This article is written by Pranav Sethi, from SVKM NMIMS School of Law, Navi Mumbai. This article analyses the critical analysis of arbitration in energy disputes.
Table of Contents
Introduction
“Future of arbitration is bright, but only because the future of litigation is not” – Respected, Senior Advocate Fali S Nariman
India’s energy supply is diverse, including coal, oil, and gas, as well as solar, wind, biomass, hydro, and nuclear power. India’s current energy requirements are primarily provided by coal-fired thermal power, accompanied by hydrocarbons, and finally clean and renewable power. Many businesses & corporations dealing in the energy sector especially in oil, gas, wind projects, solar energy and others have sought out the most efficient way to settle their parties’ matters outside the court which is through arbitration. The government’s policy think tank, the National Institution for Transforming India (NITI Aayog), had presented the Draft National Energy Policy 2017. The strategy, which is yet to be enacted, proposes a foundation for establishing an overall energy efficiency policy in India by fostering coordination among the ministries responsible for power. In this article we have analysed about types of energy disputes & the way in which arbitration proceedings are dealt in an energy dispute.
Latest energy development goals
India’s latest energy development goals, according to the policy, are as follows: affordable access, increased sustainability, better safety and sovereignty, and economic growth. By the end of 2018, NITI Aayog is anticipated to offer the Prime Minister an integrated energy policy.
The energy sector is critical to our way of life. This is especially true in the northern hemisphere’s established and mature economies, but it is also true, if to a smaller stage in the world’s least developed countries. The energy sector’s acceptance of a wider range of fuels is constantly growing. Hydrocarbon fuels like oil and gas were the primary fuels in the wealthy world a century ago, but wood of various types was important in underdeveloped countries. There is now a kaleidoscope of sources of energy to recognize, varying from conventional hydrocarbon wholesalers mining coal or conventionally pumping oil and gas, to the comparatively recent methodology of fracking, especially in the United States, by including traditional hydroelectric power, nuclear power plants, and renewable sources such as wind, solar, and wave power.
Main divisions modifications result in problem
Improvements in each of the aforementioned main divisions have exacerbated the problem. Wind power, for example, has long been a feature on remote African farms, where an isolated windmill sits still in the hot afternoon heat before spinning in a little breeze to pump up water for starving cattle. Such wind power has now been surpassed by the massive onshore and offshore wind turbines that have multiplied throughout Europe, especially in the United Kingdom.
The idea of commercially viable nuclear fusion electricity
A variety of energy types are in the initial phases of exploration Although nuclear fusion power stations have been in operation for half a century, the idea of commercially viable nuclear fusion electricity is the “new kid on the block.” The large and intriguing ITER F4E nuclear fusion prototype power plant is being funded by an international group, which includes every major country with an interest in nuclear power, and is being built in Cadarache, France. If all goes according to plan, nuclear power will become considerably cheaper, safer, and more widely available, revolutionizing the energy industry and driving down prices.
The environment in which an arbitrator working in the area of energy disputes must function is one that is continually evolving and developing. As a result, there are several features of the disputes that seem to set them apart from disputes in other business sectors. Energy arbitrations, for example, can contain complicated technical factual evidence, requiring thorough expert reports and oral testimony. Furthermore, a site visit to a remote hydroelectric dam, power facility, or oil refinery is frequently required.
Types of energy disputes
Solar and onshore wind
In recent times, the renewable energy sector has grown at an exponential rate, with numerous government initiatives (both fiscal and non-fiscal) playing a vital role. The government has undertaken remarkable initiatives to strengthen the growth of renewable energy, particularly solar and wind energy, and has established a high goal of producing 175 GW by 2022. In this respect, competitive bidding revealed extremely low solar (INR 2.44/kWh) and wind rates (INR 2.43/kWh) in 2017. The government intends to progressively scrape away the advantages as the renewable energy sector matures and achieves electricity production.
Renewable energy project producers, like many power project developers, benefited from a 10-year corporate tax break that officially ended in 2019. Another example is the planned elimination of a renewable energy project’s exemptions from paying transmission costs and losses while using the interstate transmission system. Bids for solar power projects have been increasing in recent months. Solar energy must account for 8% of total electricity consumption (excluding hydropower) by March 2022, according to the Ministry of Power‘s Tariff Policy of 2016.
Role of National Solar Mission
In this respect, the National Solar Mission (NSM), which is currently in its third phase (2017-2022), is a core scheme aimed at promoting solar energy power generation and serves as the primary foundation for solar power purchase. Solar projects are expected to be established in phases following either the NSM or state-specific strategies, with a vision of attaining 100GW (up from the original target of 20GW) of installed solar capacity by 2022, with 40GW of that capacity coming from rooftop solar projects.
To meet these goals, the federal government is collaborating with state governments to build huge solar parks and has published precise rules for their construction. The goal is to offer the power developer ring-fenced, shovel-ready land as well as associated power evacuation infrastructure. Numerous elements and sub-components of the solar energy value chains are eligible for various tax deductions, capital subsidies, and incentives under the NSM.
Wind power projects
Under the Ministry of New and Renewable Energy’s (MNRE) Policy for Repowering of Wind Power Projects 2016, the Indian Renewable Energy Development Agency (IREDA) offers an extra 0.25 percent interest rate reimbursement on onshore wind energy initiatives, in particular concerning the interest rate rebates apply to potential wind projects financed by IREDA. While India plans to sell 30 GW of solar energy and 10 GW of wind energy every year for the next ten years, the industry’s response to wind power auctions has been modest.
Oil and gas
Enhanced upstream research & development regulations, such as the Open Acreage Licensing Policy and the Hydrocarbon Exploration and Licensing Policy (HELP), have been in place in the oil and gas sector since 2016, to encourage the participation of the private sector by highlighting the shortcomings of the previous New Exploration and Licensing Policy (NELP).
Environmental concerns, shareholder value difficulties, regulatory issues, and trade restrictions, among other things, could lead to disputes in the oil and gas industry. Individual foreign parties are more frequently involved in contracts in the oil and gas business. It could be an individual or a state-level agency. Taking any contractual concerns between such entities to a national court will imply that the national court will be a foreign court to the other party. These courts have their very own system of regulations, procedures, and strategies for dealing with domestic concerns, and they may lack the skills and experience necessary to handle complex international disputes. Because the language of these courts may differ from the contract language, they cannot be used to resolve international energy disputes.
Any international contract executed by both parties which do not include an arbitration agreement will require the participants to handle their issues through foreign legal systems. Nevertheless, if the parties to the agreement include an arbitration clause, the parties will have the option of settling any legal dispute on a neutral ground instead of in one party’s or the other’s national territory. While typically oil and gas contracts are international, International Arbitration is the ideal option for resolving any contractual issues that may emerge because it allows disputants to participate in the nomination and selection of the arbitral tribunal that will hear their case.
Arabian American oil company (Aramco) case
The Arabian American Oil Company (Aramco) case is a well-known example of an international arbitration case. In 1933, the Saudi Arabian government signed a contract with Aramco, giving the company exclusive rights to extract and transport oil from its concession block within Saudi Arabia. Later in 1954, the Saudi Arabian government and Saudi Arabian Maritime Tankers Ltd came into another arrangement that was incompatible with the first (the Aramco agreement). In Geneva, in 1955, the case was finally settled by arbitration.
Hydropower
Since 1998, the current policy guiding hydropower development has been in effect. The Ministry of Power (MoP) submitted a draught policy for hydropower projects for the period 2018-2028 to the Union Cabinet for approval in March 2018. The draft policy proposes, among other things, that a lower goods and services tax (GST) rate of 5% be applied to engineering, logistics, and development (contracts for hydropower projects) and that distribution companies receive funds (equal to 4% interest subvention for five to seven years of construction and three years after plant commissioning) from the central government should sign hydropower contractual agreement for at least five years to encourage the annual production of hydropower from individual power plants.
Solar-energy
In May 2018, the Ministry of New and Renewable Energy (MNRE) released a National Wind-Solar Hybrid Policy, which aims to maximize the use of infrastructure such as land and power transmission in areas where wind and solar energy have mild to great possibilities A wind-solar plant is called hybrid if one source’s rated power capacity is at least 25% of the other source’s rated power capacity. The policy intends to not only generate new wind-solar hybrid plants but also to integrate current wind-solar hybrid plants. The MNRE, in support of this, in May 2018, the Department of Energy (DOE) announced a plan to build 2,500MW of interstate transmission-connected wind-solar hybrid power facilities. A contract for the building of a 160MW solar-wind hybrid power project with a battery energy storage system was recently released by the Solar Energy Corporation of India Ltd. While the regulation primarily solely applied to battery storage, it has subsequently been expanded to include all types of storage, including pumped hydro, compressed air, and flywheels.
Battery storage
In India, there is presently no regulatory structure in place to control electricity storage. However, in 2016, the central government proposed the commencement of a new energy storage initiative in its annual budget. The MNRE formed an expert committee to propose a policy document to construct a National Energy Storage Mission (NESM) for India in terms of developing a regulatory plan to facilitate power systems in India, and the group officially presented the policy document to the MNRE. The goal of the NESM is to provide a legislative structure that encourages the design and implementation of battery storage systems.
According to sources, the government is likewise formulating a policy approach to incorporating on-site storage into wind and solar power projects. Tenders for more than 300MW of renewable energy capacity with energy storage equipment were issued by the government in 2017. Nonetheless, for a variety of reasons, nearly all of the tenders were postponed or discontinued.
Foreign judgments enforcement procedure in energy disputes
A foreign decree could be implemented in India as an Indian court decree if it was issued by a reciprocating jurisdiction, according to the Code of Civil Procedure 1908 (CPC). If a non-reciprocating territory, such as the United States, passes a decree, it can only be executed in India by initiating a new civil suit in an Indian court, with the foreign decision serving simply as evidence. The United Kingdom, Singapore, Bangladesh, the United Arab Emirates, and Malaysia are among the 12 reciprocating territories designated by the Indian government.
Exception cases when foreign judgment might not be enforceable in India
A foreign judgment, on the other hand, is not enforceable in India if it has any of the legal flaws listed in Section 13 of the CPC, which include:
- A decision that has not been made by a court of competent jurisdiction;
- If it hasn’t been provided based on the facts of the case;
- Where the proceedings tend to be based on an inaccurate interpretation of international law or an unwillingness to consider Indian law in instances where it is relevant;
- If the proceedings in which the judgment was acquired are unconstitutional;
- If the judgment was acquired through deception; and
- Where it upholds a claim based on a violation of any Indian law.
In the case of international arbitral awards, the Arbitration Act allows them to be enforced as a court order in India. The New York Convention of 1960 and the Geneva Convention of 1924 are both signed by India. The award had to be made in a country that was a participant in the Geneva or New York Conventions.
Countries declared in the official gazette of India and highlights on foreign awards
The country (through which the award originates) must also be declared in the official gazette of India, according to Indian legislation. India has recognized approximately 50 countries so far, notably the United States, the United Kingdom, France, and Germany. Nonetheless, for the award to be enforced, it shouldn’t have any legal flaws, such as being opposed to Indian public policy. The Arbitration Act specifies that an award violates public policy only when it is influenced by fraud or corruption, is in violation of Indian law’s core policy, or disagrees with key fundamentals of morality or fairness.
A foreign award or an award in an international commercial arbitration would not be reconsidered merely because it is contradictory to Indian law or because new evidence has come to light. Foreign awards may thus, be enforced in reciprocating areas by petitioning a competent civil court to make the foreign award a decree.
Reason for preferring arbitration over litigation
Arbitration is frequently described as being opposite to litigation. The use of a neutral third party or board of impartial 3rd parties known as Arbitrator(s) is engaged to settle the dispute among parties in contention under the Arbitration procedure; it is a process of resolving the dispute outside of the court. The arbitrators listen to the arguments given by the disputing parties and then make an unbiased ruling that is favourable to both sides.
Arbitration is usually preferred over litigation because it is less expensive, faster, more reliable, and provides the parties with more confidentiality. And, among the many advantages of arbitration over litigation, the most notable advantage is its cost and time effectiveness.
Reputation and goodwill matters mainly in preferring arbitration
Because of their reputation and goodwill in the market, many company owners and manufacturing sector enterprises choose Arbitration as a dispute settlement mechanism. Arbitration is often applicable in international matters where the parties are unable to agree on the relevant jurisdiction. It’s also preferable in situations where one or both parties want a decisive verdict with no chance of even more appealing. However, in some circumstances, if the issue is too complex to be resolved in a single meeting or there are more than two interested parties, arbitration should not be used as a means of resolving the dispute.
Benefits of arbitration
- Arbitration, as an alternative to litigation, takes less time and costs less money. Arbitration aims to provide a faster negotiated settlement than traditional court proceedings. It is also less expensive than court proceedings.
- Because arbitrators are chosen from a group of specialists with specialized knowledge of a certain trade or business, they tend to provide a higher level of experience than judges, strengthening businessmen’s confidence and belief in the procedures and the resulting award. Most usually in insurance disputes with arbitrators who are experts in the industry rather than more broad-minded judges.
- Even though the arbitrator produces a factual or legal error, an arbitration ruling is final and irreversible, but there are very few options for any further appeal. International Commercial arbitration is also impartial, also unlike court processes, arbitration ensures the confidentiality and privacy of the topic in dispute, and does not reveal the identities of the concerned parties.
- Arbitration is seen as a more flexible alternative to litigation. Litigation laws are generally extremely complicated than arbitration laws; litigation should observe civil court law and must meet the CPR rule book, but arbitration rules are far more simple and few. There is no code of procedure in arbitration; it is decided by the parties, and they can agree and settle on whatever they wish.
- Arbitration can also deliver superior importance fairness than most of the country’s courts, which are overburdened. In international disputes, arbitration provides a higher-quality conclusion than domestic courts.
Dispute resolution
Considering the cross-border features of exploration and manufacturing operations, the oil and gas business has proven to be a productive field for conflicts and, specifically, for specialists of international arbitration. Litigation in the oil and natural gas (O&NG) domain is normally governed by the rules of the appropriate PSU issuing the contract or in the manner of submissions before such a Ministry of PNG authority. Arbitration clauses are common in contracts with PSUs. Before practice initiating an arbitration, however, there are usually procedures for mediation and conciliation before resorting to the dispute resolution method.
Arbitration matters brought before Indian courts
Arbitration clauses are included in Production Sharing Contracts (PSCs), and disputes originating from PSCs are resolved through arbitration. It is usual practise to select a foreign seat of arbitration and foreign governing legislation in the discovery and development activity because the majority of the applicants/bidders are from a foreign jurisdiction. Generally, the arbitration comes in the form of international commercial arbitration. In such cases, Indian Courts are only available for interim relief under Section 9 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) and any subsequent appeal under Section 37 of the Arbitration Act, or for Indian Court support in recording evidence under Section 27 of the Arbitration Act.
Section 48 of the Arbitration Act’s significance
In the context of a foreign-seated arbitration, the Arbitration Act’s Section 48 allows for an appeal to an Indian court during the implementation of the arbitral award. If the arbitration takes place in India, Indian courts have discretion over the nomination of the arbitrator, provisional relief, and any appeal to the arbitral result. In such cases, Part I of the Arbitration Act comes into play. The parties might use these powers to sue in Indian courts in support of the arbitration procedures.
Union of India v. Reliance Industries, 2018
To give an example: In the case of Union of India v. Reliance Industries (2018), the Government of India questioned the Tribunal’s partial award under Section 34 of the Arbitration Act, claiming that the specific topic of the arbitration, which included royalties, cess, service tax, and audit issues associated queries of public policy and thus were not arbitrable.
Delhi High Court ruling in the case
The Delhi High Court ruled that problems of arbitrability of disputes must be examined not only in light of the applicable law of arbitration or lex arbitri, but also in light of the public policy and intention of the parties as controlled by the laws of the country in which it has the strongest relations. The judgment highlighted that articles of the agreement must be read in their entirety to determine the parties’ intentions and if the exclusion of Indian laws undertaken for the goal of controlling arbitration can be expanded if the source material of the arbitration is non-arbitrable. The Delhi High Court dismissed the challenges to lack of jurisdiction based on the stated choice of law clauses in this context.
Supreme Court ruling in the case
The case was challenged to the Supreme Court through a special leave petition, and on May 28, 2014, the Supreme Court ruled that the Delhi High Court’s Section 34 suit was not maintainable. The Supreme Court further stated that after a final award is reached, its enforceability in India can be challenged based on public policy. The Delhi High Court’s finding that if the award is intended to be implemented outside of India, it will leave the Indian party helpless is without merit, according to the Supreme Court, because the parties have agreed that the arbitration agreement shall be guided by English law.
Interim and emergency remedies in energy disputes
Under the CPC, the procedural law regulating the resolution of civil disputes in India, courts have broad powers to give interim remedies, particularly temporary injunctions. Injunctions of this type may be imposed to:
- Keep the subject of the dispute;
- Keep the status quo;
- Prohibit the removal or alienation of property; and
- Prevent a party from granting any third-party property rights.
Even before judgment is entered, the court may order the defendant to provide protection, attach any property, and issue a warrant for the defendant’s arrest if he or she is absconding or has left the court’s jurisdiction’s local bonds. The court may also order the defendant’s assets to be frozen to avoid them from just being transferred overseas (Mareva injunction) or allow the plaintiff to access the defendant’s facilities to acquire evidence crucial to the plaintiff’s case (Anton Piller order).
Likewise, in an arbitral procedure, civil courts have the ability under Section 9 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) to award interim relief targeted at safeguarding the goods or assets that are the focus of arbitration so that the arbitration’s objective is not frustrated. The arbitral tribunal has the jurisdiction to issue interim remedies under Section 17 of the Arbitration Act while the arbitration proceedings are pending and before the award is enforced. Courts have the authority to restrain the use of bank guarantees in unusual circumstances where it is proven that there has been flagrant fraud, irreversible injustice, or specific equities.
Steps in the territory to safeguard investors in the energy sector
Bilateral investment treaties (BITs), which India has signed with the majority of countries where companies operate in India’s energy industry, are the most effective tool for protecting foreign investors’ interests. Around 73 BITs have been completed in India. These BITs include clauses that help avoid confiscation or unlawful getting of investors’ property, another very favoured nation clause that ensures that foreign investors are fairly treated a national treatment principle that ensures that Indian and foreign investors are treated equally, and a fair and equitable treatment clause that ensures that foreign investors are treated fairly.
Investment treaty arbitrations
A couple of investment treaty arbitrations have also been filed against the Republic of India. These claims (for example, Cairn Energy PLC’s claim) have been submitted under the terms of a bilateral investment treaty with India. The arbitration processes have progressed to the point where an award is expected by the end of the year.
Conclusion
Before India presents itself as an international dispute resolution centre, its law and courts will need to improve in terms of functionality and operations. However, the path to that progression is not complicated. A few main principles could assist India’s dispute resolution processes boost commercial trust in the country’s laws and procedures. The importance of having Special Commercial Courts must be factored into law reform efforts. This would have a tremendous impact on the caseload of the arbitral proceedings, ensuring that claims are resolved quickly. Having a separate cadre of judges who specialize in commercial issues would have a huge impact on the success of an arbitral tribunal. India may contemplate segregation within the cadre in the future, depending on the competence of judges within the divisions of energy disputes.
References
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