.
Second, there is a substantial and very well advanced body of English contract law much of
which has developed in the context of maritime and construction disputes, so English law
is well suited to governing these types of project. Third, London has a number of special-
ist legal practitioners in the field of shipbuilding. Finally, and perhaps of most significance
to international parties with acute concerns about the neutrality of the chosen jurisdic-
tion, London arbitrators (and the English courts) are held in high regard for impartiality
and integrity.
Arbitrating under the LMAA Terms

While the LMAA is certainly the pre-eminent arbitration body for the determination of
offshore vessel construction disputes, it does not administer or supervise the conduct of its
arbitrations or provide institutional help in the traditional sense. Instead the LMAA pro-
vides a set of rules, referred to as Terms, that the parties agree will govern any arbitration
proceedings. LMAA arbitrations are, therefore, not dissimilar to ad hoc arbitrations.
At the time of writing, new Terms are about to come in to force applicable to arbi-
trations commenced on or after 1 May 2017.3 The new Terms are, however, very much
a minor refinement of those currently in place and provide, to use the LMAA’s own
language,4 for a ‘light’ touch approach covering key aspects of the arbitration but leaving
considerable scope for the parties to adopt procedures to suit the case. To some extent the
LMAA Terms do not add a great deal to the structure already in place under the Arbitration
3 For present purposes the focus is purely on the main body of the LMAA Terms. While the LMAA does
also have intermediate and small claims procedure, these are unlikely to ever apply in an offshore vessel
construction dispute.
4 Refer to the LMAA’s Explanatory Note (dated 1 February 2017) to the new LMAA 2017 Terms.
124
Act 1996, but they do provide a tried and tested framework for the resolution of ship
building (including offshore vessel construction) disputes.
Therefore procedures that require the input of the arbitration body (for example emer-
gency arbitrator provisions as found in the rules of many of the major arbitral institu-
tions5 or the procedure for the scrutiny of awards as found in the ICC rules) are absent
from the LMAA Terms precisely because they are not appropriate for the ad hoc style
LMAA environment.
Establishment of the tribunal

The LMAA Terms provide for a simple mechanism for the establishment of the tribunal.
The default position is for a tribunal of three arbitrators, with each party choosing one
arbitrator at the outset of the arbitration and the two party-appointed arbitrators choosing
a chairperson. In practice it is very often the case in LMAA arbitration that the preliminary
stages – up to and sometimes beyond any procedural hearings following the exchange
of initial written submissions – are conducted by the party-appointed arbitrators alone.
Provided that the two arbitrators can agree, the parties and their counsel are generally
content with this approach and it reflects the flexibility inherent in LMAA arbitrations.
This can be contrasted with the rules of some of the institutional arbitral bodies where the
parties, and their appointed arbitrators, have less autonomy.6
While LMAA members are capable of hearing a broad range of disputes including
offshore shipbuilding disputes, unless the parties agree otherwise in the arbitration clause
(which is rare in offshore construction projects), the LMAA Terms themselves place no
restrictions on the parties’ choices of arbitrator. Hence the expertise of the LMAA mem-
bers is supplemented by a number of senior English lawyers (including retired judges) with
significant experience of, and expertise in, arbitrating disputes in the offshore construction
sector and who are available for appointment as arbitrator whether or not they are mem-
bers of the LMAA. It is therefore common to find tribunals made up of at least two senior
English lawyers, with the third member sometimes having a technical industry background
depending on the nature of the dispute.That those involved in offshore vessel construction
arbitrations are comfortable with this position is a reflection of both the sophistication of
the parties and the reputation of English law and London arbitration.
Procedure
Following the constitution of the tribunal, the procedure in LMAA arbitrations tends to
follow that adopted in the English courts, with the exchange of written submissions fol-
lowed by disclosure and thereafter factual and expert evidence. Parties are not, however,
hidebound to a particular approach and procedural steps (such as disclosure and the pro-
vision of expert evidence) can be tailored to the particular characteristics of the dispute.
Furthermore, and particularly in the context of the construction of a complex offshore ves-
sel, which must sometimes adhere in operation to quite stringent regulatory requirements,
5 See, for example, the LCIA Rules, 2014 edition (at Article 9B) and the ICC Rules, 2017 edition (at
Article 29).
6 See, for example, the LCIA Rules pursuant to which all appointments are made by the LCIA Court.
125
it is not unusual for parties to fall into dispute (during the course of the project) about how
the vessel is being constructed in a specific respect. Resolving these issues at the time could
be critical depending on the nature of the dispute and the extent to which adjustments to
the construction of the unit can be made at a later time. In this event the parties are often
assisted by the use of an expedited procedure that, although not formally provided for in
the LMAA Terms, can be raised with the tribunal at the outset of the arbitration as soon
as the party-appointed arbitrators are chosen and therefore before any steps are taken. In
our experience, LMAA tribunals are always alive, and responsive, to the procedural needs
of the parties.
Related proceedings
While the LMAA Terms set out no formal provisions for the consolidation of arbitra-
tions, this is rarely a consideration. In part because most offshore construction contracts
significantly restrict the post-delivery liability of the builder (as discussed below), and with
the possible exception of guarantee agreements (see below), invariably the only relevant
protagonists are the builder and its buyer. The LMAA Terms do, however, expressly permit
the tribunal to deal with two or more arbitrations raising common issues of fact or law
concurrently (i.e., the proceedings are still separate), which can be helpful in offshore ves-
sel construction disputes where ‘sister’ units are under construction at the same shipyard.
Guarantee agreements between the buyer and the builder’s bank providing for the
refund of pre-paid delivery instalments in the event of cancellation of the shipbuilding con-
tract by the buyer are often made subject to English law and English court jurisdiction. In
normal circumstances this is of no consequence because these guarantees will not respond
until the arbitration between the buyer and builder is concluded. In the event of related
guarantee proceedings taking place in the English courts at the same time as the underlying
arbitration, however, while this could lead to the risk of conflicting decisions, there may be
scope to stay the court proceedings pending the outcome of the arbitration.
The award
The LMAA Terms provide that the award should be available within six weeks. While this
is rarely realistic in the case of a substantial rig-delivery dispute, in our experience LMAA
arbitration tribunals are diligent in the production of their awards, and in all but the most
complex cases the award can be expected approximately three months following the con-
clusion of the hearing. The pedigree of the tribunals appointed in these arbitrations also
maintains a high standard of awards such that practitioners and parties involved in these
disputes have not sought to lobby for the introduction of a scrutiny process similar to that
found in the ICC Rules.
The types of disputes arising from these projects

Disputes relating to offshore vessel construction projects can broadly be divided into two
groups: those relating to events before the vessel is delivered, and those relating to events
after delivery.
Dealing first with pre-delivery disputes, the type of dispute that is likely to arise is often
determined by the state of the market. The period between when the contract is signed
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and the contractual date of delivery of the vessel is often in the region of two and a half to
three years. As is only too clear at the moment, the state of the offshore market can change
dramatically during this period. This will affect the market value of the vessel at delivery,
and therefore whether the buyer is paying more or less than the current market value. The
state of the offshore market at delivery may also affect whether the buyer has a drilling
contract for the vessel after delivery.
These two factors may significantly cool the buyer’s enthusiasm for taking delivery of
the vessel. Further, as the financing for the delivery instalment of the contract price in the
construction contract is often secured against the income stream from the drilling contract
after delivery, the absence of a drilling contract may mean that the buyer is unable to pay
the delivery instalment, particularly if the contract price is significantly in excess of the then
market price of the vessel.
Likely pre-delivery disputes in a falling offshore market

So in a poor offshore market, the buyer may well be looking for a reason to cancel the
contract, rather than take delivery.
Normally, the construction contract will provide for a contractual delivery date. If the
builder does not deliver the vessel by that date, after a few days of grace, the builder will
become liable for liquidated damages for delay. If the delay in delivery continues for a speci-
fied period through the fault of the builder, normally in the region of 210 days (the cancel-
ling date for builder delay), the buyer may cancel the construction contract and obtain a
refund of the pre-delivery instalments of the contract price, plus interest.
The buyer may also be entitled to claim damages for its losses, although these are nor-
mally excluded under the terms of the contract.
But even without a claim for damages, in circumstances where the market value of the
vessel is substantially less than the contract price, a full refund of the pre-delivery instal-
ments plus interest will be an attractive option for the buyer.
In addition, if the total delay including certain types of permissible delay such as force
majeure exceeds a specified period, (the drop-dead date), the buyer will normally have an
additional contractual right to cancel the contract.
The buyer’s remedy for cancellation on the drop-dead date is normally the same as
cancellation on the cancelling date for builder delay, namely the buyer obtains a refund of
the pre-delivery instalments of the contract price plus interest, although the rate of interest
is often lower than for a cancellation for builder delay.
The key issue in these cancellation disputes is generally whether the builder is entitled
to an extension of time, and therefore whether the relevant wrongful cancellation date had
arisen when the buyer purported to cancel.
If the cancelling date had not yet arisen, then the purported cancellation by the buyer
is likely to be a repudiatory breach of contract, entitling the builder to accept that cancel-
lation as bringing the contract to an end, and to claim damages.
The circumstances under which the builder is entitled to an extension of time will vary,
depending on the terms of the contract and which cancellation right has been exercised
by the buyer. But it is likely that variations ordered by the buyer, or other delays for which
the buyer is responsible, will in theory entitle the builder to an extension of time. Bearing
in mind that these are highly complex construction projects spanning a number of years,
127
these disputes can be complex and time-consuming, particularly if the builder is adopting
the approach of claiming every conceivable potential extension of time, and hoping that at
least some of these claims will be upheld.
These disputes are likely to involve a substantial amount of factual evidence as to the
causes of the potential delay.They are also likely to require technical expert evidence on, for
example, whether the claimed causes of delay were in fact the responsibility of the buyer, or
simply part of the builder’s scope of work in developing the design to produce a vessel that
complies with the contract. There is also likely to be expert evidence from delay experts
on whether the alleged causes of delay were on the critical path and therefore did result in
overall delay to the delivery of the vessel.
The complexity of the arbitration will be substantially increased if the builder pur-
ported to tender the vessel for delivery before the buyer served its cancellation notice.
In offshore construction contracts, one of the most difficult areas is to determine pre-
cisely when the vessel is in a deliverable condition, and therefore can be tendered for
delivery by the builder. Normally, the contract does not require every minor defect in the
vessel to be rectified before delivery. This is because a delay in delivery of the vessel can
have significant financial consequences for the builder, not only as a result of its liability to
pay liquidated damages for delay under the contract, but also because of the delay to the
payment of the delivery instalment by the buyer. So the contract normally specifies that
the vessel can be delivered with minor defects, provided these do not affect the safety or
operability of the vessel and are remedied by the builder as soon as possible after delivery.
If the builder has purported to tender the vessel for delivery before the buyer tries to
cancel, then in addition to arguments as to whether the builder was entitled to an extension
of time, and therefore the buyer cancelled too early, there will also be an argument whether
the vessel was in a deliverable condition when tendered for delivery.
The deliverability issue will involve factual evidence as to the existence of the defects, as
well as expert evidence on the consequences of any such defects. Again, if the buyer adopts
a scattergun approach as to which defect or defects prevented the vessel from being in a
deliverable condition, this can greatly increase the time and cost involved in the arbitration.
Likely pre-delivery disputes in a rising offshore market

In a rising market, it is very unlikely that the buyer will want to cancel the contract. In
these circumstances, however, it is likely that the offshore construction market will also
be overheating and the builder will have experienced significant cost overruns and delays.
The builder may therefore attempt to claim extensions of time to avoid liability for liqui-
dated damages for delay, or to claim that it is entitled to additional payment in respect of
alleged variations to the work, or to compensate the builder for implementing measures to
accelerate the project. These disputes are therefore generally less substantial than cancella-
tion disputes.
This, however, assumes that the construction contract has limited the buyer’s claims for
damages for delay in delivery to a fixed amount of daily liquidated damages up to a cap. In
a rising market, these are unlikely to compensate the buyer fully for its real losses flowing
from the delay in delivery, particularly if the buyer is not only losing out on revenue from
the vessel, but is also itself subject to liquidated damages for delay payable to its client under
128
the drilling contract. If the exclusion provisions in the contract are not watertight, the
buyer may well seek to bring a very significant claim for damages for delay.
Post-delivery warranty disputes

Given the complexity of offshore-unit construction projects, it is inevitable that they will
often not be built to the contractually required standards such that, irrespective of the oil
price at any one time, disputes will arise upon delivery in respect of perceived construc-
tion defects.
Given the enormous revenue-earning capacity of these units, the financial conse-
quences of a defect may be extreme. Builders therefore aim to contractually limit liability
in respect of post-delivery problems, whereas buyers aim to secure express rights against
the builder to have quality issues rectified promptly and at minimal cost so the unit may be
quickly redeployed back into lucrative employment.
The parties’ competing interests will typically be reconciled within the ‘warranty of
quality’ provision that can be found in almost all such construction contracts. Offshore
units are typically built pursuant to certain industry-standard contracts, though these will
be heavily negotiated and modified. Despite this, the warranty provisions will often adopt
a similar approach.
The warranty period

A warranty period will usually be provided for (often 12 months), typically running from
the date the unit is delivered to and accepted by the buyer during which, if a defect mate-
rialises, the builder’s warranty obligations will be invoked.
The contract will specify what parts of the unit the builder warrants against defects dur-
ing the warranty period – typically the vessel and all parts, machinery and equipment that
are designed, manufactured or furnished by the builder.
The warranty will usually provide that these will be free of defects that are due to causes
such as defective materials, miscalculation, poor workmanship or failure to construct in
conformity with the contract, as well as specifying the types of defects that are not covered,
which may include (but not be limited to) those arising from ‘perils of the sea, rivers or
navigation’, normal wear and tear, overloading, improper loading and stowage, fire, or by
alteration or addition by the buyer not previously approved by the builder.
A great many arbitrations arising from such construction projects involve determining
whether a defect falls within the warranty provisions, or is excluded.
Nature of the buyer’s and the builder’s obligations

The warranty provision will usually require the buyer to make prompt notification when a
defect is discovered. Depending on the clarity of the drafting, failure to do so may give rise
to a dispute about whether this sounds only in a claim for damages by the builder (i.e., in
the event that it has increased the builder’s ultimate cost of repair) or whether the buyer’s
right to a repair is lost.
There will, however, usually be a longstop date (often a specified number of days
beyond the end of the warranty period) by which the occurrence of a defect must be noti-
fied. Failure to do so will usually expressly absolve the builder of any responsibility.
129
Assuming that proper notice has been given, the builder’s primary obligation will usu-
ally be to remedy at its shipyard and at its expense, whether by repair or replacement, any
defect against which the vessel is warrantied.
Such contracts, however, will usually provide for circumstances in which the owner
will be entitled to have repairs undertaken other than at the builder’s shipyard. It will often
be provided that the builder will be obliged to reimburse the owner’s resulting costs (or
to pay some other measure of reimbursement, for example the costs that would have been
incurred if the work had been undertaken at a leading Asian shipyard). In the context of an
owner, focused on maintaining the uninterrupted employment of its highly lucrative asset
and so seeking to have repairs carried out as locally as possible, and a builder, wishing to
carry out repairs at its own shipyard and so at lower cost than elsewhere, the potential for
disputes is again high.
Extent of the builder’s liability

The warranty provisions will typically also seek to restrictively define and limit the entitle-
ment of a buyer to recover compensation in respect of losses suffered and costs incurred
when defects have arisen.
A critical issue is often whether the warranty provision should be construed as a ‘com-
plete code’ of the parties’ obligations for post-delivery defects – as providing positively and
exclusively for the entire extent of the builder’s obligations (and buyer’s rights) with all
obligations otherwise arising excluded – or was it intended simply to provide additional
rights to those arising under common law?
Post-delivery defects necessitating repair will typically give rise to significant financial
consequences for a buyer. Any builder will therefore want to provide for the warranty pro-
visions of the construction contract to stand as a complete code of the parties’ rights and
obligations and to curtail any entitlement of the buyer otherwise to recover financial losses
resulting from post-delivery defects. The builder will want to confine the buyer solely to a
right to have defects remedied (whether at the builder’s shipyard or elsewhere in the lim-
ited circumstances provided) but with no other compensation being payable.
While commercially minded arbitral tribunals will often anticipate that the builder’s
intent was to so limit the rights of the buyer, great care must nevertheless be taken by build-
ers in the drafting of warranty clauses that are intended to provide for such a ‘complete
code’ as tribunals will be reluctant to find for such a serious consequence in the face of
loose or ambiguous drafting.
An examination of how builders will seek to limit the extent of their liability for
post-delivery defects is beyond the ambit of this chapter.
However, having positively defined its obligations in respect of defects, a builder will
commonly seek to provide that all other rights arising on the part of the buyer, whether
pursuant to the contract or by the operation of law or otherwise, will be excluded and that
the buyer’s rights will be solely confined to those detailed within the warranty provision.
Care will be taken to ensure that any terms arising by law as to the quality of the unit, in
particular under the Sale of Goods Act 1979, will be excluded. Further, the builder will
typically then provide that all other financial consequences resulting from defects fall for
the account of the buyer.
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An astute buyer, however, will during contract negotiations typically seek to secure as
much potential for recourse against the builder as it can, having in mind the serious finan-
cial consequences that may result from defects. Given that these contracts will often have
been signed following an intense period of face-to-face negotiations between buyer and
builder, the potential for the drafting to give rise to disputes is again extremely high.
Strategies for success in the arbitration of these disputes

Only foolhardy practitioners would believe that they alone are able to determine the out-
come of an arbitral process. Rather, myriad decisions and factors will ultimately impact on
the outcome of any arbitration. The experienced and pragmatic practitioner will recognise
this and, while ensuring that the client is always reminded of the risk inherent in the arbi-
tral process, will seek to minimise that risk as far as possible by the adoption of sensible
strategies and practices for the resolution by arbitration of the highly complex disputes that
commonly arise from these projects.
It is beyond the limits of this chapter to provide a full analysis of how best these disputes
may be resolved by way of arbitration. We highlight below, however, some of the key ways
in which a party may be able to maximise its prospects of success in a complex offshore
unit construction related arbitration.
In our experience, a primary strategic objective, whether pursuing or defending a claim,
is to identify as early as possible what will be the narrative of the case to be advanced on
behalf of the party in question. Doing so allows for a focusing of effort and resources in the
pursuit of the party’s case through to the conclusion of the proceedings.
A number of steps can be taken with the aim of achieving this objective.
For example, a key early step in any arbitral process is to ensure that all potentially rel-
evant documents are gathered and collated as soon as possible. Any document-destruction
policies should be promptly suspended and a full and considered analysis undertaken as to
the location and nature of documents that may be held by the party relating to the dispute.
In an age of electronic documents, which has hugely increased the burden of undertaking
disclosure, the key is to ensure that all relevant material is captured. A failure to do so will
lead to failures to disclose relevant documentation and perhaps, in a worst case scenario, to
an inability to do so if the material is subsequently lost or destroyed. The resulting impact
on a party’s credibility in the eyes of the tribunal may in such a case be sufficient to turn
the outcome of the arbitral process.
Care should be taken early to identify a party’s key factual witnesses who should be
briefed on what is required of them, with resources being committed early to working with
the witnesses to ascertain and record the relevant facts. A case will often be won or lost
based on the performance of a party’s factual witnesses in cross-examination. It is therefore
always a sound investment of time and money to ensure that witnesses are educated as to
the level of detail that they will be required to provide in their witness evidence and the
extent to which they will ideally need to substantiate their evidence with contemporane-
ous documentation.
Similarly, early identification of the relevant expert issues that are at the core of the
dispute, and then the prompt and careful identification and appointment of appropriate
experts, can significantly enhance the prospects of success in arbitration. Further, the early
involvement of an expert allows for the prospect of it being determined earlier in the
131
process that the case is likely to turn on matters of expert rather than the factual evidence.
If so, the experts may be able to provide guidance as to the nature of the factual evidence
that is required, and so avoid a more extensive and costly factual evidence gathering process.
The early appointment of experts may similarly allow for a ‘sense check’ to be performed
in respect of the factual evidence provided by the witnesses and can be a check against par-
tisan factual witnesses, who would be susceptible to being discredited in cross-examination
at the final hearing.
In arbitrations as complex as those that often arise in these substantial construction pro-
jects, organisation and the early determination of a party’s case will often be key. This will
also tend to be effective in giving rise to the possibility of exploring an early settlement that
would avoid the substantial costs involved in a full and final arbitral hearing.
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9
Disputes Involving Regulated Utilities
Gordon E Kaiser1
The oil and gas industry can be divided into two main segments: upstream and downstream.
Most of the writing about energy arbitration relates to the upstream, as that is where the
exploration and development takes place. This sector is dominated by governments that
control the rights to the assets in the ground, and the multinational oil companies that
extract the oil and move it to market. This is the world of investor–state arbitration.
The attention the segment receives is not surprising. Investor–state arbitrations are the
product of the rapid growth of treaties designed to protect the interests of investors – multi
lateral treaties such as the Energy Charter Treaty and the NAFTA agreement – but also a
wide array of bilateral treaties between specific countries.
However, for every one of the investor–state cases there are 10 significant commercial
arbitrations in the downstream energy sector. Here, the centre of gravity is not London,
Stockholm or Paris, it is Houston or Calgary. Over 90 energy companies have head offices
in Calgary – Houston has three times that number.
These are arbitrations between companies. These are commercial arbitrations but not
necessarily domestic arbitrations. They are often cross-border involving US or Canadian
companies and foreign supplies of technology.
This is a world that concerns the generation of electricity that moves constantly across
state, provincial and international boundaries. These generation facilities exist throughout
the world. Each generator needs a transmitter to transmit that electricity to various markets,
and within those markets, other companies distribute the electricity to the end-user.Those
three classes of parties – generators, transmitters and distributors – are all public utilities.
Public utilities are regulated by the government, usually by an independent regulatory
commission. Within North America, that Commission can be provincial, state or federal.
1 Gordon E Kaiser is an arbitrator at JAMS, Toronto and Washington, DC.
133
These public utilities can be privately owned or owned by a government. Regardless of

ownership, they are all regulated. That regulation includes the rates they charge customers,
the quality of service, and investment in new assets. In addition there are regulatory rules
preventing market manipulation.
The utility business also involves thousands of contracts with third parties for the con-
struction and operation of generating facilities, pipeline and transmission assets, as well as
the sale of electricity and gas. Many of those contracts have arbitration provisions. Often
disputes involving regulated utilities present special problems for arbitrators. There can be
conflicts in jurisdiction and parallel proceedings.
In the United States and Canada, the courts grant deference to arbitrators. Similarly,
in both countries, courts grant deference to regulators, particularly regulators involved in
regulating complex industries with substantial national importance.This deference includes
interpretation of the regulators’ home statute. That leaves potential conflicts between regu-
lators and arbitrators. Many regulated public utilities have arbitration clauses in contracts.
The interesting question, and the subject of this chapter, is whether disputes involving
regulated utilities present special problems for arbitrators. They do. There can be conflicts
in jurisdiction and parallel proceedings.
The regulatory principles

In North America, there is a long history of regulating public utilities. It began with rail-
ways, although it can be traced to common law restrictions defining canal operators as
common carriers. In 1917, the Supreme Court of the United States first described one of
the fundamental obligations of a public utility – the duty to serve – as follows:
Corporations which devote their property use may not pick and choose, serving only the portions
of the territory covered by their franchises which it is presently profitable for them to serve and
restricting the development of the remaining portions by leaving their inhabitants in discomfort
without the service which they alone can render.2
Certain rights and obligations soon became fundamental. They include the duty to serve,
the requirement to set rates that are just and reasonable and a requirement not to discrimi-
nate unjustly between customers. In the beginning, the courts set the rules, but this quickly
fell under the jurisdiction of independent regulators appointed by the government. They
included state regulators in the United States, provincial regulators in Canada and federal
regulators in both countries.
Not surprisingly, the statutes and the judicial decisions interpreting those statutes are
remarkably similar throughout North America. The decisions started in the railroad indus-
try, moved to telegraph and telecommunications and then ultimately to energy. The basic
principles of energy regulation in terms of the fundamental obligations and rights of a
public utility are set out below.
With changing technology and the growing economic importance of this sector, energy
regulators have been given broad power by governments with wide ranging policy objec-
tives. These include promotion of conservation, energy efficiency and renewable energy.
2 New York & Queens Gas Co. v. McCall, 245 U.S. 345, 351 (1917).
134
The traditional obligations of a public utility flow from a combination of case law and
statutory provisions. A public utility must:
• set prices that are just and reasonable;3
• not discriminate unjustly between customers;4
• not set rates retroactively;5
• not refuse to serve a customer;6
• offer safe and reliable service;7
• offer access to essential facilities;8 and
• not contract for rates different than the tariff rate.9
A public utility has certain rights. Specifically a public utility is entitled to:
• a fair rate of return;10
• recover costs that are prudently incurred;11
• a fair rate of return on assets that are used and useful;12
• be free from competition in a service area; and
• limited liability for negligence.13
3 Northwestern Utilities v. Edmonton [1929] SCR 186.

4 Red Deer v.Western General Electric (1910) 3 Alta L.R. 145; Bell Telephone v. Harding Communications [1979]
1 S.C.R. 395; St. Lawrence Redering v. Cornwell [1951] O.R. 669; Epcpr Generation Inc v. Alberta Utilities Board,
2003 ABCA 374; Energy Commission (1978) 87 D.R.L.(3rd) 727; Brant County Power v. Ontario Energy Board
EB-2009-0065 (10 August 2010); Apotex Inc. v. Canada (Attorney General) [1994] 3SCR 1100; Portland
General Exchange, Inc. 51 FERC ¶ 61,108, (1990); United States v. Ill.Cent. R.R. 263 U.S. 515,524 (1924).
5 Northwestern Utilities Ltd. v. Edmonton (City), [1979] 1SCR 684; Bell Canada v. Canada Radio Television and
Telecommunications Commission [1989] SCJ No. 68 at 708; Brosseau v. Alberta (Securities Commission) [1989] SCC;
EuroCan Pulp and Paper v. British Columbia Energy Commission (1978) 87 D.R.L.(3rd) 727; Brant County Power v.
Ontario Energy Board EB-2009-0065 (10 August 2010); Apotex Inc. v. Canada (Attorney General) [1994] 3SCR
1100; Chastain v. British Columbia Hydro (1972) 32 DRL (3rd) 443; Challenge Communications Ltd. v. Bell Canada
[1979] IFC 857; Associated Gas Distribs. v. FERC, 898 F2d 809 (D.C. Cir.1990); San Diego Gas & Elect.Co. v.
Sellers of Energy, 127 FERC ¶ 61,037 (2009).
6 Chastain v. British Columbia Hydro (1972) 32 DRL (3rd) 443; Challenge Communications Ltd. v. Bell Canada
[1979] IFC 857; New York ex rel. N.Y.& Queens Gas Co. v. McCall, 245 U.S. 345 (1917) 35n62; Pennsylvania
Water & Power Co. v. Consolidated Gas, Elec.Light & Power Co. of Balt., 184 F.2d 552 (4th Cir. 1950).
7 Pennsylvania Water & Power Co. v. Consolidated Gas, Elec. Light & Power Co.of Balt., 184 F.2d 552 (4th Cir. 1950).
8 CNCP Telecommunications, Interconnection with Bell Canada,Telecom Decision, CRTC 79-11, 5 CRT 177 at 274
(17 May 1979); Otter Tail Power Co. v. US, 410 US 366 (1973); RE Canada Cable Television Assoc., OEB, RP
2003-0249 (7 March 2005).
9 Keogh v. Chicago & Northwestern Ry. Co. 260 U.S. 156 (1922); Square D Co.v. Niagara Frontier Tariff Bureau,
446 U.S. 409 (1986).
10 Federal Power Commission v. Hope Natural Gas (1944) 320US 59; Northwestern Utilities v Edmonton (1929) SCR
186; TransCanada Pipelines v National Energy Board, 2004 FCA 149.
11 British Columbia Electric Railway v. Public Utilities Commission S.C.R. [1960] 837 at 848; Northwestern Utilities
Ltd. v. Edmonton (City), [1979] 1SCR 684; TransCanada Pipelines Ltd. v. National Energy Board 2004 FCA 149;
Union Gas v. Ontario Energy Board 43 OR (2nd) 489.
12 British Columbia Hydro v.West Coast Transmission [1981] 2 FC 646; Alberta Power Ltd. v. Alberta Public Utilities
Board (1990) AJ No. 147 (Alta CA).
13 Garrison v. Pacific Nw. Bell, 608 P.3d 1206 (Or. Ct. App. 1980); Transmission Access Policy Study Group v. FERC
225 F3d. 667 (D.C. Cir.2000), affd sub nom, New York v. FERC 535 U.S. 1 (2002); Strauss v. Belle Realty Co.,
482 N.E.2d 43 (N.Y. 1985); Gyimah v.Toronto Hydro Electric System Ltd. 2013 ONSC 2920.
135
Energy market manipulation

Traditional energy regulation involves the regulation of rates and conditions of service.The
rates are regulated because these are monopoly services and consumers are not protected by
competition. However, over time a number of energy markets have become more competi-
tive and the prospect of market manipulation led governments to develop market rules that
prohibit anticompetitive practice. This jurisdiction has since 2006 been exercised by the
FERC in the US under Order 670.14 In the European Union it has been exercised under
REMIT15 since 2011. In Canada the jurisdiction is exercised by provinces of Alberta and
Ontario – the only two provinces that have competitive markets.
This is an increasingly important dimension of energy regulation and can impact arbi-
trations under contracts between private parties engaged in these markets. Arbitrators will
not enforce contracts that are illegal or contrary to public policy.
In the United States, the Federal Energy Regulatory Commission (FERC) has for
some time aggressively policed attempts to manipulate wholesale energy markets. This fol-
lowed the restructuring of natural gas and electricity markets in the United States in the
1980s when FERC began authorising the sale of electricity and natural gas at market-based
rates instead of cost-based rates. This brought many new participants into energy markets
and contributed to what was known as the California Energy Crisis in 2001, led by the
famous Enron firm.
After this crisis, the FERC promulgated six market behaviour rules that prohibited actions
that were without legitimate business purpose and that were intended to manipulate market
prices. In 2005, Congress enacted the Energy Policy Act, which established the present-day
anti-manipulation authority.The Act made it unlawful for any entity to use manipulation or
deception in connection with the purchase or sale of electricity or natural gas.
The Act gave FERC the express authority to prescribe rules and regulations necessary
to protect the public interest and ratepayers. The legislation provided civil penalties of up
to US$1 million a day. This was an increase from the previous civil penalty authority of
US$10,000 per day. The legislation also confirmed the earlier authority for disgorgement
of unjust profits. At the same time, the maximum criminal fine was raised to US$1 million.
On 19 January 2006, FERC issued Order 670, which prohibited market manipulation.
This established the new Rule 1c.2, now referred to as FERC’s Anti-Manipulation Rule.
This Rule made it unlawful for any entity, directly or indirectly in connection with any
FERC jurisdictional transaction:
(1) To use or employ any device, scheme, or artifice to defraud,

(2) To make any untrue statement of a material fact, or to omit to state a material fact necessary
in order to make the statement made, in light of the circumstances under which they were made,
not misleading, or
14 Order No. 670, Prohibition of Energy Market Manipulation, FERC STATS and REGS. Paragraph 31,
202,71 Fed.Reg. 4, 244 (2006) (codified at 18 CFR pt, 1c).
15 Council Regulation (EU) No. 1227/2011 On Wholesale Energy Market Integrity and Transparency, at art 2
(4)(a), 2011 OJ (L 326) 1, 6 (REMIT); Council Regulation (EC) No. 713/2009, Establishing an Agency for
the Corporation of Energy Regulators, art 1 (1/2), 2009,OJ (L 211) 1,4.
136
(3) To engage in any act, practice, or course of business that operates or would operate as a fraud
or deceit upon any entity.16
Rule 1c closely tracks the US Securities and Exchange Commission Rule 10b-5 prohibit-
ing securities fraud.
Between 2010 and 2014, the Commission opened 35 investigations into market manip-
ulation. In 2013, the Commission obtained more than US$300 million in civil penalties
and almost US$150 million in disgorgement.
Significant penalties were handed down, starting in 2009 with the US$7.5 million fine
in Amaranth Advisors17 and US$30 million in Energy Transfer Partners.18 This was followed by
a penalty of US$245 million in Constellation Energy19 in 2012, while 2013 saw Deutsche
Energy pay US$1.7 million20 and JP Morgan a record US$410 million fine.21 In 2014,
Louis Dreyfus Energy22 paid a civil penalty of US$4.1 million and disgorged US$3.3 mil-
lion in profits, while Twin Cities paid US$2.5 million that year.23
In 2016 FERC opened 17 new investigations and obtained monetary penalties and
disgorgement of unjust profits totalling approximately US$18 million. With the pend-
ing litigation in US federal district courts and before the Commission, FERC’s Office of
Enforcement is seeking to recover more than US$567 million in civil penalties and dis-
gorge more than US$45 million in allegedly unjust profits.
FERC’s Office of Enforcement also issued two white papers: one summarising recent
FERC and federal court case law regarding development of the Commission’s anti
manipulation doctrine and identifying factors staff will investigate for indicia of fraudulent
conduct; and another explaining internal best practices for jurisdictional entities to pre-
vent and detect market manipulation and other violations.24 The US Commodity Futures
Trading Commission (CFTC) also continued to aggressively exercise its enforcement
authority in 2016, bringing 68 enforcement actions, resulting in more than US$1.2 billion
in monetary sanctions. A significant portion of the CFTC’s enforcement actions continue
to involve the energy sector.
In Canada, the only competitive wholesale electricity markets exist in Ontario and
Alberta. In both provinces the provincial governments established agencies to guard against
price manipulation. In Alberta, a separate agency, the Market Surveillance Administrator,
was established to conduct investigations. Applications for enforcement and decisions on
penalties are made by the Alberta Utilities Commission.
16 18 C.F. R. S.1c.2 (Prohibition of Electric Energy Market Manipulation); 18 SRR S.1c.1 (2014) (Prohibition
of Natural Gas Market Manipulation).
17 120 FERC 61,085 (2007).
18 128 FERC 61,269 (21 September 2009).
19 138 FERC 61,168 (2012).
20 142 FERC 61,056 (22 January 2013).
21 144 FERC 61,068 (30 July 2013).
22 146 FERC 61,072 (2014).
23 149 FERC 61,278 (2014).
24 Federal Energy Regulatory Commission, Anti-Market Manipulation Enforcement Efforts Ten Years After Epact 2005
(November 2016).
137
In Ontario, initial investigations are conducted by the Market Surveillance Panel, a

panel of the Ontario Energy Board. Those Reports are published. The actual enforcement
is carried out by a division of the Ontario Independent Electricity System Operator. The
IESO establishes the penalty if necessary following an arbitration process. The market par-
ticipant has the option of appealing that decision to the Ontario Energy Board
The FERC Order 670 approach was followed in Ontario in May 2014 when the
Independent Electricity System Operator (IESO) enacted the General Conduct Rule to
deal with similar conduct. The General Conduct Rule was similar to a rule Alberta had
enacted in 2009 (AR – 159-2009).
On 27 July 2015, the Alberta Commission handed down its first decision,25 which
found that TransAlta, a regulated utility, had intentionally removed its generating plants
from service for maintenance purposes in a manner that would increase the price in the
market. This is a landmark decision. In 200 pages, the Commission sets out in detail the test
for establishing market manipulation in Canada.
More recently, the Ontario Market Surveillance Panel released a report finding that
Resolute, a pulp and paper company, was gaming markets to obtain unwarranted pay-
ments in the form of constrained off and constrained on payments.26 The report recom-
mended that the IESO take all necessary steps to recover the C$26 million payment. In
August 2016 the parties settled on the basis of a voluntary repayment of C$10.6 million.
The increased enforcement of Market Rules in Canada has not yet reached the level
experienced in the United States. However, the trend in North American energy regula-
tion is clear. The regulation of conduct in the competitive segments market may soon
overshadow the regulation of utility rates in monopoly markets. This shift in regulatory
focus has implications for arbitrators.
To the extent that arbitrations involve disputes in these new competitive markets the
enforcement of awards may become more difficult under the public policy defence.
We have seen the influence of serious quasi-criminal activity on arbitrations before.
This has occurred in enforcement activities under anti-bribery statutes, particularly by
the Securities and Exchange Commission in the United States and the Royal Canadian
Mounted Police in Canada.27 Both countries have aggressive legislation with serious
criminal and civil penalties: in the United States there have been convictions against over
30 energy companies; in Canada, two energy companies have been convicted.28 In a num-
ber of arbitrations, parties have raised bribery as a bar to the enforcement of awards.29 In
fact, bribery has been raised in some 50 cases but has been successful in only four.
25 Alberta Utilities Commission, Market Surveillance Administration allegation against TransAlta Corporation et al,
Decision 3110, 27 July 2015.
26 Market Surveillance Panel, Report on an Investigation into Possible Gaming Behavior related to Congestion
Management Credit Payments by Abitibi Consolidated and Bowater Canada Forest Products, February 2015.
27 Gordon Kaiser, ‘Corruption in the Energy Sector: Criminal Fines, Civil Judgements, and Lost Arbitrations’,
34 Energy L.J. (2013) at 193.
28 In 2011, Niko Resources, a Calgary oil and gas company, was charged with bribing the Bangladesh Ministry
of Energy and pleaded guilty and received a fine of C$9.5 million. In 2013 Griffiths Energy, a Calgary oil and
gas company, paid a C$10.3 million fine in connection with a bribe to obtain oil and gas concessions inChad.
29 Methenex Corporation v. United States of America, NAFTA Award 3 of August 2005; Niko Resources v. Bangladesh,
ICSID Case No. ARB-1-18, Award of 19 August 2013; International Thunderbird Gaming Corporation v. Mexico,
138
Divided jurisdiction
In the United States and Canada, the courts grant deference to arbitrators. Similarly, in both
countries, courts grant deference to regulators, particularly those involved in regulating
complex industries with substantial national importance. This deference includes interpre-
tation of the regulators’ home statute.
That leaves potential conflicts between regulators and arbitrators. Many regulated pub-
lic utilities have arbitration clauses in contracts. Assume that a regulated utility has a con-
tract with a large commercial customer that has an arbitration clause with respect to price.
And assume that there is a dispute with respect to that price. Would that be resolved before
the arbitration panel or before the regulator? If it is before an arbitration panel, will the
principles of public utility law apply?
In most cases, an energy regulator will have the jurisdiction to make sure that the price
set by the regulated utility is just and reasonable. There are very few cases across North
America where that is not the case.What happens if one party issues a notice of arbitration?
The regulator’s jurisdiction

A tribunal only has the powers stated in its governing statute or those which arise by
‘necessary implication’ from the wording of the statute, its structure and its purpose.30 The
Ontario Board’s jurisdiction to fix ‘just and reasonable’ rates is found in section 36(2) of the
Ontario Energy Board Act, 1998:
The Board may make orders approving or fixing just and reasonable rates for the sale of gas by
gas transmitters, gas distributors and storage companies, and for the transmission, distribution
and storage of gas.
This is standard language in all public utility legislation.

It is generally accepted that an energy regulator’s jurisdiction is very broad. In Union
Gas Ltd. v.Township of Dawn, the Ontario Divisional Court in 1977 stated:
this statute makes it crystal clear that all matters relating to or incidental to the production,
distribution, transmission or storage of natural gas, including the setting of rates, location of lines
and appurtenances, expropriation of necessary lands and easements, are under the exclusive
jurisdiction of the Ontario Energy Board and are not subject to legislative authority by munici-
pal courts under the Planning Act.
These are all matters that are to be considered in light of the general public interest and
not local or parochial interests.The words ‘in the public interest’ which appear, for example, in s.
40(8), s. 41(3) and s. 43(3), which I have quoted, would seem to leave no room for doubt that
it is broad public interest that must be served.31
NAFTA Award of 26 January 2006.

30 ACTO Gas and Pipelines Ltd. v. Alberta (Energy and Utilities Board, [2006] 1 S.C.R. 140, [2006] 2.C.J. 400 at
para. 38. See also Bell Canada v. Canada (Canadian Radio-Television and Telecommunications Commission,
[1989] 1 S.C.R. 1722.
31 (1977), 15 O.R. (2nd) 722, O.J. No.2223 at paras 28 and 29.
139
The same Court in 2005 issued two important decisions.The Court stated in the NRG case:
The Board’s mandate to fix just and reasonable rates under section 36(3) of the Ontario
Energy Board Act, 1998 is unconditioned by directed criteria and is broad; the Board is
expressly allowed to adopt any method it considers appropriate.32
The ruling in the Enbridge case decided that the Board in fixing just and reasonable rates
can consider matters of ‘broad public policy’:
the expertise of the tribunal in regulatory matters is unquestioned. This is a highly specialized
and technical area of expertise. It is also recognized that the legislation involves economic regu-
lation of energy resources, including setting prices for energy which are fair to the distributors
and the suppliers, while at the same time are a reasonable cost for the consumer to pay. This
will frequently engage the balancing of competing interests, as well as consideration of broad
public policy.33
The arbitrator’s jurisdiction

Arbitrators take their jurisdiction from the agreement between the parties. Absent some
legislation there is no inherent jurisdiction in the tribunal.
Depending on the scope of the arbitration agreement, the arbitrator is able to decide
matters of tort, contract or equity, and has any commercial remedy available at law and
equity or available to a court including the power to declare any provision of con-
tract unconstitutional.
Under generally accepted principles, arbitrators have the power to rule on their own
jurisdiction.This is sometimes referred to as a gateway issue or the competence-competence
principle. A tribunal has the jurisdiction to determine its own jurisdiction.34 This is
acknowledged by the statute governing most arbitrations as well as the arbitration rules
used by a number of institutions. In the Ontario Arbitration Act it is provided in section
17. In the Alberta Arbitration Act it is also provided in section 17.35
Not everything is subject to arbitration. Matters where there is a substantial public
interest component may be excluded.The strongest examples would be criminal statutes or
possibly fraud. Other areas such as competition law, intellectual property and securities law
were originally held outside the ambit, but those restrictions have been largely overcome.
All of this comes into play not just in deciding arbitrability at the start, but also enforce-
ment of an award at the end. This principle, which flows from the New York Convention,
is contained in virtually every domestic statute.The principle is that courts will not enforce
arbitration awards where the enforcement is contrary to public policy.The next question is:
Is public utility law public policy?
32 Natural Resource Gas Ltd. v. Ontario Energy Board, [2005], O.J. No. 1520 (Div. Ct.) at para. 13.
33 Enbridge Gas Distribution Inc. v. Ontario Energy Board (2005),75 O.R. (3rd) 72, [2005] O.J. No. 756 at para 24.
34 Ontario Medical Association v.Willis Canada (2013) ONCA 745: BG Group PLC v. Republic of Argentina, 572 US
(2014); Dell Computer Corp. v. Union des Consommateurs [2007] 2 SCR 801.
35 Suncor Energy Inc. v. Alberta, 2013 ABQB 728.
140
Primary jurisdiction
In dealing with arbitrators, FERC has developed the concept of primary jurisdiction and
exclusive jurisdiction. Unless the Commission is in a situation where it should exercise
primary or exclusive jurisdiction, it will defer to an arbitrator.
This question arose in the Commission’s 2007 decision regarding California Water
Resources.36 There, the California Department of Water Resources (California Water) was
involved in a contract dispute with Sempra Generation relating to Sempra’s failure to
perform under a long-term energy purchase agreement. California Water claimed over
US$100 million in false charges.
The matter went to arbitration. Sempra moved to set aside the claim on the ground that
it was barred by federal pre-emption principles and the filed-rate doctrine.
The arbitration panel granted the Sempra motion to dismiss, concluding that the
Commission had exclusive jurisdiction over the California Water claim. The panel con-
cluded there was a conflict between California’s claim and the tariff approved by the
Commission. The panel referred to the filed-rate doctrine that holds that private agree-
ments between utility customers cannot change the terms or conditions of approved tariffs.
California Water responded that there was no conflict between its claims and the tariff.
In rendering its decision, the Commission stated first, at paragraph 32:
As an initial matter, we emphasize that in this order we do not make a finding as to the validity
of CDWR’s interpretation of the Agreement, i.e., that Sempra may not knowingly schedule
energy deliveries to CDWR at congested points. Both parties have agreed to binding arbitration
to resolve their dispute regarding the Agreement and we believe this is appropriate. CDWR
states that it does not, by the instant petition, seek to reverse or overturn the Panel’s decision,
nor is it the commission’s intent to purport to do so in this order.
The Commission further stated, at paragraphs 38 and 40:
CDWR argues that the Commission asserts exclusive jurisdiction notwithstanding a binding
arbitration in only two situations: (1) to ensure the rates are just and reasonable; and (2) to
ensure the rates are not unduly discriminatory. It argues that the dispute is over Sempra’s com-
pliance with the terms of the Agreement. And that it is not seeking to change the Agreement or
change the rate under the Agreement and that it is not attacking any CAISO Tariff provisions.
Thus, it argues, no exclusive Commission jurisdiction pre-empts the contract interpretation from
proceeding in a non-Commission forum, i.e., the agreed-upon arbitration proceeding.
. . .
Having made the declaration above that the CDWR’s interpretation of the Agreement is not
in conflict with the CAISO Tariff or Amendment No. 50, we now address the jurisdictional
question posed by CDWR’s petition. The Commission’s exclusive jurisdiction covers matters
that are clearly and solely within the Commission’s statutory grant of authority. The parties’
contractual dispute is not about the proper rate for service by Sempra to CDWR. Rather, it is
about what, if any, adjustment is contemplated by the parties under the agreement regarding
36 Re California Department of Water Resources, 121 FERC 61,191(19 November 2007).
141
CDWR’s obligation for deliveries under the alleged circumstances. Such relief does not implicate
the setting of a new, just, and reasonable rate under the Agreement or the CAISO Tariff.Thus,
the parties’ contractual dispute does not fall within the Commission’s exclusive jurisdiction.
The Commission stated that it would not exercise primary jurisdiction over the dis-
pute between California Water and Sempra Generation. Sempra argued that even if the
Commission does find exclusive jurisdiction, it should exercise primary jurisdiction because
California Water raised issues involving the Commission’s expertise relating to congestion
management. The Commission disagreed, stating at paragraphs 44 and 45:
The dispute between CDWR and Sempra presents a question of contract interpretation,
which we determined above is not within the Commission’s exclusive jurisdiction. The deci-
sion whether to exercise the Commission’s concurrent jurisdiction is within the Commission’s
discretion. As the Commission has discussed in prior orders, in deciding whether or not to
entertain such a case, the commission usually considers the following three factors: (a) whether
the commission possesses some special expertise that makes the case particularly appropriate for
Commission decision; (b) whether there is a need for uniformity of interpretation of the type of
question raised by the dispute; and (c) whether the case is important in relation to the regulatory
responsibilities of the Commission. As discussed below, based on these three factors, we would
not expect to assert primary jurisdiction over such a dispute.
The facts in dispute are unique to parties. The resolution of this dispute is not important to
the regulatory responsibilities of the Commission. The Commission has not special expertise
in interpreting the Agreement or in divining how CDWP and Sempra intends to address
dec’d generation. The ascertainment of parties’ intent when they execute a contract is a matter
of case-by-case adjudication that does not involve the considerations of uniformity or techni-
cal expertise that, in other circumstances, might call for the assertion of this Commission’s
jurisdiction. Further, the Commission’s consistent policy has been to encourage arbitration
when appropriate.37
This decision is a well-reasoned and clear description of the principles US regulators con-
sider in determining whether they should take jurisdiction from an arbitration panel or
whether they should step aside.
It turns out things are not much different in Canada.
In Storm Capital,38 a decision of the Ontario Superior Court of Justice, two companies
had submitted an investment dispute to an arbitration panel. The matter dealt with the cal-
culation of a finder’s fee. The agreement provided that the finder should be registered with
the Ontario Securities Commission (OSC).
The arbitrator found that Storm Capital was entitled to compensation. The opposing
party brought an application to set aside the arbitration award claiming that the arbitra-
tor made unreasonable errors of law and had decided matters beyond the scope of the
arbitration agreement. The contract required that Storm Capital representative should be
37 See, e.g., Indiana Michigan Power Co. and Ohio Power Co. 64 FERC ¶61 , 184 (1993).
38 Advanced Explorations Inc. v. Storm Capital Association 2014 ONSC 3918.
142
registered under the Ontario Securities Act.The arbitrator decided that issue.The applicant
claimed the arbitrator lacked jurisdiction to rule on that issue because it was a matter of
securities law under exclusive jurisdiction of the OSC.
The Court stated in paragraphs 57 and 58:
A privately-appointed arbitrator has no inherent jurisdiction. His or her jurisdiction comes only
from the parties’ agreement. ‘The parties to an arbitration agreement have virtually unfettered
autonomy in identifying the disputes that may be the subject of the arbitration proceeding.’ An
arbitrator has the authority to decide not just the disputes that the parties submit to it, but also
those matters that are closely or intrinsically related to the disputes.
Public policy in Ontario favours respect for the parties’ decision to arbitrate. The Arbitration
Act, 1991 is ‘designed [...] to encourage parties to resort to arbitration as a method of resolving
their disputes in commercial and other matters, and to require them to hold to that course once
they have agreed to do so’. As a result, the Act restricts the power of a court to interfere with the
arbitration process or result.39
The Court further stated at paragraph 61 that if the legislature wishes to preclude an issue
from being subject to arbitration it must expressly state this intention. It is not enough that
the subject matter on which the arbitration is sought is subject to regulation or concerns
the public order. The Court relied on the decision of the Supreme Court of Canada in
Desputeaux40 for the principle that courts must be careful not to broadly construe areas as
exempt from arbitration simply because they concern public order, as this would under-
mine the legislative policy of encouraging arbitration. The Ontario Court further noted
that no provision in the Ontario Securities Act or any other statute was referred to that
expressly precludes arbitration on matters of securities law.
The Court in Storm Capital also refused to follow the Ontario Divisional Court’s
decision in Manning41 that the OSC has exclusive jurisdiction in some matters. That case
involved the authority to remove an individual’s exemption under the Securities Act. The
Court in Storm Capital distinguished the Manning case because Storm Capital did not
involve any exercise of the Commission’s enforcement power. The Storm Capital arbitra-
tion involved a private dispute and was not binding on any third party including the
Commission. Accordingly, the Court refused to set aside the arbitration.
The decision is a careful outline of the principles the Canadian courts will follow
where there is an apparent conflict between the jurisdiction of an arbitration panel and the
jurisdiction of the regulatory commission.The decision does not use the same terminology
as the US cases, but it does come close to it in terms of principles. For example, the decision
recognises that there are certain areas where the regulator would have primary jurisdiction,
such as the case where an individual was subject to disbarment by the Commission.
On the other hand, in cases of purely private contractual matters, the arbitration panel is
not infringing on a commission’s jurisdiction. Moreover, the Storm Capital decision makes
39 Id. at paras 57–58 (citations omitted).

40 Desputeaux v. Editions Chouette Inc. (2003) 1SCR 178 at para 52.
41 Manning v. Ontario Securities Commission (1996) 94 OAC 15.
143
it clear that if a regulator’s jurisdiction is to be preferred to an arbitrator’s jurisdiction,

there must be explicit legislative authority for that exclusive jurisdiction. This is an impor-
tant point.
Deference to regulators
The concept of deference to regulators is well understood. For years, courts in Canada42
and in the United States43 have ruled that antitrust and competition laws should not be
enforced in regulated industries where that regulation is being carried out by lawful gov-
ernment authority. In part the rationale was constitutional, but it also reflected the courts’
policy of deferring to expert tribunals.
In 2013, the Supreme Court of Canada, in a case involving the British Columbia Securities
Commission, highlighted the deference that courts should grant to expert tribunals:
The bottom line here, then, is that the Commission holds the interpretative upper hand: under
reasonableness review, we defer to any reasonable interpretation adopted by an administrative
decision maker, even if other reasonable interpretations may exist. Because the legislature charged
the administrative decision maker rather than the courts with ‘administer[ing] and apply[ing]’
its home statute, it is the decision maker, first and foremost, that has the discretion to resolve a
statutory uncertainty by adopting any interpretation that the statutory language can reasonably
bear. Judicial deference in such instances is itself a principle of modern statutory interpretation.
Accordingly, the appellant’s burden here is not only to show that her interpretation is reasonable,
but also that the Commission’s interpretation is unreasonable. And that she has not done. Here,
the Commission, with the benefit of its expertise, chose the interpretation it did. And because
that interpretation has not been shown to be an unreasonable one, there is no basis for us to
interfere on judicial review – even in the face of a competing reasonable interpretation.44
The following year, the Alberta Court of Appeal made a similar point with respect to the
Alberta Securities Commission:
The Commission is an expert tribunal, charged with the administration of the Act.The stand-
ard of review of its decisions is presumptively reasonableness, particularly where the question
relates to the interpretation of its enabling (or ‘home’) statute. Its findings of fact, findings of
mixed fact and law, and credibility findings are also entitled to deference, and will not be over-
ruled on appeal unless they demonstrate palpable and overriding error.45
The principle that antitrust authorities in North America will defer to regulators is a
long-standing one, but the most recent decision in Trinko is stark. There, the US Supreme
42 Canada (Attorney General) v. Law Society of Upper Canada [1982] SCJ No. 70, [1982] S W.W.R. 289 (SCC)
43 Verizon Communications Inc. v. Law Offices of Curtis V.Trinko, 540 U.S. (2004); Credit Suisse Sec. (USA) L.L.C. v.
Billing, 551 U.S. 264 (2007).
44 McLean v. British Columbia Securities Commission, 2013 SCC 67 at paras 40-41 (original emphasis)
(citation omitted).
45 Walton v. Alberta Securities Commission, 2014 ABCA 273 at para 17 (citation omitted).
144
Court said it doubted whether it had ever recognised the essential facilities doctrine in
antitrust law, but in any case it should not be applicable where a regulatory body could
mandate and control the terms and conditions of market entrance.
That case involved a public utility,Verizon Communications. While the case concerned
deference to a sector-specific regulator, a similar principle may well apply to a sector-specific
adjudicator. In North America, all electricity public utilities are subject to a sector-specific
regulator. That regulator licenses every generator, transmitter and distributor of electricity.
In short, the regulator mandates and controls the terms and conditions of market entrance.
The situation is similar in Europe but more complicated. There, utilities face not only
domestic regulation but international regulation under the European Union. To compli-
cate matters, there are also sector-specific treaties such as the Energy Charter Treaty. In
the European Union, the issues are usually competition law issues involving mergers and
third-party access. There are three major decisions.46 Deference is generally granted to the
sector-specific regulator. The concept of deference to administrative tribunals really began
with the 1984 decision of the United States Supreme Court in Chevron.47
Deference to arbitrators
The concept of deference to arbitrators can be traced back to the 1983 decision of the
United States Supreme Court in Mercury Construction,48 where the court stated simply that
‘any doubts concerning the scope of arbitration should be resolved in favour of arbitration’.
This was echoed by Canada’s highest court in 2007 in Dell Computer.49 In Ontario Hydro,50
a Canadian energy arbitration case, the Ontario Superior Court stated:
The Act encourages parties to resort to arbitration and requires them to hold to the course once
they have agreed to do so and entrenches the primacy of arbitration over judicial proceedings by
directing the court generally not intervene.
In a US energy arbitration case, Bangor Gas,51 the United States Court of Appeals for the
First Circuit stated:
We review the district court’s decision de novo, but our review of the arbitration award itself is
‘extremely narrow and exceedingly deferential.’ The FAA ‘embodies a national policy favoring
arbitration,’ and provides only a narrow set of statutory grounds for a federal court to vacate
an award:
(1) where the award was procured by corruption, fraud, or undue means;
(2) where there was evident partiality or corruption in the arbitrators, or either of them;
46 Case COMP/39.388 – German Electricity Wholesale Market and COMP/39.389 – German Electricity Balancing
Market; Case COMP/39.402 – RWE Gas Foreclosure; Case COMP/C-1/37.451,37.578,37.579 – Deutsche
Telekom and Case T-271/03 – Deutsche Telekom v. Commission.
47 Chevron v. Natural Resources Def Council. 467 US 837.
48 Moses H. Memorial Hospital v. Mercury Construction, 460 US 1 (1983).
49 Dell Computers v. Union des Consommateurs (2007) 2 SCR 801, Seidel v.Telus 2011 SCC 15.
50 Ontario Hydro v Dennison Mines Ltd (1992) O.J. 2848.
51 Bangor Gas Company v. Energy Services Inc., United States court of Appeals, First Circuit, 26 September 2012.
145
(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon
sufficient cause shown, or in refusing to hear evidence pertinent and material to the contro-
versy; or of any other misbehavior by which the rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual,
final, and definite award upon the subject matter submitted was not made.
In addition, this court in the past recognized a common law ground for vacating arbitration
awards that are in ‘manifest disregard of the law,’ while limiting this notion primarily to cases
where the award conflicts with the plain language of the contract or where ‘the arbitrator rec-
ognized the applicable law, but ignored it.’ The manifest-disregard doctrine has been thrown
into doubt by Hall Street Associates, L.L.C. v. Mattel, Inc., where the Supreme Court ‘h[e]ld
that [9 U.S.C. § 10] provide[s] the FAA’s exclusive grounds for expedited vacatur.’ This has
caused a circuit split, with this court saying (albeit in dicta) that ‘manifest disregard of the law
is not a valid ground for vacating or modifying an arbitral award in cases brought under the
Federal Arbitration Act’.
Even if the manifest-disregard doctrine were assumed to survive and were applied in this
case, the award neither conflicts with the plain language of the Agreement nor did the arbitrators
recognize the applicable law but ignore it.The panel resolved what is at best an argument about
how a contract of questionable meaning should be read and harmonized with a FERC doctrine
on leasing capacity. Under settled precedent, an FAA award cannot be overturned based on mere
disagreement by the court with the panel on a debatable issue, and in this instance the panel’s
decision is in our view entirely reasonable.52
In an Alberta energy arbitration, the Alberta Court of Appeal stated as follows:
As a matter of law and policy, the role of the courts in relation to arbitration has been one of
non-intervention. The objective of arbitration legislation and the jurisprudence interpreting it is
to promote adherence to agreements, efficiency and fairness and to lend credibility to an impor-
tant dispute resolution process. Courts are instructed to be mindful of this overarching purpose
in any exercise of discretion.53
Parallel proceedings
The FERC decision in California Water discussed above makes it clear that regulators will
defer to arbitrators unless the matter falls with the Commission’s exclusive jurisdiction. In
the Alberta Utilities Commission decision in Central Alberta Rural Electrification discussed in
the next section, the Commission exercised jurisdiction notwithstanding the fact that an
arbitration decision had been issued. However, there the Commission concluded that the
arbitrator had not addressed the impact of the legislation but only the terms of the contract.
In the previous section we outlined the jurisdiction of both arbitrators and regulators.
Both have substantial jurisdiction and considerable flexibility. There are cases that pro-
ceed at the same time before both arbitrators and regulators dealing with substantially the
same issues.
52 Id. (citations omitted).

53 Epcor Power v. Petrobank Energy and Resources 2010 ABCA 378 at para 16.
146
In some cases one proceeding will commence first and the second panel will have to
consider res judicata and sometimes deal with anti-suit or anti-arbitration injunctions.
As indicated earlier, courts have over the years developed a body of law that clearly
establishes as a matter of public policy that they will defer to arbitrators wherever that
is possible. And to a slightly lesser degree, courts over the past 10 years have developed a
policy of deferring to regulators with expertise in technical matters.
The two decisions examined below indicate that regulators have also developed a pol-
icy of deferring to arbitrators wherever possible.
Different procedures
The potential for parallel proceedings will be influenced by the differences in the pro-
cedures used by arbitrators compared to regulators. In many respects, the two tribunals
operate in a similar fashion. Neither tribunal is bound by the rules of evidence. The main
difference is that the regulatory tribunal receives its jurisdiction from legislation while the
arbitral tribunal receives its jurisdiction from a contract.
The remedies both tribunals can offer are similar; the main difference is that an arbitral
tribunal cannot award fines. A major difference is the ability of third parties to intervene. In
arbitrations these are primarily amicus briefs, which we have seen in a number of NAFTA
tribunals.54 These are largely limited to written submissions. Receipt of oral submissions
and access to documents is not permitted. In regulatory hearings, it is a much different situ-
ation.Third parties can successfully intervene if they can establish they’re directly affected.55
In rare cases, the scope of intervention may be limited,56 but generally all parties are treated
the same.
A related difference is the scope of disclosure. It is very wide in case of regulatory
hearings and limited in the case of arbitrations. Also, arbitrations are by their nature private
and confidential. Regulatory hearings on the other hand are public and usually initiated
by public notices in newspapers.57 A regulator also has the ability to consolidate different
proceedings, something that is not available to arbitrators.
All of these factors may create an incentive for parties in arbitrations to move their
dispute to the regulator if they do not get the result they like in the arbitration. That leads
to the question in the next section: are regulators bound by res judicata?
Res judicata
It is now accepted that arbitration awards have res judicata effect.The same is true of regula-
tory decisions.58 In the United States, arbitral awards have res judicata effect including col-
lateral estoppel.59 The binding effect of arbitral awards is provided for in a number of insti-
54 Bywater v.Tanzania.
55 Kelly v. Alberta Energy Resources Conservation Board 2009 ABCA 349; Power Workers Union v. Ontario Energy Board
(2006) OJ No. 2997.
56 Ontario Energy Board Re Toronto Hydro Electric System, EB – 2009 – 0308 (27 January 2010).
57 Ontario Energy Board Re Hydro One Networks Inc., EB 2009 – 0096 (19 January 2010).
58 Danyluk v. Ainsworth Technologies Inc. (2001) 2 SCR 12 at paras 20-22.
59 Chiron Corporation v. Ortho Diagnostics Systems, Inc. 207F, 3d 1/26 (9th Cir.2000); John Hancock Mutual Life
Insurance Co. v. Belco Petroleum Corp., 88F. 3d. 129 (2nd Cir. 1996).
147
tutional rules including Article 28 (6) of the ICC rules, Article 26.9 of the LCIA Rules and
Article 32 (2) of the UNCITRAL Rules as well as Article III of the New York Convention.
An arbitrator who renders an award in violation of res judicata may run the risk of the
award being set aside because the arbitrator exceeded the mandate having become func-
tus officio upon rendering the first award, or because the reasons contradict those of the
first award.
This possibility was considered in the 2012 decision of the Alberta Utilities Commission
in Central Alberta Rural Electrification,60 where two parties claimed the right to serve elec-
tricity customers in the same geographical territory. The two parties had a contract that
contained an arbitration clause and began an arbitration pursuant to that agreement. The
arbitration was heard and the tribunal released its decision finding in favour of one of the
parties. The losing party then brought a court application for leave to appeal the arbitra-
tion award.
The other party commenced an application before the Utilities Commission asking the
Commission to rule on the matter. By the time the Commission came to release its deci-
sion, the Court had heard the motion for leave to appeal but had not released any decision.
In the circumstances, the Alberta Commission considered whether res judicata or issue
estoppel prevented the Commission releasing its decision.
The Commission noted that the Supreme Court of Canada in Danyluk61 held that res
judicata may apply to administrative matters. The Commission went on to analyse the pre-
conditions to the operation of issue estoppel, namely that the same issue is to be decided;
that the decision which creates estoppel was final; and that the parties in the two proceed-
ing are the same parties.The Commission noted that the decision of whether to apply issue
estoppel is always a matter of discretion, citing the Supreme Court in Danyluk:
The rules governing issue estoppel should not be mechanically applied.The underlying purpose
is to balance the public interest in the finality of litigation with the public interest in ensuring
that justice is done on the facts of a particular case. (There are corresponding private interests.)
The first step is to determine whether the moving party (in this case the respondent) has estab-
lished the preconditions to the operation of issue estoppel set out by Dickson J. in Angle. . . . If
successful, the court must still determine whether, as a matter of discretion, issue estoppel ought
to be applied.62
The Alberta Commission concluded that the first two preconditions had not been satis-
fied. It was clear that the arbitrators, in determining the matter, did not focus on legisla-
tive scheme. Rather, the Commission concluded that the arbitrators had focused entirely
on the interpretation of the agreement. Accordingly, the Commission ruled that the issue
before the Commission had not been determined by the arbitrators and that res judicata
did not apply.
60 Alberta Utilities Commission, Central Alberta Rural Electrification, Decision 2012-181, 4 July 2012.
61 Danyluk v. Ainsworth Technology (2001) 2 SCR 22.
62 Id. at para 33 (original emphasis) (citation omitted).
148
Res judicata in arbitrations was addressed recently by the Alberta courts in both Transa
Generation Partnership v.Capital Power63 and Enmax Energy Corporation v.Transalta.64
In Transalta the Chief Justice of Alberta faced a situation where two parties,Transalta and
Capital Power, had participated in an arbitration under a power purchase agreement. Under
that agreement Transalta purchased power from Capital Power under a 20-year agreement
during which the generator was entitled to recover its operating and capital costs.
To allow for inflation certain government statistical indices were used to update the val-
ues for the purpose of calculating the payment amounts.That arbitration involved a dispute
regarding the application of the indices and the arbitration panel made a specific ruling.
A few years later the same parties faced another dispute under the same agreement.The
second dispute, however, related to a different price index.Trans Alta took the position that
the earlier 2011 award was binding on the parties because the doctrine of res judicata and
issue estoppel, and accordingly Capital Power was barred from taking positions that were
inconsistent with the determinations made in the prior arbitration.
The Chief Justice made three rulings:
• as a matter of law, res judicata and issue estoppel apply to arbitration awards between the
same parties under the same PPA;
• both Transalta and Capital Power are estopped or barred by res judicata from taking posi-
tions in the current arbitration that are inconsistent with the determinations made in
the previous arbitration;
• the 2011 award is binding on the parties in the current arbitration to the extent that
the requisite elements of res judicata and issue estoppel are found by the arbitral panel
to exist.
The court also ruled that having found that the doctrine of res judicata applied to arbitra-
tions the question of whether res judicata existed in the facts of the second arbitration
should be determined by the arbitration panel appointed in that hearing. As it happened
the parties agreed to the same three arbitrators that had heard the first arbitration. Those
arbitrators in the second arbitration agreed that res judicata applied but found that the facts
in the second arbitration were different and accordingly res judicata did not apply in the
second arbitration.
The application of the res judicata doctrine in a NAFTA case was decided for the first
time recently in Apotex Holdings.65 Apotex Holdings was a Canadian company that pro-
duced generic drugs in Canada while Apotex Inc was a Delaware company that distributed
drugs in the US produced by Apotex Holdings.
For the purpose of selling drugs in the United States, Apotex obtained ‘quasi-import
licences’ called abbreviated new drug applications, or ANDAs, which were approved by the
FDA in the United States. There were, however, two versions: tentatively approved ANDAs
and finally approved ANDAs. The first version had been considered in an earlier Apotex
arbitration.There the tribunal ruled the tentatively approved ANDAs were not investments
for the purpose of NAFTA, and Apotex therefore did not have a valid NAFTA claim.
63 Transa Generation Partnership v. Capital Power PPA Management Inc., 2015 ABQB 793.
64 Enmax Energy Corporation v.Transalta Generation Partnership, 2015 ABCA 383.
65 Apotex Holdings Inc. and Apotex Inc. v. United States, ICSID Case No. ARB (AF) /12/1, 25 April 2014.
149
The FDA had issued import alerts related to concerns about the quality of drugs pro-
duced at two Apotex Canadian manufacturing plants. As a result there was no sale of
Apotex drugs in the United States for two years.
Apotex filed a claim under NAFTA alleging that the import alerts issued by the FDA
infringed certain protections guaranteed to Apotex under NAFTA by way of the MFN
provisions of NAFTA Article 1103.
The US objected to the application on the ground that Apotex’s finally approved
ANDAs were not within the definition of investment as set out in NAFTA Article 1139.
This position was based on the previous arbitration decision in which the tribunal found
that tentatively approved ANDAs were not investments for the purpose of NAFTA Chapter
11 claims.
The tribunal found that the doctrine of res judicata did apply referring to Grynberg v.
Grenada66 and other authorities. However, Arbitrator J William Rowley, appointed by the
claimants, dissented on the basis that there is a difference between the two arbitrations.
While the parties were the same, the first Apotex award did not decide, and did not need to
decide, whether Apotex’s finally approved ANDAs were to be characterised as property for
the purpose of NAFTA article 1139.
Arbitrator Rowley concluded that a finally approved ANDA could properly be charac-
terised as an investment and was different from a tentatively approved ANDA.
Disallowance
The regulator has some additional tools. A regulator is not bound by an arbitration decision
and will often apply a different test – a public interest test. For example, in determining
costs, a regulator will consider the impact on ratepayers. An arbitration, on the other hand,
would likely only consider the impact on the parties.
The best example of this principle is two recent decisions – one from Ontario67 and
one from Alberta68 – where the regulator refused to accept as a cost for rate-making pur-
poses the decision of an independent arbitrator.
In Power Workers, the Ontario Energy Board denied Ontario Power Generation recov-
ery of C$145 million of labour costs.Those costs were driven by a collective agreement the
utility had entered into with the union two years earlier. In reaching that agreement, the
parties had involved an independent arbitrator.
The union and the utility argued that the Board was required to presume the compen-
sation costs were prudent. The Board disagreed and found it could rely on benchmarking
studies comparing the OPG labour costs with the costs at other utilities. The benchmark-
ing studies had been ordered by the Board in an earlier rate case. As a result of this analysis,
the Board disallowed C$145 million in labour costs.
The Board recognised the constraints on OPG but nonetheless held that ratepayers
were only required to bear reasonable costs. An appeal to the Ontario Divisional Court
upheld the C$145 reduction, stating that the Board must have the freedom to reconsider
current compensations arrangements in order to protect the public interest. That decision
66 Grynberg v. Grenada, ICSID Case No. ARB 10/16 Award, 10 December 2010.
67 Power Workers Union v. Ontario Energy Board 2013 ONCA 359, 116 OR (3rd) 793 (Power Workers).
68 ATCO Gas Ltd. and ATCO Electric v. Alberta Utilities Commission, 2013 ABCA 310.
150
was overturned by the Ontario Court of Appeal, which held that the costs were committed
costs fixed by collective agreements and the Board had violated a fundamental principle of
the prudence test, namely whether an investment or expenditure decision is prudent must
be based on the facts available at the time. The Board cannot use hindsight.
The ATCO case in Alberta is similar to the Power Workers case. In the Alberta case, the
utility had asked the Utilities Commission to approve a special charge to the ratepayers
which would cover a unfunded pension liability of C$157 million. Those costs included a
cost-of-living allowance that was set in advance each year by an independent administrator.
The allowance was set at 100 per cent of the consumer price index. As in Power Workers, the
Alberta utility argued that this was a committed cost set by an independent authority and
was therefore a prudent expenditure by the utility. The Alberta Commission disagreed and
reduced the cost-of-living allowance to 50 per cent of the consumer price index.
In disallowing part of the expense, the Commission relied on evidence that an escalator
equal to 100 per cent of CPI was high by industry standards. The utility appealed to the
Alberta Court of Appeal, which upheld the Commission’s decision.
The ATCO decision and the Power Workers decision have both been appealed to
the Supreme Court of Canada. They were heard jointly in 2015 and the Court upheld
the regulator.
There is one ground of non-enforcement that is important in this area: there is a body
of public utility law that governs much of what regulated utilities do. It can be argued that
arbitrators should apply that law. If arbitrators do not apply that law, is it ‘manifest disregard’
for the law? That is a concept more common in the United States than in Canada.
The 2008 decision of the US Supreme Court in Hall Street Associates69 suggests that the
doctrine of manifest disregard is no longer relevant even in the United States.The question
of whether courts will review an arbitrator’s award because the arbitrator failed to analyse
the proper law has risen in competition law cases. At one time, courts were prepared to
engage in the exercise; however, more recent cases such as Baxter International70 and Union
Pacific Resources71 suggest that that is unlikely unless there is an obvious error or an arbitrary
or capricious decision. In Canada, the recent decision of the Supreme Court of Canada in
Sattva Capital72 drastically limits the appeals of arbitral awards in general.
However the concern remains.There may be a special category of cases such as arbitra-
tions involving regulated utilities that require special attention by courts. The general rule
may not apply in all cases.
The situation is not unlike that which faced the Federal Power Commission in Gulf
States.73 That case involved a utility financing. The intervenors claimed that the financing
would have an anti-competitive effect and the Commission should apply the antitrust laws.
The Commission refused, saying that those laws were irrelevant.
The US Supreme Court reversed, stating that the Commission could not deem those
laws irrelevant because the Commission had broad authority to consider anti-competitive
69 Hall Street Assoc v. Mattell Inc., (2008) 128 S Ct 1396.

70 Baxter International v. Abbott Laboratories, 315 F. 3rd 829 (7th Cir. 2003).
71 American Gas Eastern Central Texas v. Union Pacific Resources, 93 Fed App1 (5th Cir. 2004).
72 Sattva Capital Corp v. Creston Moly Corp, 2014 SCC 53.
73 Gulf States Utils Co. v. FPC 411 US 747 (1973).
151
conduct if that touched on the public interest. That case concerned a regulator, but there
is no reason that the same principle would not apply to an arbitrator faced with a simi-
lar situation.
Similarly, the European Court of Justice in Eco Swiss74 ruled that a national court must
grant an application for annulment if it finds that an award is contrary to European com-
petition law. This case is interpreted as meaning that arbitral tribunal is obligated to apply
competition law, and non-application can be regarded as a breach of public policy and
grounds for non-enforcement. A similar approach was followed by the English courts in
ET Plus SA v.Welter.75 Arbitrations involving regulated public utilities arguably fall into this
category. Even if the courts will not intervene, the regulators may.
Conclusion
The basic question this chapter raises is whether disputes involving a regulated utility
should be subject to arbitration, and if so, to what degree? Is there a dividing line?
Over the past 10 years, courts throughout North America have consistently ruled
that they should defer to both regulators and arbitrators. The rationale in both cases was
increased efficiency.
Courts recognise that legislatures have established regulators with special expertise to
adjudicate on a narrow select range of matters. The highest courts in Canada and the
United States have consistently stated that wherever possible the court should defer to these
regulators, not just on matters of fact, but also on the interpretation of their home statute.
At the same time, courts in Canada and the United States have established that, as a
matter of public policy, courts should wherever possible defer to arbitrators.
The challenge we face in the choice between energy regulators and arbitrators in energy
disputes is that we have two specialised adjudicators, both with a high level of expertise. In
the energy world, the rationale for arbitration is different from in the downstream sector.
In international arbitrations, parties are driven to arbitration because they are looking
for a neutral court and the ability to enforce an order worldwide; in the downstream mar-
ket, that is not the case. These are largely domestic cases. Parties are not concerned about
the lack of a neutral court or the inability to enforce an award. What they do hope to gain
from arbitration is an expertise that they would not get from the court. Most arbitration
panels consist of very seasoned energy counsel and former regulators.
We have an interesting dilemma. We have two adjudicators: both have a high level of
expertise, but we cannot say that one should defer to the other because of expertise, nor
can we really say that one is more efficient than the other.
Arbitration and regulation involve different procedures. Regulation is more lengthy but
is tailored to meet the requirements of energy regulation in terms of obtaining a public
interest viewpoint from different parties. That is not the case in arbitration. Arbitrations
are essentially private disputes using a more streamlined process with little ability for third
parties to intervene.
74 Eco Swiss China Time Limited v. Benetton International NV [1999] ECR 1-3055.
75 ET Plus SA v.Welter (2005) EWHC 2115 (Comm).
152
At the same time, everyone recognises that parallel proceedings are not in the public
interest – they simply increase delay and produce conflicting decisions.
To a degree, we have faced this question before. Over the past decade, courts have
struggled with the question of whether arbitration should be permitted in competition law,
securities law and intellectual property. The competition law issue was resolved by the US
Supreme Court in the Mitsubishi case. Subsequent courts applied the principle to securities
and intellectual property.
These are all specialised areas of law with a substantial public interest component.
Initially it was the public interest component that led the courts to take the view that these
matters should not be subject to arbitration. That position has been set aside throughout
North America.
It would be easy to say that if arbitration is possible in competition law then why not
in energy regulation. There is, however, an important difference between the two legisla-
tive schemes.
Competition law is a law of general application. It applies to all companies in the
marketplace. Competition law was designed to eliminate monopoly power, whether that
results from mergers, price-fixing or other practices.
Regulated companies are different. They are monopolies, but they are exempt from
competition law. Yet there is a trade-off: they become subject to special legislation and a
special regulator. Of all the regulated segments in the economy today, energy has the most
extensive regulation. It is a very important sector; there are a lot of players, and it involves
a lot of regulators.
There are very few subject matters that arbitrators are prohibited from dealing with –
criminal law might be one. But there are areas where arbitrators should step carefully. In
the United States, the federal energy regulator has taken the position that it has exclusive
jurisdiction in certain areas and primary jurisdiction in others. There is a related question:
where the jurisdiction is not exclusive, is the arbitrator under a special obligation to con-
sider a particular body of law? In this case it would be public utility law.
This question is more complicated in energy than in competition law. In energy regula-
tion, it is clear that there are certain matters that should not be subject to arbitration.
US courts and regulators talk about the exclusive or primary jurisdiction of energy
regulators. In US energy regulation this relates to the concept of the filed-rate doctrine,
which we examined earlier in the California Water case. The doctrine simply means that
if a Commission has approved a rate, then the utility cannot create another rate by pri-
vate agreement. That is, a utility cannot contract out of regulation. In California Water, the
Commission stepped aside in favour of the arbitrator because the Commission concluded
that the matter before them was a private contract dispute that did not involve an approved
tariff. But had there been a tariff, the result would have been different. The matter would
have come within the exclusive jurisdiction of the regulator.
Every energy regulator in North America has, as a basic statutory mandate, the respon-
sibility to set just and reasonable rates. These are government agencies carrying out a legis-
lative mandate. Once that is done, private parties in arbitrations cannot set them aside. This
principle applies even if a regulated public utility is not one of the parties to the arbitration.
On this question, the Canadian cases reach a slightly different result. In Storm Capital,
the Ontario decision considered above, the court stated that the regulator would have
153
exclusive jurisdiction only if the legislation specifically provided for that. The Supreme
Court of Canada took this position in Desputeaux, where the defendant argued that the
Copyright Act gave the court exclusive power to decide copyright issues. The Court
rejected that argument on the ground that there were no specific statutory words to that
effect.The Alberta Commission in the Rural Electrification case held that the regulator could
decide the matter notwithstanding the existence of an arbitration decision. The rationale
was that the issue before the regulator was the interpretation of the regulatory statute. That
issue was not before the arbitrator.
This really is just a reformulation of the US primary jurisdiction or exclusive juris-
diction rule. A regulatory statute is different from other statutes because a regulator has
been specifically authorised by the legislature to enforce that particular statute. That is also
the situation in competition law. But there is a difference: energy regulators have specific
jurisdiction over specific companies. In most cases, the regulators license those companies
to operate and their continuing operations are subject to the regulators’ oversight. In most
cases the regulators will also establish by franchise agreement the exclusive territory that
the monopoly can operate in. That is not the situation in competition law.
What, then, are the areas that fall under the exclusive jurisdiction of an energy regula-
tor? The short answer might be that it would be those areas where the regulator has issued
a specific order. That would involve the rates or the prices the utility can charge.
The dividing line is never clear and it requires case-by-case analysis.
One example is access to essential facilities. This is a basic principle of public utility law
and a clear obligation of a regulated utility. But it is also a general principle of competi-
tion law.
The issue often arises in merger cases in competition proceedings. In fact, in settling
those cases by consent orders the competition authorities have often provided for arbitra-
tion in the settlement agreement where there is a dispute as to whether access is being
properly granted. The American antitrust authorities did this in the El Paso Energy and
DTE Energy merger cases.76 The Canadian authorities did it in the Air Canada and the
United Grain Growers merger.77 There is no reason why those disputes would not be within
an arbitrator’s jurisdiction.
One area where arbitrators are likely offside concerns disputes with respect to fran-
chise agreements.These are often awarded by municipalities and approved by the regulator.
Usually they have a 20-year term, but regulators can and have reduced the term where they
felt the utility was not performing in terms of service quality. An arbitrator would have no
authority to modify a franchise agreement given that it is subject to a specific order of the
regulator unless the regulator had authorised arbitration as part of the approved agreement.
The second question is: if arbitrators exercise jurisdiction, do they have an obligation to
apply the principles of public utility or regulatory law? And what happens if they do not
apply those principles?
76 In re. El Paso Energy Corp. No.C-3915, 2000 FTC LEXIS 7 (FTC, 6 January 2000) (decision and order); In re.
DTE Energy Co. [2001] 131 FTC 962 (decision and order).
77 Canada (Director of Investigations and Research) v. Air Canada [1989], 27 CPR (3d) 476 (Competition Tribunal);
Canada (Commissioner of Competition) v. United Grain Growers Limited, Competition Tribunal, CT-2002/01,
Consent Order (17 October 2002).
154
The short answer is that if arbitrators are going to deal with disputes involving regulated
utilities they have to apply the law that applies to those utilities.Those utilities have obliga-
tions established under legislation and court decisions interpreting that legislation.They are
required to meet those standards.
Those standards will impact the manner in which the arbitrator deals with the parties.
For example, under public utility law, regulated utilities have a duty to serve and an obli-
gation not to discriminate between customers and competitors. Public utilities also have
special rights. In most jurisdictions, regulated public utilities are not subject to the laws of
negligence except to the extent of gross negligence.
The gross negligence provision is particularly interesting. While this was initially a
common-law rule, today most utilities have it in their governing statute or regulations. In
Kristian v. Comcast.78 The US Court of Appeals held that the provisions in an arbitration
decision that prevent the exercise of statutory rights under federal or state law are invalid.
Earlier in this chapter, we noted that even where courts elect not to review arbitration
decisions involving regulated public utilities, the regulators may. If a public utility doesn’t
like an arbitration award, the first authority they will run to is not the courts but the energy
regulator that controls most of their actions. This is particularly the case in two circum-
stances. First, if the dispute involves the interpretation of a regulatory statute or regulatory
principle. And second, if the arbitrators have failed to consider those laws and jurisprudence.
This is what happened in Central Alberta Rural Electrification.There, the arbitration award
had been issued. One of the parties went to the regulator. The regulator decided the issue,
stating that the regulator was not bound by res judicata because the arbitrator had not con-
sidered the regulatory statute which was the issue before the regulator.
Next, an application was made to the court for leave to appeal the arbitration award.
The court refused to grant leave because it recognised that the regulator had intervened
and deference should be accorded. It was pretty clear that the Canadian court was deferring
to the regulator and essentially adopted a US primary jurisdiction rule.
There is no reason why the arbitrator could not have dealt with the regulatory legisla-
tion.The arbitrator did not and the regulator moved in.The interesting question is whether
regulators will insist that they have exclusive jurisdiction.
It is likely that regulators will defer to arbitrators on public policy grounds. It will, how-
ever, be a more cautious deference than courts grant, particularly if their home statute is at
issue. And if it is, and the arbitrators have not considered the legislation or have considered
it wrongly, the regulator will likely exercise primary jurisdiction.
In the end, this simply means that where arbitrators move into areas of public law, par-
ticularly regulatory law, and one of the parties before them is a regulated utility, then they
should be aware of the special laws that apply to the industry and publicly regulated utilities
in particular. It also means that this type of arbitration is more reviewable than most. If not
by the court then certainly by the regulator. And if a court has to pick between an arbitrator
and a regulator in these cases, the regulator will likely get the nod.
There is no bright line in this world. But if the subject is an area in which the regula-
tor has a record of exercising jurisdiction and in particular has issued orders directed at the
utility in question, a red light should flash.
78 Kristiana v. Comcast Corp 446 F 3rd 25 (1st Cir. 2006).
155
10
Arbitration Involving Renewable Energy
Gordon E Kaiser1
Introduction
The past five years have seen a dramatic increase in the amount of electricity generated
from renewable resources, principally wind and solar. Figures just released by the US
Federal Energy Regulatory Commission indicate that renewables now account for 17 per
cent of operating generating capacity in the United States but over 65 per cent of new
capacity. Goals and mandates for renewable energy continue to grow. The goal is 100 per
cent in Hawaii by 2045; 75 per cent in Vermont by 2032; and 50 per cent in California by
2030. Elsewhere, Germany has set itself a target of 80 per cent by 2050.
Investment in wind and solar energy has been driven by government incentive pro-
grammes. In Canada, this was largely undertaken by the province of Ontario, which
established a widespread feed-in tariff (FIT) programme under the Green Energy and
Green Economy Act, 2009.2 Under the FIT contracts, the government offered a 20-year
supply contract at prices substantially above market value. To further complicate matters,
the Ontario programme had a substantial minimum domestic content requirement. That
requirement was successfully challenged by Japan and Europe in WTO cases requiring
amendments to the programme.
Another challenge was the action taken by the government of Ontario to cancel some
of these programmes. The province discovered there was excess capacity on the network at
night when there was less demand for the energy and the wind generally blows harder. As
a result, the province ended up paying American customers to take energy off the grid.The
2011 cancellation of all offshore wind projects and the 2009 decision to drop the rates for
1 Gordon E Kaiser is an arbitrator at JAMS, Toronto and Washington, DC. Some passages in this chapter under
the headings ‘Recent decisions’, ‘Deference to legislators’ and ‘Domestic investors’ reproduce text written by
the author and previously published in Energy Regulation Quarterly, vol. 5, Issue 1 (2017) and vol. 2, Winter
Issue (2014).
2 Green Energy and Green Economy Act, 2009, SO 2009, c12, Sched A.
156
ground mounted solar from 80 cents to 59 cents per kilowatt hour led to further disputes.3
At year end there were two NAFTA tribunals hearing claims involving cancelled Ontario
renewable projects and one action in the Ontario courts concerning another cancellation.
In both the UK and Canada investors have challenged changes to the solar incentive
programmes in the local courts. In the UK that has been successful,4 in Canada less so.5
In Canada investors have also challenged reductions in support programmes in two
widely publicised NAFTA proceedings.6 Recently, one of those resulted in very substantial
victory for the investors. In the other, the investor lost, but that decision is under appeal.
The greatest potential for litigation lies in Europe, particularly Spain, where 27 invest-
ment treaty arbitrations have been filed, along with seven cases against the Czech Republic
and five cases against Italy.Virtually all of those are under the Energy Charter Treaty (ECT).
The first European decision was the Charanne case in 2016,7 which is discussed in this
chapter. There, the investor was not successful. The majority dismissed all claims but most
commentators believe the litigation is far from over. Charanne involved relatively minor
adjustments to the incentive programme, which were followed by more extreme adjust-
ments by the Spanish authorities, some of which clearly look to be retroactive. Retroactivity
as the courts outlined in the Friends of the Earth decision can be a ‘hard-edged question’.
The first decision to deal with the later Spanish reforms was Eiser Infrastructure,8 where
an ICSID panel in May 2017 ruled that Spain must pay €128 million to British-based Eiser
Infrastructure Limited and its affiliates. That may create a precedent for the 30 claims that
Spain is still facing with respect to the solar incentives including those launched by a sov-
ereign fund from Abu Dhabi, various German municipalities and a Canadian civil service
pension fund. Unlike Charanne, Eiser was a unanimous opinion of an ICSID panel.
The development of renewable energy is shifting away from Europe. In the UK the
amount of solar power installed in 2016 fell from the previous year as a result of the
drastic cuts in incentives that the government initiated, including the end of subsidies for
large-scale solar farms. However, the UK still led Europe in solar growth with 29 per cent
of new capacity followed by Germany with 21 per cent and France with 8.3 per cent.
Across Europe the total amount of solar now exceeds 100 gigawatts.
Attention in world solar markets is shifting to the United States, which in 2016 nearly
doubled its annual installation rate to 15,000 megawatts (MW) of solar compared to less
than half that in 2015. For the first time solar ranks as the number one source of new
electricity generating capacity United States accounting for 35 per cent of new capacity
additions across all fuel types.
The American market, unlike the UK, Canada and Europe, is less dependent on FIT
contracts and has relied to a greater degree on solar investment tax credits. Since their
introduction in 2006, these credits have been relatively stable. In the last decade solar in the
3 Trillium Power Wind Corp v. Ontario, 2013 ONCA 6083; Capital Solar Power Corp v. Ontario Power Generation,
2015 ONSC 2116; Carhoun and Sons v. Canada, 2015 BCCA 163.
4 Secretary of State for Energy and Climate Change v. Friends of the Earth et al [2011] EWHC 3575.
5 2013 ONCA 683, 117, OR (3d) 721; SkyPower v. Ministry of Energy, [2012] OJ No. 4458 at para 84.
6 Mesa Power Group LLC v. Government of Canada, PCA Case No. 2012-17, 24 March 2016; Windstream Energy
LLC v. Government of Canada, PCA Case No. 2013-22, 27 September 2016.
7 Charanne B.V. and Construction Investments v. Spain, SCC Arb. No.062/2012.
8 Eiser Infrastructure Limited and Energia Solar Luxembourg v Kingdom of Spain, ICSID Case No. ARB/13/36.
157
United States has experienced an annual compound growth rate of more than 60 per cent.
Particularly interesting in the United States is the increased dominance of utility-scale solar,
which now represents two-thirds of the market.
The changing market dynamics will influence the world of dispute resolution. In the
past, disputes involving renewable energy have centred on FIT contracts and other incen-
tive schemes that governments designed to develop the market.Today, subsidies are becom-
ing less and less necessary.
The cost of large-scale solar projects continues to rapidly decline falling by 11 per cent
in 2016 and 85 per cent since 2009.This makes new solar projects competitive with natural
gas power plants in many regions of the US, even before federal investment tax credits. In
many United States markets wind projects are the lowest-cost option among all energy
technologies. The cost of rooftop residential solar technology is down almost 26 per cent
and the median cost of electricity through offshore wind generation has declined approxi-
mately 22 per cent.
Recent decisions
The first three awards in international arbitrations dealing with government decisions to
cut back incentive programmes established to increase investments in renewable energy.
were handed down in 2016. The first was Charanne9 in January 2016, a claim against Spain
under the ECT.This was followed by Mesa Power10 in May of 2016 and Windstream Energy11
in December 2016, both of which were arbitrations under NAFTA against Canada.
The NAFTA claims involving amendments to renewable energy incentive programmes
adopted by the province of Ontario under the province’s Green Energy Act. In both
Charanne and Mesa Power the complainants were unsuccessful although there was a dis-
sent in both cases. In the last case, Windstream Energy, the complainant was successful and
received an award of C$25 million, the largest Canadian NAFTA award to date.
Charanne
The first decision involving solar incentives in Europe was Charanne, where the majority
dismissed entirely the claims of a Dutch company and Luxembourg company that had
jointly invested in solar generation based on an incentive programme established by the
Spanish government. As in Ontario, the Spanish programme consisted of feed-in tariffs for
a 25-year period. Aside from the attractive rate for the power, the programme allowed the
claimants to distribute all of the energy produced to the grid. Subsequently the Spanish
government amended the programme to limit the amount of electricity that could be sup-
plied and added a new charge for grid access.
The claimants argued that the amendments reduced their return on investment and
expropriated part of the value of their investment in breach of Article 13 of the ECT. They
also argued that the amendments violated the standard of fair and equitable treatment and
denied their legitimate expectations as investors contrary to ECT Article 10(1) and (12).

10 Mesa Power Group LLC v. Government of Canada, PCA Case No. 2012-17, 24 March 2016.
11 Windstream Energy LLC v. Government of Canada, PCA Case No. 2013-22, 27 September 2016.
158
A majority dismissed all of the claims. The claim for indirect expropriation was dis-
missed on the ground that the claimants had failed to show that the investor had been
deprived of all or part of its investment.This claim failed because the programme remained
in place, as did the contracts, although the rate of return was reduced.
The majority also held that the government actions did not breach the investors legiti-
mate expectations because the claimants had not received any specific promises or commit-
ments from Spain. The programme did not create commitments to specific individuals and
investors. The tribunal found that a commitment to a group of investors did not amount
to a commitment to an individual investor, noting that to find otherwise would amount to
an excessive limitation on the power of the state to regulate the economy in accordance
with the public interest.
In support of this conclusion, the tribunal also noted that the materials provided to
the investors in 2007 did not say that the feed-in tariff would stay in place for the regula-
tory lives of the solar plants. To decide otherwise, the tribunal stated, would mean that any
modification of the tariff would be a violation of international law, a principle the tribunal
was not prepared to accept.
There is another rationale to the decision that might find its way into other decisions.
The majority concluded that to exercise the right of legitimate expectations the claimants
must show that they had first made a diligent analysis of the legal framework for the invest-
ment. The tribunal found that if the claimant had done that, it would have discovered that
amendments to the feed-in tariff programme were permitted under established Spanish
domestic law.
But is domestic law the right test? The dissenting arbitrator disagreed with the majority
concluding that legitimate expectations can arise where states grant incentives to a specific
category of persons in exchange for their investment. The dissenting arbitrator found that
regardless of the state’s regulatory power under domestic law, a breach of an investor’s legiti-
mate expectations should result in compensation.
Eiser Infrastructure
The government of Spain was not as fortunate in the second decision relating to Spanish
renewable energy incentives. On 5 May 2017 an ICSID panel in the unanimous decision
ordered Spain to pay €128 million to Eiser Infrastructure Limited and its affiliate Energía
Solar Luxembourg.The panel ruled that the Spanish government had violated Article 10 of
the Energy Charter Treaty, depriving the company of fair and equitable treatment.
The original claim, which was filed in 2013, was for €300 million. Nonetheless the
decision is a major setback for Spain, which is facing dozens of similar cases.
Eiser partnered with Elecnor in Spain, and engineering firm Aries. Together the three
partners invested over €935 million in 2007 in three thermal solar plants in Spain. The
Eiser case differs materially from the Charanne case discussed above. Charanne, which was
decided two years earlier, related to amendments to the incentive programme Spain first
introduced in 2010 to the feed-in tariff regime. Eiser relates to the later reforms made
between 2012 and 2013 to address a €26 billion electricity tariff deficit the government
was then facing.
There are still 30 claims outstanding in Spain relating to the 2013 reforms that Eiser
considered. The Spanish government in a statement noted that the tribunal only partly
159
upheld Eiser’s claims and the panel’s decision did not question the state’s right to take
appropriate regulatory measures. The Spanish government also indicated that it is con-
sidering an appeal against the decision. However, unlike Charanne, Eiser was a unanimous
decision of the ICSID panel.
Windstream Energy
In October 2012, Windstream filed a claim against the government of Canada in the
amount of C$475 million. Following a 10-day hearing in February 2016, a panel of three
arbitrators issued an award of C$26 million, resulting from Ontario’s decision in 2011 to
suspend all offshore wind development.
The panel accepted Windstream’s argument that the government’s decision frustrated
Windstream’s ability to obtain the benefits of the 2010 contract it had signed with the
Ontario Power Authority.
In November 2009, Windstream had submitted 11 FIT applications for wind power
projects, including an application for a 300MW 130 turbine offshore wind project near
Wolfe Island in Lake Ontario. The Ontario Power Authority (OPA) offered Windstream
a FIT contract in May 2010, which Windstream signed in August of that year. Under the
contract, the OPA would pay Windstream a fixed price for power for 20 years. In total, the
contract was worth C$5.2 billion.
During this period, the Ontario government was conducting a policy review to
develop the regulatory framework for offshore wind projects, including a proposed 5 kilo-
metre shoreline exclusion zone. The policy review ceased on 11 February 2011, when the
government of Ontario decided to suspend all offshore wind development until further
research was completed.
The main ground for the Windstream claim was that the Ontario decision was arbitrary
and was based on political concerns that the wind contracts would increase electricity
rates. Windstream argued that the government really had no intention of pursuing scien-
tific research.
Canada, in response, said that Ontario was entitled to proceed with caution on offshore
wind development and that NAFTA does not prohibit reasonable regulatory delays.
Windstream made a number of claims under the NAFTA. The most important (and
the only one that succeeded) was a breach of Article 1105(1) (the minimum-standard-
of-treatment provision), which reads: ‘Each Party shall accord to investments of another
Party treatment in accordance with international law, including fair and equitable treatment
and full protection and security.’
In finding that there was a breach, the tribunal questioned whether the real rationale
for the moratorium was the need for more scientific research. Just as important was the
tribunal finding that Ontario made little, if any, efforts to accommodate Windstream, and
seemed to deliberately keep Windstream in the dark. This is best set out in the decision at
paragraphs 366 and 367:
The Tribunal notes that following the signing of the FIT Contract on 20 August 2010,
the position of the Government of Ontario grew gradually more ambiguous towards the
development of offshore wind. Thus, while the Government appears to have envisaged still
in August 2010 that the relevant regulatory framework, including the setback requirements,
160
would be in place possibly . . . its position started changing in the fall of 2010. This change
appears to have coincided with the receipt and analysis of the information generated through
the EBR posting of 25 June 2010, which indicated an increasing resistance to the develop-
ment of offshore wind. . . . It does not appear from the evidence that the various options that
were being considered and the related concerns were communicated to Windstream, either at
the meetings between the government officials and Windstream representatives or otherwise.
On 10 December 2010, Windstream delivered a force majeure notice to the OPA, effective
from 22 November 2010, stating that MNR’s failure to proceed with the permitting process,
in particular the site release process, and MOE’s failure to take steps to implement its policy
proposal to create an exclusion zone, had prevented Windstream from progressing the Project in
accordance with the FIT Contract.
The tribunal concluded at paragraph 380:
The Tribunal concludes that the failure of the Government of Ontario to take the necessary
measures, including when necessary by way of directing the OPA, within a reasonable period of
time after the imposition of the moratorium to bring clarity to the regulatory uncertainty sur-
rounding the status and the development of the Project created by the moratorium, constitutes a
breach of Article 1105(1) of NAFTA It was indeed the Government of Ontario that imposed
the moratorium, not the OPA, so it cannot be said that the resulting regulatory and contractual
limbo was a result of the Claimant’s own failure to negotiate a reasonable settlement with the
OPA.The regulatory and contractual limbo in which the Claimant found itself in the years fol-
lowing the imposition of the moratorium was a result of acts and omissions of the Government
of Ontario, and as such is attributable to the Respondent. The Tribunal therefore need not
consider whether the conduct of the OPA during the relevant period must also be considered
attributable to the Respondent.
There was a further claim by Windstream that Ontario had violated Article 1102 of NAFTA
by granting Windstream less favourable treatment than was accorded to other entities in
similar circumstances. It was argued that the treatment of Windstream was less favourable
than the treatment Ontario granted to TransCanada.
Both TransCanada and Windstream were parties to power purchase agreements with the
OPA that guaranteed a fixed price for electricity. Both contracts were terminated. However,
when Ontario terminated the TransCanada contract, Ontario awarded TransCanada a new
project and compensated it for the costs of the cancellation. In contrast, Ontario failed to
do the same for Windstream following the offshore moratorium.
The tribunal rejected Windstream’s argument, noting that Article 1102 deals with
national treatment and most-favoured nation treatment. However, the tribunal concluded
that TransCanada was not in like circumstances. Unlike TransCanada, Windstream had a
FIT contract for offshore wind.
There is no question that the TransCanada project was different from the Windstream
project. TransCanada had a contract with the OPA to build a gas generation plant in
Mississauga, near Toronto.The local residents were not happy with this, and the Liberal gov-
ernment cancelled the project in the heat of the provincial election. To keep TransCanada
161
happy, the OPA negotiated an agreement that reimbursed them for their costs and gave
them a new contract in another area.
The circumstances were different and so was the government’s response. In TransCanada
there was extensive negotiation, whereas in Windstream there was none. The tribunal con-
cluded that the two projects were totally different and, therefore, did not result in like
circumstances. TransCanada does not even provide renewable energy, which is the basis of
all FIT contracts.
Accordingly, the tribunal ruled that the moratorium and related measures did not apply
to TransCanada in the first place. TransCanada was not affected by the moratorium on
offshore wind. Moreover, the tribunal ruled that the moratorium was not applied in a
discriminatory manner because it resulted in the cancellation of all offshore wind projects.
Windstream had the only contract for offshore wind and the tribunal therefore concluded
that it could not agree that Windstream had been treated less favourably than other devel-
opers of offshore wind.
Mesa Power
The decision of the NAFTA panel in Mesa Power was very different to that in Windstream
Energy. It also involved claims under Article 1105 of the NAFTA.
On 24 September 2009 the Ontario Minister of Energy directed the Ontario Power
Authority to create the FIT programme including the FIT rules, which established the
eligibility criteria as well as the criteria for evaluating applications, the deadlines for com-
mercial operation and the domestic content requirements. Those were originally set at
25 per cent but increase later to 50 per cent. The domestic content requirements were
subsequently challenged under another regulatory regime.12
The FIT programme offered 20- or 40-year power purchase agreements with the OPA,
under which the generator was a guaranteed a fixed price per kilowatt hour for electricity
delivered to the Ontario grid. Contracts were available for projects located in Ontario that
generated electricity exclusively from renewable energy. Applicants also had to establish
that the project could be connected to the electricity grid through a distribution system or
transmission system. That proved to be a particular problem for Mesa Power.
In 2011, Mesa Power Group, a US corporation owned by Texas oil tycoon T Boone
Pickens, filed a C$775 million claim against Canada relating to the province of Ontario’s
policy of awarding power purchase agreements under the Ontario feed-in tariff programme
for the supply renewable energy.
Mesa claimed that Canada adopted discriminatory measures, imposed minimum
domestic content requirements and failed to provide Mesa with the minimum standard
treatment, in violation of NAFTA’s investment provisions. In the end, the tribunal dis-
missed all of Mesa’s claims and ordered Mesa to bear the cost of the arbitration as well as a
portion of Canada’s legal costs of nearly C$3 million.
Mesa argued that the reason it did not receive any FIT contracts was that the programme
was mismanaged and Mesa was discriminated against when Ontario granted unwarranted
12 That requirement was successfully challenged by Japan and Europe in WTO cases reporting amendments to
the programme. WTO, Canada – Measures relating to the Feed-In Tariff Program (WT/DS 426/AB/R).
162
preferences to two other applicants. Windstream really turned on the legitimacy of the
moratorium issued by Ontario to defer all offshore wind generation and the conduct of the
Ontario government following the announcement of that moratorium.
The OPA launched the FIT programme in October 2009. During the first round of
contacts, it reviewed 337 applications and granted 184 contracts for a total of 2,500MW of
capacity. The second round of contracts took place in February 2011. Forty FIT contracts
for a total of 872MW were issued. The third round of contracting took place in July 2011,
resulting in 14 contracts totalling 749MW.
Mesa Power filed six applications under the FIT programme but was unsuccessful in all
three rounds of contracting. The problem was that all the MESA projects were located in
Bruce County.To obtain a contract all applicants had to demonstrate that they had the right
to connect to the transmission system. Mesa was unable to obtain transmission connection
because of the transmission constraints in Bruce County.
Mesa argued that the failure to acquire transmission access was because of flaws in the
contracting process and preferences granted to two other parties, namely Next ERA Energy
(an affiliate of Florida Light and Power) and the Korean Consortium led by Samsung.
Mesa argued that this conduct amounted to a breach of Article 1105(1) of NAFTA.
Before the tribunal could determine if Canada had failed to grant Mesa Power fair and
equitable treatment, the tribunal had to define that term. The panel relied on the often
quoted standard set out in Waste Management:
the minimum standard of treatment of fair and equitable treatment is infringed by conduct
attributable to the State and harmful to the claimant if the conduct is arbitrary, grossly unfair,
unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice,
or involves a lack of due process leading to an outcome which offends judicial propriety – as
might be the case with a manifest failure of natural justice in judicial proceedings or a complete
lack of transparency and candour in an administrative process. In applying this standard it is
relevant that the treatment is in breach of representations made by the host State which were
reasonably relied on by the claimant.13
The tribunal in Mesa Power went on to state:
On this basis, the Tribunal considers that the following components can be said to form part
of Article 1105: arbitrariness; ‘gross’ unfairness; discrimination; ‘complete’ lack of transparency
and candor in an administrative process; lack of due process ‘leading to an outcome which offends
judicial propriety’; and ‘manifest failure’ of natural justice in judicial proceedings. Further, the
Tribunal shares the view held by a majority of NAFTA tribunals 38 that the failure to respect
an investor’s legitimate expectations in and of itself does not constitute a breach of Article 1105,
but is an element to take into account when assessing whether other components of the standard
are breached.14
13 Waste Management Inc v. United Mexican States, ICSID No. ARB(AF)00/3, Award, 30 April 2004, at section 99.
14 Mesa Power Group LLC v. Government of Canada, PCA Case No. 2012-17, 24 March 2016, at paragraph 502.
163
The tribunal rejected all three claims that Mesa made that Canada had breached the fair
and equitable treatment provisions of Article 1105 of NAFTA.
The tribunal rejected the allegation that the OPA had mismanaged the programme and
did not treat all applicants fairly, noting that the OPA had retained an independent monitor
to administer the FIT programme.
The tribunal also discounted the charge that NextEra had met with government offi-
cials, noting that this was common practice in the industry and there was no evidence of
any preference. NextEra was given access to transmission facilities in Bruce County at one
point, but apparently Mesa was also offered the opportunity.
The most contentious part of the Mesa allegations related to the Korean Consortium
agreement.Mesa had argued that the agreement between Ontario and the Korean Consortium
unfairly diminished the prospects for other investors including Mesa that were already
participating in the renewable energy programme by setting aside transmission capacity for
the Korean Consortium that was intended for FIT applicants.
Mesa also argued that Ontario was less than transparent in negotiating the agreement,
and issued inaccurate and incomplete information. Canada responded that there was noth-
ing manifestly arbitrary or unfair when a government enters into an investment agreement
that grants advantages to an investor in exchange for investment commitments.
There were two points of dissent in Mesa made by the Honourable Charles N Brower.
Canada had argued that its obligations under NAFTA Articles 1102 and 1106 did not
apply because the investment under the FIT programme was procurement under Article
1108. The majority concluded that the FIT programme did constitute procurement and
dismissed the claims under Article 1102. Judge Brower dissented from the finding that the
FIT agreement did not constitute procurement.
Judge Brower did agree with the majority that any breach of Article 1105 should be
defined by the test in Waste Management,15 which required a finding of gross unfairness,
complete lack of transparency, and lack of due process leading to an outcome that offends
judicial propriety. The majority, however, did not believe that the evidence supported that
conclusion. In addition, the majority found that states should be given a high level of def-
erence in deciding how to regulate their affairs. Judge Brower dissented from that finding,
stating that Canada had breached Article 1105 by the grotesque preference given to the
Korean Consortium:
The nub of what I see as Ontario’s, hence Canada’s, violation of Article 1105 is that it torpe-
doed the Feed-In Tariff (‘FIT’) program as offered at large, including in relation to Claimant’s
Arran and TTD projects, to the extent of the 500 megawatts (‘MW’) committed to the Korean
Consortium on 17 September 2010 in implementation of the Green Energy Investment
Agreement . . . . Up until then Claimant’s projects, as well as all other FIT applicants, had
been competing for capacity that had been 500 MW or greater. Moreover, – and this can only
be characterized as grotesque – as it actually happened, the Korean Consortium was thereby
enabled to acquire low-ranked FIT applicants in order to fill its allotted 500 MW, thereby
jumping clear losers in the FIT Program over higher-ranked, but ultimately unsuccessful FIT
15 See, for instance, Waste Management Inc v. United Mexican States (ICSID No. ARB(AF)00/3), Award,
30 April 2004 at section 96; Cargill, supra note 13 at section 296.
164
applicants, due to the reduced available megawattage. This effectively stood the FIT Program
on its head, turned it upside down. Thus the Government of Ontario acted arbitrarily, grossly
unfairly, unjustly, idiosyncratically, discriminated against the FIT applicants and in favor of the
Korean Consortium, and acted with a complete lack of transparency and candor.16
The right to regulate

Much of the analysis in NAFTA cases centres on the rights of the investor, the definitions
of legitimate expectations and indirect expropriation. These issues were canvassed in the
last section. But what about the state’s right to regulate?
The state must have a right to regulate; it certainly has responsibilities to regulate. The
difference is that the scope of this right is greater in the case of domestic investors than
foreign investors protected by NAFTA.
One thing is clear: NAFTA states cannot discriminate against foreign investors. They
must be treated the same as domestic investors. That means the law must be general in
application and there must be a level playing field. Once legislation targets specific parties,
there is a problem. That problem exists even in the case of domestic investors. It is also
widely recognised that the new regulations and legislation cannot be arbitrary or developed
without due process. That principle applies to domestic investors as well.
There is nothing wrong with states giving additional protections to foreign investors
compared to domestic investors. That goes to the heart of investor–state treaties. The pur-
pose of the treaty is to attract investment.
It is generally recognised that the states enjoy police powers to provide essential services
necessary to protect the public interest. These would include matters relating to security,
the environment and public health.
Few would object to states exercising this jurisdiction provided the states act in good
faith, and do not discriminate or expropriate private property without fair compensation.
The NAFTA decisions in Methanex17 and Chemtura18 seem to support this proposition.
In Chemtura, a US manufacturer of lindane, an agricultural insecticide moderately haz-
ardous to human health and the environment, claimed a breach of NAFTA by Canada’s
prohibition of its sale. The tribunal rejected the claim, stating:
Irrespective of the existence of a contractual deprivation, the Tribunal considers in any event
that the measures challenged by the Claimant constituted a valid exercise of the Respondent’s
police powers. As discussed in detail in connection with Article 1105 of NAFTA, the PMRA
took measures within its mandate, in a non-discriminatory manner, motivated by the increas-
ing awareness of the dangers presented by lindane for human health and the environment. A
measure adopted under such circumstances is a valid exercise of the State’s police powers and, as
a result, does not constitute an expropriation.19
16 Mesa Power Group LLC v. Government of Canada, PCA Case No. 2012-17, 24 March 2016. Concurring and
dissenting opinion of Judge Charles N. Brower at paragraph 4.
17 Methanex Corp v. United States, Decision on Amici Curiae 15 January 2001; UPS v. Canada, Decision on Amici
Curiae, 17 October 2001.
18 Chemtura Corporation v. Canada, Award, (UNCITRAL, 2 August 2010).
19 Id. at paragraph 266.
165
A state runs into problems under NAFTA where a specific promise is made to a specific
investor, the investor relies on the promised undertakings as a condition of making the
investment, and then the state rescinds the promise. However, to qualify for this rule, the
promise must usually be made to a specific investor.
Legislation is always changing. Very few pieces of legislation have sunset clauses that
declare when they end, and no legislation or set of regulations lasts forever. Laws necessarily
change with changing circumstances.
These concepts are not unique to NAFTA. Set out below are a number of decisions
under different treaties that set out these same principles.
In Continental Casualty20 the tribunal stated:
It would be unconscionable for a country to promise not to change its legislation as time and
needs change, or even more to tie its hands by such a kind of stipulation in case of crisis of any
type or origin arose. Such an implication as to stability in the BIT’s Preamble would be contrary
to an effective interpretation of the Treaty; reliance on such an implication by a foreign investor
would be misplaced and, indeed, unreasonable.
Similarly in EDF v. Romania21 the tribunal held:
The idea that legitimate expectations, and therefore FET, imply the stability of the legal and
business framework, may not be correct if stated in an overly-broad and unqualified formula-
tion.The FET might mean the virtual freezing of the legal regulation of economic activities, in
contrast with the State’s normal regulatory power and the evolutionary character of economic
life. Except where specific promises or representation are made by the State to the investor, the
latter may not rely on a bilateral investment treaty as a kind of insurance policy against the risk
of any changes in the host State’s legal and economic framework. Such expectation would be
neither legitimate nor reasonable.
In Total v. Argentina22 the tribunal stated:
In the absence of some ‘promise’ by the host State or a specific provision in the bilateral invest-
ment treaty itself, the legal regime in force in the host country at the time of making the invest-
ment is not automatically subject to a ‘guarantee’ of stability merely because the host country
entered into a bilateral investment treaty with the country of the foreign investor.
20 Continental Casualty v. Argentine Republic, ICSID Case No. ARB/03/9, Award (5 September 2008)
paragraph 258.
21 EDF (Services) Limited v. Romania, ICSID Case No. ARB/05/13, Award (8 October 2009) paragraph 217.
22 Total SA v. Argentine Republic, ICSID Case No. ARB/04/01, Decision on Liability (27 December 2010)
paragraphs 128–30.
166
And in El Paso v. Argentina23 the tribunal reminded us that:
Under a FET clause, a foreign investor can expect that the rules will not be changed without
justification of an economic, social or other nature. Conversely, it is unthinkable that a State
could make a general commitment to all foreign investors never to change its legislation whatever
the circumstances and it would be unreasonable for an investor to rely on such a freeze.
The problem is that, ultimately, these things may come down to what is fair or reasonable.
There is no bright-line but arbitrators will look for red flags; for example, giving undertak-
ings that investors rely on and later rescinding them, obvious breaches of due process or
situations where states claim that the new regulatory policies are for one purpose, such as
the need for more scientific research, when that is not the real purpose. That situation has
emerged in the renewable energy cases discussed in the concluding section of this chapter.
Deference to legislators
Deference is an important concept. In Canada and the United States courts routinely grant
deference to both arbitrators24 and regulators.25 In investor–state arbitrations, arbitrators
grant deference to governments, particularly where those governments are carrying out a
regulatory function where the public interest is the dominant test.
In Mesa Power26 the tribunal pointed to the deference that NAFTA Chapter 11 tribunals
usually grant to governments when it comes to assessing how governments regulate and
manage their affairs. The tribunal stated:
In reviewing this alleged breach, the Tribunal must bear in mind the deference which NAFTA
Chapter 11 tribunals owe a state when it comes to assessing how to regulate and manage its
affairs. This deference notably applies to the decision to enter into investment agreements. As
noted by the S.D. Myers tribunal, ‘[w]hen interpreting and applying the “minimum standard”,
a Chapter Eleven tribunal does not have an open-ended mandate to second-guess government
decision-making.’ The tribunal in Bilcon, a case which the Claimant has cited with approval,
also held that ‘[t]he imprudent exercise of discretion or even outright mistakes do not, as a rule,
lead to a breach of the international minimum standard.’27
In addition to the references in SD Myers and Bilcon pointed out by the Mesa Power tri-
bunal, we can add the tribunal’s comments in Thunderbird at paragraph 127 that the state
23 El Paso Energy International Company v. Argentine Republic, ICSID Case No. ARB/03/15, Award
(31 October 2011) paragraph 372.
24 Moses H Cane Memorial Hospital v. Mercury Construction, 460 US 1(1983) at 24; Dell Computer Corp v. Union des
consommateurs, 2007 SCC 34, [2007] 2 SCR 801; Ontario Hydro v. Dominion Mines Ltd, (1992 OJ 2848).
25 Mclean v. British Columbia Securities Commission, 2013 SCC 67, [2013] 3 SCR 895; Chevron v. Natural Resource
Def Council, 467 US 837; Walton v. Alberta Securities Commission, 2014 ABCA 273 at paragraph 17.
26 Mesa Power Group LLC v. Government of Canada, PCA Case No. 2012-17, 24 March, 2016.
27 Id. at paragraph 553 (footnote omitted).
167
‘has a wide discretion with respect to how it carries out such policies by regulation and
administrative conduct.’28
There are two subcategories of the deference principle when it comes to international
arbitration. First, tribunals have taken the position that they should defer to scientific find-
ings states make on a non-discriminatory and non-arbitrary basis in accordance with due
process. The conflict between the rights of investors and states often arises in the context
of environmental issues. A number of those cases have been referred to in this chapter.
Environmental cases invariably turn on scientific evidence.
In Chemtura, the tribunal noted that ‘[i]t is not within the scope of its task to second-guess
the correctness of the science-based decision-making of highly specialised national regula-
tory agencies.’29 This is identical to the principle that US and Canadian courts apply when
they defer to government regulators.30
The second subcategory of the deference principle is a long-standing international law
principle called ‘police powers’. The principle is that certain state action is beyond com-
pensation for expropriation under international law because states enjoy wide latitude to
regulate within the realm of their police powers.
Police powers are often defined to include municipal planning, safety, health and envi-
ronmental issues, as well as areas involving serious fines and penalties. In Chemtura the
tribunal held that Canada’s regulations phasing out the use of lindane constituted a valid
exercise of Canada’s police powers and did not constitute expropriation.31 In summary,
the deference principle routinely used by NAFTA arbitrators is not unique. It parallels the
deference courts use in deferring to regulators. Deference is particularly appropriate where
the regulatory agency is a specialised one with particular expertise in dealing with complex
evidence of a scientific nature. However, it goes without saying that both courts and arbi-
trators will wade into the fight if there is an abuse of process.
Domestic investors
Consider the cases involving the Ontario ban on wind generation. An American company,
Windstream, obtained a C$25 million judgment from a NAFTA panel. when Ontario
cancelled the programme. Trillium Power, a Canadian company with the same complaint,
was out of luck in the Ontario courts.32 The same thing happened in SkyPower.33 There
the judge remarked: ‘While it may seem unfair when rules are changed in the middle of a
game, but that is the nature of the game when one is dealing with government programs.’
28 International Thunderbird Gaming Corp v. United Mexican States, at paragraph 127, Award, (UNCITRAL
26 January 2006).
29 Cemtura Corp v. Canada, at paragraph 134, Award, (UNCITRAL 2 August 2010).
Mclean v. British Columbia Securities Commission, 2013 SCC 67, [2013] 3 SCR 895; Chevron v. Natural Resource
Def Council,467 US 837; Walton v. Alberta Securities Commission, 2014 ABCA 273 at paragraph 17.
30 Mclean v. British Columbia Securities Commission, 2013 SCC 67, [2013] 3 SCR 895; Chevron v. Natural Resource
Def Council,467 US 837; Walton v. Alberta Securities Commission, 2014 ABCA 273 at paragraph 17.
31 Cemtura Corp v. Canada, at paragraph 266, Award, (UNCITRAL 2 August 2010).
32 2013 ONCA 683, 117, OR (3d) 721.
33 SkyPower v. Ministry of Energy, [2012] OJ No. 4458 at paragraph 84.
168
Trillium Power Wind Corporation, a Toronto-based developer building offshore wind

turbines in Lake Ontario, had applied to lease provincial land under Ontario’s wind power
policy and had been granted applicant-of-record status by the Ministry of Natural Resources.
That status gave Trillium three years to test the wind power. After that, the company
could proceed with an environmental assessment and obtain authorisation to operate the
wind farm.
Trillium subsequently notified the Ontario Ministry of Natural Resources that the
company intended to close a C$26 million financing for the project. On the same day the
government of Ontario issued a moratorium on offshore wind development including
developers like Trillium that had applicant-of-record status. The government issued a press
release stating that the projects were cancelled pending further scientific research.
Trillium brought a number of claims against the Ontario government seeking C$2 bil-
lion in damages. The claims included breach of contract, unjust enrichment, negligent
misrepresentation, misfeasance in public office and intentional infliction of economic harm.
The province brought a motion to strike the Trillium statement of claim on the basis
that it did not disclose a reasonable cause of action.The motion was successful.The motion
judge found that the government decision to close the wind farms was a policy decision
and therefore immune from suit.
The motion judge also found that the fact that Trillium had been granted applicant-of-
record status did not amount to a contractual relationship between Trillium and the gov-
ernment.The motion judge concluded that the claim should be struck because it was plain
and obvious that the claim could not succeed at trial.
Trillium appealed on two grounds: first, misfeasance in public office was a tenable claim
as a matter of law; and second, the claim had been adequately pleaded. The Ontario Court
of Appeal agreed. It was not clear that the claim of misfeasance in public office would
necessarily fail. Moreover, Trillium had properly pleaded that the province’s actions were
taken in bad faith for improper purpose. The Court also found that the government’s deci-
sion was made to harm Trillium specifically. While the Court of Appeal did agree with the
motions judge that a government decision involving political factors was immune, there
was an exception for irrational acts of bad faith.
The facts in this case were unique. It was clear that Trillium’s announcement disclosing
new financing triggered the government action. And, as the court concluded, the govern-
ment specifically targeted Trillium.
This is an important case for wind developers. Government contracting for wind is
now common. And it is not unusual for governments to change these programmes. Nor is
it unusual for developers to incur substantial costs in processing their applications.
Successful claims against governments that cancel projects are rare but may increase.
This is the first time the tort of misfeasance in public office has found its way into the
energy sector. The principle was not clearly defined until the House of Lords decision in
Three Rivers District Council v Bank of England in 2000.34 The tort came to Canada in 1959 in
34 Three Rivers District Council v Bank of England [2000] 2 WLR 1220 (HL).
169
Roncarelli v Duplessis35 but was rarely used until the Supreme Court of Canada decision in
Odhavji Estate v.Woodhouse in 2003.36
Two recent decisions in 2008, one by the Federal Court37 and the other by the Ontario
Court of Appeal,38 suggest the tort may be successful where a tort of negligence would fail.
In addition, malice and reckless indifference are difficult concepts making it hard to strike
out these claims at the pleading stage.
In O’Dwyer, the Ontario Court of Appeal found that liability could exist where offi-
cials are ‘recklessly indifferent or wilfully blind as to the illegality of their actions and their
potential to harm the plaintiff.’ This is a broad principle that places a real constraint on
questionable government action.
The Trillium Power case is still before the Canadian courts. A number of investor cases
have also come before the Spanish courts. None of them have been successful, however, as
summarised by Professor Carmen Otero.39
To summarise, both the Supreme and the Constitutional Courts, in their respective
spheres of action, have considered that cuts to the incentives do not entail any violation of the
constitutional principles of legal certainty, legitimate expectations, and the prohibition on
retroactivity. They have ruled that cuts respond to a public interest duly justified by the
legislator and in particular, that the cuts constituted the public authority’s reaction to the
renewable energies technology evolution and were required to fight the tariff deficit and
guarantee sustainability of the electricity system.Therefore, the measures could not be con-
sidered an arbitrary use of public power.40
Investors have been more successful in English courts, however. In Friends of the Earth41
investors challenged the restrictions the UK government made in the incentives under the
FIT programme created to encourage solar energy.
The government reduced both the tariff term and the rate but in addition provided
that the lower rate would be effective prior to the enactment of the new regulations. The
plaintiffs attacked that provision on the ground that it was retroactive.
The High Court granted the challenge stating that legislation had on his terms of no
retroactive intent and without a specific provision the new regulation was invalid. The
Court of Appeal upheld the decision42 and the Supreme Court denied leave to hear any
further appeal.
This is an important distinction between the UK case and the Spanish cases. Charanne
did not involve any claim of retroactivity.There are, however, Spanish cases currently before
arbitrators that do involve retroactivity. The result may be different in those cases.
Retroactivity is also an important concept in North America.Virtually all of the renew-
able energy companies are regulated by regulatory agencies. All prohibit retroactive rates.
35 Roncarelli v. Duplessis, [1959] SCR121.

36 Odhavji Estate v Woodhouse (2003) SCJ No 74.
37 McMaster v.The Queen 2009 FC 937.
38 O’Dwyer v Ontario Racing Commission (2008) 293 DLR (4th) 559 (Ont CA) at paragraph 42.
39 Carmen Otero Garcia-Castrillon, ‘Spain and Investment Arbitration: The Renewable Energy Explosion’,
November 2016, Centre for International Governance Innovation (CIGI).
40 Id. at page 10.
41 Secretary of State for Energy and Climate Change v. Friends of the Earth et al [2011] EWHC 3575.
42 [2012] EWCA 28.
170
This is true in both Canada43 and the United States.44 Domestic investors in North America
will likely have a remedy if the incentive schemes are modified in a fashion that has retroac-
tive effect without specific authorisation in the statute.
Conclusion
There are a limited number of renewable energy decisions to date. But they will increase
dramatically in the near future. By 2020 most industrial countries will obtain more than
50 per cent of their new energy requirements from renewable sources.
The nature of the disputes will change. Most of the disputes to date concern govern-
ment incentive programmes and changes to them. By now most of those programmes
have been phased out. For the most part, significant cost reductions in the new technol-
ogy have eliminated the need for incentives. However, the combination of wind, solar and
storage along with local gas-fired generation will lead to a very substantial investment in
most countries. An investment of this magnitude will require an effective dispute resolu-
tion process.
43 Northwestern Utilities Ltd. v. Edmonton,[1979] 1 SCR 684; Bell Canada v. Canada Radio Television and
Telecommunications Commission, [1989] SCJ No.68 at 708.
44 Associated Gas Distributors v. FERC, 898 F2d 809 (DC Circuit.1990); San Diego Gas and Electric v. Sellers of
Energy, 127 FERC 61,037 (2009).
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Part III
Contractual Terms
11
The Evolution of Natural Gas Price Review Arbitrations
Stephen P Anway and George M von Mehren1
Price review arbitrations are, as a collection of cases, the highest-value commercial disputes
in the world today. The amounts at stake begin in the hundreds of millions of dollars and
often climb into the billions. Yet despite the staggering amounts that hang in the balance,
price review arbitration has only recently emerged from relative obscurity to become the
subject of disputation in the wider energy arbitration arena.
The authors of this chapter have been involved in price review arbitrations since their
inception. Throughout that period, the field has evolved in exciting and unexpected ways.
This chapter seeks to map that evolution by providing an overview of the past, the present
and the future of price review arbitration.
As this chapter makes clear, the twists and turns in the evolution of price review arbitra-
tions have generally not been driven by changes in contractual provisions, legal rights or the
acts or omissions of the parties involved. Rather, it has been external events – such as the
liberalisation of the national gas markets in continental Europe, the global economic crisis,
and the maturation of certain European gas hubs – that have driven the evolutionary path.
Parties to long-term gas supply contracts have therefore been forced to react – availing
themselves of the ‘price review’ provisions in the long-term contracts to recalibrate their
price formulae to reflect changed market conditions. The margin for error, however, is
razor thin. Changing just a few cents per unit of gas can shift hundreds of millions of dol-
lars between the parties because of the very substantial volumes delivered during the life of
a long-term gas contract.
Arbitrators deciding these disputes therefore have a weighty and difficult task. Price
revision provisions imbue the arbitrators with exceedingly broad authority to modify the
pricing formula with strangely little direction on how to do so. Yet despite this awesome
1 Stephen P Anway and George M von Mehren are partners at Squire Patton Boggs (US) LLP.
175
power and frequent lack of direction, arbitrators have – by and large – done a laudable job
of getting it right.
As discussed below, the story of natural gas price reviews has been, until now, largely a
European one.While this chapter starts at the beginning of that story, it is by looking back-
ward that we see the positive and important role that international arbitration has played in
the development of gas pricing over the past decade-and-a-half. And it is by reflecting on
the past that we are able to make predictions for the future.
The dramatis personæ

The parties to price review arbitrations tend to be repeat players. The sellers are typically
the producers of natural gas and government-owned, or formerly government-owned,
entities with strong state participation. There are only a handful of producers around the
world who regularly sell to the continental European markets: Gazprom (Russia), Sonatrach
(Algeria), Qatargas and RasGas (Qatar), Nigeria LNG (Nigeria), Statoil (Norway), and
Atlantic LNG (Trinidad and Tobago).
The buyers, by contrast, are often formerly state-owned companies from countries
that do not produce significant gas domestically, but which have the infrastructure in their
countries to accept delivery of the gas, transport it through an existing transmission net-
work and distribute it to wholesalers or end-user consumers in the downstream market.
Before the liberalisation of the European gas markets, these companies were predominately
state-owned monopolists, which purchased from the suppliers and had the pipeline infra-
structure to deliver the gas to end users.
Examples of former state-owned monopolists include Eni in Italy, Enagas in Spain and
Geoplin in Slovenia. When the European gas markets liberalised throughout the 2000s,
competitors entered these markets and the list of buyers grew. Edison from Italy, for exam-
ple, was not a market incumbent, but has become a major buyer in the newly liberal-
ised market.
These, then, are the usual parties to gas price review arbitrations. Historically, they have
signed with each other a very particular type of contract: a long-term, ‘take-or-pay’ con-
tract for pipeline gas or liquefied natural gas (LNG). And it is in this type of contract that
the price review clause is typically found.
The price review clause

The history of the price review clause can be traced back to the early days of the North
Sea gas industry. The upstream suppliers – the sellers under long-term contracts – often
needed financing for the investment necessary to bring the gas to commercial production.
To ensure that the producers would be able to repay the money borrowed, the sources of
financing required the producers to obtain a guaranteed long-term revenue stream from
downstream buyers.
Producers did so by signing long-term, ‘take-or-pay’ contracts with buyers, which obli-
gates the buyers to pay for a pre-determined volume of natural gas, whether or not the
buyers actually take that volume. This ‘volume commitment’ – often worth tens of billions
of dollars over the life of the contract – gives the sellers the guaranteed revenue stream,
providing long-term cash flow to support the project economics even at a relatively low
contract price.
176
The buyers were willing to undertake the volume commitment, but they needed to be
assured that the price paid to the sellers would remain viable over the long term – even as
changed market conditions affect the price that they can obtain when reselling downstream
in the end-user markets.
The problem is simple: if, for example, the price that the buyer is paying upstream to
the supplier is more than the price than the buyer can receive downstream from the end
users, then a price decrease is required because otherwise there is no margin, there are losses
and the buyer will quickly go out of business. Conversely, if the price that the buyer is pay-
ing upstream to the supplier is sufficiently lower than the price that the buyer can receive
downstream from end users, the seller may not be enjoying the benefit of its bargain.
The parties therefore must reach a balance. That balance is achieved when the contract
price is defined by reference to the price that end-users pay for natural gas in the market
where the gas is delivered.The objective is that the contract price that the buyers pay to the
sellers will self-adjust, according to a formula, as end-user prices evolve over time.
And here is the crux of the issue: how do sellers and buyers arrive at a contract price,
which will govern for decades to come, such that it will adequately track the changing value
of gas in the end-user market? The answer, in general terms, is through a netback formula.
A netback formula references a reliable natural gas price marker (such as a hub price, a
reliable published price, or a portfolio evaluation) and then deducts certain costs and allows
for a margin. For example, gas sold to the US gas market has been sold at a price tied to US
traded gas prices – such as Henry Hub – thereby ensuring that the price remains aligned
with the conditions under which the gas can be sold into the downstream market.
Historically, however, this option was not available in many gas markets. When Asian
and European importers first began contracting for natural gas supplies, there were no
developed natural gas markets in their countries. The importers – the buyers (typically
government-owned monopolists) – were creating demand downstream by importing gas
and selling it to consumers in competition not with other natural gas (because they were
the monopolist gas companies and there was no gas-to-gas competition) but, rather, with
other competing fuel products – primarily oil products.
To gain market share, gas therefore needed to be priced at a discount to those compet-
ing fuels. Prices for gas were commonly defined by the government on the basis of supply
costs – that is, the price that the buyers paid the sellers under long-term contracts. As a
result, there was no independent gas price reference in the destination market. When the
buyer and the seller were at the negotiation table discussing what price the buyer would
pay to the seller over the life of the contract, they could not simply put into the price for-
mula a gas price reference. There was none. Instead, they often included a reference to the
price of competing oil products. In this monopolist market, displacement of oil and other
competing fuels would allow the monopolist to sell the gas downstream.
In short, pricing by reference to these competing fuels was the best option to track the
competitive dynamics of the downstream natural gas market. As reflected in these contract
price formulae, oil and oil-derived products served as a proxy for the ‘value’ of natural gas.
To establish this proxy pricing, buyers and sellers often agreed to a contract price with
two fundamental components: first, a fixed base value referred to as ‘P0’; and second, an
indexation component tied to the evolution of oil-derived products. This latter compo-
nent, called an ‘escalator clause’, is a multiplier to the base value that allows the contract
177
price to fluctuate during the term of the contract in accordance with the price movement
of the oil products.
Proxies, however, are necessarily imperfect. Commodity markets are not static over
time, and there will be changes in the gas market that will not be reflected in, and therefore
not captured by, the imperfect oil proxy in the price formula.
Thus was born the price review clause. It is a clause that allows either party to seek revi-
sion of the contract price if the conditions underlying the commercial bargain significantly
change over time. This is the fundamental trade-off between the take-or-pay commitment
of the buyer and the right to periodically realign the contract price to conditions in the
destination market.
Although the terms of specific price review clauses differ, they often:
• specify a certain number of regular price reviews, which can be initiated at the request
of either party at specified dates;
• specify a certain number of ‘wildcard’ price reviews, which can be initiated by either
party at any time;
• require that a price review be initiated by filing a price review notice with the
other party;
• provide that the price review notice starts a mandatory negotiation period (usually
three, four or six months);
• impose certain requirements that must be satisfied before the price formula can be
modified, often a significant change in the market of the buyer that occurred since the
current price formula last became effective that:
• affects the value of natural gas;
• is non-temporary in nature; and
• requires an adjustment to the contract price (i.e., the economic impact of the
change is not already reflected in the current price formula);
• if these preconditions are satisfied, specify that the price formula should be revised in
accordance with certain requirements:
• the revision should take into account the economic impact of the changes that gave
rise to the price review;
• the revision must allow the gas to be sold competitively in the market, at a reason-
able marketing margin, and/or such that the buyer may market the gas economi-
cally in its end-user market;
• the revision should assume sound marketing and efficient management by the buyer.
• specify the revision is retroactive to the date of the price review notice;
• specify that the parties must calculate the difference between the revision and the for-
mer price (already paid by the buyer) for that period;
• if the revision results in a price reduction, provide that the seller owes the difference to
the buyer for that period;
• if the revision results in a price increase, provide that the buyer owes the difference to
the seller for that period;
• if the parties cannot reach agreement within the mandatory negotiation period, provide
that either party may submit the matter to international arbitration.
178
Contracts that include price review clauses typically include ICC, SCC or UNCITRAL
arbitration provisions and provide for three arbitrators. The seat of arbitration is often New
York, London, Geneva, Paris or Stockholm. Arbitral awards revising a contract price or
rejecting a request for revision are enforceable under the New York Convention – although
enforcement is rarely required because of the parties’ ongoing commercial relationship.
These price review clauses started to become standardised in the 1980s, when contracts
were signed concerning the Norwegian Troll gas field. These so-called ‘Troll contracts’
were organised through a centralised process, by which all producers (and the Norwegian
government) and all the buyers (which operated through a consortia) were involved in the
negotiations. As a result, a standardised form of agreement was used, which included the
price review language. In the decade that followed, other buyers and sellers adopted the
same or similar language in other long-term supply contracts – and the price review clause
become more or less industry standard in Europe.
These price review clauses – now in place in long-term gas contracts across Europe –
set the stage for what happened next.
The first wave of price reviews

On 22 June 1998, the European Commission – following years of preparation – promul-
gated Directive 98/30/EC relating to the liberalisation and deregulation of the natural gas
markets of EU member states. The Directive sought to encourage competition in the then
largely monopolistic European gas markets. It sought to do so by (1) allowing third parties
open access to natural gas transmission facilities, and (2) permitting consumers to choose
their natural gas supplier and to negotiate prices.The European Commission stated that the
liberalisation of the European natural gas markets would lead to increased competition and
that ‘[a]s competition increases with the progressive development of the internal market for
gas, prices are expected to fall.’2
In the years that followed, member states took a variety of measures in their national
legal orders to implement the Directive. In many countries, the national legislation sought
to achieve ‘unbundling’ – the process of functionally segregating gas marketers from opera-
tors of gas delivery and storage facilities, which enabled competition by giving competitors
non-discriminatory access to the gas system. Liberalisation proceeded at different paces in
different member states.
Change was afoot. The liberalisation efforts started to move the EU gas markets from a
system where there was only one monopolistic buyer in each country selling downstream,
to a system where numerous competitors would participate in the market, sign contracts
with suppliers like Gazprom and Sonatrach, and compete with other buyers to sell to the
downstream market, underbidding each other to gain market share. The aim was that the
downstream price paid by the end users would not be set by the supply price but, rather,
by the competitive dynamics in the end-user market itself.
There also was another, more subtle change. Whereas buyers had previously sold gas
downstream in the competition with oil-based fuel products, they were now selling the
same gas downstream in competition with other natural gas suppliers (i.e., gas-to-gas
2 European Commission, Opening Up to Choice: Launching the Single European Gas Market, p. 17.
179
competition). This caused a problem for the buyers. With the barriers to competition
crumbling, competitors could enter the market for the first time and offer prices at a
discount to what the monopolist incumbent had been charging. At the same time, the
price that buyers were paying to sellers under the long-term contracts were still tied to oil
prices set at a level before gas-to-gas competition existed. This disconnect between what
the buyers were paying upstream and what the buyers were receiving downstream created
the archetypical situation that the price review provisions were intended to address. And
arbitration commenced.
The authors were involved in one of the first of the price review arbitrations in the
early 2000s. The claim was that the liberalisation of the relevant European gas market
broke up the importer’s monopoly and for the first time created gas-to-gas competition
when new competitors entered the market and began offering prices at a discount to the
previously prevailing prices. We therefore sought the addition of a new component to the
pricing formula to reflect the new development of competition in the relevant gas market.
The tribunal agreed. It lowered the contract price formula by introducing a ‘correction’
factor into the formula – a factor to correct for the decrease in the market gas price that the
oil-linked contract price did not track. Importantly, however, the tribunal left the pricing
formula tied to oil products because, at that time, there was still no liquid gas index in the
relevant market that could reliably represent the price for natural gas on any given day. The
tribunal therefore left the price formula tied to oil products, but changed the price level to
reflect the gas-to-gas competition price in the market.
Other arbitrations followed, most resulting in significant price decreases for the buyer.
The second wave of price reviews

A second wave of price reviews was initiated – again primarily by buyers – in the wake
of what many described as a ‘perfect storm’ of price-depressing events that occurred from
2008 to 2010. Two events in particular converged to create this situation.
First, the sudden impact of the global economic crisis swept across Europe and was fully
brought to bear on the European gas market. The economic effects of the crisis caused gas
demand to decline relative to projected growth and expanded import capacity, leaving gas
companies under take-or-pay obligations to fiercely compete with each other in a desper-
ate attempt to sell their volumes.
Second, new and unexpected volumes flooded the European market. One of the key
contributors to this increased supply was the US shale gas boom, which resulted in LNG
destined for the US market being diverted to Europe. Based on higher prices in Europe
and transportation limitations, companies – under take-or-pay obligations – began unload-
ing volumes in Europe, which became a ‘sink’ market. This supply-demand imbalance led
to a gas glut.
These market changes had an important effect. The increased quantities of natural gas
being unloaded in Europe caused increased liquidity and reliability in the European natural
gas hubs. And with the influx of gas being traded at these European hubs, the hubs began
to rapidly mature.
Despite this increasing maturation of European gas hubs, however, the market prices
in many European markets still remained largely tied to oil products. As a result, most
(although not all) of the price reviews in this second wave resulted in a decrease of the
180
contract prices to reflect the reduced level of gas prices, but still left the prices tied to
oil products.
This was no small event. The buyers that achieved downward revisions to their supply
prices included:
• Bulgargaz (Bulgaria)
• Centrex (Austria)
• Conef Energy (Romania)
• DONG (Denmark)
• EconGas (Austria)
• Edison (Italy)
• Eni (Italy)
• E-On (Italy)
• Gas Natural (Spain)
• GasTerra (the Netherlands)
• GDF Suez (France)
• PGNiG (Poland)
• RWE (Germany)
• Shell Energy (the Netherlands)
• WIEH (Germany)
• WINGAS (Germany)
Each of these buyers obtained price reductions in their long-term contracts based on the
evolution of the European markets. The prices paid by end users were now no longer set
by supply costs. Rather, the reserve had happened: the supply costs were set by the end-user
prices through the price reviews.
The third wave of price reviews

A third wave of price reviews followed several years later. In this third wave, the buyers
argued that the gas hubs had developed and matured in much of Europe to the point that
they had significant traded volumes and transparent prices. This allowed hubs to act as a
price-setting mechanism in the markets that they serve.
As a general principle, the more significant the volumes traded on a hub, the more ‘liq-
uid’ – and reliable and transparent – its price reference becomes. A ‘liquid’ price is one that
is not easily influenced by a small number of trades because of the large overall volumes
traded. An ‘illiquid’ hub, by contrast, is more prone to price volatility because of the abil-
ity of a small number of trades to influence the average price more quickly. The growth
of liquidity at a trading hub also facilitates increasingly transparent prices because of the
higher number of trades made at the hub.
The continental European hub that became the most liquid during this period was
the Title Transfer Facility (TTF) in the Netherlands. By 2009, traded volumes at the TTF
had grown sufficiently that the TTF was regarded as an open and liquid gas trading hub.
By 2012, the price formation mechanism for many gas contracts in the Netherlands and
elsewhere was the TTF price.
Many buyers in this third wave of price reviews therefore asked for the proxy of oil
products in the formulae to be replaced by gas hub indexation. It is a matter of public
181
record that suppliers such as the Norwegian producer Statoil and Gazprom have increas-
ingly agreed to include gas hub indexation or reflect gas-hub price levels in their supply
contracts.3 Indeed, the two largest supply contracts into Europe – which are contracts that
ENI and E-On have with Gazprom – were revised to include gas-hub indexation (it is
public information that the ENI contract is now 100 per cent hub-indexed). And 100 per
cent of Statoil’s contracts to northwest Europe have some level of hub indexation.4
Several of the arbitrations that are part of the third wave of price reviews are still ongo-
ing – with many buyers in Europe seeking to substitute the oil proxy partly or entirely.
Looking into the crystal ball

As the foregoing shows, the evolutionary path of price review arbitration has been marked
by three epochs. During that time, the European gas markets have experienced growing
pains, and players in the field have struggled to cope with the evolving energy landscape.
International arbitration has played an important role in that evolution.
Focus now turns to the future. As we look forward, some commentators have suggested
that there might be a fourth wave of price reviews in which sellers may seek a contract
price increase because of the falling price of oil. The historical movements in oil are well
known: in 2004, Brent was at US$30-40 per barrel, rose dramatically to around US$140 per
barrel in 2008, settled between the US$100-120 per barrel range from 2011 to early 2014,
then collapsed in late 2014 and is currently in the US$45-55 per barrel range. Some have
suggested that sellers may argue that the prices that the buyers are paying are too low
because they are tied to the falling price of Brent.
If those claims proceed, the question will be whether the buyers may still be achiev-
ing a relatively high price when it sells the gas downstream. The devil, however, will be in
the detail, which will include (but will not be limited to) the nature of the ‘slope’5 of the
contract price at issue – which determines the reactivity of the formula to the movement
in oil prices. That chapter in this saga, however, has yet to be written.
Perhaps the more interesting question is whether price review arbitrations in Europe
will continue or will slowly die out (which would be sad news for price review lawyers).
As European hubs continue to mature, hub indexation will be, through party agreement or
arbitral awards, increasingly substituted for the proxy of oil products. And that means that
the supply price formulae will better react in real time to natural gas prices in downstream
markets, capture market changes in a way that the oil prices could not, and the need for
price reviews will be reduced.
In these circumstances, the question must be asked: is there still a reason to include a
price review clause if the formula is wholly tied to a gas hub index? Many believe not.They
believe that the hub indexation is the cure for everything – and that the market prices will
stay in alignment with contract prices that are tied exclusively to hub indexation. There is,
3 Jason Bordoff and Trevor Houser, American gas to the rescue?, Columbia SIPA, September 2014, p. 17.
4 Gazprom, 2012 Management Report OAO Gazprom; Jonathan Stern, December 2014: The Dynamics of a
Liberalised European Gas Market, p. 19; CGEP, American gas to the rescue, September 2014, p.17.
5 A contract price often reacts to a certain-month trailing average price of Brent at a pre-defined rate – a
decimal or percentage multiplier known as the ‘slope’. As the certain-month trailing average price of Brent
rises or falls, so rises or falls the contract price according to the agreed slope.
182
however, a more nuanced view: price review clauses may still be important because there
is no guarantee that hub pricing will reflect market prices – particularly if the destination
market is different than the hub reference.
A simple hypothetical illustrates the point. Suppose companies contracting for the
German market wish to include in the contract price a 100 per cent hub reference to TTF
in the Netherlands. They wish to do so because they believe the TTF is sending the price
signal for market prices in Germany. The parties may therefore change the contract price
formula to include 100 per cent TTF hub indexation.
Is there a need for a price review clause? The answer may be yes, because TTF may not
always remain a reasonable measure of market prices in Germany. Rather, it may be that
TTF ceases being a price signal for market prices in Germany at some point in the future
and that the German hub becomes the new sender of the price signal. In that case, the
parties would be wise to have the contractual mechanism – a price review provision, albeit
perhaps differently worded – to deal with this change in market conditions.
There is another recent event that may further motivate this change. In recent years, the
EU commission launched an investigation into Gazprom about whether its contracts with
buyers violate EU competition law. One of the European Commission’s charges is that
Gazprom is abusing its dominant position in the central and eastern European natural-gas
markets. There were several factors behind this charge, one of them that Gazprom’s prac-
tice of indexing gas prices to a basket of oil products ‘unduly favoured Gazprom over its
customers.’6
As a result, future price review arbitrations against sellers may include not only a claim
under the contract for hub indexation, but also an EU competition claim. Under the
European Court of Justice’s decision in Eco Swiss China Time Ltd v. Benetton International
NV,7 the issue of EU competition law appears to be arbitrable, subject to a second look by
a reviewing court after the arbitration (if requested).
In sum, given the European Commission’s view about oil indexation and the increased
maturity of hubs, there may be less and less oil indexation in these contracts, more and
more hub indexation, and a corresponding decline in price review arbitrations in Europe.
But it will take time to get there.
All hope for future price reviews, however, is not lost. There is reason to believe that
Asia will become the next Europe. The Asian markets today are where European mar-
kets were two decades ago: relatively immature markets in transition, where pricing is still
largely tied to oil products. For this reason, the next major battleground in price review
arbitration may be Asia (Japan, Korea, Taiwan and China), which was and remains largely
unliberalised and where end-user prices are largely set by the supply costs.
Conclusion
While the evolution of price review arbitration has been marked by three periods of
increased activity, it is has been – with the exception of a few twists and turns – a more or
less linear evolution, as gas markets have matured away from oil indexation and toward hub
6 European Commission Press Release, ‘Antitrust: Commission sends Statement of Objections to Gazprom for
alleged abuse of dominance on Central and Eastern European gas supply markets,’ 22 April 2015.
7 Case C-126/97.
183
indexation. International arbitration has been one of the primary vehicles by which pricing
disputes have gone about that evolutionary path. As we reflect on that journey and project
into the future, the road forward appears to be one of hub indexation in Europe and of
Asia being the next major battleground – much as Europe was two decades ago. And that is
precisely what the price review clauses are intended to address: changing market conditions
that are not reflected in the contract price.
184
12
Gas Price Review Arbitrations: Certain Distinctive Characteristics
Mark Levy1
Long-term gas supply agreements (GSAs) often provide for the sale and purchase of very
large quantities of gas or LNG over a period of 20 years or more. Given the long supply
period, parties rarely agree to buy and sell gas at a fixed price. Instead, they typically provide
for a formula for calculating the price of gas by reference to one or more indices including,
at least historically, the indices for the price of oil or oil products. While an indexed price
formula provides some pricing flexibility over time, it can be insufficiently responsive to
market dynamics over the term of a GSA. In particular, during that period, circumstances
may change in a manner that would cause the contract price formula to no longer reflect
the ‘fair market’ or ‘competitive’ price in the relevant market. That is why most long-term
GSAs also contain a price review clause that allows the parties to periodically (often, every
three years) request a review of the contract price formula to ascertain whether it should
be adjusted in response to changes in the market.
Typically, GSAs contain a mandatory negotiation period of several months during which
parties must discuss their differences in order to seek an amicable settlement. It is only if
parties are unable to reach commercial agreement during this period that a price review
ends up in arbitration (given the confidential nature of these disputes, it is rare to see them
referred to national courts for resolution). Most price reviews were historically resolved at
the negotiation phase and rarely submitted to arbitration. However, there has been a nota-
ble increase in arbitrations involving European gas markets in recent years, suggesting that
buyers and sellers are finding it difficult to resolve their differences through negotiations.
That has been the case primarily because these negotiations have been taking place
against a varied background, including:
1 Mark Levy is a partner at Allen & Overy LLP. This chapter was printed in the first edition of The Guide to
Energy Arbitrations and was accurate as of September 2015. The author would like to thank Adarsh Chhabria
and Rishab Gupta for their contributions to the chapter.
185
• fall in gas demand in many markets as a result of the financial crisis that began in 2008;
• regulatory and structural changes in European markets, including the emergence
of liquidly traded gas hubs (which undermined the traditional link between oil and
gas prices);
• competition from other sources of energy, including renewable energy;
• global oversupply, in particular the impact of shale gas in the US; and
• large fluctuations in oil prices.
The effect of these changes, and others, continue to be felt, and therefore there are likely to
continue to be substantial number of price review disputes in the near future.
Although these disputes are resolved in arbitration, they are not like other arbitra-
tions. Given the prevalence and commercial importance of these disputes – even a rela-
tively minor change in the contract price, when multiplied by the large volumes to be
delivered over a number of years, can have a significant financial effect on the buyers and
sellers – it is important to understand how gas price review arbitrations can differ from
other arbitrations.
In this chapter, we identify five such differences. As explained below, these differences
exist primarily because of the nature of the underlying dispute (which, unlike traditional
disputes, does not involve any allegations of a legal wrong or a breach of contract), the
commercial context of the arbitration (which, in turn, requires arbitrators to adopt a more
commercial approach and the experts and parties to be more closely involved) and the
recurring nature of these disputes within the confines of a single agreement (which raises
particular issues in respect of confidentiality and the binding nature of past determinations).
Distinctive characteristics of gas price review arbitrations

Different nature of the dispute
Typically, a commercial arbitration arises from allegations that one party has breached a
term of the contract or failed to fulfil some other legal obligation. An arbitration tribu-
nal has to determine which party is legally at fault and, if so, the compensation due to
the innocent party. By contrast, in price review arbitrations, these issues are not usually
relevant (save, perhaps, for arguments over whether a party has complied with the proce-
dural requirements for triggering a price review). Instead, arbitrators are usually asked to
determine whether the contractually stipulated criteria for an adjustment of the contract
price formula have been satisfied and, if so, what that adjustment should be. Given that by
the time the parties submit their dispute to arbitration they have already (unsuccessfully)
attempted to resolve these issues, the arbitrators are effectively asked to find a commercial
solution that the parties failed to agree on during the mandatory negotiation period.2
To fulfil this mandate, arbitrators have to perform a somewhat different role in gas price
review arbitrations, when compared to the role they typically perform in other arbitrations.
First, they need to understand the commercial (rather than purely legal) context of the
dispute. GSAs are relational contracts and the parties are ultimately interested in maintain-
ing their long-term commercial relationship. The tribunal must therefore try and find a
2 See George von Mehren, ‘The Arbitrator’s Role’, in Gas Price Arbitrations (ed. Mark Levy, 2014), p. 91.
186
solution that is acceptable, and economically sustainable, for both parties.The tribunal must
do so while at the same time interpreting and applying the relevant provisions of the GSA
and following the governing law of the contract.
Second, arbitrators need to understand at least the basics of gas pricing and the role
they are being asked to perform. Commercial arbitrators are skilled at evaluating complex
factual evidence and applying that evidence to the law. That ability is less relevant in the
context of gas price review arbitrations which rarely involve large amounts of factual evi-
dence or lengthy submissions on legal issues (although, as discussed below, these arbitrations
often involve complex contractual interpretation issues). A failure by a tribunal to adjust its
mindset to the requirements of a price review can lead (and has led) to highly unpredictable
and commercially unsatisfactory awards.
Finally, and this follows from the points made above, arbitrators have to temper their
style of decision-making in the context of a gas price review arbitration. In particular, given
the need to find a commercial solution that is acceptable to both parties, in our experience,
the best arbitrators often approach these disputes from a less legalistic, and more commer-
cial, perspective than would normally be the case in a commercial arbitration.
Common interpretation issues

Although the wording of price review clauses often varies in material ways, they tend to
have a similar structure. Broadly speaking, a price review clause will set out: the circum-
stances that permit a price revision (the trigger); the factors to consider when adjusting the
price formula; and the procedure for requesting a price review.
As far as the trigger event is concerned, different clauses take different approaches to
when a party can request a price review. At one end of the spectrum are clauses which
provide that the parties will meet at fixed intervals to discuss revisions to the contract price.
For example, the GSA between Sonatrach and Distrigas signed in 1976 simply provided
that the parties will meet ‘every four (4) years’ to discuss price revisions.3 Such clauses
eliminate any interpretation issues at the trigger stage of the price review. Another way to
limit interpretation difficulties is to provide for mechanical trigger criteria. For example,
the GSA in Esso Petroleum & Production UK Limited v Electricity Supply Board required that
the contract price must deviate from the market price by a fixed percentage before the
price can be reopened.4
However, these formulations are uncommon. Price review clauses typically require
the requesting party to show that certain qualitative changes have occurred in the relevant
market which merit revision of the price formula. In particular, they usually require the
requesting party to establish that:
• a ‘significant’ or ‘substantial’ change has occurred in the ‘buyer’s market’;
• the change occurred before the ‘review date’;
• the change was beyond the control of the party requesting a price review; and
• the change must have, or be likely to have, an effect on the market value of gas in the
buyer’s market.
3 The Sonatrach – Distrigas SPA (1976) is available at www.fossil.energy.gov. Distrigas Corporation Docket No.
88-37-LNG, Exhibit E-1: Agreement for the Sale and Purchase of Liquefied Natural Gas of 13 April 1996.
4 [2004] EWHC 723 (Comm).
187
A good example of this approach is the Atlantic LNG – Gas Natural GSA, which provided
that the requesting party must show that:

economic circumstances in Spain beyond the control of the Parties, while exercising due diligence,
have substantially changed as compared to what it reasonably expected when entering into this
Contract . . . and the Contract Price . . . does not reflect the value of natural gas in the Buyer’s
end-user market.5
In addition to setting out the trigger event, a price review clause may also indicate the
relevant criteria needed to adjust the price formula. This could include: a requirement that
the price must allow the buyer to ‘economically market’ the gas purchased;6 or a reference
to other prices as comparators, such as prices under ‘comparable contracts’ or prices in the
end-user market.
As a result of these similarities in structure and, to some extent, wording of the price
review clause, the same interpretational issues tend to arise repeatedly in these disputes.
For example, common debates arise out of the meaning of words and phrases such as
‘significant’, ‘value’ and ‘economic circumstances’, as well as factual disputes regarding, for
example, whether changes were foreseeable or beyond the control of the party requesting
the price review.
At the adjustment stage, to the extent the price review provision refers to a buyer’s abil-
ity to ‘economically market’ the gas, questions often arise as to what that phrase means. For
example, does it mean that, irrespective of market conditions, the buyer should always be
entitled to make a net profit on the gas that it on-sells? If so, at what level should that profit
be fixed? Similarly, if the tribunal is required to consider prices in ‘comparable contracts’,
a question often arises as to what ‘comparable’ means. Should the tribunal be restricted to,
for example, comparing prices under other long-term LNG contracts only, or can it also
consider prices under long-term contracts for pipeline gas and short-term (spot) contracts
for the sale of LNG? Aside from the interpretation difficulty, this analysis is further compli-
cated by the fact that, as explained below, the relevant data is rarely available because most
LNG and pipeline gas contracts contain strict confidentiality clauses and the terms are not
in the public domain.
The list of issues highlighted above is by no means exhaustive: there are many other
interpretation issues that arise again and again in gas price review arbitrations.7 That is
partly because similar clauses seem to be reused as standard in GSAs. In that sense, gas price
review arbitrations are similar to investment treaty arbitrations. Investment treaty tribunals
have to often grapple with the same treaty interpretation issues that previous tribunals
have already considered. Again, that is the mostly due to similarities in the wording of the
5 Terms of the Atlantic LNG GSA became public when the arbitration award in the underlying arbitration –
Atlantic LNG Company of Trinidad & Tobago v Gas Natural Aprovisionamientos SDG SA, UNCITRAL, Final
Award dated 17 January 2008 – was challenged in US federal courts.
6 This clause, which is also referred to as the ‘any case’ clause, often reads as follows: ‘[Whatever adjustment is
made] in any case the buyer should be entitled to market the gas economically’.
7 For more examples, see Mark Levy, ‘Drafting an effective price review clause’, in Gas Price Arbitrations (ed.
Mark Levy, 2014), pp. 9–20.
188
bilateral investment treaties. That said, the task of an investment treaty tribunal is aided by
the availability of a large corpus of publicly available awards to which it can refer while
deciding a particular dispute. However, as explained below, that is not the case with gas
price review arbitrations.
Role of experts
Experts are frequently used in commercial arbitrations. In most cases, expert testimony
is adduced where either the quantum of damages is a contested issue (e.g., in expropria-
tion cases) or where industry standards and conduct are in question (e.g., in construction
disputes). In these cases, while the role of an expert is crucial, it is often not central to the
resolution of the dispute because the tribunal has to grapple with complex factual and legal
issues before turning its mind to the expert testimony. For example, expert evidence on
quantum is only relevant where the tribunal has found a breach of a legal obligation requir-
ing the payment of damages; in the absence of that finding, such evidence is largely useless.
By contrast, experts play a central role in gas price review arbitrations.8 Expert evidence
often runs into hundreds of pages, setting out, among other things: the economics of the
parties’ transaction (e.g., explaining the take-or-pay obligations under the GSA); analysis
of the ‘trigger’ criteria (e.g., whether or not there has been a change in circumstances that
meets the contractual criteria); and the appropriate level of ‘adjustment’ (in case the tribunal
finds that the criteria for triggering the price review have been met). In fact, experts usually
provide the majority of the evidence in a gas price review arbitration: factual witness state-
ments are rarely submitted and, even if they are, they are often limited to short accounts of
pre-contractual negotiations (a party may wish to explain the circumstances in which the
GSA was concluded) or pre-arbitration negotiations (a party may wish to explain how it
followed, or the other party failed to follow, contractually required procedures before com-
mencing arbitration).
Moreover, legal submissions in gas price review arbitrations largely track the expert
evidence. Although these arbitrations often involve complex contractual interpretational
issues – and, as explained above, the same issues tend to arise again and again – the focus
of the legal submissions is on explaining whether the trigger criteria have been met and, if
so, the level of adjustment to which the requesting party is entitled. That, in turn, requires
describing the alleged changes in economic circumstances, assessing them against specified
criteria and reflecting the effect of those changes in the adjusted price formula (to the
extent the adjustment criteria is expressly linked to the trigger criteria). Because these are
mostly questions for the expert, legal submissions tend to largely focus on the evidence
contained in the expert reports.
Finally, given the volume of expert evidence, at the hearing, a majority of the time is
unsurprisingly spent on expert testimony, rather than testimony from factual witnesses or
the presentation of legal submissions. By contrast, in many commercial arbitrations, rela-
tively little time is reserved for expert testimony at the hearing.
8 See Colm Gibson, Boaz Moselle, ‘The role of an expert in price review arbitrations’, in Gas Price Arbitrations
(ed. Mark Levy, 2014), p. 118.
189
Confidentiality
Confidentiality is a hallmark of international arbitration. Generally speaking, arbitration
proceedings are conducted in private, which means that only the parties involved in the
proceedings are allowed to attend the hearing and only they are provided with access to all
the information emanating from the arbitration, including the award of the arbitral tribu-
nal. By contrast, judicial proceedings take place in open court. The resulting publicity may
not be desirable for disputing parties and hence the confidentiality offered by arbitration is
often viewed as one of the key advantages of arbitration over litigation.
In the context of gas price review disputes, the confidentiality afforded by the arbi-
tration process is even more important as the contract price is among the most sensitive
information in the gas industry. Of course, confidentiality itself does not distinguish a gas
price review arbitration from a commercial arbitration. However, its effect is felt rather
differently. Confidentiality issues tend to arise at all stages of gas price review disputes,
including during pre-arbitration negotiations, during the arbitration itself and after the
arbitration has ended.9
As for pre-arbitration negotiations, often they involve parties exchanging views and
information on various issues, including the relevant trigger events and the appropriate
level of adjustment to the contract price formula. During the negotiations, parties fre-
quently make concessions to reach a mutually acceptable solution and avoid arbitration.
Positions taken by a party during these negotiations, however, may be different to the posi-
tion it wishes to adopt in the arbitration. There is, therefore, a risk that parties may try to
use information exchanged during the negotiations in any subsequent arbitration.To avoid
that risk, such negotiations are often conducted on a without-prejudice basis. In addition,
the parties may enter into specific confidentiality agreements, either in the original GSA or
in any subsequent agreement, to ensure that the information exchanged will not be used
in a subsequent arbitration.
Next, during the arbitration, confidentiality may have a significant effect on how the
parties argue their respective cases. As noted above, price review clauses often require tri-
bunals to adjust the contract price by taking prices in comparable contracts into account.
However, pricing information is usually confidential and, therefore, there may not be much
publicly available evidence for the tribunal to draw upon. In the absence of information
from contracts of third parties, one of the parties to the dispute may want to rely on its
own prices in the market. For example, the seller may have multiple buyers in the market
and could disclose prices under those contracts to give the tribunal an idea of the prices at
which other buyers, in that moment, are buying gas. Similarly, the buyer is likely to know
the prices end-users in the market pay for gas, as these end-users will often be its customers.
The exclusive access to some of the pricing information leads to an asymmetrical situation:
the buyer and seller have access to pricing information which the other party does not have
access to and accordingly they may decide to use that information selectively (i.e., only
when it is helpful to their case).
9 See Philippe Pinsolle, ‘Confidentiality in gas price reviews’, in Gas Price Arbitrations (ed. Mark Levy, 2014), pp.
47-61.
190
This information asymmetry can be addressed if the parties are required to disclose
their prices. However, because these prices are set out in contracts that often contain confi-
dentiality provisions, it may not be possible to compel disclosure. As a result of these restric-
tions, very often the only evidence of prices on which the parties and the tribunal rely are
publicly available information, even though such information may not, in some markets, be
as reliable or complete as pricing information held by the parties.
Finally, the award issued by the tribunal in gas price review arbitration, as in any other
commercial arbitration, remains confidential. In the ordinary course, this is rarely an issue
because every commercial dispute is likely to involve unique issues of fact and law, and past
awards are, therefore, of limited interpretive value to future arbitrations. That, however, is
not the case with gas price review arbitrations which, as noted above, tend to involve simi-
lar interpretational issues. As such, access to awards rendered in gas price review arbitrations
could be very useful.
Because parties are unlikely to disclose their awards voluntarily, there are primarily
three avenues through which such awards may become available: when one of the parties to
the arbitration is making a stock market announcement (there is usually a duty to disclose
at least the result of the arbitration if that result could have an effect on the share price);
when the award is being challenged or enforced in a domestic court; and extracts from the
award may be published, after redacting names of the parties and other sensitive informa-
tion, in the relevant arbitration institution’s bulletin.
Thus, one of the best known gas price review awards – the Atlantic LNG award10 –
became public when both parties to the arbitration decided to challenge the award in US
federal courts.There are also two well-known International Chamber of Commerce (ICC)
awards, from 1999 and 2007 respectively, regarding the same long-term gas supply agree-
ments; extracts of these awards were published in the ICC Bulletin in 2009.11 Because these
three awards are rare examples of publicly available awards rendered in gas price review
arbitrations, they have assumed far greater influence than they otherwise would, and are
often cited by counsel in their submissions and by arbitrators in their awards.
Forward looking nature of these disputes

Typically, commercial arbitration, like commercial litigation, is a backward-looking pro-
cess that hinges on the tribunal (court) awarding damages to the claimant for a breach
that occurred in the past. In doing so, the arbitrators only have to consider events leading
up to the date of the breach as that is usually the date by reference to which damages are
assessed. In particular, the tribunal does not have to concern itself with events post-dating
the breach, let alone events that might post-date the award.
Gas price review arbitrations, on the other hand, require the tribunal to exercise both
backward-looking and forward-looking judgment.12 The purpose of a price review is to
fix the contract price formula as of a specified ‘review date’. To do so, the tribunal has to
10 Atlantic LNG Company of Trinidad & Tobago v Gas Natural Aprovisionamientos SDG SA, UNCITRAL, Final
Award dated 17 January 2008.
11 ‘Extracts from the ICC Arbitral Awards: Price Setting and Price Revision in the Energy Sector’, in ICC
International Court of Arbitration Bulletin,Vol. 20/2, 2009, pp 69-76 and 93-109.
12 See David Mildon, ‘The adjustment phase’, in Gas Price Arbitrations (ed. Mark Levy, 2014), p. 134.
191
first determine whether a triggering event occurred at or before the review date.Therefore,
strictly speaking, changes that post-date the review date are not relevant: those changes are
for the next price review, and taking them into account in an earlier price review risks
double-counting them in both the current price review and the next. In that sense, when
it comes to establishing whether a triggering event has occurred, tribunals are expected to
exercise backward-looking judgement only.
Next, if the trigger is established, the tribunal must adjust the contract price formula
in accordance with specified criteria. While these criteria differ from contract to contract,
broadly, a price review clause would either try to relate the price revision to the change
that triggered the review or it would not. In the former case, the task of the tribunal is to
determine the value of the change, whereas in the latter case its task is to determine the
value of the gas. In both cases, the adjustment has to be made by reference to the review
date (i.e., the revised contract price should reflect the value of the change or the value of
the gas as of the review date).
However, it is possible that the energy prices will rise between the review date and the
hearing date, which gives rise to the perception that a higher contract price is justified, or
vice versa. It can be difficult for a tribunal to avoid those perceptions, especially where the
triggering events that occurred during the price review period suggest the opposite. The
tribunal is also likely to be guided by its mandate to find a solution that is commercially
acceptable to both parties: it may be, therefore, reluctant to set a price that completely
ignores changes in market prices post-dating the review date (although whether it has the
mandate or even the jurisdiction to take these factors into account can be called into ques-
tion). Further complications can arise if the clause requires, for example, the effect on the
value of gas to be expected to have an enduring effect, which requires some prescience on
the part of the tribunal.
Conclusion
While gas price review arbitrations are a subset of commercial arbitrations and therefore
share some of the characteristics of commercial arbitrations, they are in many respects quite
different. In this chapter, we have identified five important differences. Ultimately, the key
difference relates to the nature of the underlying dispute: by requiring the tribunal to find
a commercially acceptable solution so that the long-term relationship under the GSA can
be continued, the parties essentially require the arbitrators to perform a role that is very
different to the role that they normally perform. Because arbitrators have to adopt a com-
mercial approach to their decision-making, they unsurprisingly rely heavily on testimony
provided by experts, who play a central role in these arbitrations. The other differences
identified above are also largely a manifestation of the unique context in which gas price
review arbitrations are conducted.
This list of differences is, however, not exhaustive. For example, we have not discussed
some of the procedural challenges that one tends to encounter in these arbitrations (e.g.,
issues relating to timing and content of review notices) or the effect of the principles of res
judicata and issue preclusion. (Given that the same interpretation issues are likely to arise
each time there is a new price review under the same contract, arbitration tribunals have
to decide what weight, if any, should be given to determinations made by prior tribunals.)
It is also important to note that these differences are a matter of degree: for example, it is
192
possible that some of the confidentiality issues identified in this chapter may not be rel-
evant to a given gas price review arbitration, particularly if the market in question is more
transparent than usual.
Given the recurrent nature of the issues discussed in this chapter and the increasing
frequency of these disputes, one might have expected some kind of industry consensus to
emerge. To date that has not happened. And with the polarisation of the position between
buyers and sellers, perhaps that is inevitable. Whatever the reasons, the effect has been the
adoption of a wide of variety of approaches by tribunals in price review awards. That in
turn creates unpredictability, risk and, in some cases, deep dissatisfaction with the process.
It remains to be seen whether the end-users of the arbitration process, the industry clients,
remain content to allow their valuable contracts to be subject to such vagaries, or whether
we will see a move towards an industry consensus as to how some of these issues should be
addressed. In our view, such a move would be most welcome.
193
13
Destination Restrictions and Diversion Provisions in LNG Sale and
Purchase Agreements
Steven P Finizio1
Liquefied natural gas (or LNG) has been commercialised for more than 50 years, but in
the past several decades there has been substantial growth in its use, and it now accounts
for about a third of the global trade in natural gas.2 Liquefying natural gas (which involves
cooling it to approximately -161C°) allows it to be transported by ship, which has enabled
countries with large gas reserves not linked by pipeline to other markets to sell gas around
the world.3 Terminals for receiving and regasifying LNG have been built in many parts of
the world, and the market for LNG has grown from North America and Europe to include
Asia, the Middle East, South America and, as of 2015, Africa.4 LNG plays different roles
in different parts of the world. In some markets it is the primary source of gas supply; in
others it helps make up for decreases in domestic production; in yet others it balances or
complements other sources of gas.
1 Steven P Finizio is a partner at Wilmer Cutler Pickering Hale and Dorr LLP. The author thanks Siddharth
Velamoor and Matthew Kennedy for their contributions to this chapter.
2 International natural gas trade accounted for about 30 per cent of global consumption, with LNG exports
totalling approximately 340 billion cubic metres in 2015 (compared to approximately 700 billion cubic
metres exported by pipeline). See BP Statistical Review of World Energy 2016, at pp. 4, 29. LNG exports
in 2016 were sufficient to supply power to approximately 500 million homes. Shell LNG Outlook 2017,
available at http://www.shell.com/energy-and-innovation/natural-gas/liquefied-natural-gas-lng/lng-outlook.
html#vanity-aHR0cDovL3d3dy5zaGVsbC5jb20vbG5nb3V0bG9vaw.
3 The largest producers of LNG are now Qatar, Australia, Malaysia, Nigeria, Indonesia, Algeria, Russia, and
Trinidad and Tobago. See International Gas Union, World LNG Report – 2017 Edition, at p. 9. Eighteen
countries exported LNG in 2016. See International Gas Union, World LNG Report – 2017 Edition, at p. 9.
Australia and Indonesia opened new facilities in 2015.
4 In 2016, more than 70 per cent of LNG imports were to the Asia-Pacific and Asia regions. See International
Gas Union, World LNG Report – 2017 Edition, at p. 8. The number of countries importing LNG has
continued to grow, with 35 countries importing LNG in 2016. The biggest importing countries include Japan,
South Korea, China and India. See Shell LNG Outlook 2017, at p. 9.
194
Destination Restrictions and Diversion Provisions in LNG Sale and Purchase Agreements
Constructing the facilities required to extract, liquefy and export gas such as LNG,
including liquefaction trains, requires substantial capital investment.5 Because of the need
to finance these facilities, producers have historically sought to enter into long-term con-
tracts. However, LNG is also increasingly sold through short-term or ‘spot’ agreements
(e.g., a single cargo may be sold) or medium-term agreements (e.g., a number of cargos or
a certain volume of LNG sold over the course of a number of months or several years).6
In some instances, LNG supplied under a long-term contract may be sold and delivered
to customers in different destinations. Companies may also enter into swap agreements to
create efficiencies, including through savings on shipping costs.7
Because LNG can be transported to markets in different parts of the world, differences
in gas prices between markets can create arbitrage opportunities. In the past 10 years, as
LNG production increased as new facilities came online, demand for LNG in different
markets has changed significantly. In the mid-2000s, the growth of shale gas production
in the US meant that volumes of LNG originally expected to be delivered to the United
States were delivered to Europe instead, and there were also opportunities to send LNG
to Asia and South America as demand in those markets increased. After the global finan-
cial crisis in 2008, while LNG deliveries increased supply, demand for gas decreased in
Europe and Asia, and there were fewer opportunities for shorter-term sales. However, Asian
demand increased significantly following the Fukushima nuclear disaster in March 2011,
when Japan’s nuclear power plants were shut down, and over the next several years, sub-
stantial volumes of LNG were sent to Asia. Those imports subsequently decreased as price
differences reduced.8 Further shifts in the supply and demand balance will inevitably occur,
creating new arbitrage opportunities.
Many of the disputes that arise in connection with other long-term gas supply con-
tracts, and which may result in arbitration, also arise with long-term LNG supply contracts.
In particular, most long-term LNG supply contracts include price review provisions that
allow a party to request an adjustment or revision of the price when there have been
5 Liquefaction facilities can cost as much as US$20 billion to construct and maintain and regasification facilities
can cost as much as US$1 billion. See ‘Financing LNG Projects and the Role of Long-Term Sales-and-
Purchase Agreements’, Discussion Papers, DIW Berlin, No. 1441, dated January 2015, at p. 3. See also World
LNG Report – 2014 Edition, International Gas Union, at p. 21. As a less costly alternative, floating regasification
and storage units (FRSUs) are increasingly being used.
6 See, generally, ‘The New LNG Trading Model Short-Term Market Developments and Prospects,’ Poten &
Partners, dated 2010. In 2016, approximately 25 per cent of LNG was traded through non-long term contracts
(e.g., through spot, short or medium term contracts). See World LNG Report – 2017 Edition, International Gas
Union, at p. 15.
7 In a simple swap agreement, where seller 1 is contracted to deliver to buyer 1, and seller 2 is contracted to
deliver to buyer 2, seller 1 would deliver to buyer 2, and seller 2 would deliver to buyer 1. For example, one
company may send a cargo from Trinidad to the US, rather than to Spain, and the other company send a cargo
from Algeria to Spain, rather than the US, and share the additional value created by saving on shipping costs.
See A Patten and P Thomson, ‘LNG trading’, in P Griffin (ed.), The Law and Business of LNG, 1st ed, 2008,
at pp. 62-64; ‘The New LNG Trading Model Short-Term Market Developments and Prospects,’ Poten &
Partners, dated 2010; ‘Market insight: swapping strategies,’ World Gas Intelligence, dated 17 July 2002.
8 See ‘The US Shale Gas Revolution and its Impact on Qatar’s Position in Gas Markets,’ Columbia/SIPA
Center on Global Energy Policy, dated March 2015. See also International Gas Union, World LNG Report –
2016 Edition, at p. 8.
195
changes of circumstances as defined in those provisions. Rather than focus on those general
pricing disputes, this chapter will focus on issues that are more specific to LNG contracts.
In particular, the chapter discusses issues that arise because LNG can be delivered to differ-
ent destinations and can be re-exported after it is delivered.
Features of long-term LNG supply contracts

Historically, most LNG supply contracts have been in the form of long-term sale and pur-
chase agreements (SPAs) with a contract term of 20 years or more, and an option to extend
or renew. As noted above, the capital costs for building the facilities and equipment required
to extract gas and then transform, transport and distribute LNG, can be many billions of
dollars.9 At least in part to obtain financing for such projects, producers wanted to contract
with buyers who would commit to purchasing substantial volumes over a long time-period
and would provide regular revenues.10 At the same time, many buyers were monopoly
or semi-monopoly gas merchants, with substantial downstream obligations in their home
markets, and they were interested in diversifying their supply portfolio and having a secure
supply of gas (and many buyers continue to have those interests even in liberalised gas mar-
kets, although LNG is increasingly being sold through shorter term contracts).
Certain key features of long-term LNG SPAs are discussed below.
Price and price review provisions in LNG SPAs

Outside of North America (where gas contracts are usually priced using the ‘Henry Hub’
gas market price),11 many LNG SPAs were priced using formulae with a base price and
indexation referring to competing sources of energy like fuel oil, gasoil, and coal (and
some LNG contracts have been priced by reference to wholesale electricity prices). More
recently, some LNG SPAs have been priced using gas hub prices or using formulae with a
mixture of hub prices and alternative fuels. The contract price may also be linked to other
economic indicators such as inflation or tax rates.
Like other long-term gas supply contracts, LNG SPAs usually include a price review
or reopener provision, which will generally provide for periodic dates when either party
may request a price revision or adjustment when there has been a change of circumstances
meeting certain requirements in a defined market within a defined period of time (or
‘review period’).12 Providing for periodic price reviews in a long-term supply contract
balances two competing concerns:
9 See ‘Financing LNG Projects and the Role of Long-Term Sales-and-Purchase Agreements,’ Discussion Papers,
DIW Berlin, No. 1441, dated January 2015.
10 See P Weems, Overview of issues common to structuring, negotiating and documenting LNG projects,
8 International Energy Law & Taxation Review 189, 193-194 (2000); See ‘Financing LNG Projects and
the Role of Long-Term Sales-and-Purchase Agreements,’ Discussion Papers, DIW Berlin, No. 1441, dated
January 2015, at pp. 2-7.
11 Henry Hub is a physical meeting point of various gas pipelines in Louisiana, USA, from which collated
trading data is used as a price-setter for North American gas markets. See P Roberts, Gas and LNG Sales and
Transportation Agreements: Principles and Practice, 4th ed, 2014, at p. xxvii.
12 Many SPAs provide for the right to request a price review at specified intervals (e.g., every two or three
years), and often provide that both parties have the additional right to a limited number of unscheduled price
review requests over the term of the contract (often referred to as ‘wild card’ or ‘joker’ requests). When a
196
• it allows the price to be adjusted to maintain the parties’ original commercial bargain
over the lifetime of the contract because circumstances may change; and
• it avoids ‘imposing price reviews too frequently which may have the adverse effect of
increasing contractual uncertainty’.13
There are different approaches to how a price review is triggered. For example, while it is
less common in LNG SPAs, the parties may include a provision providing for automatic
price adjustments at regular intervals based on the levels of published fuel prices or tax rates.
More commonly, many LNG SPAs provide that a party may request a price revision where
certain criteria have been established, such as a substantial and unforeseen change in cir-
cumstances that was beyond the parties’ control.14 The price review provision will usually
define the market in which the change must take place (e.g., within a specified geographic
market, the buyer’s end user market in a certain geographic area, the buyer’s market more
generally, specific segments of a market). As discussed below, whether and how the price
review clause refers to the relevant market may be significant when a dispute arises about
whether sales of LNG to other markets can trigger a price revision.
As liquid traded gas markets have developed, a number of buyers have brought price
review requests seeking to introduce gas hub pricing into the price formulae in their LNG
SPAs (usually in place of or in addition to price formulae linked to oil products). Following
the liberalisation of European gas markets during the 2000s, a number of requests for price
adjustments resulted in arbitrations, and similar disputes have and will take place as gas
markets develop in other parts of the world. Other pricing disputes have arisen because of
alleged regulatory or other changes. Price review disputes in relation to the sale of LNG
cargos to other markets have also resulted in arbitrations. These are discussed below.
Take-or-pay provisions
Because producers wanted buyers that would commit to purchasing substantial volumes
over a long time-period and provide regular revenues, long-term LNG SPAs have typically
required the buyer to take a very substantial annual quantity and include a take-or-pay pro-
vision, which requires the buyer to pay for a certain amount of the annual contract quantity
(sometimes 100 per cent but often a percentage of that quantity, e.g., 85 or 90 per cent),
whether or not the buyer takes that quantity.
While these long-term SPAs sometimes are described as ‘sea pipelines’, the practicali-
ties of delivering LNG can make it a different and less ‘flexible’ product than gas delivered
party requests a review, the contract may obligate the parties to engage in discussions to determine whether a
revision is justified, and if it is, to agree on an appropriate revision reflecting the change of circumstance. Most
SPAs provide that if the parties cannot agree, the parties may resolve their dispute through arbitration.
13 M Clarke, T Cummins, and F Worthington, ‘The price isn’t right – gas pricing disputes’, 1 Int’l Energy L Rev
13, at pp. 15-16 (2015).
14 See, e.g., Gas Natural Aprovisionamientos SDG, S.A. v. Atlantic LNG Co. of Trinidad and Tobago, No. 08 Civ 1109,
2008 WL 4344525 (SDNY 16 September 2008). Some SPAs may also provide for a price revision where
certain objective criteria have been satisfied. Such a clause might stipulate a certain return for the buyer, for
example, that triggers a price review when it is not met. The price review clause may also identify certain
criteria that must be taken into account when revising the contract price, including the price of other gas
imported under long-term contracts.
197
by pipeline. A full cargo of LNG on a conventional LNG tanker is a significant quantity

of gas (more than sufficient to supply a small city for a year, for example). It takes time to
load, transport and unload a cargo, and shipping must be scheduled (including potentially
to include sufficient time for a vessel to make the return voyage). Deliveries are usually on a
regular schedule (although weather and other events can disrupt that schedule). As a result,
gas volumes delivered as LNG may not closely match the demands of the buyer’s custom-
ers throughout the year (which can vary substantially depending on a number of factors,
including the season), and there may be limited storage capacity available for the buyer to
store excess gas.
Because of this, parties may include provisions in a long-term LNG SPA that allow the
buyer to shape its offtake profile to better match the market demand for gas and reduce
its exposure to take-or-pay risks.15 The parties may also provide for destination flexibility
so that the LNG may be delivered to different terminals. Destination flexibility helps the
buyer manage the take-or-pay risks arising from its volume commitment by enabling it to
sell to additional markets and, as with other mechanisms intended to create offtake flex-
ibility, also creates the opportunity for the buyer to engage in price arbitrage (by selling to
higher priced markets).
The amount of destination freedom a buyer has will depend on the specific terms of
the SPA. As discussed below, some SPAs may include destination restrictions that require
the buyer take delivery at a specified port or only sell the LNG in a specified geographic
area (although many contracts do not include such restrictions and they may be illegal in
certain jurisdictions). Other SPAs will have detailed provisions providing for delivery to
other destinations.
Shipping terms and title to the LNG

Most LNG SPAs will include a provision identifying the delivery point and shipping terms
that stipulate that title, custody and risk transfer from the seller to the buyer at that point;
both title and shipping terms are relevant to determining how much destination flexibility
a buyer has.16
The allocation of costs and risk between the seller and buyer is usually specified by
reference to the Incoterms shipping rules published by the ICC.The most commonly used
15 Mechanisms for doing so include ‘make-up’ clauses that enable a buyer to defer taking the stipulated annual
quantity in one year and to make up the deficit in a subsequent year on favourable payment terms; ‘downward
quantity tolerance’ clauses that allows a buyer to reduce the number of lifted cargos (e.g., by 5-10 per cent),
which can reduce the annual contract quantity; ‘delivery flexibility’ so deliveries are scheduled flexibly over the
course of the year (to correspond to periods of higher demand); and swing flexibility in supply (e.g., 10 per
cent up or down). See P Roberts, Gas and LNG Sales and Transportation Agreements: Principles and Practice, 4th
ed., 2014, at paras. 12-005, 17-002.
16 Although title, custody and risk will ordinarily be transferred at the delivery point, they are distinct and the
parties may agree bespoke terms under which title, custody and risk pass at different points. For example, an
SPA may provide for custody and risk to transfer ex-ship, while nonetheless providing that title will shift to the
buyer immediately before the LNG reaches the country in which the port of unloading is located. Such an
arrangement is intended to relieve the seller of any tax liabilities that may be triggered when the LNG reaches
its point of destination. See P Roberts, ‘Effective title transfers in international LNG trades’, 7 International
Energy Law & Taxation Review 99, at pp. 99–100 (2007).
198
delivery terms in LNG SPAs are delivery ‘free on board’17 (FOB) and delivery ‘ex ship’18
(DES).19 (The DES term was eliminated from Incoterms 2010 and parties appear now to
be using ‘delivered at terminal’20 (DAT) in more recent agreements.21)
If LNG is delivered FOB, title and risk will shift to the buyer when the LNG is loaded
on to the ship and the buyer is responsible for arranging the vessel. Accordingly, unless
there are other contractual provisions that purport to limit the buyer’s ability to resell
or send the LNG to whatever destination it chooses, under an FOB contract, the buyer
may have almost complete destination freedom (subject to shipping and other commercial
constraints).22
By contrast, if LNG is delivered DES (or DAT), the seller retains title and risk until the
LNG is unloaded at its destination, and the seller is responsible for shipping costs. In such a
case, the SPA will identify a specific delivery port (often in the buyer’s home market) and
the buyer may have no destination freedom at all, unless the parties have added provisions
providing that the buyer may request delivery to other destinations, often referred to as
diversions (or deviations). Diversion provisions are discussed in more detail below.
17 Free on board ‘means that the seller delivers the goods on board the vessel nominated by the buyer at the
named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods
passes when the goods are on board the vessel, and the buyer bears all costs from that moment onwards.’ See
International Chamber of Commerce, Incoterms 2010, ICC Publication No. 715E, at p. 87.
18 Delivered ex ship ‘means that the seller delivers when the goods are placed at the disposal of the buyer on
board the ship not cleared for import at the named port of destination. The seller has to bear all of the costs
and risks involved in bringing the goods to the named port of destination before discharging. If the parties
wish the seller to bear the costs and risks of discharging the goods, then the DEQ term should be used.’ See
International Chamber of Commerce, Incoterms 2000, ICC Publication no. 560, at p. 97.
19 The Association of International Petroleum Negotiators’ Model Contract Master LNG Sale and Purchase
Agreement (2012) (the AIPN Model LNG SPA) uses the terms ‘Buyer Delivery Sales’ and ‘Seller Delivery
Sales,’ which are similar to FOB and DES respectively. See AIPN Model LNG SPA, Art. 1. Another option
is delivery ‘Cost, Insurance, and Freight’ (CIF), which ‘means that the seller delivers the goods on board the
vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the
goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring
the goods to the named port of destination. The seller also contracts for insurance cover against the buyer’s
risk of loss of or damage to the goods during the carriage. The buyer should note that under CIF the seller
is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance
protection, it will need either to agree as much expressly with the seller or to make its own extra insurance
arrangements.’ International Chamber of Commerce, Incoterms 2010, ICC Publication No. 715E, at p. 105.
20 Delivered at Terminal ‘means that the seller delivers when the goods, once unloaded from the arriving
means of transport, are placed at the disposal of the buyer at a named terminal at the named port or place of
destination. The seller bears all risks involved in bringing the goods to and unloading them at the terminal
at the named port or place of destination.’ See International Chamber of Commerce, Incoterms 2010, ICC
Publication No. 715E, at p. 53.
21 See P Roberts, Gas and LNG Sales and Transportation Agreements: Principles and Practice, 4th ed., 2014, at para.
11-007.
22 Id. at para. 4-015.
199
Destination restrictions in LNG SPAs

In addition to designating the delivery point, historically, many long-term LNG SPAs con-
tained destination restriction clauses.23 Such provisions restricted the buyer from reselling
the LNG outside of a designated geographic market (usually, the buyer’s home market).24
However, such restrictions have become less common and, as discussed below, the European
Commission has said that such provisions are not permitted in contracts for the sale of
LNG to European buyers.
A seller may want to prevent a buyer from being able to deliver cargos to other destina-
tions because the seller does not want the buyer to compete with it in other markets or to
compete with its other buyers. A seller may also be concerned about the costs of deliver-
ing to alternate destinations and the potential disruption to its transportation logistics and
schedule, or that delivery to a different market than the one designated in the contract may
violate trade restrictions or the terms of the seller’s financing.25
In contrast, a buyer may view the right to deliver LNG cargos to different destinations
as essential to mitigating the take-or-pay risk created by its volume commitment (because it
may not have sufficient customer demand in the designated delivery market to sell gas there
at a profit or to avoid a take-or-pay penalty). A buyer may also have obligations to supply
customers or its own facilities in different locations (for example, a buyer may own facili-
ties such as combined cycle gas turbines in other places) and it therefore may want to have
the contractual right to deliver to multiple destinations. More generally, a buyer may want
destination flexibility to manage its overall portfolio (which may include different sources
of supply with different pricing and other terms) and to pursue arbitrage opportunities.
The European Commission has conducted a number of investigations (involving
both LNG and pipeline contracts) in which it has said that ‘territorial restriction clauses
(re-export prohibitions) and mechanisms having similar effects’, including the effect of
reducing the opportunity for the buyer to pursue arbitrage sales, constitute a ‘severe restric-
tion’ on competition.26 The Commission has made clear that it considers such provisions in
contracts between non-EU producers and European buyers to constitute a ‘serious breach’
of European competition law because they prevent cross-border trade and undermine the
goal of a single integrated gas market in Europe, and has entered into a number of settle-
ments requiring gas producers to change the terms of supply contracts.
The Commission has also stated that profit-sharing mechanisms where ‘the buyer/
importer [has] to share a certain part of the profit with the supplier/producer if the gas is
23 See ‘Evolution of Long-Term LNG Sales Contracts: Trends and Issues’, King & Spalding LLP, dated
29 August 2005, at p. 6. See also S Farmer, ‘LNG Sale and Purchase Agreements’, in P Griffin (ed.), The Law
and Business of LNG, 1st ed, 2008, at p. 52.
24 See P Roberts, Gas and LNG Sales and Transportation Agreements: Principles and Practice, 4th ed., 2014, at para.
4–016. See also S Farmer, LNG Sale and Purchase Agreements, in P Griffin (ed.), The Law and Business of
LNG, 1st ed., 2008, at p. 52.
25 See S Farmer, ‘LNG Sale and Purchase Agreements’, in P Griffin (ed.), The Law and Business of LNG, 1st ed.,
2008, at p. 52.
26 The Commission indicated in its 2002 settlement of its investigation of Nigeria LNG that ‘once the gas is
delivered and paid for, the buyer is free to re-sell the gas wherever it wishes.’ See European Commission
Press Release, ‘Commission settles investigation into territorial sales restrictions with Nigerian gas company
NLNG’, dated 12 December 2002, IP/02/1869.
200
sold on by the importer to a customer outside the agreed territory’ have been used as an
alternative to territorial restriction clauses27 and may restrict competition by dissuading
purchasers from selling cargos outside a designated market even if such provisions do not
expressly prohibit such sales.28 In 2007 the Commission stated, in settling an investigation
of Sonatrach that, in its view, profit-sharing mechanisms are not permissible for LNG sold
on an FOB basis. The Commission indicated, however, the use of profit-sharing mecha-
nisms may be permitted where an SPA provides for delivery on an ex-ship basis and ‘title
of the gas remains with the seller until the ship is unloaded’.29
Destination restrictions are thus generally not included in LNG SPAs with European
buyers and diversion provisions requiring profit sharing are generally understood to only
be permissible while the seller retains title of the LNG.30 It is not clear whether destination
restrictions or profit-sharing mechanisms in FOB contracts violate antitrust or competi-
tion laws in other jurisdictions or how arbitral tribunals will address claims that a particular
contract provision (with a European buyer or otherwise) violates antitrust or competition
laws, although this issue has been raised in arbitrations.
Diversion provisions in LNG SPAs

The option to sell LNG cargos in alternative destinations may be an opportunity to create
additional value for the buyer and the seller. In addition to obtaining a higher price, sending
a cargo to a new destination may result in substantial savings in shipping costs. Because of
this, parties often cooperate in identifying and sharing the benefits from diversion oppor-
tunities even if there is no provision in their SPA requiring that they do so. However, sellers
and buyers can have different views as to whether diversions should be permitted as a right
in an SPA and, if so, under what circumstances a buyer should be permitted to divert cargos
to other destinations.
Provisions addressing the possibility of diverting cargos are increasingly common in
LNG SPAs, and help parties structure diversion rights in order to accommodate their
competing commercial interests. The Association of International Petroleum Negotiators
27 See European Commission Press Release, ‘Commission and Algeria reach agreement on territorial restrictions
and alternatives clauses in gas supply contracts,’ dated 11 July 2007, IP/07/1074.
28 In doing so, the Commission specifically referred to clauses that restrict LNG buyers from selling LNG ‘into
terminals located in a different member state.’ See European Commission Press Release, ‘EC settlement with
E.ON Ruhrgas and Gazprom’, dated 10 June 2005, IP/05/710.
29 See European Commission Press Release, ‘Commission and Algeria reach agreement on territorial restrictions
and alternative clauses in gas supply contracts,’ dated 11 July 2007, IP/07/1074. See also E Wäktare, ‘Territorial
restrictions and profit sharing mechanisms in the gas sector: the Algerian case,’ 3 Comp Pol Newsletter 19,
20 dated 2007 (‘By requiring the importer to share part of the profit gained through the deviation of the
gas to a more profitable destination, the [profit-sharing mechanism] may have an anti-competitive effect, if it
removes or reduces the importer’s incentive to deviate the gas.’). Previously, as a condition to the conclusion
of the Commission’s investigation into its use of territorial restrictions, Nigeria LNG Limited agreed not to
introduce profit-sharing provisions in its SPAs with European purchasers. See European Commission Press
Release, ‘Commission settles investigation into territorial sales restrictions with Nigerian gas company NLNG,’
dated 12 December 2002, IP/02/1869.
30 The AIPN Model LNG SPA takes a similar approach: its model diversion provision applies only to a ‘Seller
Delivery Sale,’ not to a ‘Buyer Delivery Sale.’
201
(AIPN) issued an updated version of its Model Contract Master LNG Sale and Purchase
Agreement in 2012, which contains an optional diversion provision.31
Some diversion provisions are very brief, while others are very detailed. There is a
wide range of approaches to such provisions: (1) some permit the buyer a certain number
of diversions (and some also permit the seller to divert); (2) some set out circumstances in
which the buyer may request diversions and the seller must agree; and (3) some provide
that either the buyer or the seller may propose diversions and the parties will discuss such
proposals in good faith. Many SPAs provide for a combination of these options.
Diversion provisions may also include other limitations or conditions: (1) some limit
the volume of cargos that a purchaser may send to alternate markets; (2) some limit the
number of diversions to which a party is entitled; and (3) some limit the particular destina-
tions to which cargos may be diverted. The parties may also agree on other conditions as
to when diversions may be permitted or refused. For example, the parties may stipulate that
the buyer may not be entitled to divert cargos to alternate markets unless the market price
for gas in the designated market falls below the contract price. More commonly, the parties
may stipulate that the buyer may not have a right to divert a cargo unless the diversion will
not increase the shipping distance or costs, or impair the seller’s vessel from returning to the
loading port in time to make its next scheduled delivery.32 The parties may also stipulate
that the buyer is obligated to pay for any additional costs that the seller incurs in order to
deliver LNG to an alternate destination.
There are different approaches to pricing or sharing the economic benefit from diverted
cargos.33 For example: (1) the parties may have an agreed profit sharing mechanism for
diverted cargos; (2) the parties may need to agree on a price (or a profit sharing mecha-
nism) each time a cargo is diverted or on a profit sharing mechanism; or (3) where the
parties have identified permitted diversion destinations in the SPA, they may also include
pricing provisions for cargos delivered to specified markets (and these price formulae can
be very different from the contract price for non-diverted LNG).
These pricing provisions may also be subject to revision in the event of a change in
the diversion market (and the price review provision for the diversion markets may have
different standards).34
Disputes relating to LNG diversions

As the LNG market has grown, and as short-term changes in demand and supply have cre-
ated more opportunities for price arbitrage by sending LNG to other markets, there have
31 See AIPN Model LNG SPA, at Clause C17. The AIPN model diversion provision provides that a buyer may
request that a cargo be diverted to an alternative discharge port if the diversion will not affect that seller’s
shipping schedule and if the parties are able to agree on a profit-sharing mechanism or other price revision.
32 See AIPN Model LNG SPA, at Clause C17.
33 See E Wäktare, ‘Territorial restrictions and profit sharing mechanisms in the gas sector: the Algerian case’,
3 Competition Policy Newsletter 19, at p. 19 (2007) (‘Typically the contracts provide for a 50/50 split of the
additional profits’). As discussed above, the European Commission has indicated profit sharing is permissible
when LNG is diverted under a DES contract where the seller retains title and bears the costs and risks of
shipping to a different destination).
34 See C Bell, ‘United States: what happens when your gas contract price is linked to one market but you are
delivering into another?’, 1 International Energy Law Review 10, at pp. 10-11 (2009).
202
been an increasing number of price disputes relating to deliveries to other destinations

and diversions.
In some instances, sellers have argued that a buyer’s use of diversions justifies revising
the SPA’s price formula. In these cases, the seller may argue that the contract price was
negotiated in light of the parties’ mutual understanding that the gas supplied under the
contract would be sold only in a particular market, such that a destination restriction effec-
tively constitutes an implied element of the parties’ bargain. The seller may therefore con-
tend that the diversion of cargos to other markets alters the bargain reached by the parties.
Parties also have sought adjustments to the price formulae used in some SPAs to price
LNG delivered to alternate destinations (often on the same or similar grounds as in other
pricing disputes, including that formulae based on competing sources of energy should be
revised to include gas market prices). There have been a range of other disputes, including
as to whether the seller has the right to refuse a diversion proposal and whether (and how)
the parties have agreed to share profits on cargos delivered to other destinations.
Most disputes relating to LNG SPAs are confidential and therefore publicly available
details about disputes relating to diversions are limited. However, the arbitral award in a
dispute concerning diversions between a Trinidad producer, Atlantic LNG, and a Spanish
buyer, Gas Natural, was made public as part of court proceedings in the US, and illustrates
some of the issues that can arise with regard to diversions.35
The dispute arose out of a long-term SPA for the sale of approximately 40 per cent of
the LNG produced at Atlantic LNG’s facility. In the award, the tribunal found that the par-
ties had negotiated their contract price ‘on the assumption that the LNG would be deliv-
ered to and sold in Spain’, including by modelling the contract price on various aspects of
the Spanish energy market.36 The SPA nevertheless permitted Gas Natural to divert some
or all of the LNG cargos to New England in the US, but it did not provide for any change
to the contract price if Gas Natural did so.
When a price difference made selling to the US sufficiently attractive, Gas Natural
elected to divert cargos to New England. Atlantic LNG claimed that these diversions enti-
tled it a price review under the terms of the SPA (which referred without specifying to the
whether the contract price ‘reflected the value of Natural Gas in the end user market’37)
because the contract price reflected the Spanish market and not the New England market.
The tribunal agreed and imposed a revised price formula that was intended to ‘be adaptable
depending on the Buyer’s end user market at the time’. The revised price formula required
Gas Natural to pay a New England-based price in the event that it elected to divert a speci-
fied percentage of cargos to the New England market.38
35 Gas Natural Aprovisionamientos SDG, S.A. v. Atlantic LNG Co. of Trinidad and Tobago, No. 08 Civ. 1109, 2008 WL
4344525 (SDNY 16 September 2008). The tribunal’s Final Award was exhibited in the proceedings (referred
to below as Atlantic LNG v. Gas Natural, UNCITRAL, Final Award).
36 See Atlantic LNG v. Gas Natural, UNCITRAL, Final Award, at paras. 9, 23.
37 See Gas Natural Aprovisionamientos SDG, S.A. v. Atlantic LNG Co. of Trinidad and Tobago, No. 08 Civ. 1109,
2008 WL 4344525, at *1, *2 (SDNY 16 September 2008).
38 See Atlantic LNG v. Gas Natural, UNCITRAL, Final Award, at para. 60. See also Gas Natural Aprovisionamientos
SDG, S.A. v. Atlantic LNG Co. of Trinidad and Tobago, No. 08 Civ. 1109, 2008 WL 4344525, at *2 (SDNY
16 September 2008).
203
While widely cited, the decision in is controversial, including because the tribunal
appears to have imposed a remedy that neither party proposed. It also turns on the spe-
cific contractual provisions in the SPA and the tribunal’s findings concerning the parties’
expectations. It nonetheless reflects some of the issues that can arise concerning diversions,
particularly where the parties have not included detailed diversion provisions.
Potential issues relating to the re-export of LNG

LNG terminals are often capable of both unloading and loading LNG. As supply and
demand has shifted in international markets, some buyers have re-exported LNG after tak-
ing delivery of it to sell it to higher-priced markets. A buyer that has imported LNG may
export LNG because it does not have a contractual right to divert cargos (or the seller has
refused to do so) or because sufficient LNG is available in the import market and it can be
sold more economically to a different market.
In order to export LNG, the buyer may be able to make a ship-to-ship transfer (usually
to smaller vessels). LNG also may be unloaded and sent to storage facilities at the LNG
terminal, where it is commingled with LNG in the storage tanks. A buyer may then use
the commingled LNG from several deliveries (or purchase LNG from other importers) to
load a cargo onto a vessel or vessels to sell to another destination. Some terminals in the
US have been used to load LNG for delivery to other destinations (rather than regasifying
it) since the 1970s. LNG terminals in Spain began loading larger volumes of LNG in the
late 1990s;39 other LNG terminals in Europe and elsewhere have begun to load LNG more
recently.40
While these activities are sometimes referred to as ‘reloading’, which implies that a
cargo of LNG has been unloaded by the buyer and that cargo has then been transferred to
a new vessel for re-export, the reality of exporting LNG is more complicated. Due to the
‘boil-off ’ of LNG while it is transported, unloaded and stored, there will not be sufficient
LNG from one cargo to load a full cargo onto another LNG tanker.
Like diversions, the ability to load LNG provides a buyer with the ability to mitigate
its take-or-pay risks, manage storage constraints, manage its supply portfolio and engage in
price arbitrage. Unlike a diversion, however, a buyer loads LNG after it takes title and load-
ing does not involve additional costs or risks for the seller (as the seller is not involved in
the loading operation or the delivery of the loaded LNG to another destination). Moreover,
unlike a diversion, where it may be possible to reduce shipping costs, loading LNG typi-
cally involves incurring additional shipping costs (because the LNG is delivered twice), as
well as the costs of storing and loading the LNG, which can be substantial.41 Because of
these added costs, ‘a premium well in excess of shipping costs is required to incentivize the
re-exporting of gas’.42 There also can be other logistical constraints which limit a buyer’s
39 See ‘Case study: LNG terminals under regulation: the Spanish experience’, Enagas, dated 25 March 2014, at
p. 44.
40 LNG was re-exported from ten countries in 2016. See International Gas Union, World LNG Report –
2017 Edition, at p. 10.
41 See ‘Atlantic Basin LNG reloading trend could develop soon in Asia market’, Facts Energy Global, dated
14 February 2014.
42 ‘Will European LNG reloads continue?,’ Timera Energy, dated 26 August 2013, at p. 4.
204
ability to export LNG (including having sufficient LNG, timely access to the LNG termi-
nal and available shipping capacity).43
Thus, while the ability to load LNG may allow a buyer with limited or no diversion
rights to sell LNG to other markets, loading LNG is usually less efficient than diverting
LNG. Indeed, in many cases where it would have been profitable to divert a cargo to
another market, it will not be economical to load LNG to pursue the same opportunity.
Because of this, LNG cargos began to be loaded in larger amounts from Spain, for exam-
ple, only when very substantial price differences developed between Europe and Asia and
South America.44
There have been a number of recent disputes involving loading of LNG for delivery to
other destinations. While the details of those disputes are not public, where the SPA does
not permit diversions or limits their availability, a seller may argue that loading LNG is
inconsistent with the parties’ expectations or an attempt to evade contractual limitations.45
However, in many SPAs, there are no limits on what the buyer may do after it takes title
to the LNG. Moreover, the rationale for sharing the benefit gained when parties agree to
divert a cargo does not apply when LNG is loaded by the buyer after title has shifted to it
and the buyer bears all the costs and risks of the loading and subsequent sale.
Profit sharing in these circumstances also potentially raises competition law issues.
Indeed, the European Commission reasoned that it was impermissible to share profits on
diversions where LNG was sold on an FOB basis because the diversion takes place after
delivery to the buyer when the seller no longer has title to the LNG. That logic would
appear to apply equally to LNG that is re-exported after delivery to a market.46
As loading of LNG becomes more common, it is likely that there will be more disputes
about its consequences for existing supply contracts. Arbitral tribunals are just beginning
to address these issues, and it is not clear to what extent, if at all, sellers will be able to
43 See European Commission Quarterly Report on European Gas Markets,Vols. 6-7, 2013-2014, p. 14 (noting
that buyers loading cargos ‘face a number of logistical constraints and associated costs ... such as reloading
times, energy lost via boil-off and how long gas can be kept in terminal before it needs to be discharged.’).
44 See ‘Spain Plans 30% Hike in Third-Party LNG Reload Costs’, Downstream Today, dated 27 June 2012, at p. 1.
See also ‘Gas price convergence stalls Spanish LNG exports’, Reuters UK, dated 29 April 2015, at p. 1.
45 See ‘Secondary Markets for LNG Exports: Legal implications of ‘reloads’ for LNG Sales Agreements’, HWL
Ebsworth, dated 27 February 2014 (suggesting that ‘A buyer who obtains an advantage through arbitrage
opportunities via ‘reloads’ may potentially be found to be in breach of its LNG Sale and Purchase Agreement
if it is found to have engaged in strategic behaviour designed to evade contractual obligations. This may
potentially occur where the buyer engages in a systematic series of trades which are found to have the effect
of injuring the right of the seller to receive a benefit under the agreement. Much will turn on the provisions
of the contract itself and the activities undertaken, however, there is potential for a buyer to be found to be in
breach of its implied duties of good faith and fair dealing under the contract in these circumstances.’).
46 As discussed above, commentators have therefore interpreted the Commission’s settlements in the Nigeria
LNG Limited and Sonatrach investigations as precluding a seller from restricting the buyer’s use of LNG
or sharing in profits after delivery by the seller. See E Wäktare, ‘Territorial restrictions and profit sharing
mechanisms in the gas sector: the Algerian case’, 3 Competition Policy Newsletter 19, at p. 21 (2007) (‘Once
title and risk pass to the buyer the PSMs should not be applied.’). See also European Commission Press
Release, ‘Commission and Algeria reach agreement on territorial restrictions and alternative clauses in gas
supply contracts,’ dated 11 July 2007, IP/07/1074; European Commission Press Release, ‘Commission settles
investigation into territorial sales restrictions with Nigerian gas company NLNG,’ dated 12 December 2002,
IP/02/1869.
205
seek to revise the contract prices in long-term SPAs because the LNG delivered may be
re-exported to different markets.
Conclusion
As global trade in LNG continues to evolve, there will be more disputes relating to the
delivery and re-export of LNG, particularly under SPAs that may have only addressed such
issues in broad terms, if at all. Moreover, as parties shift away from long-term supply con-
tracts and enter into shorter and more flexible agreements, new and different disputes will
arise. As with the disputes that have already resulted in arbitrations, the specific contractual
language agreed by parties regarding the destination and use of the LNG will be critical in
resolving these disputes.
206
14
Gas Price Review Arbitrations: Changing the Indexation Formula
Marco Lorefice1
In the first edition of this book, the author illustrated his experience of gas price reviews
and, in particular, the key factors required to properly run the process.2 The intention was
to help arbitrators involved in price review proceedings to implement a methodology to
resolve those controversial and decisive issues they inevitably have to cope with, and to take
the right direction at any crossroads that would be decisive for the case. It derived from
the development of the first two rounds of price reviews that took place in continental
Europe from 2010 to 2015 and that were all based mainly on the decoupling of the oil and
market prices.
Rather than rising or falling at the same pace, as had usually happened before the first
round of arbitrations, oil prices started to rocket in 2010 (before beginning a rapid descent
in autumn 2014) while gas market prices decreased. This amplified the negative difference
between the prices at which the gas could have been resold by buyers in the market and
the contract sales price of the gas, which was indexed to oil prices.
A third round of price reviews commenced in 2015 in an environment of unusually
low oil prices and resulted in a series of awards in favour of the buyers.
If the two first rounds of price reviews generally sought a review of the ‘P0’ element
of the contract sales price, the new generation of reviews seems to be different. The main
reason is that the contract sales prices in the existing long-term sales and purchase con-
tracts were disconnected to the market prices and such disconnection was obvious with
the occurrence of the decoupling. As already explained in the previous publication3 this
situation predominantly related to continental Europe and Asia.
At the outset of the gas industry in Europe, there was a need to link the contract sales
prices to competing fuels in the absence of liquidity in gas trading markets. Following
1 Marco Lorefice is a senior lawyer with Edison Spa.

2 Marco Lorefice ‘Crossroads in Gas Price Review Abitrations, J William Rowley (ed), The Guide to Energy
Arbitration, (Global Arbitration Review 2015) at pages 161-172.
3 Ibid at page 161.
207
European gas market liberalisation and the subsequent creation of several gas trading hubs,
where the gas prices reflect the market value of gas, this approach has become obsolete.
Changing the indexation element of the contract price from oil to gas market prices has
become key. This has been recognised by industry4 and regulatory bodies.5 This is also
reflected in the new long-term gas sales and purchase contracts executed in the past few
years, where price review clauses are no longer as relevant because the contract sales price
has changed indexation formula from oil-linked to hub-priced.6
As well as its significance to the value of gas sale and purchase contracts, this also has
implications for tribunals who have to decide on the methodology to adjust the contract
sales price based on the indexation formula of P0 rather than on P0 only.
The issue of the power of the tribunal to change the indexation formula and not just
the P0 element of the contract sales price was already briefly illustrated in the previous pub-
lication.7 The scope of the present work is to dig into the details of several aspects involved
in the price review process where a change in the indexation formula is requested.
Changing the indexation formula

Arbitrators deliberating on the change of the indexation formula of a long-term oil-linked
gas sales and purchase contract do not face an easy task. It cannot be resolved in isolation
without the assistance of the parties. The wording of the price review clauses in the exist-
ing long-term gas sales and purchase contracts entered into at the time of no gas-to-gas
competition, which still predominate, form the basis for most of the problems.
These clauses were written in a very vague language and only thanks to the efforts of
tribunals and practitioners has it been possible to identify a set of general rules of interpre-
tation that constitute the basis for their enforcement. Nowadays these clauses appear to be
outdated and unsuitable for the changing market. However, the tribunals in price review
proceedings still have to interpret old clauses like the following:
Each of the Parties shall be entitled to request a revision of the applicable Contract Sales Price,
provided that the market of the country of final destination of the natural gas shall undergo
changes of such nature and extent that would justify a revision of the Contract Sales Price to
enable the Buyer to maintain a reasonable marketing margin assuming the application of the
principles of sound marketing practices and efficient management by the Buyer.
The main task of the tribunal is that of revising the contract sales price. In the gas industry,
a price review is usually based on four (or sometimes three) steps, whereby the failure of
4 For example, in Italy, Eni Spa has stated that as of the end of 2015 approximately 70 per cent of its portfolio
(22.46 Bcm) is hub-linked, ‘Eni, Relazione Finanziaria Semestrale Consolidata al 30 giugno 2016’, at page 51.
5 According to the Italian Regulator, the AEEGSI, about 50 per cent of the gas imported in Italy on a
long-term basis (over five years) was hub-indexed in 2015 ‘Relazione Annuale sullo Stato dei Servizi e
sull’Attività Svolta’, of 31 March 2016, at page 126.
6 The gas to be imported into Italy from Azerbaijan through the Tap pipeline has been negotiated on hub
prices, see Il sole 24 ore, ‘Gas azero a prezzi sganciati dal petrolio’, 11 April 2014.
7 Lorefice at 167.
208
the claimant, seeking either a reduction or an increase in the applicable contract sales price,
to pass any step would bring the process to an end.
The first step, namely to determine if the significant changes have occurred during the
review period, would remain the same, as it is not affected by the request to change the
indexation formula. The claimant must always demonstrate that a ‘change’ to the market
conditions has occurred.
The second step is to verify if, at the review date, such changes are not reflected in
the contract sales price, and the third is to determine if the buyer is able to economically
market the gas. As with the first step, these steps are not affected by a price review request
seeking a change in the indexation formula. Indeed, the test necessary to run the check on
steps two and three, namely the delta of delta test, is based on the value of the contract sales
price against the market value of the gas in the given market. They are a matter of fact. It is
a comparison between the contract sales price and the market prices at the beginning and
at the end of the review period.8
Therefore, it can be assumed that, all the preconditions to change the contract sales
price whether relating to the P0 element only or to the indexation formula as well, remain
unchanged. They constitute the basis of the right of the claimant to have the contract sales
price reviewed.
The most important difference is around the last step, when the arbitrators and the par-
ties have to run the market test to change the contract sales price to determine what is the
appropriate level of the contract sales price at which the buyer is able to sell the gas in the
market economically, namely its reasonable margin. The obtainability test is a key factor in
this process.9 As the tribunal has to consider a change in the indexation formula and not
just in P0, the preference to refer to the buyer’s actual obtained prices rather than to the
prices obtainable in the market and therefore to disregard the market data of a hypothetical
buyer, could be disputed.
If in the change of the P0 element only, preference must be given to the buyer’s obtained
prices in the relevant market, when the indexation formula is challenged the validity of this
approach becomes doubtful.
8 The implications of these two steps have already been discussed by the author in the previous edition of
this publication.
9 M Leijten and M deVries Lentsch, Gas Price Arbitrations – A Practical Handbook, 2014; edited by M Levy,
Published by Global Law and Business-Global Business Publishing Ltd, at page 42.
209
The change of the indexation formula requires eliminating in the contract sales price
the reference to the oil basket indexation and to the P0 element as indicated below:10
Contract Sales Price = P0+(G-G0)+(LSFO-LSFO0)+(GR-GR0)+(HSFO-HSFO0)-BR
and replacing it as indicated below:
Contract Sales Price = TTF-D
The hub reference generally used in Europe is the TTF, though in some countries the
increasing liquidity of the gas markets has created specific country hub prices.11
It could be argued that the change from oil-linked to hub-price indexation should be
made by making reference to the obtainable prices in the relevant gas market disregarding
the actual prices obtained by the buyer and its market segmentation. If the indexation refers
directly to the market, it could appear at first blush to be logical.
However, even if the contract sales price is the hub price, the market segmentation and
the prices obtained by the buyer are still relevant. In fact, when the tribunal runs the market
test, it should assume a contract sales price that would always entitle the buyer to obtain a
reasonable margin on its own sales. To do so the tribunal should calculate the contract sales
price based on the algebra calculations of the hub prices – in general the average monthly
prices at the given hub of the month preceding the month of the day of the review date,
adding or deducting the necessary value to the hub to arrive at the level that, at the review
date, would allow the buyer to obtain a margin the tribunal deems appropriate.
The logic of revising the contact sales price following a request should not change
depending on the nature of the request.
The main question is how the tribunal should determine the revised contract sales
price. There are two possibilities.
The first is to determine a sort of ‘fixed’ price by taking the hub reference price and
adjusting it, as the case may be, by adding or deducting a value expressed in the currency
of the contract, and eliminating the P0 element of the contract sales price. The final result
should be a contract sales price that would allow the buyer to sell the gas economically in
the market taking into consideration its own market segmentation.
It could be argued that the end result would result in a major change in the structure
of gas sales and purchase contracts as it would embed the principle of a potential guar-
anteed margin to the buyer. However, today this methodology is frequently used for sales
of gas into end markets and it is also frequently used in the gas industry when seller and
buyer agree to revise the contract sales price by changing indexation, or when they enter
10 Where TTF is for each month of delivery the arithmetic average of the Heren Price expressed in €/MWh, for
all days of the relevant month. Each day, the Heren Price shall be the mean average of the bid and offer prices
under the title ‘TTF Price Assessment’, as published in the ICIS Heren European Spot Gas Markets of the
closest previous London business day, for the following trading products: ‘day ahead’, if the concerned day is a
London business day; ‘weekend’, if the concerned day is not a London business day. D is the x.y euro/MWh
converted monthly from euros to dollars.
11 For example the Punto di scambio virtuale (PSV) in Italy.
210
into a new sale and purchase contract. It could well be said that this is the new trend in
the industry.
The second is to maintain the P0 element of the contract sales price and to change the
indexation from oil to hub prices. However, in this case the tribunal should also change
P0 to arrive at the intended result. In fact, the P0 element relates to the contract sales price
level while the indexation formula relates to the movement of the contract sales price.
Changing only the indexation formula to the hub prices would have the effect of locking
the contract sales price to the market prices but would not necessarily enable the seller to
obtain the margin it deserves under the contract.This would be the same as pretending that
hedging the oil indexation formula basket products would be the solution to every price
revision and to the fluctuation between contract sales prices and market prices. Obviously,
this is not the case, as, in the gas industry, hedging the oil products of the indexation for-
mula is far from being the right solution.
This second methodology relates to the scenario where the parties or the tribunal
decide only to partly change the indexation formula from oil-linked products to the hub
prices. It is very obvious that in such case there is still the need for a P0 element.
In general, it can be said that for tribunals to decide if and how to change the indexation
formula incorporating hub prices into the contract sales price is a very difficult task that
could hardly be achieved without the full cooperation of the parties and their experts, who
would play a role of paramount importance. The tribunal should also consider appointing
its own expert.
In conclusion, the process to review a contract sales price by changing the indexation
formula and eliminating the P0 element would not be much different from the process in
place to review a P0 element only when oil-linked. With the change to hub-price indexa-
tion the contract price would automatically adjust to the price of the market, as such that
it could be defined as an automatic adaptation clause.
The authority of the tribunal to change the indexation formula

In any gas price review proceeding, either party or both parties may request the switch
from an oil-linked to a hub-price indexation formula, unless it is expressly prohibited by
the contract. If the contract generally provides for the right of either party to request a
review of the contract sales price, it can be assumed that the tribunal may change or elimi-
nate the P0 and change the indexation formula. In fact the contract sales price is always
the end result of the price review, and what really matters is the final result. Therefore the
tribunal may review the contract sales price at it wishes to do. In practice, some contracts,
however, expressly limit the review to the P0 element, in which case the authority of the
tribunal would be limited.
In the Atlantic LNG case the tribunal went even further. It decided to change the
indexation formula even though neither party had requested it. This approach has given
rise to doubts that the award was ultra petita.12
12 Gas Natural Aprovisionamientos, SDG, S.A. v. Atlantic LNG Company of Trinidad and Tobago in the United States
District Court for the Southern District of NewYork (2008) WL 4344525 (S.D.N.Y.).
211
The other elements to take into consideration to determine the existence and extent
of the tribunal’s authority to change the indexation formula are the governing law of the
contract, the procedural legislation of the place of arbitration and the terms of reference
agreed by the parties.
The effects of changing indexation formula on the contracts

As discussed above, changing the indexation formula of the contract sales price by the
agreement of the parties or by the tribunal will have the same result as changing the P0 ele-
ment, in either case the applicable contract sales price has been reviewed.
Although changing the indexation formula rather than P0 would apparently not change
the end result, the consequences on the gas sales and purchase contract will be very different.
In first place, the risk allocation widely recognised in the industry13 whereby the buyer
assumes the volume risk through take-or-pay provisions and the seller assumes the price
risk through the indexation formula would be dismantled, as would the parties’ right to
periodically review the contract sales price.
With the oil-linked formula the seller takes periodically the risk of the P0 element as
an essential part of the contract sales price, every time that a request of price review is sub-
mitted by either party (in general every three years). In other words the seller takes the risk
of the decoupling between the contract sales price and the market price as the buyer must
be able to sell the gas economically. With the change of indexation to hub prices and the
elimination of the P0 element, the result is that the risk of the spread between the contract
sales price and the market prices is taken on average every month, and not periodically.The
price risk may then change its nature and become a ‘market risk’.
Some may assume that also the volume risk taken by the buyer should be amended to
reflect the increased risks taken by the seller with the hub prices indexation.
In the new era of long-term gas sales and purchase contracts such change involves a
deletion of the buyer’s contract flexibility through an increase up to 100 per cent of the
level of take-or-pay and the consequent exclusions of make-up rights.
The effect of such change would, however, result in a change of the very nature of such
contracts, from take or pay to take and pay.
Second, the switch to a full indexation to hub prices would also have the effect of dis-
mantling the price review clause. The definition and interpretation of the buyer’s market
and of the market value would no longer have any meaning. It would not be necessary to
determine the market value as it would be that of the hub prices. The delta of delta meth-
odology would become useless.
13 Ana Stanic̆ and Graham Weale, Changes in the European Gas Market and Price Review Arbitrations, page
325, Journal of Energy and Natural Resources Law,Vol. 25, No. 3 (2007); International Energy Law and Policy
Research Paper Series Working Research Paper Series No. 2010/03, Centre for Energy, Petroleum &
Mineral Law & Policy, University of Dundee (24 February 2010); A J Melling, Natural Gas Pricing and its
future: Europe as the battleground, Carnegie Endowment for International Peace, 2010; Morten Frisch, Current
European Gas Pricing Problems: Solutions Based on Price Review and Price Re-Opener Provisions, page
17, International Energy Law and Policy Research Paper Series Working Research Paper Series No. 2010/03,
Centre for Energy, Petroleum & Mineral Law & Policy, University of Dundee (24 February 2010); Jonathan
Stern, Continental European Long-Term Gas Contracts: is a transition away from oil product-linked pricing
inevitable and imminent?, page 16, Oxford Institute for Energy Studies (September 2009).
212
One interesting issue would be if the market margins at the wholesalers would change
during the review period. Assuming that the new formula is the hub price minus a certain
value, if that value has diverged from the market value, the question is if a price review
could be requested to change such deduction from the hub prices to align the contract sales
price to market value, namely if the possibility of the buyer to economically market the gas
would be assessed against the general trend of the other market players.
Conclusions
A new era for gas long-term sales and purchase contracts has begun. The system created in
the 1960s to trade gas long term with take-or-pay contracts is changing. The driving force
of this change is the switch from oil-linked prices to hub prices. Inevitably, the existing
format of gas long-term sales and purchase contracts is being profoundly reconsidered by
the industry.
Are the ‘old’ contracts outdated? This seems to be the most fascinating question arising
out of a decade of gas price reviews in continental Europe, which put enormous pressure
on the oil-linked price formulae. This period has seen no less than three waves of price
reviews, many of which have been resolved by arbitrations. If in the first wave (2010–2012),
it was not an impossible exercise for the buyers to demonstrate decoupling between oil
and market prices and their consequent incapability to sell the gas economically. With the
second wave (2012-2015) the parties began to consider the resolution of the difficulties
originating with the decoupling differently. With the final wave of price reviews begun in
2015, it has become obvious that the most efficient way to restore the equilibrium of the
contract without requiring periodically the intervention of the tribunals was to eliminate
the oil-linked formulae and to replace them with a system incorporating an automatic
adaptation of the contract sales price to the market prices.
The reasons justifying the replacement of oil-linked formulae with hub-price indexa-
tion are found in the liberalisation and the increased liquidity of the markets that created
several trading hubs in continental Europe. There is no need of referring to the gas to gas
competition any more.
However, this is not new for the United States and the United Kingdom, where this
system has been in place for a long time. As has been noted: ‘[t]he market conditions in
Europe have some striking similarities to those in the United States in the 1980s and
the United Kingdom in the 1990s, leading some commentators’ to predict the end of
long-term oil linked-pricing’.14
Increasingly the new generation of long-term gas contracts resemble the short-term and
spot contracts as regards contract sales price and flexibility. Indeed, these ‘new’ long-term
contracts have a new structure to reflect a change in the risk allocation, whereby the con-
tract sales price is fully indexed to hub prices and along with such changes the flexibility
granted in the ‘old’ system tends to disappear with volume clauses referring to 100 per cent
of the agreed quantity of gas to be taken and the make-up rights no longer available to the
14 B Holland and P Spencer Ashley, ‘Natural Gas Price Reviews: Past, Present and Future’, Journal of Energy &
Natural Resources Law,Vol. 30, No.1, 2012, page 42.
213
buyers. Price review clauses are becoming meaningless, and with that the relevance of the
principles of ‘market of the buyer’ and ‘economically market the gas’.
One could wonder if the next contractual provision to be affected by the changes con-
templated with the switch from oil-linked to hub-price formulae will relate to the duration
of the contracts, and with that the industry’s need for long-term contracts themselves. It
is safe to assume that for the construction of new pipelines long-term contracts may be
necessary to assure the return on the investment but, maybe, this will be the last change in
the industry if the fears of Europe’s national governments and the European Union related
to the security of supply will permit such change and align the conditions on which gas is
imported to those in place in the United States and in the United Kingdom.
The future of price review clauses and of their application is becoming doubtful. The
end result produced by this new trend would be the change in the nature of the gas sales
and purchase contracts from a take or pay to a take and pay basis with all consequences
arising therefrom.
214
Part IV
Procedural Issues in Energy Arbitrations
15
Multi-Tier Dispute Resolution Clauses as Jurisdictional Conditions
Precedent to Arbitration
George M Vlavianos and Vasilis F L Pappas1
In the energy industry, multi-tier dispute resolution clauses have become commonplace,
particularly in complex construction contracts, joint venture agreements and other contracts
where long-term relationships are created and continuous cooperation is contemplated.2
Multi-tier dispute resolution clauses state that when a dispute arises, parties must
undertake certain steps prior to commencing arbitration, in an attempt to amicably settle
the dispute.
While there are a number of benefits to such clauses, there are also drawbacks. Moreover,
some uncertainty exists as to whether such clauses are binding, whether they constitute
jurisdictional conditions precedent to the commencement of arbitrations, and what the
consequences of a party’s failure to comply are. Indeed, there remain differing opinions
among national courts with respect to the effects of non-compliance on an arbitral tribu-
nal’s jurisdiction.
This chapter will explore the benefits and drawbacks of multi-tier clauses, and identify
how various jurisdictions around the world have addressed whether they constitute juris-
dictional conditions precedent to the commencement of arbitration. This paper will then
outline considerations for transactional lawyers and parties incorporating multi-tier clauses
into their agreements, and how arbitration practitioners should deal with such clauses
when they encounter them.
1 George M Vlavianos is the managing partner of Bennett Jones (Gulf) LLP and Vasilis F L Pappas is a partner
of Bennett Jones LLP. The authors would like to express their gratitude to John Siddons, Jonathan McDaniel,
and Stephanie Clark for all of their assistance in the preparation of this article.
2 Didem Kayali, ‘Enforceability of Mutli-tiered Dispute Resolution Clauses’ (2010) 27:6 Journal of International
Arbitration 551 at 552.
217
Multi-Tier Dispute Resolution Clauses as Jurisdictional Conditions Precedent to Arbitration
Function, benefits and drawbacks of multi-tier dispute resolution clauses

Definition
In its simplest form, a multi-tier clause will require parties to engage in a single step prior
to commencing arbitration, such as negotiations among party representatives for a defined
period. In its more complex forms, a clause may require parties to undertake multiple steps
prior to commencing arbitration, such as negotiation among lower-level representatives,
followed by negotiation by higher-level representatives, followed by formal mediation or
conciliation proceedings, all for defined periods. By including a multi-tier clause in a con-
tract, the parties signal that efforts should be made to settle a dispute prior to arbitration,
and that arbitration will only be sought as a last resort.3
Benefits
There are a number of benefits to multi-tier dispute resolution clauses. For example:
• they provide the parties a contractually mandated opportunity to resolve disagreements
relatively inexpensively without incurring the costs and delays associated with actual
arbitration proceedings;
• they provide a contractual ‘cooling-off period’ during which the parties can reassess and
evaluate whether to strike a compromise outside of the antagonistic and contentious
arbitral context, which may yield more fruitful and beneficial settlement discussions;
• they can be particularly useful in circumstances where parties have a long-term com-
mercial relationship that they wish to preserve; and
• they may enable the parties to narrow the issues to be arbitrated, by settling those issues
on which they find common ground in advance of arbitration, resulting in a more effi-
cient and cost-effective arbitration.4
Drawbacks
Multi-tier clauses may also give rise to several negative effects that should be given careful
consideration. Depending on the circumstances, such clauses could give rise to the following:
• pre-arbitration negotiations where the parties are entrenched in their positions and the
possibility of reaching an agreement is futile can lead to an unnecessary waste of time
and expense;
• the obligation to conduct pre-arbitration negotiations can impair a party’s ability to
secure interim measures in time-sensitive disputes by postponing the commencement
of an arbitration;
3 Nigel Blackaby et al. Redfern and Hunter on International Arbitration 6th ed, (Oxford: Oxford University Press,
2015) at para 2.88; Alexander Jolles, ‘Consequences of Multi-tier Arbitration Clauses: Issues of Enforcement’
(2006) 72:4 Arbitration 329 at 329; Oliver Krauss, ‘The Enforceability of Escalation Clauses Providing for
Negotiations in Good Faith Under English Law’ (2015-2016) 2:142 McGill Journal of Dispute Resolution
142 at 143; Craig Tevendale, Hannah Ambrose & Vanessa Naish, ‘Mutli-tier Dispute Resolution Clauses and
Arbitration’ (2015) 1:31 Turk. Com. L. Rev. 31 at 32.
4 Gary Born & Marija Scekic, ‘Pre-Arbitration Procedural Requirements, A Dismal Swamp’ in DD Caron,
Practising Virtue: Inside International Arbitration (Oxford: Oxford University Press, 2016) 227 at 230; Kayali, supra
at 552-53; Krauss, supra at 144-145; Tevendale supra at 32-33.
218
• in particularly complex disputes, where additional claims are discovered or developed

after an arbitration has commenced, multi-tier clauses can lead to objections on the
ground that they were not expressly negotiated during pre-arbitration negotiations;
• multi-tier clauses can lead to objections to counterclaims made in an arbitration that
were not specifically discussed and negotiated at pre-arbitration negotiations on the
basis that such counterclaims were not first subject to settlement discussions; and
• where a limitation period is set to expire before the contractually mandated negotiation
period, a claim can be barred.5
In view of the foregoing, while there are benefits to multi-tier dispute resolution clauses,
they are not without risks, and could impose significant challenges depending on the
nature of the claims in dispute as well as procedural concerns.
Non-compliance
A number of national courts and arbitral tribunals have found that the pre-arbitral steps in
a multi-tier dispute resolution clause constitute jurisdictional conditions precedent to the
commencement of arbitration. In other words, they have ruled that where a party fails to
carry out the contractually mandated pre-arbitral steps, a tribunal does not have jurisdiction
to hear a dispute. Accordingly, a failure to comply with the pre-arbitral steps in a multi-tier
clause carries with it significant risks. If a jurisdictional objection is addressed by a tribunal
early in the arbitral proceedings, the arbitration might be dismissed for lack of jurisdiction.
If, on the other hand, a jurisdictional objection is addressed by a tribunal in the final award,
a national court could set aside or otherwise refuse to enforce it.
The question of whether the pre-arbitral steps in a multi-tier clause constitute jurisdic-
tional conditions precedent to arbitration is answered differently from jurisdiction to juris-
diction. Generally speaking, most national courts and arbitral tribunals have been reluctant
to find that pre-arbitral steps constitute jurisdictional conditions precedent to commencing
arbitration, absent clear language to that effect within the multi-tier clause. However, a
number of jurisdictions appear to be more inclined to find such steps to constitute juris-
dictional conditions precedent, even in the absence of clear language.6
In the sections that follow, we will review recent national court decisions and arbitral
awards involving multi-tier dispute resolution clauses to assess the degree to which these
clauses have been held to constitute jurisdictional conditions precedent to arbitration. This
review is not intended to be an exhaustive comparative analysis of how courts and tribu-
nals around the world have addressed this issue, but rather is set out solely for illustrative
purposes. Following this review, advice will be provided on how to mitigate some of the
potentially resulting uncertainty, in terms of drafting, and initiating arbitration pursuant to,
multi-tier clauses.
5 Kayali, supra at 553; Tevendale, supra at 34.

6 Louis Flannery and Robert Merkin, ‘Emirates Trading, Good Faith and Pre-Arbitral ADR Clauses: A
Jurisdictional Precondition?’ (2015) 31 Arb Int’l 63 at 65-66; Born, supra at 228.
219
Recent treatment of multi-tier dispute resolution clauses by national courts

England and Wales
Historically, English courts have been reluctant to find that pre-arbitral steps in multi-tier
dispute resolution clauses constitute jurisdictional conditions precedent to arbitration,
absent clear language to that effect. These decisions stem primarily from the House of
Lord’s decision in Walford v. Miles, in which Lord Ackner held that a bare agreement to
negotiate was unenforceable as a mere ‘agreement to agree’.7
For example, in Sulamerica CIA Nacional de Seguros v. Enesa Engenharia,8 the Court of
Appeal was presented with a multi-tier clause that required that ‘prior to a reference to
arbitration, [the parties] will seek to have the Dispute resolved amicably by mediation’,
and that:
If the Dispute has not been resolved to the satisfaction of either party within 90 days of service
of the notice initiating mediation, or if either party fails or refuses to participate in the mediation,
or if either party serves written notice terminating the mediation under this clause, then either
party may refer the Dispute to arbitration.9
The issue presented to the Court of Appeal was whether mediation was a binding condi-
tion precedent to the commencement of arbitration. The Court held that it was not, as it
did not contain clear language to that effect and did not define the obligation to mediate
with sufficient certainty. In particular, the Court held that the multi-tier clause ‘did not set
out any defined mediation process, nor does it refer to the procedure of a specific media-
tion provider’. Rather, it ‘contain[ed] merely an undertaking to seek to have the dispute
resolved amicably by mediation’ and ‘[n]o provision [was] made for the process by which
that [was] to be undertaken’.10 Accordingly, the court ruled that mediation was not a juris-
dictional condition precedent to arbitration.11
Similarly, in Tang Chung Wah & Anor v. Grant Thornton International Ltd,12 the contract at
issue contained a multi-tier dispute resolution clause that provided that prior to commenc-
ing arbitration, the parties were required to refer disputes to conciliation for one month,
after which the parties were required to refer disputes to a panel of three individuals identi-
fied in the clause. The clause made clear that until those steps were undertaken ‘no party
may commence any arbitration procedures in accordance with this Agreement’.13
The claimant in that case commenced an arbitration against the respondent without
fulfilling the pre-arbitral steps, and the respondent asked the tribunal to dismiss the claim
for lack of jurisdiction.The tribunal found that it had jurisdiction, so the respondent sought
to have this determination set aside by the High Court (Chancery Division). Ultimately,
the High Court upheld the tribunal’s ruling, and held that the pre-arbitral steps in the
7 [1992] 1 All ER, at 460.

8 Sulamerica CIA Nacional de Seguros v. Enesa Engenharia, [2012] EWCA Civ 638.
9 Ibid at para 5.
10 Ibid at para 36.
11 Ibid.
12 [2012] EWHC 3198 (Ch).
13 Ibid at para 27.
220
multi-tier clause did not constitute binding conditions precedent to the commencement
of arbitration, because they did not contain clear language to that effect and did not ade-
quately specify the form in which the pre-arbitral steps should proceed. Specifically, the
High Court held that the multi-tier clause did not indicate:
what form the process of conciliation should take (apart from the injunction that it is to be
undertaken ‘in amicable fashion’), . . . who is to be involved and what (if anything) they are
required to do by way of participation in the process, . . . [or] what the obligation to attempt to
resolve the dispute or difference requires the [conciliator] to do.14
When read together, Sulamerica and Tang evidence the high threshold that English courts
have historically applied when determining whether a multi-tier clause is a jurisdictional
condition precedent, as well as the English courts’ hesitation in enforcing pre-arbitration
requirements as binding conditions precedent to the commencement of arbitration.15
Very recently, however, a decision from the High Court (Commercial Court) appears
to challenge the English courts’ reluctance in this regard. In particular, in Emirates Trading
Agency LLC v. Prime Mineral Exports Private Limited,16 the contract at issue contained a
multi-tier clause that required the parties to negotiate for four weeks prior to commenc-
ing arbitration. The claimant commenced an arbitration against the respondent, and the
respondent brought an application to the High Court seeking an order that the tribu-
nal lacked jurisdiction on the ground that the parties had allegedly failed to negotiate as
required by the multi-tier clause. In the event, and in apparent contradiction to Sulamerica
and Tang, the High Court held that negotiation was a ‘condition precedent to the right to
refer a claim to arbitration’,17 but ultimately found that on the facts of that case, the parties
had sufficiently negotiated to confer jurisdiction on the tribunal.
It remains to be seen whether the holding in Emirates Trading will be followed in sub-
sequent English decisions, or whether it is a mere outlier; it is a lower court case, while
Sulamerica is from the Court of Appeal. Further, Emirates Trading has been heavily criticised
by international arbitration practitioners and commentators as inconsistent with English
law, contrary to English public policy and at odds with the goals of international arbitra-
tion.18 Moreover, Emirates Trading relied in large measure on an Australian case that is itself
generally regarded as an outlier.19
Emirates Trading may thus be seen as an exception to the established reluctance of the
English courts in finding that pre-arbitral steps in multi-tier clauses constitute jurisdictional
conditions precedent to arbitration absent express language to the contrary.
14 Ibid at para 63.

15 Flannery, supra at 65.
16 [2014] EWHC 2014 (Comm).
17 Ibid at para 26.
18 Flannery, supra at 65-66 and 102-103.
19 Kayali, supra at 570.
221
The United States

In the United States, the prevailing view appears to be that pre-arbitral steps in multi-tier
clauses will not constitute jurisdictional conditions precedent to the commencement of
arbitration, unless the multi-tier clause at issue expressly includes language to the contrary.
For example, in the 2014 decision of BG Group plc v. Republic of Argentina,20 the United
States Supreme Court took the position that a failure to comply with pre-arbitral steps set
out in multi-tier clauses do not deprive an arbitral tribunal of jurisdiction to adjudicate a
dispute, without clear language to the contrary.
That case concerned a bilateral investment treaty between Argentina and the United
Kingdom. The treaty contained a multi-tier dispute resolution clause that stated that prior
to the commencement of an arbitration by a foreign investor, the investor was required to
submit the dispute to a local court. However, the claimant commenced arbitration against
Argentina without first submitting the dispute to a local court. Accordingly, Argentina
applied to the arbitral tribunal to dismiss the case for lack of jurisdiction. The tribunal,
however, determined that it had jurisdiction and rendered a final award. Argentina then
sought to vacate the final award before the United States District Court for the District of
Columbia on the basis that the tribunal did not have jurisdiction on account of the claim-
ant’s failure to comply with the pre-arbitral steps. The District Court denied Argentina’s
claims and confirmed the award. But Argentina appealed, and the US Court of Appeals for
the District of Columbia Circuit reversed and vacated the award, holding that the arbitral
tribunal lacked jurisdiction to decide the dispute.
Argentina then appealed to the Supreme Court.The Supreme Court analysed the issue
by considering whether the multi-tier clause constituted a ‘procedural’ or a ‘substantive’
condition precedent to arbitration. If a procedural condition precedent, it observed that
it was for the tribunal to determine whether the multi-tier clause bound the parties to
carry out the pre-arbitral steps prior to commencing arbitration – in effect, then, that
the tribunal had jurisdiction to determine what, if any consequences, should arise from
a party’s failure to comply with pre-arbitral steps. By contrast, the Supreme Court stated
that if the pre-arbitral steps constituted a substantive condition precedent, it meant that it
constituted a substantive limitation on a party’s right to commence arbitration, and a failure
to comply with such pre-arbitral steps would be a jurisdictional bar to a party’s commenc-
ing arbitration.21
Ultimately, the Supreme Court found that the pre-arbitral steps constituted procedural
conditions precedent, reversed the Court of Appeals, and found that the tribunal had juris-
diction to adjudicate the dispute between the claimant and Argentina. Important to this
finding was the fact that the multi-tier clause was, in the majority’s view,‘a claims-processing
rule that governs when the arbitration may begin, but not whether it may occur or what its
substantive outcome will be on the issues in dispute’.22 In other words, had the multi-tier
clause expressly stated that it was a legally binding condition precedent to arbitration, it
very likely would have been held to constitute a substantive and jurisdictional condition
precedent to arbitration.
20 BG Group PLC v. Republic of Argentina, 572 _ (2014) (slip op.).

21 Ibid at 8-9 and 15-17.
22 Ibid at 9.
222
BG Group is consistent with other cases in the United States that have held that
pre-arbitral steps in multi-tier clauses do not constitute jurisdictional conditions precedent
absent express language to the contrary. For example, in Int’l Ass’n of Bridge, Structural v.
EFCO Corp and Constr. Products Inc,23 the Court of Appeals for the Eighth Circuit was
confronted with a multi-tier clause requiring that the parties undertake certain pre-arbitral
procedures.The plaintiff filed suit with the District Court for the Southern District of Iowa
to compel arbitration of a dispute with the defendant. The defendant, however, resisted
on the ground that the plaintiff had failed to comply with the pre-arbitral steps in the
multi-tier clause. The District Court agreed with the defendant, and denied the plaintiff ’s
application to compel arbitration.
On appeal, however, the Court of Appeal reversed the District Court’s findings. Like the
Supreme Court in BG Group, it held that the pre-arbitral steps constituted procedural, not
substantive, conditions precedent, and accordingly ruled that an arbitral tribunal had juris-
diction to rule on the consequences of the plaintiff ’s failure to comply with the pre-arbitral
steps.24 In so holding, therefore, it ruled that pre-arbitral steps in a multi-tier clause do not
constitute jurisdictional conditions precedent absent language to the contrary.
BG Group and EFCO Corp also appear to be consistent with decisions in the United
States that have ruled that pre-arbitral steps in multi-tier clauses are jurisdictional condi-
tions precedent to arbitration. For example, in HIM Portland LLC v. DeVita Builders Inc,25
the US Court of Appeals for the First Circuit was confronted with a multi-tier clause
that stated that the parties were required to engage in mediation prior to arbitration, and
expressly stated that such mediation was ‘a condition precedent to arbitration’. In that case,
therefore, the Court of Appeals ruled that mediation was a jurisdictional condition prec-
edent to arbitration, as the contracted stated ‘in the plainest possible language that media-
tion [was] a condition precedent to arbitration’ and that it was ‘difficult to imagine language
which more plainly states that the parties intended to establish mediation as a condition
precedent to arbitration proceedings’.26 A similar outcome was reached on the basis of
explicit ‘condition precedent’ language in Ponce Roofing Inc v. Roumel Corp.27 In those cases
the courts found that the pre-arbitral steps constituted ‘substantive’ conditions precedent
that barred the commencement of arbitration until the steps had been fulfilled because –
unlike the multi-tier clauses at issue in BG Group and EFCO Corp – the clauses expressly
stated that the pre-arbitral steps were ‘conditions precedent’ to arbitration.
Notwithstanding the foregoing, there are a number of cases in the United States where
courts have ruled that pre-arbitral steps in multi-tier clauses constitute jurisdictional con-
ditions precedent to arbitration, even without express reference to ‘condition precedent’.
For example, in Kemiron Atlantic Inc v. Aguakem International Inc,28 the parties did not use
express language in their multi-tier dispute resolution clause, but the Court of Appeals for
the Eleventh Circuit found that the pre-arbitral steps in the clause constituted jurisdictional
23 359 F.3d 954 (8th Cir. 2004).

24 Ibid at 956-957.
25 317 F 3d 41 (1st Cir 2003).
26 Ibid at 44.
27 Ponce Roofing, Inc v. Roumel Corp, 190 F Supp 2d 264 (DPR 2002).
28 290 F 3d 1287 (11th Cir 2002).
223
conditions precedent to arbitration.29 Similarly, in Red Hook Meat Corp v. Bogopa-Columbia

Inc, the Supreme Court of New York likewise held that pre-arbitral steps in a multi-tier
clause constituted jurisdictional conditions precedent even though the clause did not use
the term ‘condition precedent’ or any other mandatory phrase.30
Thus, while the prevailing view adopted by the United States Supreme Court and
other Courts of Appeal appears to be that pre-arbitral steps in multi-tier clauses do not
constitute jurisdictional conditions precedent absent clear language to that effect, a number
of other cases have held otherwise. Accordingly, it remains to be seen how US courts will
deal with this issue in the future.
Switzerland
In Switzerland as well, the prevailing view appears to be that a failure to comply with a
pre-arbitral step in a multi-tier dispute resolution clause does not deprive an arbitral tribu-
nal of jurisdiction to adjudicate a dispute.
In a recent Swiss First Civil Law Court decision from March 2016,31 two companies, X
and Y, entered into a series of contracts that contained multi-tier dispute resolution clauses
requiring the parties to undertake conciliation proceedings prior to arbitration. Following the
emergence of a dispute,Y submitted a demand for conciliation. Before the conciliation was
formally terminated, however, Y commenced arbitration proceedings. While X participated
in the appointment of the arbitral tribunal, it objected to its jurisdiction owing to Y’s failure
to comply with the contracts’ pre-arbitral steps. Following an exchange of briefs, the tribunal
rendered a partial award confirming its jurisdiction. X challenged the tribunal’s decision at the
Swiss Court and argued, among other things, that the tribunal wrongly accepted jurisdiction,
its jurisdiction should be terminated, and Y ’s claim should be rejected.
The Swiss Court accepted that the multi-tier clause required the parties to engage in
conciliation prior to commencing arbitration. However, it refused to terminate the tribunal’s
jurisdiction or to reject Y’s claim. Rather, it held that terminating the tribunal’s jurisdiction ‘is
certainly not the most appropriate solution’ as doing so would require that another tribunal
be constituted following conciliation proceedings, accomplishing little more than prolonging
the proceedings and creating additional costs.32 Further, it observed that in other circum-
stances, such a finding could lead to unduly punitive results, particularly in circumstances
where a limitation period had expired following the commencement of an arbitration.33
Accordingly, the Swiss Court found that the most sensible solution was simply to stay
the arbitration so that the conciliation proceedings could take place, after which the arbi-
tration could resume before the originally constituted tribunal. The Court further ruled
that decisions as to the nature of the stay and the conciliation proceedings should be
deferred to the tribunal, which had overall jurisdiction over the dispute.34
29 Ibid at 1291.
30 Red Hook Meat Corp v. Bogopa-Columbia, Inc, 31 Misc 3d 814 at 819 (NY Sup Ct 2011).
31 4A_628/2015 of March 16, 2016. English translation available through Swiss International Arbitration
Decisions http://www.swissarbitrationdecisions.com/
32 Ibid at 19.
33 Ibid.
34 Ibid at 20.
224
Therefore, the Court effectively ruled that a pre-arbitral step in a multi-tier dispute res-
olution clause did not constitute a jurisdictional condition precedent, and that a failure to
comply with such a pre-arbitral step would not deprive a tribunal of jurisdiction. However,
it did make clear that parties to multi-tier dispute resolution clauses should generally be
required to abide by pre-arbitral steps in multi-tier dispute resolution clauses.35
Singapore
A recent court decision from Singapore indicates that Singaporean courts may be prepared
to attach significant jurisdictional consequences to the failure to satisfy the pre-arbitral
requirements of a multi-tier dispute resolution clause. In particular, in the 2013 decision
International Research Corp PLC v. Lufthansa Systems Asia Pacific Pte Ltd and another,36 the
Singapore Court of Appeal ruled that strict compliance with multi-tier dispute resolu-
tion clauses is a binding precondition to arbitration, the non-compliance with which can
deprive a tribunal of its jurisdiction.
In that case, the parties in dispute had entered into several contracts related to the
supply of technology services. One of the agreements contained a multi-tier dispute reso-
lution clause requiring disputes to be escalated through several negotiation discussions
among representatives of increasing seniority from each party prior to the commence-
ment of arbitration. A payment dispute arose between the parties, which was the subject
of several meetings, although these meetings did not strictly satisfy the requirements of the
multi-tier clause.
The claimant filed a notice of arbitration with the Singapore International Arbitration
Centre against the respondent, and the respondent raised a preliminary objection to the
tribunal’s jurisdiction on the basis of, among other things, the claimant’s failure to satisfy
fully the pre-arbitral steps set out in the multi-tier clause. The tribunal, however, dismissed
the objection by way of a preliminary award on jurisdiction. The respondent then applied
to the Singapore High Court to set aside the tribunal’s award on jurisdiction, which denied
the respondent’s application.The respondent then appealed to the Court of Appeal, seeking
an order for the tribunal’s award on jurisdiction to be set aside.
The Court of Appeal held that the pre-arbitral steps in the multi-tier clause were bind-
ing conditions precedent to the commencement of arbitration and had to be observed.The
Court of Appeal further held that ‘[g]iven that the preconditions for arbitration . . . had not
been complied with, and given our view that they were conditions precedent, the agree-
ment to arbitrate . . . could not be invoked’, and that ‘[t]he Tribunal therefore did not have
jurisdiction over [the respondent] and its dispute with [the claimant]’.37
Thus, it would appear that Singaporean courts are not only prepared to enforce
multi-tier dispute resolution clauses, but are also prepared to attach significant jurisdic-
tional consequences in the event such clauses are not complied with. Nevertheless, it is
noteworthy that the Court of Appeal in Lufthansa Systems observed that there were a
number of other grounds on which the tribunal’s jurisdiction should have been rejected.
Accordingly, it remains to be seen whether a Singapore court in the future will be prepared
35 Ibid at 13.
36 [2013] SGCA 55.
37 Ibid at para 63.
225
to terminate an arbitration or set aside an award solely on the basis of a failure to comply
with a multi-tier clause.
Australia
In Australia, it appears that pre-arbitral steps in multi-tier clauses are generally considered to
be enforceable and binding on the parties, but it is unclear whether they constitute juris-
dictional conditions precedent to arbitration.
For example, in United Group Rail Services Ltd v. Rail Corp New South Wales,38 the con-
tract at issue contained a multi-tier clause that required that disputes be referred to party
representatives to ‘meet and undertake genuine and good faith negotiations with a view to
resolving the dispute or difference’ prior to arbitration.39
The issue before the New South Wales Court of Appeal was whether the requirement
for negotiation in the multi-tier clause was enforceable and binding on the parties. After
reviewing the history of legal scholarship on the subject – including English case law – the
Court of Appeal found that the requirement for negotiation was enforceable.40
However, it is not clear from the Court of Appeal’s determination whether the Court
of Appeal would be of the view that the negotiation requirement was not only enforceable,
but also a jurisdictional condition precedent to arbitration – that is to say, that a failure to
comply with the negotiation requirement would result in the termination of a tribunal’s
jurisdiction, or the set-aside of an arbitral award for lack of jurisdiction. It should also be
noted that United Group Rail has been characterised by academic commentators as an out-
lier that stands against the Australian courts’ predominant view that agreements to negotiate
are too uncertain to be enforceable as they do not create binding obligations.41 Accordingly,
it remains to be seen how Australian law develops on this subject.
Treatment of multi-tier dispute resolution clauses by arbitral tribunals

Arbitral tribunals have demonstrated a general reluctance to choosing a course of action
that would bar the commencement of an arbitration or deprive a tribunal of jurisdiction
where a party has failed to fulfil the pre-arbitral steps in a multi-tier clause.42
For example, Ethyl Corporation v. Canada43 was commenced under Chapter Eleven of
the North American Free Trade Agreement (NAFTA). Article 1120 of NAFTA required
that a foreign investor could only commence an arbitration ‘provided that six months have
elapsed since the events giving rise to a claim’. In that case, a US investor commenced an
arbitration against Canada with respect to a measure that was in the process of being enacted
more than six months prior to the commencement of the arbitration, but which only took
legal effect within six months prior to the commencement of the arbitration. Accordingly,
Canada objected to the jurisdiction of the tribunal on the ground that the claimant failed
to wait the full six months required by Article 1120 prior to commencing arbitration.
38 [2009] NSWCA 177.

39 Ibid at para 15.
40 Ibid at para 81.
41 Kayali, supra at 570.
42 Gary Born, International Commercial Arbitration 2nd ed (Kluwer Law International, 2014) at 923-24.
43 Ethyl Corp v. Gov’t of Canada, in NAFTA Award on Jurisdiction (24 June 1998), 38 Int’l Legal Mat 708.
226
While acknowledging that Canada was technically correct, and that the claimant had
jumped the gun when it commenced the arbitration, the tribunal rejected Canada’s objec-
tion to its jurisdiction. To begin, it held that if it were to rule that it did not have jurisdic-
tion, such a determination would be inconsistent with the object and purpose of NAFTA,
which ‘would not be best served by a rule absolutely mandating a six-month respite fol-
lowing the final effectiveness of a measure until the investor may proceed to arbitration’.44
Further, the tribunal held that ‘no purpose would be served by any further suspension of
Claimant’s right to proceed’.45 In particular, the tribunal ruled that because the measure
took legal effect within the six months of the date on which the arbitration was com-
menced, ‘[i]t is not doubted that today Claimant could resubmit the very claim advanced
here’ and that ‘a dismissal of the claim at this juncture would [therefore] disserve, rather
than serve, the object and purpose of NAFTA’.46 In other words, the tribunal held that little
purpose would be served by dismissing the arbitration for lack of jurisdiction, other than
to cause wasted time and expense. Accordingly, the tribunal held that the claimant’s failure
to satisfy Article 1120 of NAFTA should not ‘be interpreted to deprive this Tribunal of
jurisdiction’. However, it ruled that because claimant did fail to comply with Article 1120,
claimant should bear all costs associated with the jurisdictional proceedings.47
Similarly, Salini Costruttori v. Morocco48 involved a bilateral investment treaty between Italy
and Morocco that contained a multi-tier clause requiring that all disputes ‘should, if possible,
be resolved amicably’ and that a dispute could only be referred to arbitration if it ‘cannot be
resolved in an amicable manner within six months of the date of the request [for amicable
settlement]’.49 In that case, two Italian investors commenced an arbitration against Morocco,
and Morocco objected to the tribunal’s jurisdiction on the ground that the investors failed to
comply with the pre-arbitral steps of the multi-tier clause. In particular, Morocco alleged that
the investors had failed to seek to negotiate the dispute within the six months pre-dating the
commencement of the arbitration with the necessary governmental authorities. In response,
the investors pointed to a number of letters and memoranda they had sent to various branches
of the Moroccan government generally referring to the dispute.
The tribunal ultimately rejected Morocco’s application to dismiss the case for lack of
jurisdiction. In particular, the tribunal observed that:
The mission of this Tribunal is not to set strict rules that the Parties should have followed;
the Tribunal is satisfied to determine if it is possible to deduce from the entirety of the Parties’
actions whether, while respecting the term of six months, the Claimant actually took the neces-
sary and appropriate steps to contact the relevant authorities in view of reaching a settlement,
thereby putting an end to their dispute.50
44 Ibid at para 83.

45 Ibid at para 84.
46 Ibid at para 85.
47 Ibid at para 88.
48 Salini Costruttori v. Morocco, Decision on Jurisdiction ICSID Case No. ARB/00/4 (23 July 2001).
49 Ibid at para 15.
50 Ibid at para 19.
227
Because the investors had issued correspondence and memoranda that generally referred
to the dispute to Moroccan government authorities, the tribunal concluded that they
‘constitute[d] a written request aimed toward the amicable settlement of the dispute and
satisf[ied] the requirement set out in the Bilateral Treaty’.51 In so holding, the tribunal
demonstrated a reluctance to interpret strictly the pre-arbitral steps in the multi-tier clause
as binding conditions precedent to arbitration to avoid the termination of the arbitration.
Likewise, in an ICC case from 2001,52 the contract at issue required that the parties
undertake efforts to negotiate disputes prior to submitting them to arbitration. In that case,
the claimant commenced an arbitration against the respondent without making any effort
to negotiate, and the respondent consequently challenged the jurisdiction of the tribunal.
In its defence, the claimant contended that negotiations would have been futile and urged
the tribunal to accept jurisdiction.
The tribunal rejected the respondent’s application and asserted jurisdiction over the
dispute. It relied in large measure on its finding that there would have been little prospect
of settlement had they carried out negotiations prior to arbitration. In particular, the tri-
bunal stated:
The arbitrators are of the opinion that a clause calling for attempts to settle a dispute amicably
are primarily expression of intention, and must be viewed in the light of the circumstances.They
should not be applied to oblige the parties to engage in fruitless negotiations or to delay an
orderly resolution of the dispute.
Accordingly, the arbitrators have determined that there was no obligation on the claimant
to carry out further efforts to find an amicable solution, and that the commencement of these
arbitration proceedings was neither premature nor improper.53
In view of the above cases, it appears that arbitral tribunals are generally reluctant to find
that pre-arbitral steps in multi-tier dispute resolution clauses are jurisdictional conditions
precedent to the commencement of arbitration, particularly where doing so would have
the effect of terminating an arbitration or otherwise depriving a tribunal of jurisdiction.
Practical guidelines
The determination of whether the pre-arbitral steps in a multi-tier dispute resolution
clause constitute jurisdictional conditions precedent can have very serious consequences.
For example, if a claimant commences an arbitration without complying with the
pre-arbitral steps in a multi-tier clause, and a limitation period expires while the arbitra-
tion is pending, a finding that the pre-arbitral steps constituted a jurisdictional condition
precedent can result in the arbitration being dismissed and the claimant being time-barred
from pursuing its claims.
Similarly, if a claimant fails to carry out pre-arbitral steps in a multi-tier clause and suc-
cessfully obtains a final award against the respondent, a determination by a national court
after the conclusion of the arbitration that the pre-arbitral steps constituted jurisdictional
51 Ibid.
52 ICC Case No. 8445, Final Award, XXVI Y.B. Comm. Arb. 167 (2001).
53 Ibid at 169.
228
conditions precedent could result in the award being set aside or otherwise not enforced
for lack of jurisdiction.
There are a number of considerations both transactional lawyers and arbitration practi-
tioners need to bear in mind when confronted with such multi-tier clauses.
Practical guidelines for transactional lawyers

Given the mixed views among national courts and arbitral tribunals on whether multi-tier
clauses constitute jurisdictional conditions precedent to the commencement of arbitration,
careful consideration should be given to whether they should be included in an arbitra-
tion clause at all. Often, commercial parties in the energy industry will request that they be
included to maximise the likelihood of reaching a settlement prior to arbitration. However,
the risks associated with such clauses should be clearly explained, as well as the reality that
there is nothing to prevent commercial parties from seeking to negotiate a settlement – or,
indeed, to agree to participate in a formal mediation or conciliation process – at any time,
regardless of whether the parties’ dispute resolution clause formally requires the parties to
do so. As a result, transactional lawyers should carefully assess with their clients whether a
multi-tier dispute resolution clause is necessary or desired.54
To the extent a multi-tier clause is desired and the parties wish for the pre-arbitral steps
in the clause to constitute jurisdictional conditions precedent, transactional lawyers should
ensure the following are considered:
• The multi-tier clause should expressly and unequivocally state that the pre-arbitral steps
are conditions precedent to the commencement of arbitration, and that arbitration may
not be commenced until such time as they have been fulfilled.
• The pre-arbitral steps should be described in detail, with clear, unequivocal, and deter-
minate language to ensure that they can be followed and enforced.
For instance, where the parties wish to incorporate a requirement that the parties
negotiate prior to commencing arbitration, they should avoid simply stating that the
parties must negotiate prior to arbitration. Rather, the clause should specify precisely
what the parties’ obligations are. For example, the clause should specify: (1) the precise
period over which the parties must negotiate prior to commencing arbitration; (2)
what event triggers the commencement of the negotiation period (e.g., the issuance
of a notice); (3) what party representatives must participate in the negotiations (e.g.,
the parties’ chief executive officers); (4) how the negotiations are to take place (e.g., in
person, by telephone conference or otherwise); (5) how many negotiation sessions are
required; and (6) a clear event that triggers the termination of the negotiation require-
ment (e.g., the expiration of the negotiation period).
Similarly, where the parties wish to incorporate a requirement that formal media-
tion or conciliation proceedings take place prior to arbitration, they should again avoid
simply stating that mediation or conciliation is required prior to arbitration. Rather,
they should specify: (1) the precise period in which the parties will be required to
mediate or conciliate; (2) an institution before which mediation or conciliation is to
54 Jason File, ‘United States: multi-step dispute resolution clauses’ IBA Legal Practice Division Mediation
Committee Newsletter (July 2007) 33 at 35.
229
take place; (3) the mediation or conciliation rules that will apply; (4) how the parties
will commence mediation or conciliation; (5) what party representatives are required
to participate; (6) how many sessions are required; and (7) a clear event that triggers the
termination of the mediation or conciliation.
Lastly, whether the parties incorporate negotiation, mediation or conciliation as a
pre-arbitral condition precedent, they should also avoid using indeterminate statements
that require the parties to negotiate, mediate or conciliate ‘genuinely’ or in ‘good faith’,
for example, to avoid either party being able to assert that while its counterpart may
have participated in negotiation, mediation or conciliation sessions as required, it did
not do so genuinely or in good faith, to pre-empt the commencement of an arbitration.
• Where the parties wish to incorporate multiple tiers of pre-arbitral steps (e.g., nego-
tiation among low-level representatives, followed by negotiation among higher-level
representatives, followed by mediation or conciliation), the transition between the dif-
ferent tiers must be outlined in sufficient detail so that the sequence of procedures can
be clearly followed and enforced.
Finally, if the parties wish to include the possibility of holding pre-arbitration discussions
without elevating them to binding jurisdictional conditions precedent, the simplest way to
accomplish this would be to state that they are not conditions precedent to the commence-
ment of arbitration. Further, the parties should avoid any mandatory language that could
be interpreted as making the pre-arbitral steps conditions precedent to arbitration such as
‘shall’ or ‘must’, and instead use permissive verbs such as ‘can’ and ‘may’.
Practical considerations before initiating arbitration

When advising a party contemplating arbitration, careful attention should be paid to
whether there is a multi-tier clause in the parties’ agreement that will need to be satisfied
prior to serving a notice of arbitration. Failure to do so may result in an objection from
the opposing party that the tribunal has not been appropriately vested with jurisdiction, an
allegation which may result in the termination of the arbitration or, at worst, lead to the
set-aside or non-enforcement of an award after it has been delivered.
To minimise the risk of objections arising from an alleged failure to comply with a
multi-tier clause, counsel should undertake the following steps, to the extent applicable:
• Counsel should ensure that the parties have carefully performed all steps required by
the multi-tier clause prior to commencing arbitration.
• Counsel should carefully document the commencement, performance and completion
of all pre-arbitral steps required by the multi-tier clause so that there is a clear docu-
mentary record of the parties’ compliance.
• Prior to commencing the pre-arbitral steps, counsel should ensure that all limitation
periods or time considerations have been taken into account, and that ample time is
provided for the pre-arbitral steps to be carried out to avoid any time-bar or prescrip-
tion issues.
• Prior to commencing the pre-arbitral steps, counsel should review the claims that will
be advanced in the arbitration, with expert assistance if necessary, to ensure that all
claims that will be made form part of the pre-arbitral negotiations, mediation or con-
ciliation, and written notice should be provided of all such claims prior to commencing
230
the pre-arbitral procedure. This will prevent a counterparty from asserting that specific
claims made in the arbitration were not previously raised as required by the multi-tier
clause to challenge a tribunal’s jurisdiction. If insufficient time is available for counsel to
undertake this prior to commencing the pre-arbitral steps, the disputes at issue should
be framed as broadly as possible in the party’s notice and during the negotiations,
mediation or conciliation to ensure that all claims raised in the arbitration can be linked
back to the pre-arbitration discussions.
• In the event that the respondent is served with notice of the commencement of the
pre-arbitral steps by the claimant and the respondent anticipates it will advance coun-
terclaims in a future arbitration, the respondent should ensure that all potential coun-
terclaims form part of the pre-arbitral negotiations, mediation or conciliation and that
written notice of them is provided so that the claimant cannot seek to have such
counterclaims dismissed for lack of jurisdiction. Ideally, the respondent should review
the counterclaims that will be advanced in the arbitration, with expert assistance if
necessary, to ensure that all such counterclaims specifically form part of the pre-arbitral
procedure. But, if insufficient time is available, the counterclaims should be framed
as broadly as possible to ensure that all counterclaims raised in the arbitration can be
linked back to the pre-arbitration discussions.
Conclusion
Given the collaborative nature of the energy industry, parties and joint ventures to
energy-related contracts may be inclined to include a multi-tier clause into their agree-
ments to avoid the cost of arbitration and to minimise any upset to the parties’ ongoing
relationship that would result from escalated proceedings. Despite the benefits that flow
from such clauses, however, consideration must be given to whether a multi-tier clause
warrants inclusion in an agreement, particularly if both parties are sophisticated, as is often
the case in the energy industry, and are likely to engage in settlement negotiations irrespec-
tive of the presence of a multi-tier clause.
The assessment of whether to include a multi-tier clause in an agreement must take
into account the risks that may arise from the failure to comply with such a clause. While
most national courts and arbitral tribunals have generally shown a reluctance to finding
multi-tier clauses as jurisdictional conditions precedent to arbitration, there is a risk that a
failure to comply with them may have jurisdictional consequences. Accordingly, multi-tier
clauses should not be treated as boiler-plate provisions whose inclusion in an arbitration
agreement can be treated as an afterthought. Nor should multi-tier clauses be ignored in
the lead-up to an arbitration. Rather, given their potentially very serious ramifications,
counsel should pay careful attention to multi-tier clauses, and fully apprise their clients of
the implications of not complying with them.
231
16
Compensation in Energy Arbitration
Aimee-Jane Lee, Samantha J Rowe and Roni Pacht1
This chapter focuses on compensation issues that arise in arbitrations in the energy sector.2
Arbitral tribunals resolving energy disputes typically use the same valuation approaches
that are used in disputes relating to other sectors. Compensation in energy arbitration,
however, deserves particular consideration. Energy-related investments are often high-value
and long-term, subject to price volatility and typically more susceptible to political risk,
not least as a result of ‘public-interest concerns’ relating to energy security and calls for
resource-nationalism. Each of these factors may have a significant impact on quantum.
The chapter proceeds in four parts. First, we set out two valuation techniques that are
typically adopted by tribunals to determine quantum in energy arbitrations – the predomi-
nant discounted cash flow (DCF) approach and the market-valuation approach. Second,
we discuss the appropriate valuation date for determining damages, which can have a
significant impact on quantum in light of fluctuating energy prices. Third, we analyse cur-
rent approaches to awarding interest, another factor that may have a substantial impact on
1 Aimee-Jane Lee is international counsel, and Samantha J Rowe and Roni Pacht are associates, in the
international disputes resolution group at Debevoise & Plimpton LLP. The views expressed in this chapter are
those of the authors alone. The authors are grateful for the assistance of Debevoise associate Fiona Poon in the
preparation of this chapter.
2 The term ‘compensation’ is sometimes distinguished from ‘damages’, the former being more closely associated
with the nature and kind of remedy applicable in circumstances involving permitted or lawful expropriations,
as codified in investment treaties. The term ‘damages’ by contrast is sometimes more closely associated
with unlawful conduct more generally and specifically breaches of contract. See Walde, T.W. and Sabahi, B.,
‘Compensation, Damages and Valuation in International Investment Law’ in Compensation And Damages in
International Investment Arbitration (ed. I. Marboe), OUP Oxford (20 August 2012) p. 2. The primary focus of
this chapter concerns the methodologies employed by tribunals in evaluating quantum in energy arbitrations
and the terms ‘damages’ and ‘compensation’ are used interchangeably.
232
quantum and yet is considered a ‘vastly under-pleaded area’.3 Finally, we provide a few
concluding thoughts.
Valuation methodologies
Before considering which methodologies are best suited to determining quantum, it is neces-
sary first to consider the appropriate standard of compensation to be applied. In commercial
arbitration, this will depend on the governing law and type of breach. Treaties, however, do
not always address these issues, particularly in circumstances where there has been an unlaw-
ful expropriation or cases involving other treaty violations. In such circumstances, tribunals
will often look to principles of compensation in international law, most commonly citing the
Chorzów Factory4 standard of ‘full reparation’. The aim of the full reparation principle (in the
absence of restitution) is effectively to determine the measure of quantum that would restore
an aggrieved party to that it would likely have enjoyed, but for the wrongful act.
As the tribunal in CMS Gas v. Argentina5 observed, the methods employed by tribunals
to determine compensation depend on the circumstances. Often, however, the aim is to
ascertain the fair market value (FMV) of the asset or assets in question. The description of
FMV set out in the ASA’s International Glossary of Business Valuation Terms was described
by the tribunal in CMS Gas v. Argentina as an ‘internationally recognized definition’:
the price, expressed in terms of cash equivalents, at which property would change hands between
a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms
[sic] length in an open and unrestricted market, when neither is under compulsion to buy or sell
and when both have reasonable knowledge of the relevant facts.6
The methodology employed in determining an asset’s FMV can have a significant impact
on quantum and is often a source of dispute between parties to an investment treaty arbitra-
tion. In striving to ascertain the FMV, tribunals most frequently employ the DCF approach
and, less frequently, the market-valuation approach. Specific issues arise in relation to each
in the context of energy arbitration.
The DCF approach

The DCF approach measures value at a given date on the basis of projected future cash-flows
that income-producing assets are expected to generate.These projected income streams are
then appropriately discounted to produce a value at the given date that takes account of the
risks inherent in such projections.
3 Clemmie Spalton, ‘An unexpected interest in interest,’ Global Arbitration Review (12 May 2015).
4 Factory at Chorzów, Merits, Judgment (13 September 1928), P.C.I.J., Series A, No. 17.
5 CMS Gas Transmission Company v. Argentine Republic, ICSID Case No. ARB/01/08, Award (12 May 2005)
at 402.
6 International Glossary of Business Valuation Terms, American Society of Appraisers, ASA website, 6 June 2001,
p. 4 as cited in CMS Gas Transmission Company v. Argentine Republic, ICSID Case No. ARB/01/08, Award
(12 May 2005) at 402.
233
The DCF methodology is the ‘most widely used and accepted method in the oil and
gas industry for valuing sales or acquisitions’.7 It has been adopted by numerous tribunals,
especially in the context of investment treaty arbitration.8 A strong recommendation for
using DCF is that it is often employed by business people in the sector when making com-
mercial decisions, reflecting that they identify it as a suitable tool for quantifying value in
an industry subject to a degree of inherent uncertainty.
However, some tribunals have considered DCF methodologies inappropriate for valu-
ing investments that are at an early stage, where there is insufficient historical data on which
to base future projections.9
Projecting future cash flows

A projection of future cash flows requires an assessment of future revenue streams and costs.
Projecting future revenues relies on various inputs, each of which can be highly subjective
and also have a significant impact on the quantification of future revenues.
First, a tribunal will need to assess likely future production, usually with reference to a
volume and production profile (i.e., projecting the size of the reservoir or field and establish-
ing the number of barrels or cubic metres that can be produced each year economically) and
possibly incorporating risk adjustment factors to reflect the risk that certain reserve categories
7 Occidental Petroleum Corp v. Republic of Ecuador, ICSID Case No. ARB/06/11, Award (5 October 2012) 779
(Occidental). See also, Abdala, Manuel A., ‘Key Damage Compensation Issues in Oil and Gas International
Arbitration Cases’, American University International Law Review 24, no.3 (2009) at 548.
8 Occidental 779; CMS Gas Transmission Company v. Argentine Republic, ICSID Case No. ARB/01/08, Award
(12 May 2005); El Paso Energy International Company v. Argentine Republic, ICSID Case No. ARB/03/15, Award
(31 October 2011) (El Paso); Enron Creditors Recovery Corporation (formerly Enron Corporation) and Ponderosa
Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3 (22 May 2007) (Enron); Hulley Enterprises Limited
(Cyprus) v. Russian Federation, PCA Case No. AA 226, Final Award (18 July 2014), Veteran Petroleum Limited
(Cyprus) v. Russian Federation, PCA Case No. AA 228, Final Award (18 July 2014); Yukos Universal Limited (Isle
of Man) v. Russian Federation, PCA Case No. AA 227, Final Award (18 July 2014) (together, Yukos). See also,
Quiborax SA v. Plurinational State of Bolivia, ICSID Case No. ARB/06/02, (16 September 2015) 344. ‘The
DCF method is widely accepted as the appropriate method to assess the FMV of going concerns with a
proven record of profitability’.
9 For example, see Windstream Energy LLC v. Government of Canada, PCA Case No. 2013-22, Award
(27 September 2016) 475-476, in which the tribunal found that the DCF approach was not an appropriate
method for valuing a wind farm that was in early development, instead preferring to rely on the evidence
relating to comparable transactions involving early-stage projects; see also Copper Mesa Mining Corporation v.
Republic of Ecuador, PCA No. 2012-2, Award (15 March 2016) 7.26, in which the tribunal was tasked with
assessing the value of mining concessions that were at an early exploratory stage. In the circumstances, the
tribunal found that the most reliable, objective and fair method was to base its assessment of the claimants’
proven expenditure; Tenaris S.A. and Talta – Traiding e Merketing Sociedade Unipessoal Lda. v. Bolivarian Republic
of Venezuela, ICSID Case No. /11/26, ARB/11/26 59, Award (29 January 2016) (Tenaris 1) in which,
notwithstanding that both parties agreed DCF was the most appropriate valuation methodology [520],
the tribunal rejected the DCF methodology, partly on the basis that the history of operations only ran to
approximately 42 months and had been characterised by uncertainties [525-527]. The tribunal also rejected
the market multiples approach on the basis that it was not satisfied that the companies put forward as most
comparable provided reliable guidance [532]. Instead, the tribunal held that the price that had been paid for
the interest in the plant almost three and a half years prior to expropriation was an appropriate reflection of
the FMV of Talta’s interest in the plant, without any adjustment [566-567].
234
may not produce the projected amount of oil.10 Generally, expert evidence is tendered to
substantiate the parties’ assessments but they may also present (or seek disclosure of) internal
projections or business plans that reflect contemporaneous assessments of reserves and pro-
duction estimates. In Occidental Petroleum Corp v. Republic of Ecuador, the tribunal was strongly
persuaded by the fact that an assessment made by Petroamazonas (a unit of Ecuador’s state oil
company) for business and reporting purposes substantiated the claimants’ expert’s estimates.11
The second crucial input is found in the relevant commodity price projections.
Forecasting future crude oil and gas prices is fraught with uncertainty given the volatility
in prices, most recently highlighted by the price collapse in late 2014. As noted below, the
valuation date may be extremely relevant in terms of price projections as a result. A tribunal
will often seek to forecast prices based on market conditions as at the valuation date. One
way of achieving this is by relying on actual futures prices as at the valuation date which
should, theoretically, price in the market’s forecast prices.12 Alternatively, it is possible to rely
on industry price forecasts (e.g., price forecasts published by SPEE), or expert evidence.
As well as estimating future revenues, based on a quantity/price assessment, the tribu-
nal will have to consider cash flows out, namely operating expenditure and a portion of
capital expenditure.
Discounting future revenues

Finally, the third important element of a DCF analysis is the discount rate. This is intended
to reduce the anticipated future cash flows to a present value, accounting for the time value
of money and risk. There are different ways that the discount rate may be calculated. The
‘build up’ method essentially aggregates discount rates to reflect the time value of money
and multiple risks. The weighted average cost of capital (WACC) method is intended to
reflect the relevant company’s cost of debt and equity, which supposedly reflects the risk
attached to the company.
In the context of energy arbitration, the discount rate can be very important. Often the
relevant contracts and operating life of the reservoir/field are long-term so the projected
revenues stretch far into the future, amplifying the effect of the selected discount rate.
Moreover, energy assets can be subject to a host of risks that may or may not be incorpo-
rated into the discount rate (e.g., political risk).
A key element in any DCF analysis is country risk. This is the risk associated with
making an investment in a particular geography that lacks one or more of the sophisticated
legal, financial or constitutional systems evident in more developed economies. It incor-
porates myriad risks from political, sovereign and macroeconomic to the risks arising from
poor or ageing infrastructure, constraints on access to health care or education and even the
potential for natural disasters.
Country risk in a cost-of-capital calculation is normally expressed as a percentage pre-
mium to be added to the developed country cost of capital. There are three main sources
of country risk measurement: ratings and other agencies; political risk consultancies; and
10 For example, a tribunal may apply different adjustment factors for proved reserves, probable reserves and
possible reserves.
11 Occidental, 714.
12 Id. 752-758.
235
statistical databases that measure country risk based on the prices of publicly traded securi-
ties. Country risk can be calculated by examining the interest rate spread of the country’s
sovereign bonds compared with ‘risk free’ countries or by reference to equity market devia-
tions. While the latter might appear more appropriate for a foreign equity investor, equity
market values for these purposes remain a matter of debate. The alternative is to build up
a bespoke risk profile specific to the particular project or investment forming the subject
matter of the damages calculation.
Country risk is controversial because it can be hard to calculate, it sometimes includes
factors to which the particular investment may not be exposed, and it does not always
reflect the economic reality of sophisticated and in particular diversified investors.
Certainly the treatment of country risk within a valuation analysis can significantly
impact the quantum of damages ultimately awarded. The divergent outcomes in seven
recent cases involving Venezuela are revealing:
In Gold Reserve Inc v. Bolivarian Republic of Venezuela,13 the tribunal held that Venezuela
had breached its fair and equitable treatment (FET) obligation in the Canada–Venezuela
bilateral investment treaty (BIT) by terminating the mining company’s two concessions to
operate a gold and copper mine in a series of acts and omissions between March 2007 and
June 2010. The tribunal ordered Venezuela to pay US$713 million before interest and
applied a country risk premium in 2008 of 4 per cent.
In Venezuela Holdings BV & Others v. Bolivarian Republic of Venezuela,14 Venezuela was
held liable under the Netherlands–Venezuela BIT for expropriating assets of ExxonMobil
subsidiaries in two oil projects and violating the FET obligation by implementing cer-
tain production and export curtailment measures. The tribunal awarded the claimants
US$1.6 billion plus interest, having applied a global discount rate of 18 per cent. Based
on the parties’ submissions, this suggests a country risk premium of approximately 9 per
cent. The award has subsequently been partly annulled, although for reasons unrelated to
country risk premium.15
13 Gold Reserve Inc. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/09/1, Award
(22 September 2014) (Gold Reserve).
14 Venezuela Holdings, B.V. & Others v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Award
(9 October 2014) (Exxon).
15 Id. Decision on Annulment (9 March 2017). In the annulment proceedings,Venezuela argued that the
property rights acquired by the investors were circumscribed in a manner that limited the compensation due
to the investors in respect of the Cerro Negro Project (the price cap). The ad hoc committee found that the
tribunal had not given consideration to the relevance of the price cap to the application of the mandatory
criteria set out in the BIT for compensation. In particular, there had been no discussion of what effect the
price cap may have had on the market value of the investment or the amount a hypothetical willing buyer
might be willing to pay [184]. The award was partly annulled on a number of bases including that: the
tribunal had manifestly exceeded its powers by determining that customary international law regulated the
determination and assessment of compensation in place of the provisions of the BIT; the tribunal had failed to
state reasons in relation to those parts of the award that purported to be based on the existence of a justiciable
obligation to compensate regardless of the provisions of the BIT in respect of compensation; and the tribunal’s
dismissal of the relevance of the compensation provisions under the price cap that were said by Venezuela to
have formed part of the investors’ investment was unsupported by analysis, based on contradictory reasoning
and hence amounted to a failure to state reasons [188].
236
In Flughafen Zürich AG and Gestión e Ingenería IDC SA v. Bolivarian Republic of Venezuela,16

Venezuela was found in breach of the Chile–Venezuela and Switzerland–Venezuela BITs.
The tribunal unanimously concluded that Venezuela had expropriated the claimants’ invest-
ment in the Isla Margarita airport, and held by a majority that Venezuela was also liable for
a denial of justice.Venezuela was ordered to pay US$14.8 million as compensation for the
expropriation plus interest. The Flughafen tribunal held that Venezuela’s country risk pre-
mium was 7.9 per cent during the course of the claimants’ investment in 2004 and 2005.
In OI European Group BV v. Bolivarian Republic of Venezuela,17 the tribunal found that
Venezuela’s undisputed expropriation of OI European Group’s investment in two glass pro-
duction facilities in Venezuela was unlawful because it lacked due process and there had been
an excessive and unjustified delay of over four years in the payment of just compensation.The
tribunal also held Venezuela in breach of its FET obligation, arising from the illegality of the
expropriation itself and from Venezuela’s occupation of the glass production plants follow-
ing the expropriation decree. The claimant was awarded US$372.5 million plus interest the
tribunal having assessed Venezuela’s country risk premium in 2010 at 6 per cent.
In Tidewater Investment SRL and Tidewater Caribe CA v. Bolivarian Republic of Venezuela,18
the tribunal held that Venezuela’s undisputed expropriation of the claimants’ Venezuelan
maritime oil support services business was lawful under the Barbados–Venezuela BIT, meet-
ing all the treaty conditions for a permissible expropriation except the payment of prompt,
adequate and effective compensation. The tribunal assessed damages as US$46.4 million
plus interest having assessed Venezuela’s country risk premium in 2009 at 14.75 per cent.
In Tenaris SA v. Bolivarian Republic of Venezuela,19 the tribunal awarded US$137 mil-
lion in damages for Venezuela’s expropriation of the claimant’s investments. The tribunal
assessed Venezuela’s country risk premium in 2008 at 4.6 per cent, based on the delta
between Venezuelan and US bond yields.20
In Saint-Gobain v. Bolivarian Republic of Venezuela,21 the tribunal found that Venezuela
had expropriated the claimant’s investment and failed to pay adequate compensation. The
tribunal assessed Venezuela’s country risk premium in 2010 at 10.26 per cent.
This divergence is explained in some respects by the decision of several of these tribu-
nals to include the risk of expropriation by the host state in its country risk analysis.
In Gold Reserve – the first reported ICSID case expressly considering whether the
country risk premium in a DCF analysis should account for expropriation risk – the tri-
bunal found that it was ‘not appropriate’ to increase the country risk premium to reflect
the market’s perception of a heightened risk of expropriation in a given country’s political
16 Flughafen Zürich A.G. and Gestión e Ingenería IDC S.A. v. Bolivarian Republic of Venezuela, ICSID Case No.
ARB/10/19, Award (18 November 2014) (Flughafen).
17 OI European Group B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/11/25, Award
(10 March 2015) (OI).
18 Tidewater Investment SRL and Tidewater Caribe, C.A. v. Bolivarian Republic of Venezuela, ICSID Case No.
ARB/10/5, Award (13 March 2015) (Tidewater).
19 Tenaris S.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/12/23 594, Award (12 December 2016)
(Tenaris 2).
20 Tenaris 2, 461-462.
21 Saint-Gobain Performance Plastics Europe v. Bolivarian Republic of Venezuela, Decision on Liability and Principles of
Quantum (30 December 2016) (Saint-Gobain).
237
climate.22 The tribunal considered that only those political risks ‘other than expropriation’
could be factored into the country risk premium.23 The tribunal adopted a country risk
premium (as of the valuation date of April 2008) of 4 per cent, resulting in a total discount
rate of 10.09 per cent.
The Exxon award, which was issued less than three weeks later, reached the opposite
conclusion. That tribunal held that the risk of expropriation should be taken into account
when calculating the discount rate applicable to the compensation due for an expropria-
tion. It reasoned that, under the standard of compensation it held applicable in that case,
compensation must correspond to the amount that a willing buyer would have been ready
to pay at a time before the expropriation had occurred. Because ‘it is precisely at the time
before an expropriation . . . that the risk of a potential expropriation would exist,’ the tribu-
nal held that the willing buyer would have taken this risk into account when determining
the sum he would be willing to pay at that time.24
The Flughafen, OI and Tidewater tribunals followed the approach taken in Exxon, reject-
ing the claimants’ arguments that legal, regulatory and political risk must be excluded from
the country risk premium. Those tribunals reasoned that: the claimants were aware of the
existing political and legal uncertainties in Venezuela when they invested in the country;25
an emerging country had a ‘disadvantage’ arising from a hypothetical investor’s prefer-
ence to invest in a developed country, which the country risk premium was intended to
capture;26 and the country risk premium quantifies the ‘general risks, including political
risks, of doing business in a particular country’ and the BIT did not insure or guarantee
against these general risks.27 The OI tribunal did, however, observe that the calculation of
a discount rate in one case:
may not be mechanically extrapolated as regards another situation – even though one is dealing
with a company in a similar sector, and one in the same country . . . in each case, the decision
of a tribunal is predetermined by the arguments and counter-arguments made and the proof
brought forward by the experts and the parties.28
In addition to the uncertainty created by these divergent awards, the inclusion of expro-
priation risk raises real questions as to the appropriateness of country risk premiums in
investor–state disputes. Many investors consciously structure their investments with treaty
coverage and could reasonably be said to have hedged against risks such as unlawful expro-
priation through such structuring.
The inclusion of expropriation risk by tribunals ignores the particular circumstances
of such an investment. Its inclusion potentially fails to safeguard against the state being
rewarded for engaging in conduct that increases the hypothetical buyer’s perception of
22 Gold Reserve, 841.

23 Id.
24 Exxon, 365.
25 Flughafen, 907.
26 OI, 780.
27 Tidewater, 184, 186.
28 OI, 763.
238
country risk, even in circumstances in which the state has agreed by treaty either to refrain
from or to provide compensation in respect of such action. The tribunal in Flughafen,
recently observed that states ought not to be allowed to benefit from an increase in coun-
try risk where the increase is caused by the post-investment conduct adopted by the state,
although on the facts before the tribunal, it found that had not been the case.29
Allowing conduct that is in breach of a treaty to operate as an effective discount on
compensation might suggest that no value is attributed to such treaty-protections beyond
the creation of a cause of action and access to international arbitration (rather than any
local courts). On this view, no protection appears to be afforded to an investor’s ability to
actually recover the full value of their investment. On another view, completely excluding
expropriation risk from country risk might arguably be viewed as unrealistic, excluding
risks that both the market and the investor have priced into the asset in question. Such an
approach could be viewed as over-compensating the investor.
The tribunal in Saint-Gobain considered the issue of the appropriate country risk pre-
mium at some length. A significant source of the parties’ disagreement turned on ‘whether
the risk of being expropriated without the payment of (sufficient) compensation as required
by the Treaty should be excluded from the country risk premium applicable to Venezuela.’30
The majority took the view that the treaty and recourse to arbitration did not provide
insurance against the general risks of investing in Venezuela, which a willing buyer would
necessarily take into account.31 The majority went on to hold that the country risk pre-
mium for Venezuela ‘must reflect all political risks associated with investing in Venezuela,
including the alleged general risk of being expropriated without payment of (sufficient)
compensation.’32
The concurring and dissenting opinion of Judge Charles N Brower in the Saint-Gobain
case, however, illustrates that a significant divergence of opinion on this issue remains:
To reduce the recovery to the injured Claimant by applying a ‘fair market value’ that incor-
porates the very risk of which the Claimant purportedly is being relieved by the Tribunal is to
deny the Claimant the full compensation to which it is entitled. It is like undertaking to restore
to the owner of a severely damaged automobile a perfectly repaired and restored vehicle but then
leaving parts of it missing because it just might be damaged again in the future.33
Outside the investor–state arena, country risk remains an appropriate albeit controversial
aspect of an overall damages assessment.
29 Flughafen, 905-907.
30 Saint-Gobain, 703.
33 Saint-Gobain, Concurring and Dissenting Opinion of Judge Charles N. Brower (21 December 2016), 3.
239
An alternative to DCF: the market-valuation approach

The market-valuation approach is outward looking insofar as it appeals to the market to
discover the price at which willing buyers and willing sellers are prepared to transact for
comparable assets, businesses, companies or shares from which a valuation of the particular
asset or company can be extrapolated.
In practice, it is rare to find appropriate comparables in the oil and gas industry because
‘each oil and gas property presents a unique set of value parameters’.34 They are likely
to be of different sizes, host unique geological features, yield different quality of oil, be
governed by specific contractual arrangements, be subject to different environmental and
remedial obligations, and face different political and legal risks. Moreover, as commodity
prices fluctuate, so too will the valuations of assets and companies. The task of identifying
and selecting potential assets for comparison and determining whether they constitute
appropriate comparators, involves a significant degree of judgment and can be a source of
dispute. Tribunals are generally reluctant to adopt the market-valuation approach ‘due to
the restricted reliability of sound sets of comparables in the local market’.35
Nonetheless, there are examples where the market-valuation approach has been used in
energy arbitrations. For example, in BG Group Plc v. Republic of Argentina, the tribunal relied
on two comparable transactions, taking place either side of the relevant egregious legislation,
from which the tribunal could assess the impact of the legislation and awarded the difference
between the two comparable transactions: US$185 million.36 In Ioannis Kardassopoulos and
Ron Fuchs v. Georgia, the tribunal was presented with three offers related to the claimant’s
shares and held that ‘a completed or seriously contemplated transaction offers the best evi-
dence of an asset’s FMV’.37 The tribunal adopted the claimant’s approach of weighting the
comparable transactions based on the ‘relative maturity of each transaction or offer’.38
More recently, the tribunal in Crystallex v. Venezuela39 relied on two market-based
approaches that yielded similar outcomes: a stock market approach and a relative market
multiple approach. Under the stock market approach, the claimant sought to have the value
of its investment assessed by reference to Crystallex’s market capitalisation prior to the
impact of the expropriatory measures, adjusted to take account of the performance of other
gold companies that had not been affected by the measures. One of the factors that led
the Crystallex tribunal to accept this approach was the fact that Crystallex was effectively a
one-asset company – its investments in Las Cristinas, an area reported to contain one of the
world’s largest undeveloped gold deposits, were its only asset. This, combined with the fact
that Crystallex’s shares were actively and heavily traded on two stock exchanges, persuaded
34 Occidental, 781, 787.

35 El Paso, 711.
36 BG Group Plc v. Republic of Argentina, UNCITRAL Award (24 December 2007) (BG) 444.
37 Ioannis Kardassopoulos and Ron Fuchs v. Georgia, ICSID Case Nos. ARB/05/18 and ARB/07/15, Award
(3 March 2010) 595.
38 Id. 600-603.
39 Crystallex International Corporation v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/11/2 Award
(4 April 2016) (Crystallex).
240
the tribunal that the stock market approach was an especially appropriate and reliable val-
uation method in this case.40
The relevant market multiple approach assessed the ratio of the enterprise values to
gold reserves of publicly traded gold companies, and then applied this ratio to the amount
of Crystallex’s in situ gold reserves at Las Cristinas.The tribunal was satisfied that the claim-
ant and its experts had identified sufficiently comparable companies.41 The two approaches
led to results that were largely consistent with each other, which provided the tribunal with
further comfort.42
Undoubtedly the most high-profile and significant use of the market valuation approach
was in Yukos Universal Limited (Isle of Man) v. Russian Federation (set aside by the Dutch
courts on unrelated grounds in 2016). Rather than relying on comparable transactions, the
tribunal used the market valuation of comparable companies as ‘the most tenable approach
to determine Yukos’ value’.43 It selected the RTS Oil and Gas index, an index that included
nine Russian oil and gas companies.The tribunal then used the movements in the index to
adjust Yukos’ value as of 21 November 2007 (the date of the breach) to the award date (the
valuation date) and awarded over US$30 billion.44
Alternatively, rather than being used as the primary valuation method, the
market-valuation approach may prove to be a useful check on a DCF valuation approach.
Thus, in Enron Creditors Recovery Corporation v. Argentine Republic, the tribunal referred to
the company’s market capitalisation (given that the company’s shares were traded on the
Buenos Aires and New York stock exchanges) to find that it was ‘satisfied that the figures
resulting from DCF do not show unreasonable differences with those resulting from the
verification done in light of the stock market value’.45
Other alternatives to DCF

Other valuation methods have also been applied by tribunals in circumstances where a
DCF approach was considered inappropriate. For example, in Rusoro v. Venezuela,46 the
tribunal held that the best approach to determining the FMV of expropriated gold mines
was a weighted combination of three methodologies. The first was described as the ‘maxi-
mum market value’, in effect, the enterprise value of the assets at their peak, prior to the
measures taken by Venezuela. Noting that this value was reached only for a very short
period, three years prior to the date of expropriation, the tribunal gave it a 25 per cent
weighting. The second was the book value of Rusoro’s assets on the last day of the quarter
in which the expropriation took place. Noting that this did not reflect the increase in gold
prices between the investment and expropriation, nor Rusoro’s development of the mining
40 Crystallex, 889-890.
41 Crystallex, 901.
42 Crystallex, 901.
43 Yukos, 1787.
44 The tribunal adjusted the value to both the expropriation date and the award date. The tribunal had earlier
identified that the claimants were entitled to select either the expropriation date or the award date as the
valuation date.
45 Enron, 428.
46 Rusoro Mining Limited v.The Bolivian Republic of Venezuela, ICSID Case No. ARB(AF)/12/5 Award
(22 August 2016) (Rusoro).
241
properties, the tribunal gave this value a 25 per cent weighting. Finally, the tribunal gave a
50 per cent weighting to what was described as the adjusted investment valuation, which
was derived by adjusting the original investment consideration for the increase in the price
of gold and value of gold producing companies.47
Valuation date
The valuation date, namely the date on which the market value of a claimant’s assets is
established for purposes of determining compensation, may have a significant impact on
quantum. In energy arbitration in particular, the date on which a party’s investment is val-
ued may be of critical importance given the price volatility that has characterised energy
markets in recent years.
As an initial matter, choice of valuation date may not be available to claimants in com-
mercial arbitrations premised on a breach of contract. Instead, ‘[b]y far, the common legal
approach’ is to use a valuation date ‘as of the date of harm’.48
However, the issue is more complicated in investor–state disputes where the host state is
alleged to have expropriated the claimant’s assets. Expropriations may be lawful or unlawful.
The appropriate valuation date for a lawful expropriation is ‘well-settled’ and refers to ‘the
date of expropriation, or to the date before the impending expropriation became public
knowledge, whichever is earlier’.49
On the other hand, tribunals in cases of unlawful expropriation (and sometimes other
treaty breaches50) have referenced the full reparation standard, applicable to remedy illegal acts
under international law, to justify departure from this approach. These tribunals have instead
valued the claimant’s expropriated assets as of the date of the award.51 The justification for a
date-of-award valuation is often linked to international law’s preference for restitution:
investors must enjoy the benefits of unanticipated events that increase the value of an expro-
priated asset up to the date of the decision, because they have a right to compensation in lieu
of their right to restitution of the expropriated asset as of that date. If the value of the asset
increases, this also increases the value of the right to restitution and, accordingly, the right to
compensation where restitution is not possible.52
This approach was recently adopted by the majority in Quiborax v. Bolivia, which concluded
that assessing the value of the investment on the date of the award allowed the tribunal
consider ex post data:
47 See Rusoro, 787-790.

48 Kantor, Mark, Valuation for Arbitration, Kluwer Law International (2008), p. 61.
49 Ripinsky, Sergey and Williams, Kevin, Damages in International Law, British Institute of International and
Commercial Law pp. 243-244.
50 Murphy Exploration & Production company – International v.The Republic of Ecuador, Partial Final Award,
UNCITRAL, PCA Case No. AA434 (6 May 2016), 425.
51 See generally, e.g., ADC Affiliate Limited and ADC & ADMC Management Limited v. Republic of Hungary, ICSID
Case No. ARB/03/16, Award (2 October 2006), Siemens A.G. v.The Argentine Republic, ICSID Case No.
ARB/02/8, Award (17 January 2007), Yukos.
52 Yukos, 1767. See also Draft Articles on Responsibility of States for Internationally Wrongful Acts, adopted by
the International Law Commission at its fifty-third session (2001), (ILC Draft Articles) Articles 35–36.
242
Using actual information is better suited for this purpose than projections based on information
available on the date of the expropriation, as it allows to better reflect reality (including market
fluctuations) when attempting to ‘re-establish the situation which would, in all probability, have
existed if that act had not been committed.’53
Similarly, having already found that the appropriate valuation date was the date of the
Award, the majority in Burlington Resources v. Ecuador held that ‘if, in the circumstances of
the particular case, the use of ex post information is relevant, reasonable and reliable … it
should be preferred to ex ante information’.54
The tribunal in Murphy v. Ecuador adopted a different approach. It held that in the
circumstances, it was not appropriate to assess the value as at the date of the award on the
basis of ex-post data. The tribunal found that such an approach would not have reflected
‘what the situation would have been in a but-for scenario’ because, following the sale to
Repsol, an entirely new contractual framework had been agreed that substantially changed
the financial dynamics of the investment.55
It is therefore important to understand when an expropriation may be characterised
as lawful or unlawful, which will often be dictated by the relevant investment treaty. For
example, the Energy Charter Treaty (ECT) provides that lawful expropriation entails that
the taking is in the public interest, not discriminatory, carried out under due process of
law, and ‘accomplished by the payment of prompt, adequate and effective compensation’
and satisfaction of other requirements.56 Recent cases have concluded that non-payment of
compensation is insufficient to render an otherwise lawful expropriation unlawful, where
the state has negotiated payment of compensation in good faith.57
53 Quiborax SA v. Plurinational State of Bolivia, ICSID Case No. ARB/06/02, (16 September 2015) at 379, citing
Factory at Chorzów, Merits, 1928, P.C.I.J., Series A, No. 17, p. 47.
54 Burlington Resources v. Ecuador, ICSID Case No. ARB/08/05 Decision on Reconsideration and Award
(7 February 2017).
55 Murphy v. Ecuador, 483-484. Following the introduction of the measure that ultimately led to the sale of
Murphy Ecuador to Repsol YPF, Repsol negotiated a new contractual framework that incentivised investment
(which Repsol did, leading to increased production). By contrast, under the old contractual framework
in place with Murphy, the incentives were to wind down investment. In the circumstances, the tribunal
employed an FMV methodology with a valuation date coinciding with the sale, rather than with the date of
the award [486]. The tribunal did, however, make use of information that became known after the valuation
date in determining whether the assumptions on the development of oil prices and production levels should
be adjusted and concluded that it was ‘neither necessary nor justified to adjust the ex-ante calculation of
damages’ [487].
56 ECT, Article 13(1).
57 ConocoPhillips Petrozuata B.V., ConocoPhillips Hamaca B.V. and ConocoPhillips Gulf of Paria B.V. v. Bolivarian
Republic of Venezuela, ICSID Case No. ARB/07/30, Decision on Jurisdiction and Merits (3 September 2013),
401 (‘The Tribunal accordingly concludes that the Respondent breached its obligation to negotiate in good
faith for compensation for its taking of the ConocoPhillips assets in the three projects on the basis of market
value as required by Article 6(c) of the BIT, and that the date of the valuation is the date of the Award.’); Mobil
Corp. et al v.Venezuela, ICSID Case No. ARB/07/27, Award (9 October 2014), 301, 305–306 (‘[T]he mere fact
that an investor has not received compensation does not in itself render an expropriation unlawful. An offer
of compensation may have been made to the investor and, in such a case, the legality of the expropriation
will depend on the terms of that offer. . . . [T]he evidence submitted does not demonstrate that the proposals
243
As noted above, assessing damages as of the date of the award may have a major impact
on quantum. For example, the tribunals’ decision to value the claimants’ expropriated
assets as of the date of the award in the Yukos arbitrations accounted for a difference of
US$44.7 billion. As a result of the significant increase in oil prices over the past decade, the
value of the assets had grown from US$21.9 billion on the date of the alleged expropriation
in 2004, to US$66.6 billion when the award was issued in 2014.58
Of course, claimants should not automatically opt to have their damages assessed as of
the date of the award where their investments have been unlawfully expropriated, espe-
cially if the value of the relevant assets has declined in the interim. In this regard, the Yukos
tribunals suggested that an investor is entitled ‘to select either the date of expropriation or
the date of the award’.59
Even if the chosen valuation date is the date of the expropriation, that does not render
market value as of the date of the award irrelevant.Where the market value of the expropri-
ated asset at the time of the award confirms the assumptions underlying a party’s valuation
model, the tribunal may take comfort in this additional check and look more favourably
on that party’s valuation.60
Awards of interest
Awards of pre-award interest (accruing from the date of breach through the date of the
award) and post-award interest (accruing from the date of the award through the date of
payment) on principal damages are provided for in many national legal regimes, and in
international law.61 Today, it is common practice for international arbitral tribunals to award
one or both types of interest, and to set the mode by which interest will be calculated
where post-award interest is ordered, although some commentators have bemoaned the
lack of a ‘rational and uniform approach for evaluating interest claims’.62
Before turning to consider the rules and principles that tribunals have applied to calcu-
late interest payments, it is important to keep in mind the functions that awards of interest
are typically believed to fulfil. In essence, payment of interest reflects that the damages
owed by the respondent to the claimant are a debt.63 As such, the claimant is entitled
made by Venezuela were incompatible with the requirement of “just” compensation of Article 6(c) of the BIT.
Accordingly, the Claimants have not established the unlawfulness of the expropriation on that ground.’).
58 Yukos, 1826.
59 Id. 1763.
60 For example, in Amco Int’l Finance Corp. v. Iran, the tribunal referred to actual post-valuation oil prices to
check the reasonableness of forecasts adopted by experts. Amco Int’l Finance Corp. v. Iran, Iran Award 310-56-3,
15 Iran-U.S.C.T.R. 189, (14 July 1987), 181, 237. In Occidental the tribunal availed itself of post-valuation data
to check the parties’ assumptions. Occidental 726.
61 ILC Draft Articles on State Responsibility, Article 38(1). (‘Interest on any principal sum . . . shall be payable
when necessary in order to ensure full reparation. The interest and mode of calculation shall be set so as to
achieve that result.’)
62 Gotanda, John Y. ‘Awarding Interest in International Arbitration’ (1996) 90 AJIL 40, 40; Walde, T.W. and Sabahi,
B., ‘Compensation, Damages and Valuation in International Investment Law’ in Compensation and Damages in
International Investment Arbitration (ed. I. Marboe), p. 46.
63 Harris, D., Caldwell, R. and Maniatis, M. Alexis, ‘A Subject of Interest: Pre-award Interest Rates in
International Arbitration’ (1 June 2015), http://www.brattle.com/system/publications/pdfs/000/005/173/
original/A_Subject_of_Interest_-_Pre-award_Interest_Rates_in_International_Arbitration.pdf?1433164385.
244
to compensation for the time value of money, preventing the unjust enrichment of the
defendant, who improperly derived benefit from the ‘borrowed’ money, and encouraging
the timely resolution of disputes by attaching financial consequences to the time elapsing
between the defendant’s breach and the resolution of the dispute and payment of dam-
ages.64 Interest may also be viewed as compensating the claimant for the payment risks
attached to the respondent.65
An arbitral tribunal will look first to the relevant treaty or contract to determine whether
interest should be paid, and in what amount. If the treaty or contract is silent, the tribunal
may resort to the relevant national law rules regarding payment of pre and post-judgment
interest,66 or general principles of international law.67 Tribunals in investor–state disputes
have moved away from the application of domestic law rules, towards an international law
rule of full reparation and compensation for the injured party.68 Claimants and respondents
should survey the contractual provisions, relevant national laws and international law to
determine which regime provides the most advantageous rules.
Interest can have a significant impact on quantum, especially where compounded inter-
est at a commercially reasonable rate is ordered.69 The Tenaris tribunal recently awarded
pre-award interest in a sum almost as much as the calculated loss of investment.70 Having
applied an interest rate of 9 per cent compounded semi-annually, the pre-award interest
calculated on the loss of US$87.3 million amounted to approximately US$85.5 million.
Subject to a six-month grace period, post-award interest was ordered on the same basis.
Accrual of interest
It is generally accepted under international law that interest begins to accrue from the date
on which the loss is suffered, usually the date breach: ‘Interest runs from the date when
the principal sum should have been paid until the date the obligation to pay is fulfilled’.71
While this may be an easy rule to apply in the case of an outright expropriation, it may
be more difficult to discern the date of breach in cases of ‘creeping’ expropriations or, for
64 Gotanda, John Y., ‘Compound Interest in International Disputes’ (2004) Oxford U. Comparative L. Forum at
https://ouclf.iuscomp.org/articles/gotanda.
original/A_Subject_of_Interest_-_Pre-award_Interest_Rates_in_International_Arbitration.pdf?1433164385.
66 Gotanda, John Y., ‘Awarding Interest in International Arbitration’ (1996) 90 AJIL 40, 51 (describing the process
of ascertaining a national law to be applied to an interest claim as ‘particularly complex’).
67 Id. at 53.
68 Compañía de Desarollo de Santa Elena, S.A. v.The Republic of Costa Rica, ICSID ARB/96/1, Final Award
(17 February 2000) (Santa Elena); Wena Hotels v. Egypt, 41 I.L.M., pp. 933, 945 (2002).
69 For example, the Occidental tribunal awarded the claimant pre-award interest on principal damages of
$1.769625 billion at the rate of 4.188 per cent per annum, compounded annually over six years, and
post-award interest at the US six-month LIBOR rate, compounded monthly, accruing from the date of the
award in September 2012. Ecuador still has not paid the award while an annulment application is pending.
Occidental 876.
70 Tenaris 1, 625.
71 ILC Draft Articles on State Responsibility, Art. 38. See also Ioan Micula and others v. Romania, ICSID Case No.
ARB/05/20, Award (11 December 2013), 1273 (‘Interest must be calculated from the date on which the loss
was suffered. This is usually the day on which the breach occurs.’).
245
example, where the respondent has failed to accord fair and equitable treatment to the
claimant’s investment.
Compound or simple interest

Awards of compound interest have become the prevailing practice in international arbitra-
tion over the course of the last decade.72 For example, in 2007, the tribunal in Compañiá
de Aguas del Aconquija SA and Vivendi Universal SA v. Argentine Republic conducted a
‘non-exhaustive review of investment arbitration cases’ and concluded that seven awards
granted compound interest and three granted simple interest.73
However, an award of compound interest should not be taken for granted. Despite rec-
ognising that ‘the awarding of compound interest under international law now represents
a form of ‘jurisprudence constante’ in investor–state expropriation cases’,74 the Yukos tribu-
nal concluded that ‘it would be just and reasonable to award Claimants simple pre-award
interest’ in the circumstances of that case, although it did order that post-award interest be
compounded.75 Similarly, the tribunal in Mr Franck Charles Arif v. Republic of Moldova also
considered the award of simple interest as ‘more appropriate’.76 It therefore is important
for a claimant to provide reasoned argument in favour of an award of compound interest,
highlighting the recognition that compound interest is not punitive, but rather intended to
ensure appropriate compensation;77 and the fact that compound interest may better reflect
the economic ‘realit[ies] of financial transactions’ or ‘contemporary financial practice’.78
Interest rate
If the governing contract or treaty specifies the appropriate interest rate, the tribunal gen-
erally will apply that provision. In the absence of an explicit provision governing the rate
of interest (or where provision is simply made for interest to be paid ‘at a commercial rate
established on a market basis’),79 tribunals have typically considered payment at:
• a reasonable commercial rate, typically reflecting a risk-free rate or benchmark inter-
est rate;
• the respondent’s unsecured ‘borrowing’ rate;
72 This was not always the case; in 2007, two commentators noted that ‘[t]he norm, until recently, has been to
award simple interest.’ See Walde, T.W. and Sabahi, B., ‘Compensation, Damages and Valuation in International
Investment Law’ in Compensation and Damages in International Investment Arbitration (ed. I. Marboe), OUP
Oxford p. 45.
73 Compañiá de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentine Republic, ICSID Case No.
ARB/97/3, Award (20 August 2007) (Vivendi), 9.2.4. See also Walde, T.W. and Sabahi, B., ‘Compensation,
Damages and Valuation in International Investment Law’ in Compensation and Damages in International
Investment Arbitration (ed. I. Marboe), OUP Oxford p. 45.
74 Yukos, 1689.
75 Id.
76 Mr. Franck Charles Arif v. Republic of Moldova, ICSID Case No. ARB/11/23, Award (8 April 2013), 619.
77 Santa Elena, 104.
78 Azurix Corp. v.The Argentine Republic, ICSID Case No. ARB/01/12, Award (14 July 2006) 440; LG&E Energy
Corp. & Ors v. Argentina, ICSID Case No. ARB/02/1, Award (25 July 2007) 103.
79 Id., Art. 13(1).
246
• the claimant’s borrowing rate; or

• the cost of the claimant’s own capital.
Tribunals will most often order interest to be paid at a commercially reasonable rate,
although they have diverged in determining how such a rate should be calculated. The
majority of tribunals have looked to risk-free rates or benchmark interest rates when
awarding interest to claimants. The underlying theory is that as a result of the breach, the
claimant no longer bears the risk attached to its investment and it therefore should not be
compensated for those risks. Instead, the award of interest simply compensates the claimant
for the time value of money for the period of the dispute. Commonly used risk-free rates
derive from US or German government bonds, although a tribunal will have to decide
which short-term or long-term rate is most appropriate depending on the particularities
of the case. In BG Group Plc. v.The Republic of Argentina, the tribunal applied the rates of US
Treasury six-month certificates of deposit, compounded semi-annually.80 Benchmark rates
will typically take the form of LIBOR plus a spread. For example, in PSEG Global Inc. and
Ors v.Turkey, the ordered interest to be paid at a rate of LIBOR +2 per cent.81 The tribunal
in Guaracachi and Rurelec v. Bolivia, on the other hand, awarded interest at ‘the annual interest
rate reported on the website of the Central Bank of Bolivia for USD commercial loans’.82
wThe claimant’s borrowing rate, namely the ‘average interest rate which Claimant
would have paid to borrow’ has been applied by tribunals, on the assumption that ‘it is
appropriate and realistic to assume that Claimant would have applied the sums received
either to eliminate existing debt or avoid incurring additional debt’.83
Awarding interest at the claimant’s cost of capital, or at the rate of return available on
investment alternatives, reflects the notion that the claimant would have made productive
use of the damages owed to it by the respondent by profitably investing in its own business.
This approach has been criticised on the grounds that it is economically unsound, not
least because ‘the claimant never undertook the alternative investments nor did it run the
associated risks, yet pre-award interest at the claimant’s return would provide compensation
on the presumption that the claimant did and that the investments turned out as expect-
ed’.84 Tribunals are divided on the acceptability of an award of interest at the claimant’s
cost of capital. While the tribunal in Vivendi v. Argentina accepted that pre-award interest
represented a ‘reasonable proxy for the return Claimants could otherwise have earned on
80 BG, 455.
81 PSEG Global Inc. and Konya Ilgin Elektrik Üretim ve Ticaret Limited Sirketi v.Turkey, ICSID Case No. ARB/02/5,
Award (19 January 2007), 348 (PSEG).
82 Guaracachi America, Inc. and Rurelec PLC v.The Plurinational State of Bolivia, UNCITRAL, PCA Case No.
2011-17, Award (31 January 2014) 615 (Guaracachi).
83 National Grid P.L.C. v.The Argentine Republic, UNCITRAL, Award (3 November 2008) 294.
original/A_Subject_of_Interest_-_Pre-award_Interest_Rates_in_International_Arbitration.pdf?1433164385;
see also Abdala, Manuel A., Lopez Zadicoff, Pablo D., Spiller, Pablo T., ‘Invalid Round Trips in Setting
Pre-Judgment Interest in International Arbitration’, World Arbitration and Mediation Review, 2011 Vol. 5 No. 1,
p.11.
247
the amounts invested and lost’,85 many tribunals have rejected this argument. For example,
the tribunal in Guaracachi and Rurelec v. Bolivia found that the claimant’s weighted aver-
age cost of capital did not constitute ‘interest at a normal commercial or legal rate’, and
left the claimants overcompensated because ‘the WACC includes an ex ante allowance for
forward-looking business risks which should not be applied ex post’.86
Conclusion
While every case for damages in the energy sector will turn on its facts, a few lessons of
general import can be taken from the discussion above. In particular, there are a number of
legal and factual issues that must be considered and properly pleaded to maximise (for the
claimant) or minimise (for the defendant) quantum. It will almost always be appropriate to
engage at least one expert to support any damages analysis submitted in energy arbitration,
with appropriate experience in the relevant sector.The expert or experts will need to work
closely with counsel as well as internal business people, who will often be best-positioned
to provide evidence and information regarding, for example, the production profile for the
specific assets at issue.
The first decision to be made will be selecting the valuation model to support the
compensation claim. A DCF model will be appropriate in the majority of situations, but it
is worth considering whether a market-valuation approach may provide a viable alternative
(or whether it might provide comfort to the tribunal as a check on the reasonableness of
a DCF valuation). It is important to spend time thinking about the appropriate evidence
to support the cash flow inputs for a DCF analysis, namely production and price, or the
appropriateness of the comparables selected for a market-valuation approach. Likewise,
serious thought should be given to an appropriate and credible discount rate that properly
reflects the risk to which the assets in question are subject, including country risk. Where
there is potential in investment treaty arbitration for a claim of illegal expropriation, this
may provide an opportunity to value the assets as of the date with the most advantageous
price point and projections, whether that is the date of breach or the date of the award.
Finally, requests for interest on the principal damages sum should be fully articulated and
economically sound, to ensure that the claimant is compensated for the full scope of its loss.
85 Vivendi, 9.2.8. Note, though that the tribunal halved the ‘anticipated 11.7 per cent rate of return on
investment’ sought by the claimant to a 6 per cent interest rate. Id.
86 Guaracachi, 609, 615. See also PSEG 348 (rejecting the claimant’s cost of equity, Turkish bond yields and US
Treasury bills in favour of LIBOR +2 per cent, compounded semi-annually); Enron 451–52 (rejecting use of
the claimant’s WACC and applying instead an interest rate of 6-month LIBOR +2 per cent).
248
17
Expert Evidence
Howard Rosen and Matthias Cazier-Darmois1
Disputes tend to arise more often in the energy industry than in others. In addition to
the scale and complexity of the investments typically required in energy projects, another
important explanatory factor is volatile energy prices that affect the returns realised on
these investments.
Oil prices dropped from US$140/barrel in mid-2008 to approximately US$40/barrel
in just six months. In the US, following a dramatic increase in shale gas production, natural
gas prices dropped from above US$12/MMBtu in mid-2008 to just over US$3/MMBtu a
year later. More recently, oil prices went from over US$100/barrel in late 2014 to less than
US$50/barrel a few months later. Coal and power prices have also experienced significant
fluctuations over the same time period.
Although energy agreements are typically designed to split identified risks between pro-
ducers, transporters and users, significant price variations can affect the commercial balance
(real or perceived) of energy agreements and lead to tensions among stakeholders (investors,
lenders, states and consumers) on how profits (or losses) should be shared between them.
This is fertile ground for disputes and arbitrations: in 2015, 20 per cent of the cases filed
with the International Centre for Settlement of Investment Disputes (ICSID) were in the
‘Oil, Gas and Mining’ industry and 42 per cent in the ‘Electric Power and Other Energy’
industry. The energy and extractive industry cases therefore collectively represented 61 per
cent of all ICSID cases registered in 2015, far more than any other sector.2 Variation in
energy prices has also resulted in a large number of commercial arbitrations following the
activation of price review clauses in sales agreements.
1 Howard Rosen is a senior managing director and Matthias Cazier-Darmois is a senior director at FTI
Consulting. They would like to thank Dugald Young for his assistance in researching and writing this chapter.
2 ICSID Case Load Statistics, issue 2016-1, p. 26.
249
Expert Evidence
When disputes arise, the amounts at stake are often substantial. In 2012, an ICSID
tribunal awarded US$1.8 billion in damages (excluding interest) in the Oxy v. Ecuador dis-
pute.3 In October 2014, an ICSID tribunal awarded damages of US$1.6 billion (excluding
interest) to Exxon Mobil following a claim brought against Venezuela.4 These awards were
dwarfed by the decision of the tribunal in the arbitration between the former shareholders
of Yukos and the Russian Federation where damages of US$50 billion were awarded to
Yukos’s former shareholders. This award would have been US$17 billion higher, had the
tribunal not determined that the claimant bore partial responsibility for the breaches.5 The
financial impact of price review arbitration decisions is also often in the billions of dollars.
In this chapter, we briefly discuss the role of expert witnesses in arbitrations and consider
three specific features that can affect the nature of expert evidence in the energy industry.
Firstly, assessing damages typically requires forecasting cash flows over long periods,
often in hypothetical (or counterfactual) scenarios. As there can be significant uncertain-
ties associated with this exercise in the energy industry, parties may be inclined to rely
on industry experts to provide opinions on future or counterfactual states of the world.
However, at the same time, industry specialists may lack the expertise required to turn their
industry knowledge into robust quantifications of damages or evaluate how the evidence
of a case supports their own opinion. These skills fall more naturally under the remits of
valuation or economic experts. The frequent need for a variety of expertise and the often
high financial stake tend to make energy disputes more prone to multiple appointments of
experts. Some of the implications of dual appointments are discussed in this article.
Secondly, more often perhaps in energy disputes than in others, expert evidence can be
relevant to the merits of the case. This is because the financial circumstances of a dispute
can be an aid to understanding the potential motivations behind a breach: for example, a
20-year contract may have been terminated because a notice was not issued on time, as
a respondent might allege, or it may have actually been because the respondent stood to
lose substantial sums if it had continued to honour its contractual obligations because of
changes in the price environment since the deal was originally struck. Counsel may rely on
their experts to address some of these questions.
Thirdly, the volatility of energy prices makes the date on which damages are assessed
especially important. This can have a significant impact on the value of a claim, as dis-
cussed herein.
3 ICSID Award in Occidental Petroleum Corporation, Occidental Exploration and Production Company (claimants) v.The
Republic of Ecuador (respondent), dispatched to the parties on 5 October 2012, p. 326.
4 ICSID Case No. ARB/07/27, Award, p. 133.
5 The tribunal found that ‘the Claimants contributed to the extent of 25 percent to the prejudice they suffered
at the hands of the Russian Federation. As a consequence, the amount of damages to be paid by Respondent
to Claimants will be reduced by 25 percent to USD 50,020,867,798.’ (p. 564, paragraph 1827, PCA Final
Award in Yukos International Limited v. Russian Federation). This finding was based on the reasoning that, if ‘there
is a sufficient causal link between any willful or negligent act or omission of the Claimants . . . and the loss
Claimants ultimately suffered’ the final award should be reduced to reflect that (Id. p. 501, paragraph 1599).
This award was subsequently overturned by a court in The Hague on jurisdictional grounds. At the time of
publication, the original claimants are preparing to appeal this decision.
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Expert Evidence
Role of expert witnesses

Experts are typically appointed to assist the tribunal in making an assessment of the mon-
etary compensation that would put the injured party back in the economic situation in
which it would have been in the absence of the wrongful actions of the respondent.
Three main valuation methods are often employed by experts to estimate the value
of a claimant’s investment: income-based approaches, market-based approaches and
asset-based approaches.
Income-based approaches consist of estimating the present value of future monetary
benefits lost by the claimant because of the breach. Among these approaches, the most
widely applied is the discounted cash flow (DCF) method. Under the DCF method, the
expert estimates the company’s or project’s expected future cash flows and discounts them
at a rate reflecting the risks associated with their realisation. Cash flows are sometimes fore-
casted under two main different scenarios, with and without the alleged breach, to measure
the cash flows ‘lost’ as a result of the breach in question.
The strength of this approach lies in its theoretical and practical soundness: it is the
most commonly applied methodology in the oil and gas industry for project and acquisi-
tion appraisal and other resource allocation decisions. It is also able to factor in the unique
features of the company or project in question (in relation to costs, taxes, risks, etc., which
can vastly differ between projects).
Conversely, the forward-looking nature of the DCF requires assumptions over future
revenues and costs, such as commodity prices, which may be difficult to predict. The DCF
methodology is therefore best suited in cases where future cash flows can be estimated with
a reasonable degree of confidence. The application of the DCF method further requires
assessing an appropriate discount rate to account for the risks associated with the realisation
of the forecasted cash flows. A number of elements, such as the project’s geographic loca-
tion, or its state of advancement, can affect the level of risk and warrant specific adjustments
to the discount rate. For this reason, and because there is no universally agreed method to
quantify a number of specific risk factors, the discount rate is often the subject of debate
between experts, with potentially significant effects on the estimate of damages.
Market-based approaches consist of deriving the value of a project or company by
reference to the value of other comparable projects or companies whose market value is
known or can be inferred. The market value of a power plant, for example, could in theory
be estimated by reference to the market value of similar power companies listed on a stock
exchange or recently sold. The expert can then adjust for differences in size (by assessing
‘multiples’ of certain relevant metrics such as profits or, in the example of power plants,
capacity) or timing (through indexation methodologies), to infer an estimate of the market
value of the company.
The strengths of this approach are that it is relatively straightforward to understand, and
that it is based on market observations, arguably less prone to subjective judgements than
the DCF method. A limitation is the ability of the expert to identify sufficiently compa-
rable companies for benchmarking. Adjusting for different features between the company
being valued and the benchmarks identified (such as different extraction costs, growth
prospects, locations, etc.) can be difficult and involve a degree of judgement. A lack of
pertinent details regarding the benchmarks (for instance, details of the circumstances sur-
rounding the transactions in comparable assets) can further compound the issue.
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Expert Evidence
The third approach consists of valuing a company or project by reference to the value
of the assets it holds.This can be achieved by considering the investments made in the com-
pany of the value its individual assets and liabilities. This approach is typically appropriate
for early stage companies (when investments, operating costs and revenues are unknown
or when reserves have not been delineated) or for companies that are not going concerns.
The main disadvantage of this method stems from the difficulty in identifying and valu-
ing the market value of each asset and liability, and not considering them as an operating
unit. Additionally, for profitable going concerns the amounts invested in the project may
be worth less than the present value of the project’s expected profits and this approach may
therefore understate the true market value of that project.
The market value of a business should in principle not depend on the method applied
to measure it. All methodologies, if appropriately applied, should lead to similar conclusions
on value, and applying multiple valuation methodologies will typically bolster a conclu-
sion. Ultimately, although well-sourced and documented models can be effective and are
essential in almost all energy disputes, the litmus test for any tribunal is often how well the
analysis stands up against evidence the observable behaviour of the market.
Independence and transparency, two key requirements for expert witnesses

Although experts are typically appointed by parties, they are expected to perform an inde-
pendent assessment.
Party-appointed experts are governed by a set of rules specific to each arbitral institu-
tion. These procedural guidelines often include instructions relevant to the use of experts.
The parties also sometimes adopt standardised rules published by the International Bar
Association (IBA) or by the United Nations Commission on International Trade Law
(UNCITRAL) to supplement institutional rules.
Arbitral institutions do not provide uniform guidance on experts, although a few
themes are universal. Broadly, arbitral institutions require that experts be independent from
the parties and transparent on how they reached their conclusions (the facts they relied
upon, the methodology they used, the opinions they hold, etc.).
Independence from the parties is a key requirement for party-appointed experts, who
are expected to provide impartial evidence rather than a partisan testimony on behalf of
their client. They commonly provide declarations of their independence in their reports to
tribunals (as well as to comply with arbitration rules). This practice delineates the expert’s
ethical and independence obligations, but equally reminds the expert of his or her primary
duty to assist the tribunal.6
6 The IBA and UNCITRAL Rules require for instance that experts affirm their independence before accepting
appointment. Art. 5(2) of the IBA Rules require party-appointed experts to provide ‘a statement of his or
her independence from the Parties, their legal advisors and the Arbitral Tribunal’ and to make ‘an affirmation
of his or her genuine belief in the opinions expressed in the Expert Report’. Additionally, under these
rules, an expert must confirm that matters discussed in the report are accurate, and within his or her area of
expertise. Experts appearing before ICSID tribunals are required to ‘solemnly declare upon [their] honour and
conscience that [their] statement will be in accordance with [their] sincere belief.’ IBA Rules on the Taking of
Evidence in International Arbitration, adopted by a resolution of the IBA Council on 29 May 2010.
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Expert Evidence
This independence obligation can also be governed by self-regulated professional bod-

ies: general professional codes of conduct have been adopted for instance by the Chartered
Professional Accountants Canada, the American Institute of Certified Public Accountants,
the Institute of Chartered Accountants of England and Wales or Institute of Chartered
Accountants of Scotland, or the CFA Institute which awards and regulates the use of
the certified financial analyst designation. Although not all these bodies provide specific
guidance for their members acting as expert witnesses, they all broadly address the issue
of independence.
Transparency is the other key requirement for an expert witness, to allow the parties
and the tribunal to understand the premises underpinning the expert’s conclusions, and the
reasoning behind his or her findings.
Institutional rules governing expert evidence typically require experts to prepare reports
that are relevant, sufficient and reliable, based on acceptable methodologies.The IBA Rules
for instance require expert witnesses to set out the facts on which their opinions are based,
and describe the method, evidence and information relied on.7 Some rules (such as the
CIArb Protocol) also recommend that an expert bring to the attention of the tribunal all
matters which may adversely affect his or her professional opinion, and notify the parties
if their opinion requires correction subsequent to submission of a written expert report.
The ability of the parties and tribunal to question expert witnesses during a hearing is
another convention aimed at transparency. It is a pervasive feature of institutional rules. All
arbitral institutions require that experts be available for cross-examination or a similar form
of questioning by the tribunal and counsel.
Dual appointments are often made in relation to energy disputes

One of the most common methods used by experts to assess economic damages in energy
disputes is the DCF method, which, as explained above, requires an estimation of cash
flows, sometimes far into the future. However, one difficulty with applying this method is
that the energy industry is prone to significant and often unexpected economic changes.
The past or current performance of a project or company is not always the best guide to
future performance.
Experts assessing damages in energy disputes may therefore be confronted with difficult
questions: what will be the price of Brent crude oil in 2050? How will gas prices evolve in
the Mediterranean basin over the next two decades? Will the gap between the natural gas
hub prices and oil indexed prices expand or narrow in the future?
More complex questions can arise when the uncertainty over the future of market
fundamentals is combined with the uncertainty of a counterfactual scenario, such as what
profits a concession could have reasonably generated over 20 years, had the gas field been
as warranted in the concession agreement.
In addition, the financial consequences of the actions complained of often need to be
assessed as at the date of the breach. For example, if a gas delivery contract providing for
deliveries until 2030 was terminated unlawfully in 2010, the financial consequences of the
supply interruption may need to be evaluated as of 2010. In principle that means that the
7 IBA Rules, Art. 5.2, 1 June 1999.
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Expert Evidence
experts should rely only on expectations from 2010. Experts therefore, not infrequently,
find themselves having to make predictions based only on the knowledge and expecta-
tions that prevailed at some point in the past. With arbitration proceedings sometimes aris-
ing years after the alleged breaches, this compounds the difficulty of the exercise that the
experts must undertake.
Experts appointed in energy arbitrations therefore are often required to make forecasts
amid considerable uncertainty. Quantum experts that are otherwise well placed to estimate
the present value of future cash flows may not be best qualified to give an opinion on spe-
cific industry developments affecting cash flows, and industry experts may provide valuable
insight when these questions arise.
At the same time, industry experts may lack the skills or experience required to trans-
late market predictions into cash flow forecasts for use in a DCF, assess the riskiness of the
claimant’s business operations to calculate an appropriate discount rate, or assess the impact
of other economic factors on the market value of, say, an expropriated company. Industry
experts may also be less comfortable with the forensic examination of the evidence before
a tribunal to triangulate their views with business plans, forecasts or transactions in com-
parable companies at the time of the breach. These fall more naturally under the remits of
quantum experts.
As both sets of skills are distinct and necessary, it is not infrequent for parties to appoint
experts with industry knowledge and experts with valuation skills. This is a relatively com-
mon feature of energy arbitrations. In Oxy v. Ecuador, twelve experts were appointed with
quantum experts relying extensively on the evidence of industry experts. Similarly in
ExxonMobil v.Venezuela, the claimants alone appointed eight experts.8
Multiple appointments of experts have various implications for the tribunal, the parties,
counsel and the experts.
Experts must work independently to arrive at their own opinions, but also in concert
so that their opinions are based on the same set of facts, and can be incorporated into
an overall analysis of damages. Furthermore good planning and coordination is required,
especially when the appointed experts are not from the same firm and are not used to
working together. Indeed the evidence of an industry expert is frequently used as an input
to the work of a quantum expert.9 Further, industry experts who have not had experience
in preparing expert reports for use in international arbitration will require guidance as to
the rules governing experts and the need to communicate clear, unambiguous conclusions
based on the evidence in the case.
Experts may choose to produce their evidence in separate reports authored and signed
by each expert or in a joint co-signed expert report. The former option can provide more
clarity and accountability, while the latter is more likely to guarantee a coherent frame-
work of analysis. Either way, the appointment of more than one expert is invariably more
expensive and may lead to an inflation of the proceeding costs. In Oxy v. Ecuador, a total
8 Including two quantum experts, one financial theory expert, two experts in the field of oil reserves evaluation,
one expert in oil price forecasting, one expert in the management of oil and gas projects, and one expert in
the field of negotiations of commercial and fiscal arrangements in energy projects.
9 In ExxonMobil v.Venezuela, the oil price forecast of the claimant’s oil prices expert was for instance used by the
claimant’s damages expert to estimate the project’s long-term cash flows.
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Expert Evidence
of 32 expert reports produced by 12 experts (five on the claimants’ side and seven on the
respondent’s) during proceedings.10
Expert evidence can be relevant to the merits of a case

Another characteristic of energy disputes is that expert evidence may be relevant not only
to the quantification of damages but also to questions pertaining to the merits of a case.
Outright expropriations or terminations of long-term contracts are not very com-
mon: respondents will allege that their decision (for example) to expropriate, discriminate
or terminate was a response to some prior wrongful acts of the claimant. Allegations of
infringement on environmental laws, tax evasion, late payments or non-conformity of the
product with the terms of the original agreement are examples of claims typically made by
respondents to justify the actions complained of by the claimant.
Understanding motives behind alleged breaches may assist the tribunal in determining
the credibility of the parties’ assertions. Experts can aid understanding of the potential eco-
nomic motivations of the parties, for example by calculating the financial benefits associ-
ated with the respondent’s decision to terminate a long-term contract.
Allegations of corruptions against the claimant or the respondent also sometimes arise
in disputes and arbitrations proceedings. As corruption is often difficult to prove, counsel
might seek to rely on expert evidence to show, for instance, that the original deal was unbal-
anced from the outset. In that context, experts might be instructed to consider whether
in their opinion the returns on the claimant’s investments conformed to industry norms,
whether the royalty rates provided in the agreement were sound, or whether the level of
price agreed was commensurate with energy prices prevailing at the time of the agreement.
Naturally, imbalances and misalignments of interest can also arise because of divergent
expectations from the outset, asymmetric information or differences in bargaining power
at the time of the signing of the original agreement.
These considerations illustrate situations in which counsel may instruct their experts on
matters not directly relevant to quantum.
Importance of timing in energy disputes

In 2014, oil prices dropped from over US$100/barrel in late 2014 to less than US$50/
barrel a few months later. This sell-off was prompted by a combination of factors. On
the supply side, US shale production increased significantly over the last few years, while
OPEC decided not to reduce their level of output, resulting in an unexpectedly high global
oil supply.11 On the demand side, past investments in fuel-efficient technologies to accom-
modate the soaring costs of fuel, and the slow growth in Western economies led to unex-
pectedly low levels of demand. Collectively, these factors contributed to an unexpected
imbalance between supply and demand with dramatic effects on prices.12
10 ICSID Case No. ARB/06/11, Award, p. 31.

11 Shale gas production is up 230 per cent and US crude oil production up 67 per cent since 2010. Looking
Forward- Effects of $50/BBL Oil, FTI Consulting, p. 1.
12 Reuters, Oil price fall exacerbated by hedging, energy firms’ debt: BIS, 7 February 2015.
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Expert Evidence
Forecasts of future energy prices are about as volatile as energy prices themselves.
Investors considering an investment in an oilfield in July 2014 would have been unlikely to
build a dramatic fall in oil prices in the following months into their forecast.13
Similarly an expert or a tribunal seeking to reconstruct expectations to assess damages
as of that date should also in principle disregard developments subsequent to the date of
breach.14 Given the significant volatility of energy prices, a small change in the date on
which damages are assessed can have a substantial impact on the quantum of the claim.
Yet, identifying the date on which damages are assessed is not always straightforward.
The choice of the relevant date (whether date of breach or current date) depends on the
nature of the breach as well as the applicable law.15 Furthermore, different approaches have
been adopted in similar circumstances by different tribunals, adding uncertainty as to what
date it is appropriate to use. Difficulties can be further compounded where there are several
breaches complained of or where the breach takes place over a long period, such as in the
case of rampant expropriations.16
The Yukos case provides an interesting illustration of the substantial effect that the
choice of the valuation date can have on quantum. In this case, the tribunal performed
two assessments of Yukos former shareholders’ damages: one at the expropriation date in
2004 (US$16.5 billion) and the other at the date of the award in July 2014 (US$50 bil-
lion). On the basis that investors should benefit from favourable events increasing the
value of the expropriated asset up to the date of the award (as is generally the case in
unlawful expropriations), the tribunal awarded the largest of these amounts. The difference
between these assessments, some US$33.5 billion, reflects the impact of the choice of the
date of assessment on damages. This US$50 billion award would have been approximately
13 In early July 2014, with oil prices at around US$110/barrel, oil future contracts for delivery in 2021 traded at
approximately US$100/barrel. Six months later, when oil prices were approximately US$40/barrel, 10 year
contracts traded at substantially less, close to US$75/barrel).
14 Tribunals sometimes explicitly rely on hindsight, in particular to confirm certain key assumptions. Recently
for example in the Tidewater Investment SRL v.Venezuela case, the tribunal found that although damages
should be assessed as at the date of the expropriation, the tribunal was ‘not required to shut its eyes to events
subsequent to the date of injury, if these shed light in more concrete terms on the value applicable at the
date of injury or validate the reasonableness of a valuation made at that date’. In this case we understand that
the question was relevant in deciding whether the tribunal should account for revenues associated with a
prospective gas field that turned out to be dry shortly after the expropriation date. (Tidewater Investment SRL
and Tidewater Caribe, C.A. v.Venezuela, ICSID Case No. ARB/10/5, paragraph 160).
15 A number of tribunals have decided that a claimant was entitled, in cases of an unlawful expropriation, to
claim for damages as at the date (whether date of breach or current date) that maximises the claim. The
rationale articulated for instance in the Yukos case is that investors should benefit from favourable events
increasing the value of the expropriated asset up to the date of the award, but at the same time, because the
claimants could have sold their asset at an earlier date, unfavourable developments should be disregarded.
16 In the Yukos case, the claimants had for example argued for a date of breach in 2007. The tribunal considered
that the date of the breach was in fact in 2004, setting out the general principle that: ‘in the event of an
expropriation through a series of actions, the date of the expropriation is the date on which the incriminated
actions first lead to a deprivation of the investor’s property that crossed the threshold and became tantamount
to an expropriation’ (Final Award of 18 July 2014 in PCA Case No. AA 226, Hulley Enterprises Limited (Cyprus)
vs. Russian Federation, p. 543, paragraph 1761).
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Expert Evidence
US$7.6 billion lower had the decision been rendered six months later, after the fall in oil
prices that occurred in late 2014 and early 2015.17
The relative uncertainty over the applicable valuation date in arbitration cases, coupled
with high price-volatility, therefore raises two important practical challenges for experts
involved in energy arbitrations.
Firstly, several assessments of losses might be required: when there is uncertainty over
the actual date of the breach, counsel might instruct their experts to consider alternative
plausible dates of assessment. In the case of unlawful expropriations, valuations as at the
date of breach and as at the date of award may need to be performed. Secondly, in cases of
unlawful expropriations or wherever a current date of valuation is deemed appropriate it
is technically impossible to assess losses as at the date of an award because experts need to
produce their evidence long before the award itself. Where a current date is appropriate,
indexation solutions might be usefully proposed by the experts to account for changes after
the production of their evidence.
Conclusions
Quantum experts acting in energy disputes, as in any industry, are expected to provide
independent advice on a counterfactual state of the world, in which there was no breach,
as well as to assess the monetary compensation that would put the claiming party back in
the position in which it would have been, in the absence of the breach.
Energy projects tend to be long-term projects, and the assessment of their value heavily
relies on the expected price of volatile commodities. This consequently affects the pro-
vision of expert evidence in various ways. From the outset counsel and experts should
consider three general questions: what sort of expertise will be helpful to the tribunal and
is more than one expert necessary? Can the expert usefully provide insight into questions
that pertain to liability? And as of when should damages be assessed by the experts?
17 The tribunal calculated the equity value of Yukos by scaling the value at 27 November 2007 by the RTS Oil
& Gas Index at the date of breach and date of award. The estimated award represents the sum of the equity
value, dividends paid to that date and prejudgment interest scaled in accordance with the proportion of shares
owned by the claimants (70.5 per cent) and reduced by a further 25 per cent to account for the claimant’s
contributory fault. Replicating the tribunal’s approach based on the actual variation of the RTS Oil & Gas
Index, we estimate that the award would have been approximately US$7.6 billion lower (15 per cent) as at
31 December 2014.
257
18
Issue Estoppel in Gas Price Reviews
Liz Tout and Matthew Vinall1
In several recent price reviews we have come into far too close contact with the fraught
effects of issue estoppel on long-term contracts. Price review clauses in long-term2 gas
and liquefied natural gas (LNG) sale and purchase contracts in Europe (and elsewhere) are
common.3 A tribunal’s decision on the interpretation of the price review clause in the first
price review will resonate throughout the life of the contract.Yet, the arbitrators will decide
that price review against the background of the relevant facts and market conditions at the
time. The inexperienced may also have little knowledge of how those facts may change
during the remaining term of the contract. In this article, we explore the challenges this
poses not only for international arbitrators but also for parties and their legal advisers when
pursuing or defending price reviews. To do so, we will explore the nature and extent of
issue estoppel and the practical impact it may have on later price review arbitrations.
Introduction
English law, in common with other legal systems, ‘requires that limits must be placed on the
rights of citizens to . . . reopen disputes’.4 Therefore, ‘if an issue has been distinctly raised
and decided in an action . . . it is unjust and unreasonable to permit the same issue to be
relitigated afresh between the same parties or persons claiming under them.’5 So, ‘the law
insists on finality’ and ‘certainty of justice prevails over the possibility of truth.’ 6 These are
the ideas that lie at the heart of the principles of res judicata and issue estoppel.
1 Liz Tout is a partner and Matthew Vinall is counsel at Dentons UKMEA LLP.
2 i.e. 20 years or longer.
3 For ease of reference, throughout the remainder of this paper we will refer to these simply as
‘long-term contracts’.
4 Lord Wilberforce in The Ampthill Peerage Case [1977] AC 547 at 569.
5 Maugham LC in New Brunswick [1939] AC 1 at 19-20.
6 Lord Wilberforce in The Ampthill Peerage Case [1977] AC 547 at 569.
258
In that context, an agreement that expressly anticipates that over its term the parties
may repeatedly ask the same issue7 to be decided may appear rather curious.Yet, long-term
contracts commonly include price review clauses that do precisely that at a number of set
times during the life of the contract. They invite arbitral tribunals (rather than courts) to
decide whether (and how) the contract price should change. Other long-term contracts in
the international energy business, such as joint operating agreements or unitisation agree-
ments, often ask tribunals (or experts) to do something similar, for example redetermina-
tions of the same issue several times during the contract.
All of these contracts commonly use international arbitration (or expert determination),
rather than court, to decide these issues. English law has accepted for some time that issue
estoppel applies equally to an arbitral award8 (or expert determination9) as it does to a court
judgment. However, it is notable the leading English law textbook on res judicata and issue
estoppel10 devotes no more than two sentences to applying issue estoppel in arbitration.11
This article explores the interaction between price reviews under long-term contracts
and issue estoppel. As a starting point it is necessary, therefore, briefly to explain and explore
how price review clauses in long-term contracts commonly work and the doctrine of
issue estoppel. The principles of issue estoppel outlined below are also, of course, of gen-
eral application to an arbitral award involving any long-term contract in the international
energy business.
Price review clauses in long-term gas contracts

Parties agreeing a price (and price formula) in a long-term contract will usually do so given
their current market understanding and expectations about how that market may develop
in the future. So, on the date it is agreed, the price is likely to reflect the current market
value of gas (or LNG) with the agreed price formula anticipated to track market value over
time. Nevertheless, over 20 years or more, markets change, and, inevitably, the relationship
between the price produced by the agreed price formula and the current market value will
vary. Prudent parties will build an anticipated degree of price variation into their initial
valuation. However, no matter how prudent parties are, sometimes the underlying deal
encapsulated in the price formula will break down. This is why parties commonly agree
price review clauses.
There is no standard form of price review clause and this article will not consider in
detail how they work.12 However, commonly, they enable either party to trigger a price
review every three to five years during the contract if certain conditions are satisfied, often
linked to significant changes in the market between a fixed date and the review date. This
usually involves a detailed economic analysis of market conditions and prices on or around
7 Of course, whether it is ‘the same issue’ will be central to the application of issue estoppel and will form a
considerable part of the discussion in this article.
8 Fidelitas [1966] 1 QB 630 (CA); followed in Aegis [2003] 1 WLR 1041 (PC).
9 Or the outcome of an expert determination: see Kendall on Expert Determination, 5th. Ed., Sweet & Maxwell
2015, paragraphs 12.9-3 and 13.3-3.
10 Spencer Bower and Handley, Res Judicata, 4th. Ed., Butterworths 2009 (Spencer Bower).
11 Spencer Bower, paragraph 8.27.
12 For such a discussion, please read ‘If you start to feel the pinch, will a price review clause ease your suffering?’
by Matthew Vinall [2009] IELR Issue 1, 13.
259
those dates. If the trigger conditions are satisfied, the price review clause will provide
objective criteria for assessing the revised contract price (and price formula) to apply from
the review date. Applying those criteria will require complex economic and mathemati-
cal modelling and reliance on multiple competing sources of pricing information. This
brief summary should provide a flavour of the challenges that parties, their legal advisers
and international arbitrators face when dealing with a contentious (and high-value) price
review arbitration.
It is notable, however, that at no stage does a price review arbitration involve any allega-
tions of breach of contract by either party resulting in loss and, therefore, a cause of action
in damages or some other claim. Rather, what the parties are asking the arbitral tribunal to
do is to operate the price review clause, absent them having agreed a new price or price
formula. Therefore, cause of action estoppel cannot arise (there being no cause of action),
but there is the possibility of an issue estoppel on the decision made by the tribunal.
Having considered the terms of the price review clause and the evidence, the tribunal
should issue an award that decides several issues. First, it will interpret the price review
clause. Second, it will apply the facts to that interpretation, namely in deciding whether
there should be a price review. Finally, if it decides the price should be reviewed, it will also
set the new price, the new price formula and the back payment due.
Issue estoppel in price review arbitrations

Spencer Bower starts its exploration of issue estoppel by stating simply that ‘A decision will
create an issue estoppel if it determined an issue in a cause of action as an essential step in its
reasoning. Issue estoppel applies to fundamental issues determined in an earlier proceeding
which formed the basis of the judgment.’13 Therefore, an issue estoppel applies to ‘a state of
fact or law which is necessarily decided by the prior judgment, decree or order’.14
Further, in the Good Challenger case,15 Clarke LJ summarised the four conditions neces-
sary to establish an issue estoppel under English law as:
(1) the judgment must be given by a foreign court of competent jurisdiction; (2) the judgment
must be final and conclusive on the merits; (3) there must be identity of parties; and (4) there
must be identity of subject matter, which means that the issue decided by the foreign court must
be the same as that arising in the English proceedings . . . .16
We would expect these four conditions to apply equally to an arbitral award as to a court
judgment, and there is no English law authority to suggest otherwise.
Applying this test to an arbitral award in a price review

It might seem indisputable that the arbitrators’ decision in the first price review under
a long-term contract will create an issue estoppel on the meaning of the price review
13 Spencer Bower, paragraph 8.01.

14 Dixon J in Blair v. Curran [1939] 62 CLR 464 at 532.
15 Good Challenger Navegante SA v. Metalexportimport SA [2004] 1 Lloyd’s Rep. 67.
16 Ibid, at paragraph 50.
260
clause for any future reviews. That issue estoppel will also prevent the parties from raising
in any future price review under the long-term contract new issues (or evidence) about
that interpretation ‘which the parties, exercising reasonable diligence, might have brought
forward’ in the first arbitration.17
One particular point of interpretation that often arises in price review arbitration is the
meaning of the word ‘significant’. Commonly price review clauses require a change or a
difference to be significant before allowing a price review to occur. It is strange that English
law has failed to define that word beyond trite comments such as ‘not insignificant’.18 This
lack of legal guidance means that a tribunal may form a view on what significant means
given the facts at the time. In doing so it might define significance for future price reviews
under the same long-term contract.
Applying the facts to the price review clause and, therefore, deciding whether a price
review should occur will raise more complex questions about the extent of any issue estop-
pel that may arise. That is because ‘only determinations that are necessary for the decision
and fundamental to it’ will result in an issue estoppel; collateral findings will not.19 There
are few decisions that highlight the difference between fundamental and collateral find-
ings. However, for example, it would appear a decision to grant probate over an estate to a
person is unlikely to be conclusive as to whether that person and the deceased were joint
tenants of the deceased’s property.20 The decision to grant probate is fundamental; the ques-
tion of the joint tenancy, collateral. So, distinguishing the necessary and fundamental from
the unnecessary and not fundamental may be, to say the least, difficult. Is the finding of a
particular fact ‘no more than part of the reasoning supporting the conclusion’21 or is that
fact itself the ‘immediate foundation’22 of the decision?
The extent of any issue estoppel on whether the trigger conditions for a price review
has been satisfied as at the review date will be important for future price reviews. For
example, let’s assume a price review is triggered where ‘circumstances beyond the control
of either party resulted in a significant change in the energy market of the Buyer compared
to such energy market on [date]’.23 If a tribunal decides a significant change in the energy
market happened between the review date and the date stated in the clause, an issue estop-
pel should prevent either party from arguing the contrary in any future arbitration.24
However, is it fundamental to that decision that the tribunal has also decided the state
of the energy market of the buyer at each relevant date? Arguably, it must be, because absent
those findings of fact its decision that the relevant energy market has changed significantly
17 Wigram J in Henderson v. Henderson (1843) 3 Hare 100 at 115 followed by the Privy Council in relation to
issue estoppel in Hoysted v. Federal Taxation Commissioners [1926] AC 155.
18 JT v. Stirling Council [2007] CSIH 52.
19 Spencer Bower, paragraph 8.23 referencing Danyluk [2001] 2 SCR 460, 476.
20 This example is a blend of the facts in Hoysted v. Federal Taxation Commissioners [1926] AC 155 and Blackham’s
Case (1708) 91 ER 257 (decided at a time under English law when all of the property of a woman
automatically vested in her husband upon marriage and she had no property ownership rights).
23 See ‘If you start to feel the pinch, will a price review clause ease your suffering?’ by Matthew Vinall, [2009]
IELR Issue 1, 13.
24 The same would be true if the tribunal decided that trigger conditions had not been satisfied.
261
could not stand.25 Nevertheless, the contrary view says those findings of fact are merely
collateral to the fundamental decision that the trigger conditions are satisfied, namely the
relevant energy market has changed significantly. So, in a future price review, will a party
be able to reopen the issue of the state of the relevant energy market as at the review date
for the first price review? This is important: the state of the market then will be the starting
point for assessing significant change in the next price review. In our view, the issue estop-
pel should properly extend to the state of the relevant energy market as at the review date
for the first price review. That is because, absent certainty about that fact, it is difficult to
conduct a proper assessment for a future price review. However, there is clearly room for
argument. Further, it must be remembered that it is for the party asserting an issue estop-
pel to prove it arises26 and there is English Court of Appeal authority urging that caution
should be exercised in finding an issue estoppel arises.27
This point is not limited to price review clauses that examine the relevant energy mar-
ket. A similar issue will arise in any price review clause that requires a comparison between
two states of affairs. That could be comparing the market at two different times. Similarly,
it could be comparing two prices at the same time (e.g., the contract price and the market
price or average import price on the review date). Using ideas of ‘change’ or ‘difference’
is common in price review clauses for obvious reasons. To decide difference necessarily
involves two factual assessments both of which may, strictly speaking, prevent a future rede-
termination of the same facts in a future arbitration.
Finally, the tribunal’s decisions on the revised price, the revised price formula and the
back payment due result in a clear issue estoppel. If one party disagrees with the tribunal’s
decision on these issues, its recourse is to appeal (if it can) or challenge the award. It is not
to start separate proceedings disputing that the price or price formula should change or that
it is not liable to make the back payment.
Practical issues with an arbitral tribunal deciding the first price review
So far we have considered the possible extent of any issue estoppel that may arise from an
arbitral award on the first price review under a long-term contract. We have done so by
looking at each part of the likely award, namely interpretation, application and the financial
result. However, our experience of price review arbitrations suggests that, in reality, both
the parties’ and the tribunal’s approach to arguing and deciding a price review is not that
clean-cut.
Separating the meaning of the price review clause from its application to the relevant
facts is often artificial in practice. The facts, opinions and data that economic experts pre-
sent in evidence at price review arbitrations are, in our experience, usually the key deter-
minants of the result of the price review. In particular, access to data and questions about
their accuracy and reliability are often crucial issues. Long-term contracts (and especially
their price formulae) are highly confidential. So, obtaining actual pricing information often
proves impossible. Publicly available pricing information (such as filed accounts and cus-
toms data) can prove opaque and, therefore, open to argument and challenge. As a result,
25 The test articulated in Re Allsop and Joy’s Contract (1889) 61 LT 213.

26 Spencer Bower, paragraphs 8.03 and 8.05.
27 Moore-Bick LJ in Svenska Petroleum Exploration AB v. Lithuania [2006] EWCA Civ. 1529 at paragraph 109.
262
the economic evidence presented by both sides not only is complex but also often leads the
experts to take diametrically opposed positions arising from differences of opinion about
methodologies or the most relevant facts and data. Therefore, the real dispute between the
parties sometimes boils down to a debate about which methodology or price data the price
review clause directs the tribunal to use to decide various issues.
This reality can lead to the competing legal arguments about the interpretation of the
price review clause becoming secondary to the complex economic evidence the tribunal
has to assess. The result of this is that the available economic and price data relied on to
apply the price review clause often ends up driving the competing interpretations of the
clause advanced by each party.
The danger this evidence-driven approach creates is that arbitrators may fall into the
trap of interpreting the clause in the context of (and to work with) a specific methodology,
price data or state of affairs. Further, an evidence-driven approach may rely on a fiction
(or misunderstanding) of what parties have in mind when agreeing price review clauses.
When agreeing a price review clause, parties may not form any common intention about
the relevant price data they will use in future price reviews. In fact, the opposite may
be true – they may actively disagree about referring to specific price data. This is why
price review clauses often use vague words like ‘comparable products’ or ‘alternative prices’,
which give both parties scope to argue for their preferred price data in any future price
review. Further, price data will change over time (and may become obsolete or out of date).
This is another good reason parties are reluctant to tie themselves down when agreeing a
price review clause.
One example of the problems that may occur can be seen from considering the inter-
pretation of the words ‘comparable products’ in a price review clause. A tribunal faced
with conflicting expert evidence about what were the competing products could focus on
this issue at the time the parties agreed the clause or at the relevant review date, or both.
If it focused exclusively on the former, it might then decide ‘comparable products’ must
refer only to the fuels with which the relevant gas competed when the parties agreed the
contract, not the fuels with which it will compete at each future review date. However,
that might miss the parties’ real concern when they agreed the long-term contract. They
may have foreseen the possibility that a new competing fuel would emerge (or the mix of
competing fuels would change) that could undermine the economics on which they had
analysed the original contract price and price formula. So, they may have thought their
price review clause would look afresh at the basket of competing fuels each time they asked
for a review.Yet, the tribunal might interpret the price review clause otherwise. As a result,
if they had waived their rights to appeal, the parties would find themselves a few years into
their 25-year contract with a decision that could prevent them both from successfully trig-
gering another price review in future. That, in turn, will leave both parties exposed to an
unchangeable price formula that, due to market conditions, may place either of them in
serious difficulties for the remaining life of the contract.
In conclusion, as with the danger of defining the word ‘significant’ (see above), tribunals
should resist the temptation to interpret a price review clause by reference to the economic
evidence presented to them at any particular price review. Instead, they should apply the
263
principles of interpretation set out in decisions such as Arnold v. Britton.28 To do so, in our
view, they should give meanings to price review clauses that enable those clauses to work
regardless of economic or market conditions at any particular time. Doing otherwise risks
the meaning of the clause changing as market conditions change. Instead, arbitrators should
try to remain focused on the meaning of the price review clause at the time the parties
agreed the long-term contract. That interpretation will not change as the market changes.
Finally, issue estoppel prevents the parties from raising in future proceedings an issue
that ‘the parties, exercising reasonable diligence, might have brought forward’ earlier.29 This
presents the parties with an important decision ahead of the first price review arbitration.
To what extent should they present evidence about the factual matrix in which the par-
ties agreed the price review clause (as well as the price and price formula)? If they fail to
do so, chances are they will be unable to advance that evidence at any future arbitration.
However, it is often unpredictable what impact that evidence will have on how a tribunal
will interpret the price review clause. Further, if the contemporaneous evidence is confus-
ing or double-edged, using it may detract from the clarity of an argument based solely on
the natural and ordinary meaning of the price review clause. So, each party will need to
make a careful judgment call about its only opportunity to present this evidence.
Contracts with the same parties and price review clause, but different prices
It is not uncommon, especially in the LNG market, for the same parties to enter into a
series of long-term contracts. For example, as an LNG producer opens new trains at its liq-
uefaction plant, often its existing buyers will seek further supplies. In these cases, it is natural
that the new contract uses the existing contract as the starting point for negotiations.While
prices (and price formulae) and volumes will alter to reflect the market conditions at the
time the parties agree the second (or further) contract, other terms may remain the same.
A series of long-term contracts with the same price review clause adds a further degree
of complexity (and potential uncertainty) in terms of possible issue estoppel in future price
review arbitrations. If, for some reason, the timings of regular price reviews under the
different contracts become synchronised, this will increase complexity yet further. This is
perhaps best explained through an example.
Let’s assume three long-term contracts exist between the same parties, each with the
same price review clause. A price review arbitration takes place under the first contract
in time. An award decides the meaning of the price review clause. Further, it applies the
facts at the review date (Y) to that meaning, for example to decide that a significant mar-
ket change has occurred between dates X and Y justifying a change to the contract price.
Therefore, the tribunal has made a series of legal and factual determinations about the
price review clause and the state of the relevant market at certain times. Meanwhile, a
price review under the second contract begins. Does any issue estoppel from the first price
review arbitration affect the second?
The simple answer is no. English law says if the same parties enter another contract on
the same terms some time later, they may have intended the words in the second contract
28 [2015] UKSC 36.

29 Wigram J in Henderson v. Henderson (1843) 3 Hare 100 at 115 followed by the Privy Council in relation to
issue estoppel in Hoysted v. Federal Taxation Commissioners [1926] AC 155.
264
to mean something different to those in the first contract.30 English law will interpret each
contract at the time it was agreed and within the relevant factual matrix at that time.While
that is correct legally, it may appear a curious result to commercial parties who probably
agreed to the same terms in the second contract precisely because they intended them to
have the same result. So, if one assumes the tribunal for the price review under the second
contract involves some (or all) of the same arbitrators as the first, in reality, it is unlikely the
arbitrators will interpret the second clause differently. Therefore, the result of the first price
review may crystallise the meaning of the price review clause for all future reviews under
each of the three contracts.
A similar result may also arise for determinations of fact. Let’s assume, either through
coincidence or design, the regular price review cycles under the first and the third contracts
become synchronised. Therefore, the review date (Y) for the first price review under the
first contract becomes the starting point not only for the next price review under the first
contract but also for the first price review under the third contract. However, when the
next regular review date falls due under both contracts, the parties only seek a price review
under the third contract.31 Again, strictly speaking, the finding of fact about the state of the
relevant market at date Y in the award under the first contract should not result in an issue
estoppel in the arbitration under the third contract.Yet, if the new arbitration involves some
(or all) of the same arbitrators as the first, again, in reality, they are unlikely to depart from
their past findings of fact.
This juxtaposition of legal principle and reality raises several practical issues. First and
foremost, it will influence the parties’ choice of arbitrator in later price review arbitrations.
Subject to internationally respected rules governing repeated appointments,32 there is a
natural tendency for parties to wish to keep (or change) their party-appointed arbitrator
based on experience. So, if the findings of law or fact in the first arbitration suit you, you
will try to appoint the same arbitrator again and, if not, the opposite is true. Even if an issue
estoppel is not raised, chances are the award in the first arbitration will find its way into the
second arbitration (given there would be no issues of confidentiality).Therefore, it (and any
common arbitrator’s views it may reflect) will have persuasive, if not legal, force in the sec-
ond arbitration. Almost inevitably, the perceived ‘loser’ in the first arbitration may then face
an uphill struggle to convince the second tribunal to depart from the reasoning of the first.
Second, it questions the sense in copying price review clauses between different con-
tracts (or synchronising regular price reviews).While doing so may be natural and save time
and money when negotiating later contracts, if, in reality, parties are fixing the possible
result of future price reviews under each contract, there is a significant risk in adopting this
approach. Instead, both parties may consider it more sensible to have different price review
clauses for risk management purposes, in a similar way to agreeing price formulae with
different profiles and results.
30 New Brunswick [1939] AC 1 at 20, followed in Shiels v. Blakeley [1986] 2NZLR 262.
31 For example, because the revised price formula under the first contract has continued to track the price
arising from the valuation mechanism in the price review clause but the price formula in the third contract
has not.
32 For example, the IBA Guidelines on Conflicts of Interest in International Arbitration.
265
How might the arbitrators tackle the second price review arbitration?
Before tackling the psychology of the tribunal’s approach to the second price review arbi-
tration, it is worthwhile recapping where we have reached in terms of the law on issue
estoppel. To summarise:
• if a second price review arises under the same contract, then:
• the first tribunal’s decision interpreting the price review clause should result in an
issue estoppel. This means the second tribunal should apply that interpretation to
the relevant facts (e.g., new market conditions) at (or during) the relevant time for
the second review;
• a question mark arises over whether any findings of fact by the first tribunal that
remain relevant in the second review will result in an issue estoppel. This will
depend on whether those findings of fact were necessary and fundamental to the
award; and
• a second tribunal should be cautious about deciding that any issue estoppel arises; and
• if the second price review arises under a different contract (even if between the same
parties and on the same terms), an issue estoppel should not arise from the first tribu-
nal’s award.
If the second price review is before the same tribunal, a desire for consistency inevitably
increases the chances of receiving the same result (whether or not for reasons of issue estop-
pel), even if it is considering a different contract. Further, to achieve consistency, parties to
sequential price reviews under several contracts may decide to agree in advance that the
tribunal’s decision on the first contract will bind them in later price review arbitrations
under the other contracts. This type of agreement could not only apply to the interpreta-
tion of identically worded price review clauses but may extend to findings of fact about
market conditions that are relevant to each price review.
Further, if either party correctly raises an issue estoppel (e.g., relating to the interpreta-
tion of a price review clause in a second price review arbitration under the same agree-
ment), a different tribunal would err legally if it departed from the first tribunal’s decision.
That said, if the tribunal could properly decide there was no issue estoppel (e.g., a price
review under a different contract, albeit between the same parties, on the same terms and
within the same review period), then strong-minded arbitrators who thought the first
award was simply wrong could, quite properly, decide a different interpretation. For reasons
that should be clear from complexities of issue estoppel mentioned above, this uncertainty
makes it difficult to advise a client to run a second price review based on the possibility
that a different tribunal may come up with a new and better interpretation of the contract.
266
Conclusions
International arbitration practitioners and arbitrators are keen to portray the decisions of
arbitral tribunals as at least as predictable as those reached by the most eminent courts.They
are right to do so, because many international arbitrators, especially in highly-specialised
fields such as price review disputes, can bring to bear knowledge and experience that few
judges can match. That said, absent concerns about their awards being subject to appeal,
arbitrators may be more willing to avoid the strictures of issue estoppel than an English
High Court judge. Therefore, subsequent price review arbitrations can sometimes afford
an opportunity to revisit issues that one might have thought were determined finally in
an earlier award. Similar possibilities may arise under other long-term agreements familiar
in the international energy business, such as joint operating agreements and unitisation
agreements, that often ask tribunals (or experts) to redetermine the same issue several times
during the contract. Accordingly, understanding the possible scope and application of issue
estoppel in arbitration is useful to any practitioner in the international energy business.
267
Conclusion
The Challenges Going Forward
Gordon E Kaiser1
In the foreword to the first edition of this book,Andrew Clarke of ExxonMobil International
sets out the costs and benefits of arbitration in the oil and gas world. It is worth repeating:
While it is by no means perfect, international arbitration has become the primary mechanism by
which disputes are resolved in the oil and gas industry. For cross-border transactions involving
parties from a broad range of jurisdictions, or disputes between an investor and a state, there is no
practical alternative. It provides the opportunity for an impartial, independent determination of
a dispute with an established mechanism for the enforcement of awards in most jurisdictions in
the world under the auspices of the New York Arbitration Convention of 1958. Unfortunately,
the dispute resolution process itself is becoming increasingly complex and uncertain, adding a
further layer of difficulty to the parties finding solutions to their disputes. The time and cost
associated with international arbitration now compares unfavourably with litigation (which was
never a good benchmark in the first place). Extended document disclosure requests and the
willingness of arbitrators to accede to them is burying the process in indiscriminate evidence.
And, despite the inherent flexibility and the discretion vested in the arbitrators, first procedural
orders are not always designed to meet the specific needs of the parties or the dispute, nor do
they provide for an efficient and cost-effective process.This fourth perspective is a cause of concern
as uncertainty over the outcome of dispute resolution process only creates additional work and
delay, benefiting the international arbitration industry and not the parties it is designed to serve.
Andrew’s views, as a user, rather than a supplier, of arbitration services are important. In
his foreword, he is quite critical of some of the practices that have developed in oil and gas
arbitration. But as he notes, in that world (ie, the investor–state world), there is no practi-
cal alternative: arbitration is the only game in town. The parties need a neutral adjudicator,
1 Gordon E Kaiser is an arbitrator at JAMS, Toronto and Washington, DC.
268
Conclusion
and they need the ability to enforce that award around the world. Only arbitration can
provide that.
Andrew Clarke notes that the time and cost associated with international arbitra-
tion no longer compares favourably with litigation. He points to the extended disclosure
requirements and the willingness of arbitrators to accede to them in burying the process
in indiscriminate evidence. There is no doubt that this happens. But it gets worse: there is
also unnecessary duplication of proceedings and bifurcation of issues. To some extent the
energy sector is the poster child of this abuse.
Duplicate proceedings are a good example. In Spain we now face 27 arbitrations deal-
ing with the same issue, namely whether the Spanish government was entitled to change
the incentive plans to attract new investment in solar energy. We have one decision to date.2
It may be surprising to some that there has been so little success consolidating the claims.
This practice is not unique to Spain or the Energy Charter Treaty. In the Canadian
province of Alberta, the government created power purchase agreements by which 12 gen-
erators would sell electricity to contracting parties. The agreements are virtually identical
and were created by regulation and approved by the Alberta regulator. All the agreements
have identical arbitration provisions.
Every one of these agreements has been subject to an arbitration under the Alberta
Rules.The issue is virtually the same in each case: what is the proper treatment of inflation-
ary indices to adjust the costs the generators entitled to recover? These arbitrations are all
confidential with the result that common issues are constantly being re-litigated.This is no
one’s fault, but it does point to costly inefficiency.
The other unfortunate development is the increasingly common practice to bifurcate
issues. This started with preliminary objections to jurisdiction. (It is not unusual for those
to last two years.) More recently we have developed a tendency to bifurcate the liability
and damage phases of the arbitration. In Mobil Investments,3 the majority delivered its award
on liability in May 2012. The final award on damages was delivered in February 2015,
three years later. The same thing happened in Bilcon.4 The majority delivered its award
in March 2015. The parties are still engaged in document production with respect to the
damages phase.
Arbitration in the energy sector today faces a full-blown public policy conflict. Private
parties are exercising their rights to attack legislation enacted by the host country to address
domestic public policy concerns. The rationale for the claimants is that the change in gov-
ernment policy has a negative impact on their business and investment opportunities. This
raises the fundamental question of whether host countries can regulate in the public inter-
est or whether regulations and legislation must be frozen in time.
While NAFTA has been a major focus, these issues are not limited to Canada, the
United States and Mexico. The German government was not amused when a private
party questioned the country’s ability to phase out nuclear power5 any more than the

3 Mobil Investments Canada Inc and Murphy’s Oil Corp v. Canada, ICSID Case No. ARB (AF) 107/4 Award,
(22 May 2012).
4 Bilcon of Delaware Inc v. Canada, Award on Jurisdiction and Liability, (10 March 2015), UNCITRAL.
5 Vattenfall v. Germany, ICSID Case No. ARB /12/12.
269
Conclusion
American government was happy when Canadian companies attempted to derail regula-
tions designed to protect Californian drinking water.6 Nor were Canadians happy when
American companies attempted to strike down Canadian bans on fracking,7 pesticides8 or
offshore wind development.9
Governments were quick to respond that private corporations were using NAFTA to
curtail the right of governments to regulate in the public interest.This debate soon became
worldwide, driven by leading academics and arbitrators.10 This debate is not limited to
NAFTA. The same issue arose under the Energy Charter Treaty that followed NAFTA in
1994.Today there are over 30 arbitration claims under that treaty challenging the legislation
by four different European governments to change their incentive programmes for renew-
able energy without notice. The controversy in the NAFTA world was recently joined by
another controversy driven by the economic nationalism of the new Trump administration
in the United States. The issue there is not a state’s right to regulate, but a state’s right to
eliminate trade deficits. It has put NAFTA under a new spotlight that includes the Chapter
11 dispute resolution mechanism.
In 2016 Candidate Trump raised the anti-NAFTA rhetoric to a new level in the form
of 140-character tweets. Recently the new President signed an executive order announcing
that NAFTA will be renegotiated.The order placed a broad set of issues on the table.Where
that will end up is hard to say.
The real concern may be that we have inadvertently created an ‘Appeal Court of Last
Resort’. In most cases, NAFTA parties first litigate in domestic courts and then appeal to
NAFTA. NAFTA offers definite advantages. Damages are available under NAFTA, some-
thing that does not always exist under domestic administrative law. In Apotex11 and Eli
Lilly,12 both companies first went to the Canadian Federal Court to contest patent rulings.
When they failed,13 they went to NAFTA. Bilcon appealed the ruling of the Nova Scotia
Environmental Commission to a local court. When that failed, they went to NAFTA,
where they succeeded.
Mercer International14 went first to the BC Utility Commission.15 When that did not
work out they went to NAFTA. Mobil Investments16 first appealed to the Newfoundland
6 Methanex Corp v. United States, 44 I.L.M. 1345 (NAFTA Chap.11 Arb. Trib. 3 August 2015) (Final Award).
7 Lone Pine Resources Inc v. Government of Canada, Notice of Arbitration, 6 September 2013.
8 Dow Agro Sciences v. Canada, Settlement Agreement (UNCITRAL, 2011).
9 Windstream Energy LLC v. Government of Canada, PCA Case No. 2013-22, 27 September 2016.
10 Jose Alvarez, ‘Is Investor-State Arbitration “Public”?’, Journal of International Dispute Settlement, 2016, 7,534-576;
Stephen M Schwebel, ‘The Outlook for the Continued Vitality or lack there of in Investor-State Arbitration’,
Arbitration International, 2016, 32, pages 1–15.
11 Apotex v. United States of America, ICSID Case No. ARB (AF) 12/1(25 August 2014).
12 Eli Lilly and Company v. Government of Canada, Award, (UNCITRAL, 16 March 2017).
13 Eli Lilly Canada Inc v. Novapharm Ltd, 2011 FC 1288; Novapharm v. Eli Lilly & Co, 2010 FC 915
14 Mercer International Inc v. Canada, 16 May 2014 (ICSID).
15 Fortis BC – Application for Approval of Stepped and Stand-By Rates Decision Stage II (24 March 2015).
16 Mobil Investments Canada Inc and Murphy’s Oil Corp v. Canada, ICSID Case No. ARB (AF) 107/4 Award,
(22 May 2012).
270
Conclusion
Board R&D directive to the local courts.17 When the company lost it went to NAFTA,
where it succeeded.
To make matters worse, NAFTA is a unique appeal court. Only foreign investors
can bring cases. Consider the cases involving the Ontario ban on wind generation. An
American company, Windstream, obtained a C$28 million judgment from a NAFTA
panel18 when Ontario cancelled the programme.Trillium Power, a Canadian company with
the same complaint, was out of luck in the Ontario courts.19 The same thing happened in
SkyPower.20 There the judge remarked: ‘While it may sometimes seem unfair when rules are
changed in the middle of a game, that is the nature of the game when one is dealing with
government programs.’
The next group of opponents are those that just do not like arbitrators. This group
believes there should be an investment court with appeal procedures. It is an open question
whether a multinational investment court will give us better decisions than arbitration pan-
els. There is also a question of whether the Americans would buy into that concept, given
the isolationist tendencies of the new administration. The Canadians seem to have bought
into the concept. Courts have replaced arbitrators in the recently signed EU–Canada Trade
Agreement (CETA).
Much of the analysis in NAFTA cases centres on the rights of the investor, the defi-
nitions of legitimate expectations, and indirect expropriation. But what about the state’s
rights? The state must have a right to regulate; it certainly has responsibilities to regulate.
Few would object to states exercising this jurisdiction provided they act in good faith,
and do not discriminate or expropriate private property without fair compensation. The
NAFTA decisions in Methanex21 and Chemtura22 seem to support this proposition.
In Chemtura, a US manufacturer of lindane, an agricultural insecticide moderately haz-
ardous to human health and the environment, claimed a breach of NAFTA by Canada’s
prohibition of its sale. The tribunal rejected the claim, stating:
Irrespective of the existence of a contractual deprivation, the Tribunal considers in any event
that the measures challenged by the Claimant constituted a valid exercise of the Respondent’s
police powers. As discussed in detail in connection with Article 1105 of NAFTA, the PMRA
took measures within its mandate, in a non-discriminatory manner, motivated by the increas-
ing awareness of the dangers presented by lindane for human health and the environment. A
measure adopted under such circumstances is a valid exercise of the State’s police powers and, as
a result, does not constitute an expropriation.
17 Hibernia Management and Development Co v. Canada Newfoundland Offshore Petroleum Board, [2007] NJ No. 168;
Hibernia Management and Development Co v. Canada Newfoundland Offshore Petroleum Board, [2008] NJ No. 310.
18 Windstream Energy v. Canada, PCA Case No. 2013-22, 27 September 2016.
19 2013 ONCA 683, 117, OR (3d) 721.
20 SkyPower v. Ministry of Energy, [2012] OJ No. 4458 at paragraph 84.
21 Methanex Corp v. United States, Decision on Amici Curiae 15 January 2001; UPS v. Canada, Decision on Amici
Curiae, 17 October 2001.
22 Chemtura Corporation v. Canada, Award, (UNCITRAL, 2 August 2010).
271
Conclusion
In investor–state arbitrations, arbitrators grant deference to governments, particularly where

those governments are carrying out a regulatory function where the public interest is the
dominant test.
In Mesa Power23 the tribunal pointed to the deference that NAFTA Chapter 11 tribunals
usually grant to governments when it comes to assessing how they regulate and manage
their affairs. The tribunal stated:
In reviewing this alleged breach, the Tribunal must bear in mind the deference which NAFTA
Chapter 11 tribunals owe a state when it comes to assessing how to regulate and manage its
affairs. This deference notably applies to the decision to enter into investment agreements. As
noted by the S.D. Myers tribunal, ‘[w]hen interpreting and applying the “minimum standard”,
a Chapter Eleven tribunal does not have an open-ended mandate to second-guess government
decision-making.’ The tribunal in Bilcon, a case which the Claimant has cited with approval,
also held that ‘[t]he imprudent exercise of discretion or even outright mistakes do not, as a rule,
lead to a breach of the international minimum standard.’24
In addition to the references in SD Myers25 and Bilcon pointed out by the Mesa Power tri-
bunal, we can add the tribunal’s comments in Thunderbird at paragraph 127 that the state
‘has a wide discretion with respect to how it carries out such policies by regulation and
administrative conduct.’26
Going forward
There is widespread agreement that the investor–state dispute resolution process requires
serious reform.This is particularly true in the energy sector.There is a clear conflict between
the interests of private corporations and the public interest mandate of states. The process
as currently structured is not capable of balancing these competing interests in a meaning-
ful and predicable fashion. The reform process will no doubt start with NAFTA, given the
position of the new US administration. It will likely be a long and challenging discussion.
23 Mesa Power Group LLC v. Government of Canada, PCA Case No. 2012-17, 24 March, 2016.
24 Id. at paragraph 553 (footnote omitted).
25 S.D. Myers v. Canada (NAFTA/UNCITRAL), First Partial Award, 13 November 2000.
26 International Thunderbird Gaming Corp v. United Mexican States, at paragraph 127, Award, (UNCITRAL
26 January 2006).
272
Appendix 1
About the Authors
Stephen P Anway
Squire Patton Boggs (US) LLP
Stephen Anway is a partner in Squire Patton Boggs’ New York office, co-head of its invest-
ment arbitration practice, and a member of its global board. He is also an adjunct professor
of law at Case Western Reserve University, where he teaches a full doctrine course every
year on international arbitration.
Mr Anway has worked in more than 25 countries and has represented clients – including
10 different sovereign nations and numerous foreign investors – in some 70 international
arbitration proceedings. He represents sovereign nations and multinational corporations in
both investment treaty arbitrations and international commercial arbitrations.
Cyrus Benson
Gibson, Dunn & Crutcher LLP
Cy Benson is a US- and English-qualified partner in the London office of Gibson, Dunn
& Crutcher and serves as co-chair of the firm’s international arbitration practice group. Mr
Benson represents clients in commercial and investment treaty arbitrations under all major
institutional rules arising from a wide variety of industry sectors, with particular emphasis
in oil and gas, mining and minerals, and infrastructure. He is experienced in complex litiga-
tion and has significant trial and appellate experience in US federal and state courts.
Doak Bishop
King & Spalding
Doak Bishop is co-head of King & Spalding’s international arbitration practice group and a
member of the firm’s Latin American Practice Group. Mr Bishop has over 38 years’ experi-
ence focusing on international arbitration and litigation of oil and gas, energy, construction,
environmental and foreign investment disputes. He has developed a national reputation for
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About the Authors
his experience in international arbitration, serving both as an arbitrator and counsel in large
business disputes.
Mr Bishop is Board Certified in civil trial law by the Texas Board of Legal Specialization.
He served as chairman of the Institute of Transnational Arbitration (2012–2015) and Board
of Directors of the American Arbitration Association. He also serves as a member of the US
delegation to the NAFTA Advisory Committee on Private Commercial Disputes. He has
previously served as chairman of the litigation section of the State Bar of Texas (1998) and
co-chair of the American Bar Association International Litigation Committee (1998-1999).
Mr Bishop received his BA degree, with high honours, and departmental distinction
from Southern Methodist University in 1973, and his JD degree, with honours, from The
University of Texas Law School in 1976 where he served as research editor of the Texas
Law Review.
Mr Bishop is a member of the Texas State Bar.
Nigel Blackaby
Freshfields Bruckhaus Deringer US LLP
Nigel is global head of Freshfields’ international arbitration group and is recognised as an
‘undisputed leader in his field’. He has acted as counsel and arbitrator in over 100 ad hoc and
institutional arbitrations in the English and Spanish languages (including over 30 investment
arbitrations). He has particular expertise in Latin America and energy and mining disputes.
James Brown
Haynes and Boone CDG, LLP
James Brown, partner with the contentious department, has more than 15 years of experi-
ence as a disputes lawyer. His primary focus is litigating and arbitrating complex, high-value
engineering and construction disputes for international clients operating in the shipping
and offshore oil and gas sectors. He is a recommended lawyer in the Transport (Shipping)
section of the 2016 UK edition of The Legal 500, Legalease. He pursues and defends
claims including in relation to the deficient performance of contracts; contractual vari-
ations; responsibility for delay and related cost-overruns; defects and warranty issues; and
in respect of associated guarantees, and appeals, challenges and enforces court judgments
and arbitral awards resulting from such claims. His experience extends to claims in the
English High Court, including the Commercial Court and Technology and Construction
Court, and in arbitration (including under the rules of the London Maritime Arbitrators
Association (LMAA), the London Court of International Arbitration (LCIA) and the
International Chamber of Commerce (ICC), as well as the UNCITRAL rules and those
of the Chartered Institute of Arbitrators). James also assists clients to obtain orders (includ-
ing freezing orders) from the English court in support of both domestic and foreign court
or arbitral proceedings. James regularly writes, lectures and provides seminars on current
dispute resolution issues.
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About the Authors
Matthias Cazier-Darmois
FTI Consulting
Matthias Cazier-Darmois is a director at FTI Consulting. Matthias works in the economic
and financial consulting practice, and is based in Paris. He has more than twelve years of
experience of assessing damages in the context of complex commercial disputes includ-
ing breaches of contracts, expropriations of assets or companies, breaches of warranties
and representations, breaches of fiduciary duties, transfers of shares below market value
and unfair prejudices to minority shareholders. Matthias has led teams in relation to over
40 cases before several jurisdictions and in a broad range of industries. He is listed as one of
the top expert witness in international commercial arbitration globally by Who’s Who Legal:
Consulting Experts, a one-of-a-kind guide to the leading consulting experts across the globe.
Before joining the firm in June 2009, Matthias was at LECG and, before that, a member
of Deloitte’s forensic and dispute services team. Matthias spent more than half of his
professional career based in London and relocated to Paris in 2014.
William Cecil
William Cecil is a partner and head of the contentious department, with extensive arbitra-
tion experience in offshore oil and gas and energy. He has recently been involved in an
ICC arbitration in Geneva relating to a power and desalination construction project in the
Middle East, an SCMA arbitration in Singapore relating to a rig upgrade, and an LMAA
arbitration and associated High Court proceedings relating to the construction of two
drilling rigs in China.William is currently working on an LMAA arbitration relating to the
termination of a construction contract for an offshore unit with claim and counterclaim
values in excess of US$500 million each, and two related arbitrations arising out of the
termination of a long-term offshore drilling contract with a total claim value in the region
of US$350 million. William is a recommended lawyer in the Transport (Shipping) section
of the 2016 UK edition of The Legal 500, Legalease. Chambers UK, Chambers and Partners,
2017 ranks William as a notable practitioner, saying ‘William Cecil has a wealth of experi-
ence advising on arbitration and litigation for shipping and offshore energy clients,’ with
one client remarking that he is ‘very hard-working and good to work with.’
Samuel W Cooper
Paul Hastings LLP
Samuel W Cooper is a trial partner in the Houston office of Paul Hastings LLP. He has
tried cases to a decision on behalf of plaintiffs and defendants before juries, arbitrators and
judges. He has substantial experience in commercial litigation and arbitration, and has rep-
resented both corporations and sovereigns in a variety of international disputes including
breach of contract, expropriation, shareholder squeeze-out, post-closing net working capi-
tal true-up, and fraud and breach of representation and warranty claims.These matters have
been before fora ranging from International Chamber of Commerce panels in London and
Singapore to a single expert arbitrator. Mr Cooper is recognised in Best Lawyers in America,
Chambers USA and as a Texas Super Lawyer. He graduated Order of the Coif from Stanford
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About the Authors
Law School, was managing editor of the Stanford Law Review, received his AB summa cum
laude, Phi Beta Kappa, from Harvard College and served as a law clerk to the Honorable J
Harvie Wilkinson III of the United States Court of Appeals for the Fourth Circuit.
Andreas Dracoulis
Andreas Dracoulis is a partner and disputes lawyer who has extensive experience of work-
ing with international clients in the shipbuilding, offshore construction and energy sectors.
Andreas’s practice is focussed on international arbitration and court litigation, and he regu-
larly acts for owners, shipyards and offshore contractors. He has in particular advised on a
number of substantial disputes for the construction of offshore drilling units and trading
vessels concerning issues such as cancellation and deliverability, delay and cost overruns,
defective work or design, compliance with performance guarantees, disputed variation
orders, and post-delivery warranty claims. He also advises clients in connection with drill-
ing contracts, offshore chartering agreements (such as for FPSOs), other offshore related
energy projects, ship sale agreements and superyacht projects. Andreas also has significant
past experience of onshore construction and infrastructure projects, and recent experience
of bribery and corruption claims and high level oral agreements. These disputes are inter-
national in nature (often involving parties in Europe, Asia and South America) and there-
fore often raise complex cross-border issues. Andreas has represented clients in international
arbitrations conducted under many of the commonly used rules (including LMAA, LCIA
and ICC) and in the English High Court and Court of Appeal.
Kabir Duggal
Baker McKenzie LLP
Kabir Duggal is a senior associate in Baker McKenzie’s international arbitration practice
group focusing on international investment arbitration, international commercial arbi-
tration, and public international law matters. Mr Duggal’s experience includes disputes
under numerous bilateral and multilateral investment treaties in South Asia, Latin America,
Central Asia, the Middle East, Europe and Africa. He has also worked as a judicial clerk for
an Indian Supreme Court Judge.
Mr Duggal is a lecturer-in-law at Columbia Law School teaching international invest-
ment arbitration and also gives lectures at Georgetown Law and Fordham Law School.
He has published several articles and books and is regularly invited to speak at confer-
ences globally. He is the managing editor for Columbia Law School’s The American Review
of International Arbitration and is an editor for investmentclaims.com, hosted by Oxford
University Press. He also serves on ICSID Review’s Peer Review Board and is an associ-
ate editor for Brill-Nijhoff ’s international law and arbitration section. He is a Fellow at
Columbia Center on Sustainable Development.
Mr Duggal is a graduate of the University of Mumbai (University Medal), University of
Oxford (DHL-Times of India Scholar) and NYU School of Law (Hauser Global Scholar).
He is admitted to practise law in India, England and Wales (solicitor) and New York.
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About the Authors
Steven P Finizio
Wilmer Cutler Pickering Hale and Dorr LLP
Steven Finizio is a partner at Wilmer Cutler Pickering Hale and Dorr LLP. Mr Finizio’s
practice focuses on international dispute resolution. He also serves as an arbitrator.
Mr Finizio has particular experience with oil and gas, financial services, shareholder,
joint venture and M&A issues. He has advised clients regarding disputes under the rules of
most of the well-recognised international arbitration institutions and governed by the laws
of jurisdictions in Europe, Asia, Africa and the United States.
Mr Finizio’s publications include ‘A Practical Guide to International Commercial
Arbitration: Assessment, Planning and Strategy’ and ‘International Commercial Arbitration’,
in The Law of Transnational Business Transactions. He also teaches international arbitration as
an adjunct professor.
Mr Finizio is recognised as a leading international arbitration lawyer in Who’s Who
Legal: International Arbitration, Chambers UK, Legal 500, Chambers Global, Chambers Europe,
PLC Which Lawyer?, The Euromoney Guide to the World’s Leading Experts in Commercial
Arbitration and The Best of the Best.
Mark W Friedman
Debevoise & Plimpton LLP
Mark W Friedman is a litigation partner at Debevoise & Plimpton LLP. He has broad
experience in civil and criminal matters, with a concentration on international arbitration
and litigation. Mr Friedman has represented clients in a wide variety of disputes, including
those concerning energy, mining, construction, shareholder relationships, joint ventures,
telecommunications and investments. He has acted as counsel or arbitrator in disputes
under the major institutional rules.
Mr Friedman has been ranked as a leading individual by Chambers Global, Chambers
UK, Chambers USA, Who’s Who Legal: Commercial Arbitration, Who’s Who Legal: Commercial
Litigation, PLC Which Lawyer?Yearbook and Legal Experts, and as one of the inaugural ‘45 stars
under 45’ by Global Arbitration Review. Among other positions, he is a vice president of
the Court of the ICC Arbitration, a member of the editorial board of Dispute Resolution
International, was previously co-chair of the International Bar Association’s Arbitration
Committee, member of the Court of the London Court of International Arbitration, vice
chair of the International Dispute Resolution Committee of the International Section of
the American Bar Association and co-rapporteur of the International Law Association’s
Commercial Arbitration Committee.
Grant Hanessian
Baker McKenzie LLP
Grant Hanessian is a partner in the New York office of Baker McKenzie and former global
co-chair of the firm’s international arbitration group. Mr Hanessian has more than 25 years’
experience as counsel and arbitrator in disputes concerning investment, energy, construc-
tion, commodities, financial services, insurance, intellectual property and other matters.
Mr Hanessian is the US alternate member of the ICC International Court of
Arbitration in Paris, chairman of the Arbitration Committee of the US Council for
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About the Authors
International Business (US national committee of the ICC), US vice chair of the London
Court of International Arbitration’s North American Users Council, and a member of
the ICC’s Commission on Arbitration, its Task Forces on Arbitration Involving States
or State Entities and on Financial Institutions and International Arbitration (leader of
Investment Arbitration and Banking and Finance work stream). He is also a member of
the American Arbitration Association–International Centre for Dispute Resolution’s
International Advisory Committee and its Advisory Committee on Brazil, the International
Arbitration Club of New York, the Arbitration Committee of the International Institute
for Conflict Prevention and Resolution, the New York City Bar Association’s Committee
on International Commercial Disputes and Club Español del Arbitraje. Mr Hanessian is a
founding board member of the New York International Arbitration Center.
Mr Hanessian has authored more than 50 articles and book chapters on international
dispute resolution topics and spoken at conferences and universities worldwide. He is rec-
ommended by Chambers Global and Chambers USA (‘elite lawyer’ who is ‘very experienced,
hugely knowledgeable and effective’, a ‘powerful advocate for clients’), The Legal 500 (‘a
great practitioner’ with a ‘strong commercial profile’), PLC Which Lawyer, Who’s Who Legal:
Arbitration and Expert Guide to Leading Practitioners in International Arbitration (‘Best of the
Best’ in international commercial arbitration). He received an LLM in International Law
from Columbia University, a JD from New York University and a BA from the University
of Pennsylvania.
Doug Jones AO
Professor Doug Jones AO is a leading independent international commercial and investor–
state arbitrator.
The arbitrations in which he has been involved include infrastructure, energy, com-
modities, intellectual property, commercial and joint venture, and investor–state disputes
spanning over 30 jurisdictions around the world.
Doug is an arbitrator member at Arbitration Place in Toronto and a door tenant at
Atkin Chambers in London, and has an office in Sydney, Australia.
Prior to his full time practice as an arbitrator, Doug had 40 years’ experience as an
international transactional and disputes projects lawyer.
Doug is acknowledged as a leading arbitrator and is highly ranked in a number of lead-
ing publications. Most recently, in 2017, Chambers Asia-Pacific recognised Doug as ‘with-
out question the leading Asia-Pacific-based arbitrator for construction disputes’, and he
maintained his Band One ranking in the International Arbitration Category for a seventh
consecutive year.
Doug has published and presented extensively, and holds professorial appointments at
Queen Mary College, University of London and Melbourne University Law School.
Doug is an officer of the Order of Australia, and one of only four Companions of the
Chartered Institute of Arbitrators.
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About the Authors
Gordon E Kaiser
JAMS
Gordon E Kaiser is an arbitrator practising at JAMS in Toronto and Washington, DC. His
practice involves domestic and international disputes in energy and technology. He served
as vice chairman of the Ontario Energy Board for six years. Prior to that he was a partner
in a national law firm where he appeared in the courts and regulatory agencies across the
country as well as the Federal Court of Appeal and the Supreme Court of Canada.
He has advised the Ontario Energy Board, the Alberta Utilities Commission, the
Commissioner of Competition, the Ontario Independent Electricity System Operator and
the Competition Tribunal.
Mr Kaiser has mediated disputes on multi-year rate plans between public utilities and
their major customers and long term contracts for the pricing of gas, electricity and wire-
less data. He has advised the Alberta’s Utility Commission and the Ontario IESO on settle-
ments under the Market Rules and the Attorney General Canada on settlements under the
Competition Act. He has arbitrated disputes dealing with the construction of transmission
and pipeline facilities, power purchase agreements, gas supply contracts, the construction of
power plants, and wind and solar interconnection.
Mr Kaiser is an adjunct professor at the Osgoode Hall Law School, co-chair of the
Canadian Energy Law Forum, and editor of Energy Regulation Quarterly. He is recognised as
one of Canada’s leading Arbitrators by Chambers Global.
Aimee-Jane Lee
Aimee-Jane Lee is an international counsel in the firm’s international dispute resolution
Group and is based in the London office. Her practice focuses on international commercial
arbitration and litigation, and public international law.
Ms Lee has advised private clients and states across multiple jurisdictions (notably in
Asia, Africa and Eastern Europe) and a number of industries, including mining, construc-
tion, hospitality, advertising and, especially, energy. She has represented clients in arbitra-
tions conducted under the auspices of the main institutions and governed by a variety of
substantive and procedural legal systems.
Ms Lee advises on the international protection of investments (notably under bilateral
investment treaties, the Energy Charter Treaty and investor–state contracts) and represents
her clients in associated disputes. She has also advised extensively on treaty drafting and
interpretation and the interaction between public international law and domestic law.
She is recommended for Public International Law in The Legal 500 UK (2016) and
Chambers UK (2017) and is named by Who’s Who Legal in its Future Leaders list.
Ms Lee has passed Levels 1, 2 and 3 of the CFA (Chartered Financial Analyst) exams.
She is therefore particularly proficient in assisting clients with quantum-related aspects of
their dispute and liaising with quantum experts.
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About the Authors
Mark Levy
Allen & Overy LLP
Mark Levy is a London-based partner in Allen & Overy’s international arbitration group.
He specialises in disputes in the energy and natural resource sector, and also has extensive
experience of public international law. He is known as a market leader in the field of
gas price arbitrations, and edited the recently published Gas Price Arbitrations: A Practical
Handbook (published by Globe Law and Business, 2014) – the market’s first book on pric-
ing disputes.
He regularly represents leading global energy companies in international arbitrations,
as well as investors and sovereign states in investment treaty cases, where he has particular
experience of the Energy Charter Treaty. He has experience of conducting cases under all
the major institutional rules, including those of the ICC, LCIA, SCC and ICSID, as well as
the UNCITRAL Rules.
Mark acts as lead advocate in his cases and has extensive experience in the
cross-examination of experts in the energy sector, including pricing disputes.
He is regularly invited to speak at arbitration and energy disputes conferences, and
publishes in trade journals.
Marco Lorefice
Edison Spa
Marco Lorefice is a senior lawyer with Edison spa where he is the counsel responsible for
oil and gas, and international arbitration. Marco has spent most of his career as in-house
counsel in the energy industry, where he has been working for almost twenty years, with
a specific focus in the oil and gas industry. He has developed the legal structure of the
Egyptian and Adriatic LNG projects. He also has been working on the development of new
structures of long-term gas sales and purchase agreements.
Marco is an experienced litigator and has been working on several energy cases, mainly
arbitrations on gas price review. He represented the company in some very high-value,
well-known cases, representing some of the most important price review arbitrations over
the last years.
Marco is a graduate of Trieste University Faculty of Law (LLB 1987) and received a
diploma in international trade law from Monash University School of Law in Melbourne,
Australia (1990).
Marco has published the most significant publication on take-or-pay contracts (and
price review process) today available in Italian, Le Clausole di Take or Pay nei contratti di com-
pravendita di idrocarburi, Giuffrè Editore 2013. In 2015 he published ‘Crossroads in Gas Price
Review Arbitration’ in the first edition of this publication.
He has been an expatriate in Australia and Egypt, and he is regularly invited to be a
panellist at international gas conferences.
Lucy Martinez
Three Crowns LLP
Lucy is counsel in Three Crowns’ London office. She has extensive experience advising and
representing both investors and states in complex, high-value international arbitrations and
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About the Authors
litigations, including before AAA, ICC, ICSID, LCIA and UNCITRAL tribunals, pursuant
to investment treaties and contracts. Lucy has worked on cases involving oil and gas, electric-
ity, highway construction, telecommunications, satellite technology, waste processing and
rock concerts in various regions of the world, including Africa, Asia, Europe, Latin America
and North America. She also has extensive experience in: reviewing dispute resolution
clauses in draft agreements; advising on settlement of international disputes; and advising
on various international pro bono projects. Before joining Three Crowns, Lucy worked in
the international arbitration practices of two leading international law firms in New York
and London; taught at Columbia Law School and the University of New South Wales; and
clerked at the High Court of Australia and the Queensland Court of Appeal. She is listed in
Who’s Who Legal: Arbitration (2017), Who’s Who Legal: Arbitration Future Leaders (2017), and
in UK Legal 500 for Dispute Resolution/Public International Law (2016).
Sara McBrearty
King & Spalding
Sara McBrearty is an associate in King & Spalding’s international arbitration practice group
in the Houston office, with a particular focus on international arbitration in the tradi-
tional and renewable energy industries. Her experience ranges from the initial stages of
drafting arbitration agreements and maximising investment protections to the final phases
of award recognition, enforcement and set-aside. She has represented and advised corpo-
rate clients in investor–state and commercial arbitrations under the ICC, SCC, ICSID,
UNCITRAL, AAA and CRCICA Arbitration Rules, and in ancillary litigation in US
federal and state courts.
She is a member of the Texas State Bar and a certified mediator in the state of Texas.
Ms McBrearty holds a JD from the University of Texas School of Law and a BA from
Baylor University. Prior to joining King & Spalding, she interned for the Honorable Judge
Andrew Austin in the Western District of Texas.
Victoria Orlowski
Victoria Orlowski is an associate in the New York office of Gibson, Dunn & Crutcher, and
a member of the litigation and international arbitration practice groups.
Roni Pacht
Roni Pacht is an associate in the international dispute resolution group resident in London.
His practice focuses on high-value, complex and multi-jurisdictional commercial litiga-
tion and arbitration matters as well as judicial review proceedings and contentious regula-
tory matters. His experience spans a number of industries and sectors including aviation,
banking, insurance, energy, environment, mining and natural resources, oil and gas, power
and telecommunications.
Mr Pacht is a core member of the firm’s energy disputes group. He advises a wide range
of clients with a particular focus on those operating in the energy, natural resources, oil and
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About the Authors
gas and power sectors. He has advised on contentious matters including disputes relating
to alleged environmental damage in transnational tort actions, joint operating agreements,
production sharing agreements, service agreements, sale and purchase agreements, price
reviews, termination and frustration of agreements, regulatory investigations, and the intro-
duction of regulatory changes impacting obligations aimed at reducing carbon emissions.
Prior to joining Debevoise in 2014, Mr Pacht was part of a tier 1 international energy
practice at an international law firm based in London.
Vasilis F L Pappas
Bennett Jones LLP
Vasilis Pappas’ practice focuses on international commercial arbitration and investor–state
arbitration, with a particular emphasis on construction disputes.
Vasilis represents multinational companies all over the world in complex commercial
disputes in a diverse range of sectors, including, oil and gas, mining, banking, insurance,
telecommunications and pharmaceuticals. He has acted as arbitration counsel under the
world’s leading international arbitration rule systems including ICC, LCIA, UNCITRAL,
ICDR and AAA, and as litigation counsel before the courts of the United States and
Canada. Vasilis also represents sovereign states and multinational companies worldwide in
investor–state disputes under NAFTA Chapter 11, the ICSID Convention, and other bilat-
eral and multilateral investment treaties.
Prior to joining Bennett Jones, Vasilis practised for eight years in New York City with
a leading international law firm. He also practised with the Government of Canada’s
Department of Foreign Affairs and International Trade, representing Canada in investor–
state arbitrations and investment treaty negotiations.
Vasilis now works out of Bennett Jones’ Calgary and Doha offices. He is an adjunct pro-
fessor at the University of Calgary’s Faculty of Law in the field of international commercial
arbitration, and is on the Canadian roster of arbitrators of the ICC International Court of
Arbitration. He also publishes and speaks regularly on topics pertaining to international
commercial arbitration and investor–state arbitration.
Constantine Partasides QC
Three Crowns LLP
Prior to founding Three Crowns LLP, Constantine led the international arbitration practice
of a leading international law firm in London. He has appeared as counsel on some of the
largest commercial arbitrations of the last decade, relating to the energy, telecommunica-
tions and satellite sectors. Most recently, Constantine has been lead counsel for commercial
clients in claims against sovereigns and state entities in Indonesia, Algeria and Kazakhstan,
and led a team that obtained a final award for a client against the Nigerian National
Petroleum Company in excess of US$2 billion. Constantine has also advised and repre-
sented a variety of investors and states in relation to disputes under relevant bilateral and
multilateral investment treaties, and was counsel of record in high-profile ICSID successes
for the Republic of Kenya in World Duty Free v. Republic of Kenya, and for the Republic of
Lithuania in Parkerings v. Republic of Lithuania.
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About the Authors
Constantine has been named as one of the ‘top 20’ individuals in the world of arbitra-
tion in the 2011, 2012 and 2013 ‘Who’s Who’ of Commercial Arbitration. He is a co-author
of the fourth and fifth editions of the leading textbook on international arbitration, Redfern
and Hunter on International Arbitration, and the news editor of the leading journal International
Arbitration Law Review. He is a solicitor-advocate (Higher Courts Civil), and was recently
appointed Queen’s Counsel.
Charles A Patrizia
Paul Hastings LLP
Charles A Patrizia is a partner in the litigation practice of Paul Hastings LLP and is based
in the firm’s Washington, DC, office. His practice focuses on regulatory and international
matters, with a concentration in matters affecting the environment, energy, trade and com-
pliance. Mr Patrizia has an active counselling and litigation practice involving international
trade and regulation, export and related financing, environmental and energy matters, as
well as other commercial matters and government contracts. He represents clients in a
range of international and national transactions, export financing and guarantees, and has
represented clients in a variety of international arbitrations, including arbitrations under
the International Chamber of Commerce, UNCITRAL, the Singapore International
Arbitration Centre and maritime arbitration rules. Mr Patrizia has been an instructor in
trial advocacy tactics at the National Institute for Trial Advocacy. Mr Patrizia received his
AB degree, Phi Beta Kappa, from the University of North Carolina and his JD degree from
Yale Law School. While at Yale, he was an editor of the Yale Law Journal and winner of the
John Currier Gallagher Prize.
Ina C Popova
Ina C Popova is a litigation partner in the firm’s New York office whose practice focuses on
international arbitration, complex commercial litigation and public international law. She
is dual-qualified in civil law and common law and she frequently leads contentious matters
in Spanish and French. Ms Popova is admitted to practise in Paris and New York and holds
advanced degrees in English law. She has particular experience in the mining and energy
sectors, in which she regularly handles multibillion-dollar disputes involving commercial,
environmental and public international law issues across a variety of jurisdictions. Ms
Popova represents private clients and states in arbitrations governed by various substantive
laws and conducted under the rules of the major arbitral institutions, as well as in court
proceedings in federal and state courts in the United States, including the United States
Supreme Court.
Ms Popova has served in a number of leadership positions, including as co-chair of the
2016 Annual Meeting of the American Society of International Law and as a rapporteur
for the ASIL-ICCA Joint Task Force on Issue Conflicts in Investor-State Arbitration. Ms
Popova was listed as a Future Star by Benchmark Litigation and named as a Future Leader
in Who’s Who Legal: Arbitration 2016. She has taught law at the Institut d’Études Politiques
de Paris (Sciences Po) and is a Fellow of the Société de Législation Comparée.
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About the Authors
Dietmar W Prager
Dietmar W Prager is a litigation partner in the firm’s New York office who focuses his
practice on international arbitration and litigation with a particular emphasis on Latin
America. Dr Prager has represented parties in numerous arbitrations throughout the world
under the auspices of ICSID, the ICC, the AAA and ICDR and the PCA, as well as in ad
hoc arbitration proceedings. He was also one of the youngest lawyers ever to argue before
the International Court of Justice.
Dr Prager’s recent representations include disputes involving bilateral investment trea-
ties, complex construction projects, mining ventures, oil and gas, the retail sector, the finance
sector, sovereign debt and distribution agreements. Dr Prager is a vice chair and member
of the executive board of the Institute for Transnational Arbitration (ITA), and served as the
first chair of ITA’s Americas Initiative. He also regularly sits as arbitrator.
Dr Prager is ranked among the leading international arbitration practitioners by
Chambers Global, Chambers USA, Chambers Latin America, Legal 500 Latin America, Benchmark
Litigation and Who’s Who Legal.
Joseph R Profaizer
Paul Hastings LLP
Joseph R Profaizer is a partner in the Washington, DC, office of Paul Hastings LLP. An
adjunct professor of international arbitration and litigation at Georgetown University,
he has been repeatedly recognised by Chambers Global, Chambers USA, Global Arbitration
Review, Who’s Who Legal: Arbitration and The Legal 500 (United States) as a leading attorney
in international arbitration. He is a US-qualified attorney and English-qualified solici-
tor, and has practiced in both the United States and England. Mr Profaizer has served as
counsel in threatened or actual litigation or arbitration in over 45 countries, as well as in
over 50 proceedings under the rules of the ICC, the AAA/ICDR, the LCIA, the SIAC,
the HKIAC, ICSID, JAMS and UNCITRAL. He is the author and co-author of numer-
ous articles on international arbitration and a frequent speaker on international arbitration
and international legal issues. He is a graduate of the University of Texas at Austin, the
University of Texas School of Law and the London School of Economics. He is a former
law clerk to the Honorable George P Kazen at the US District Court for the Southern
District of Texas.
Eldy Quintanilla Roché

King & Spalding
Eldy Quintanilla Roché is an associate in King & Spalding’s international arbitration prac-
tice group in the Houston office.
Ms Roché holds a law degree from the Catholic University of Honduras and a juris
doctor degree from Gonzaga University School of Law. She also holds a master in com-
parative law from the University of Miami. Her experience includes representing corpo-
rate clients in investor-state arbitration, commercial arbitration, tort litigation and foreign
enforcement of judgments. Ms Roché has significant experience advising clients on issues
of civil law and international law with a particular focus in South America.
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About the Authors
Before joining King & Spalding, she was a member of the global disputes practice
group at a large international law firm. She also served as a law extern for the US District
Court for the Eastern District of Washington (2009) and worked as an escribiente at the
Court of Appeals in San Pedro Sula, Honduras (2002–2005).
Ms Roché is a member of the Honduran Bar, the Florida State Bar, the Washington DC
Bar and the Texas State Bar.
Howard Rosen
FTI Consulting
Howard Rosen is a senior managing director at FTI Consulting and has over 34 years of
experience advising on all aspects of business valuations, damages quantification and corpo-
rate finance matters. He has acted as an adviser to private and public companies, regulatory
bodies, and all levels of government on a wide variety of industries. His work experience
covers assignments across North and South America, Europe, the Middle East, Africa and
Asia. Howard has provided expert witness testimony in damages quantification and valua-
tion matters in courts in Canada and the United States, and also in international arbitration
hearings in North and South America, Asia, Africa, Europe and the Middle East.
Howard has acted as court-appointed administrator, monitor and inspector, and has sat
as a member of an arbitral tribunal and as sole arbitrator. He is the co-author of two texts,
a number of chapters and articles on the quantification of economic damages, and he has
lectured extensively to professional interest groups.
Howard has acted as instructor at the NITA and FIAA Expert Witness Trial Practice
Programs, the MIDS Program in Geneva, and as an MBA instructor at the Schulich School
of Business in Toronto. He has been listed as one of the top valuation and damages experts
in Canada by Lexpert, and internationally by Who’s Who Legal as one of the leading experts
in international commercial arbitration worldwide every year since the inception of the
list in 2011. In the 2016 Who’s Who Legal: Consulting Experts, a one-of-a-kind guide to the
leading consulting experts across the globe, Howard is listed as one of the top five experts
in North America.
Howard leads the global international arbitration practice and is the head of economic
and financial consulting in North America and Asia for FTI Consulting.
Samantha J Rowe
Samantha J Rowe is a member of Debevoise & Plimpton’s international dispute resolution
group and is based in the London office. Ms Rowe is admitted to the New York Bar and a
solicitor in England and Wales. Her practice focuses on international arbitration and public
international law. She represents private clients and states in arbitrations governed by vari-
ous substantive laws and conducted under the rules of the ICC, SIAC, LCIA, ICSID and
UNCITRAL, and in court proceedings in federal and state courts in the United States,
including the United States Supreme Court. Ms Rowe speaks French and Spanish, and
basic Portuguese, and frequently handles contentious matters involving these languages.
She was recently named by Who’s Who Legal in its Future Leaders list, and sits on the steer-
ing committee for the American Bar Association’s International Arbitration Committee
285
About the Authors
and the board of directors of the New York International Arbitration Center (NYIAC).
Ms Rowe received her BA (Hons) with first class honours in English Law and French Law
from the University of Oxford, Wadham College, a Certificat Supérieur de Droit Français
from the Université de Paris II Panthéon-Assas, and an LLM in International Legal Studies
from New York University.
J William Rowley QC
20 Essex Street
J William Rowley QC has chaired or participated as a tribunal member or counsel in over
200 international arbitrations, involving over 50 national or state laws or treaty systems.
He is described as ‘one of the elite international arbitrators’ (The New Peace Keepers); a
‘Star Performer’ (Legal Business Arbitration Report); one of London’s ‘Super-Arbitrators’
(Global Arbitration Review); ‘Exceptional’, ‘Olympian’, ‘no one ever leaves the chamber with
a sense of injustice’, a ‘big character on the scene’ (Chambers UK); and an ‘extremely strong’
arbitrator and a ‘sensible chairman’ (Chambers Global 2013’s Most In Demand Arbitrators).
He served as board chairman of the LCIA from 2013 to 2017 and is a former member
of the LCIA Court. He is a member of the ICSID Panel of Arbitrators, the ICC Canadian
Panel and multiple regional panels (eg, AAA/ICDR, SCC, DIAC, KLRC, SIAC, HKIAC).
He is a past member of the NAFTA 2022 Committee.
He was general editor of Arbitration World from 2004 to 2012. He is the chair of the
editorial board of Global Arbitration Review; past chair of the IBA Business Section and IBA
Antitrust Committee; and co-author of Rowley & Baker: International Mergers – the Antitrust
Process. He served as chairman at McMillan LLP from 1996 to 2009, and as chairman
emeritus and special counsel from 2009 to 2014.
Igor V Timofeyev
Paul Hastings LLP
Igor V Timofeyev is a partner in the Washington, DC, office of Paul Hastings LLP. His
practice focuses on appellate and international litigation, as well as international arbitration.
Mr Timofeyev has represented corporations and foreign governments in investor–state
arbitration, ad hoc international commercial arbitration,World Trade Organization disputes
and a variety of appellate, trial and regulatory proceedings. In addition, he has advised
clients on issues concerning investment treaties and free trade agreements. Mr Timofeyev
previously served as Director of Immigration Policy and Special Advisor for Refugee
and Asylum Affairs at the US Department of Homeland Security, and as associate legal
officer to the president of the International Criminal Tribunal for the Former Yugoslavia.
Mr Timofeyev is a former clerk to Justice Anthony M Kennedy of the US Supreme Court
and Judge Alex Kozinski of the US Court of Appeals for the Ninth Circuit. He is a gradu-
ate of Yale Law School, Oxford University and Williams College.
286
About the Authors
Liz Tout
Dentons UKMEA LLP
Liz is head of Dentons’ litigation and dispute resolution practice in the UK.
Liz has nearly 30 years’ experience in the energy and projects sectors and regularly
works for major oil and gas companies, with whom she works closely on a range of inter-
national disputes. She frequently advises on matters relating to African assets and operations
in the energy sector.
With extensive experience in international arbitration and mediation, especially in sub-
stantial pricing and technical disputes, Liz has received independent recognition as a lead-
ing energy disputes lawyer. She is widely acknowledged for her grasp of many technical
engineering and public and private procurement concepts and is used to working closely
with in-house counsel and experts.
Liz advises a number of major oil and gas companies on arbitration, litigation, expert
determination and mediation on a range of matters including the price of oil, gas and LNG,
pre-emption, issues under production sharing contracts and concession agreements, cost
sharing, JOA disputes, sales, transportation and trading agreements. She has experience of
international arbitration in continental Europe, the Middle East, Africa and the UK under
the ICC, LCIA and UNCITRAL Rules.
Matthew Vinall
Dentons UKMEA LLP
Matthew is counsel specialising in energy disputes, including price reviews and major con-
struction, infrastructure and engineering disputes.These disputes often lead to international
arbitrations, and Matthew has significant experience operating under all the major inter-
national arbitration rules. He works closely with clients and independent technical experts
in fields including forensic accountancy, economics, design and engineering, project plan-
ning, and quantity surveying. As well as major arbitrations, over the years, Matthew has also
worked on a wide range of commercial disputes in the High Court and before regulatory
tribunals and has been involved in several mediations.
Matthew’s arbitration and technical expertise has been recognised by The Legal 500,
which remarks that he is ‘an excellent manager of heavy arbitration work’ (2011) and has
‘unique mathematical skills’ (2015).
George M Vlavianos
Bennett Jones (Gulf) LLP
George Vlavianos is the managing partner of Bennett Jones (Gulf) LLP, which carries on
the practice of law in Doha, Qatar, in association with Bennett Jones LLP.
Leader of the firm’s arbitration practice, George practises in the area of dispute reso-
lution and construction law. He has also acted for owners, contractors and engineers in
a wide range of construction disputes, from civil to industrial. In addition, he has broad
experience with insurance claims arising out of large industrial construction projects.
George represents major industrial clients in complex multiparty litigation and is
involved in both domestic and international mediation and arbitration with respect to sig-
nificant commercial disputes. He has considerable international arbitration experience as
287
About the Authors
counsel under the world’s leading arbitration rules, including UNCITRAL and ICC, and
occasionally sits as an arbitrator. George also has extensive experience with construction
lien disputes, particularly in the oil and gas context.
George is a registered practitioner with the DIFC courts in Dubai. He has also appeared
before all levels of court in Alberta, Canada, including the Alberta Court of Appeal.
George is a Fellow of the Canadian College of Construction Lawyers (CCCL) and a
member of the Congress of Fellows of the Center for International Legal Studies. He is
also a member of the London Court of International Arbitration. George is admitted to
the Panel of International Commercial Arbitrators of the ICC National Committee of
the Canadian Chamber of Commerce. He is ranked by Chambers in the fields of dispute
resolution and construction law.
George is also fluent in English, French and Greek. He has a working knowledge of
German and a basic knowledge of Arabic.
George M von Mehren

Squire Patton Boggs (US) LLP
George von Mehren is a partner in Squire Patton Boggs’ London office and leads the firm’s
international dispute resolution practice group. With more than 35 years of experience in
complex adversarial proceedings, Mr von Mehren spends 100 per cent of his time repre-
senting clients in international arbitrations.
Charline Yim
Charline Yim is an associate in the New York office of Gibson, Dunn & Crutcher, and a
member of the litigation and international arbitration practice groups.
288
Appendix 2
Contributing Law Firms’ Contact Details
20 Essex Street Baker McKenzie

20 Essex Street 452 Fifth Avenue
London 15th Floor
WC2R 3AL New York
Tel: +44 20 7842 1200 NY 10018
Fax: +44 20 7842 1270 United States
[email protected] Tel: +1 212 626 4362
www.20essexst.com Fax: +1 212 310 1698
[email protected]
[email protected]
Allen & Overy LLP
www.bakermckenzie.com
One Bishops Square
London
E1 6AD Bennett Jones LLP
United Kingdom 4500 Bankers Hall East
Tel: +44 20 3088 3700 855 2nd Street SW
[email protected] Calgary, Alberta
www.allenovery.com T2P 4K7 Canada
Tel: +1 403 298 3068
[email protected]
289
Contact Details
Bennett Jones (Gulf) LLP Doug Jones AO

Qatar Financial Centre Branch Level 15
37th Floor, Tornado Tower 1 Bligh Street
Al Funduq Street, West Bay Sydney
PO Box 11972 NSW 2000
Doha, Qatar Australia
Tel: +974 4020 4700 Tel: +61 2 9353 4120
[email protected] Fax: +61 2 8220 6700
www.bennettjones.com [email protected]
Atkin Chambers
1 Atkin Building
65 Gresham Street
Gray’s Inn
London
London
EC2V 7NQ
WC1R 5AT
United Kingdom
United Kingdom
Tel: +44 20 7786 9000
Tel: +44 20 7404 0102
Fax: +44 20 7588 4180
Fax: +44 20 7405 7456
[email protected]
[email protected]
Arbitration Place
[email protected]
Bay Adelaide Centre
900-333 Bay Street
919 Third Avenue
Toronto
New York
Canada
NY 10022
M5H 2T4
United States
Tel: +1 416 848 0203
Tel: +1 212 909 6000
Fax: +1 416 850 5316
Fax: +1 212 909 6836
[email protected]
www.dougjones.info
[email protected]
[email protected]
Edison Spa
www.debevoise.com Foro Buonaparte
31 Milan 20121
Italy
Dentons UKMEA LLP
Tel: +39 02 62227330
One Fleet Place
Fax: +39 02 62227841
London
[email protected]
EC4M 7RA
www.edison.it
Tel: +44 20 7242 1212
Fax: +44 20 7246 7777
[email protected]
[email protected]
www.dentons.com
290
Contact Details
Freshfields Bruckhaus Deringer 200 Park Avenue

US LLP New York
700 13th Street, NW, 10th floor NY 10166-0193
Washington, DC 20005-3960 United States
United States Tel: +1 212 351 4000
Tel: +1 202 777 4500 Fax: +1 212 351 4035
Fax: +1 202 777 4555 [email protected]
[email protected] [email protected]
www.freshfields.com
www.gibsondunn.com
FTI Consulting
79 Wellington Street West Gordon E Kaiser
Suite 2010 JAMS
Toronto 77 King Street West
Ontario M5K 1G8 Suite 2020
Tel: +1 416 649 8072 Toronto, ON M5K 1A1
Fax: +1 416 649 8101 Canada
Fax: +1 416 861 2465
22 place de la Madeleine
5th floor 555 13th Street, NW
75008 Paris Suite 400 West
France Washington, DC, 20004
Tel: +33 1 53 05 36 17 United States
Fax: +1 202 942 9186
www.fticonsulting.com [email protected]
Gibson, Dunn & Crutcher LLP www.jamsadr.com

Telephone House
2-4 Temple Avenue
London
29 Ludgate Hill
EC4Y 0HB
London EC4M 7JR
United Kingdom
United Kingdom
Tel: +44 20 7071 4239
Tel:+44 20 8734 2800
Fax: +44 20 7070 9239
Fax: +44 20 8734 2820
[email protected]
[email protected]
[email protected]
[email protected]
www.haynesboone.com
291
Contact Details
King & Spalding Squire Patton Boggs (US) LLP

1100 Louisiana 30 Rockefeller Plaza
Suite 4000 New York, NY 10112
Houston United States
TX 77002 Tel: +1 212 407 0146
United States Fax: +1 212 872 9815
Tel: +1 713 751 3200 [email protected]
Fax: +1 713 751 3290
[email protected] 7 Devonshire Square
[email protected] London
[email protected] EC2M 4YH
www.kslaw.com United Kingdom
Tel: +44 20 7655 1395
Fax: +44 20 7655 1001
Paul Hastings LLP
[email protected]
875 15th Street, NW
Washington, DC, 20005
www.squirepattonboggs.com
United States
Tel: +1 202 551 1700
Fax: +1 202 551 1705 Three Crowns LLP
[email protected] New Fetter Place
[email protected] 8-10 New Fetter Lane
[email protected] London
EC4A 1AZ
600 Travis Street United Kingdom
58th Floor Tel: +44 20 3530 7960
Houston, TX 77002 Fax: +44 20 3070 0997
United States [email protected]
Tel: +1 713 860 7300 [email protected]
Fax: +1 713 353 3100 www.threecrownsllp.com
[email protected]
Wilmer Cutler Pickering Hale and
www.paulhastings.com
Dorr LLP
49 Park Lane
London
W1K 1PS
United Kingdom
Tel: +44 20 7872 1000
Fax: +44 20 7839 3537
[email protected]
www.wilmerhale.com
292

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ALLEN & OVERY LLP

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BENNETT JONES (GULF) LLP

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DENTONS UKMEA LLP

FRESHFIELDS BRUCKHAUS DERINGER US LLP

GIBSON, DUNN & CRUTCHER LLP

GORDON E KAISER (JAMS)

HAYNES AND BOONE CDG, LLP

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Part I: Investor-State Disputes in the Energy Sector

2 The Energy Charter Treaty������������������������������������������������������������������������� 30

3 Investment Disputes Involving the Renewable Energy Industry Under the

4 Of Taxes and Stabilisation��������������������������������������������������������������������������� 60

5 Utilities, Government Regulations and Energy Investment Arbitrations������� 77

6 The Role of Sovereign Wealth Funds and National Oil Companies in

Part II: Commercial Disputes in the Energy Sector

8 Offshore Vessel Construction Disputes�������������������������������������������������������122

9 Disputes Involving Regulated Utilities�������������������������������������������������������133

10 Arbitration Involving Renewable Energy���������������������������������������������������156

Part III: Contractual Terms

12 Gas Price Review Arbitrations: Certain Distinctive Characteristics�������������185

13 Destination Restrictions and Diversion Provisions in LNG Sale and Purchase

14 Gas Price Review Arbitrations: Changing the Indexation Formula�������������207

Part IV: Procedural Issues in Energy Arbitrations

16 Compensation in Energy Arbitration���������������������������������������������������������232

18 Issue Estoppel in Gas Price Reviews����������������������������������������������������������258

The Breadth and Complexity of the International Energy Industry

Doak Bishop, Eldy Quintanilla Roché and Sara McBrearty1

Oil and gas: overview of the traditional energy sector

Upstream, downstream and midstream

Gas: US Infrastructure Challenges, 100 Iowa L Rev 947, 965 (2014-2015).

Private energy companies are often classified as a ‘major’ or as an ‘independent’ com-

The changing role of host states in the international energy industry

33 Ernest E Smith, et al, International Petroleum Transactions, 54 (2d Edition).

The Organization of the Petroleum Exporting Countries

National oil companies

51 Ernest E Smith, et al, International Petroleum Transactions, 58-59 (2nd Edition).

The oil and gas contract

Initially, concession agreements were negotiated on a case-by-case basis66 as international

Overview of energy-related investment disputes

The ICSID Convention

ICSID was designed specifically to administer arbitrations of foreign investment disputes.82

The New York Convention

The North American Free Trade Agreement

The Energy Charter Treaty

Bilateral investment treaties

Mark W Friedman, Dietmar W Prager and Ina C Popova1

Expropriation can be direct or indirect. A direct expropriation typically occurs when

In AES v. Hungary, the tribunal considered a claim of indirect expropriation based on a

2 The Energy Charter Treaty�� 30

3 Investment Disputes Involving the Renewable Energy Industry Under the

4 Of Taxes and Stabilisation�� 60

5 Utilities, Government Regulations and Energy Investment Arbitrations�� 77

6 The Role of Sovereign Wealth Funds and National Oil Companies in

8 Offshore Vessel Construction Disputes��122

9 Disputes Involving Regulated Utilities��133

10 Arbitration Involving Renewable Energy��156

12 Gas Price Review Arbitrations: Certain Distinctive Characteristics��185

13 Destination Restrictions and Diversion Provisions in LNG Sale and Purchase

14 Gas Price Review Arbitrations: Changing the Indexation Formula��207

16 Compensation in Energy Arbitration��232

18 Issue Estoppel in Gas Price Reviews��258