Arbitration Clauses In Energy Contracts – Pros and Cons

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Many contracts in the energy sector contain arbitrations clauses – some are mandatory, while others are optional. In recent years, arbitration has become a mainstay in resolving energy disputes, particularly because of the rapidly changing industry landscape. While there have always been unique challenges impacting business in the energy sector, there is now increasing risk of conflict around issues including supply and demand disruptions; inflation pressure; transformative technologies; changing and increasing regulation; price volatility; ongoing liabilities for aging assets; surface use; geopolitical shifts; ESG matters; etc. In the face of these challenges, arbitration has become the preferred choice to resolve disputes for many organizations. But is it right for you?

Whether to pursue litigation or arbitration should conflict arise, is an important business decision and well-defined arbitration clauses can be key to ensuring that deals and projects move forward as smoothly as possible.  To that end, we have put together a list of helpful pros and cons to consider when drafting and negotiating energy contracts.

Pros

  • Fast and flexible. Arbitration is not a trial setting, subject to the court’s regular docket, hundreds if not thousands of other cases, and trial resets.  Rather, arbitration can be scheduled when the parties are ready and around the timing and availability of everyone involved.  Additionally, under most arbitration rules, the award/decision must be issued within 30 days after conclusion of the final hearing, whereas some trial courts can delay releasing decisions.
  • Less expensive. Arbitration tends to be less expensive than the traditional trial route, as discovery is often limited, there may not be a need for expert witnesses, and it generally takes less time overall to present the case.  Caveat here, this does not mean that arbitration cannot be expensive, particularly if counsel for the parties treat arbitration as nothing more than an alternative forum for implementation of the traditional litigation model.
  • Pick the arbitrators. The parties will agree to select the arbitrator(s) to preside over their dispute.  This allows the parties to opt for a panel that can have specific experience in their area of law, business, or dispute.
  • Confidentiality. Arbitration proceedings are not publicized or held in open courtrooms.   Thus, any proprietary or trade secret information and documents will be protected, as well as the nature of the dispute, the parties involved, and the ultimate outcome.
  • Less formal. Discovery is generally truncated and limited to discrete issues and the rules of evidence and civil procedure are largely relaxed.  This leads to a freer exchange of information between the parties and the introduction of evidence related to the issue.  The extensive pre-trial motion practice is also addressed by a few phone calls with the arbitrator and the parties.
  • Fair/reasonable outcome. The fear of a runaway arbitration panel is non-existent.  Unlike juries, arbitrators will look to find a fair and reasonable outcome, devoid of jury sensationalism.  Simply, the dispute’s resolution will not be based on the bias and emotional reaction of the jury.
  • Opportunity to maintain the business relationship. Arbitration can work to resolve the dispute between two parties and avoid the stigma and contention of litigation.  Often, the actual parties – rather than the lawyers – are asked to participate and create a resolution, which can foster working together to find a peaceable solution, rather than harboring hostility through the litigation process.

Cons

  • Uneven playing field. Mandatory arbitration clauses in an agreement can inure to the benefit a larger entity by strongarming a company with less bargaining power – a “take it or leave it” situation.
  • Decision is final and not subject to appeal. Once the arbitrator(s) decides an issue, that decision is final, and there is no right or opportunity to appeal.  As with all rules, there are exceptions and the parties can agree otherwise, but by far and large, this is the prevailing rule.
  • Limited discovery and motion practice. Discovery in arbitration is limited to discrete and targeted issues, with limited to no tolerance outside of these issues.  This can include a limited number of depositions and/or discovery requests.  Whether obtaining evidence from non-parties remains disputed and varies, discovery is generally limited to the information between the parties. Similar limitations with dispositive motion practice.  While not generally prohibited, the burden is higher before even filing such motion.  Generally, these motions are permitted after the moving party makes a showing that the motion is likely to succeed and will dispose of or narrow an issue in the case.   The reality is however that because they are antithetical to giving the parties a fair hearing, dispositive motions are rarely granted.
  • Lack of consistency and transparency. The ultimate decision is based on what the arbitrator decides after hearing the issues.  This may or may not include correct or consistent application of the law and evidence, but rather, an effort for the arbitrator to “split the baby” or strike a balance between the parties.  However, because these decisions are not subject to review or public scrutiny, such decisions could be more tainted or biased given the arbitrator’s position.
  • Unpredictability. Because arbitration does not strictly apply the rules of procedure and evidence, sometimes the arbitrator may hear evidence that would not be customarily admitted in a trial.  Additionally, if evidence is received solely on documents, there is no opportunity to cross-examine the witness.  Finally, arbitrators will sometimes look for “creative” or “unique” solutions to resolve an issue – which could be a pro or a con.

These highlight some of the considerations in determining whether arbitration makes sense for your contract or agreement.  Ultimately, the decision is one to be made depending on the circumstances and details of your specific situation. If we can be of assistance helping your company evaluate if arbitration is appropriate in your given situation, please let us know.

Andrew represents companies active in the oil and gas industry in both litigation and arbitration matters, from risk management to trial. He also advises clients on compliance and regulatory issues and handles proceedings in front of administrative agencies / governmental bodies, including the Ohio Department of Natural Resources and the Ohio Department of Commerce.

In addition to his energy practice, Andrew has broad experience in commercial and business litigation, including breach of contract / lease claims, construction disputes, non-compete / non-solicitation disputes, trade secrets, business torts, and real property-related claims. He is OSHA certified in Construction Safety and Health and has drafted and reviewed numerous construction contracts.

Molly advises on all aspects of litigation, from risk mitigation to pre-suit investigation to trial investigation, and has extensive experience conducting depositions and handling motion practice. She represents clients in connection with commercial and industrial accident claims, construction disputes, engineering and design defect cases, contract and indemnity disputes, and general insurance defense litigation. In the oil and gas sector, Molly advises service companies, manufacturers, producers, operators, well interest owners, and others in complex matters before state and federal courts and regional governing agencies.

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