Arbitration
Babelian Oil Services (“BOS”) is a state-owned corporation established under statute in Babelia, an oil-rich country in the Caucasus. In September 2020, American Petroleum Enterprises Inc. (“APE”), an American oil company, entered into a concession agreement with BOS in relation to the exploitation of certain oil fields in Babelia. The agreement provided for BOS to be paid a commission for each concession granted to APE. In addition to standard commercial terms, the concession agreement contained the following clauses:
10. Force Majeure
Neither party will be liable for loss caused by an event of force majeure if the event is beyond the control of the party claiming exemption from liability, after exercising best efforts.
11. Governing Law
This agreement will be governed in every respect by the law of Babelia and international principles commonly used in oil concession agreements.
A separate piece of paper has been stapled to the agreement immediately following the signature pages, which appeared to be a copy of e-mail correspondence, sent by APE and responded to by BOS two days before the agreement was signed by the parties. This e-mail correspondence includes the following language:
“Further to discussions, we hereby agree that all disputes under the concession agreement shall first go to mediation in Babelia but, if that fails, the dispute shall be referred to court in Babelia which will have exclusive jurisdiction SAVE THAT at the written option of APE, disputes may be submitted to arbitration in London. In this case, to ensure its neutrality, the arbitration will be under the auspices of the United Nations Committee on International Trade or such other neutral body as is available to hear disputes. The arbitrators will have at least 10 years’ experience in the oil and /or gas industry and the governing law will be the English Arbitration Act 1996.”
Initial exploration shows the presence of significant oil deposits in the region which APE is granted concessions over. In the meantime, however, elections held in Babelia return the Environmental Socialist Party of Babelia (ESPN) to power. ESPN had contested the elections on a programme of restoring state control of Babelia’s natural resources, restricting inward investment and stopping the harm which industrialisation was doing to Babelia’s environment. One of the first acts of the newly elected government is to issue a decree suspending all agreements relating to development of oil and gas fields in that region, and prohibiting any Babelian company party to such an agreement from proceeding with it, or paying or permitting the payment of any compensation to any foreign company that may be affected by the suspension. After the issue of this decree, BOS is advised by its lawyers that it must stop APE proceeding further with implementing the Agreement, and sends a notice to APE to this effect, which APE interprets as a repudiatory breach of contract.
In February 2022, APE therefore issues a notice of breach to BOS, and includes notice to invoke the arbitration clause and its proposal to nominate Sir Theodore Rumwinkle, Q.C., a leading lawyer with 15 years’ experience specialising in energy law, as its arbitrator. BOS refuses to nominate an arbitrator, and files a response with APE denying arbitral jurisdiction on the following grounds:
i. There is no agreement to arbitrate as the e-mail correspondence does not form part of their agreement; and/or
ii. It did not have the corporate capacity to agree to arbitration; and/or
iii. Even if the e-mails have been incorporated into their agreement, APE has not tried to mediate the dispute, so the arbitration clause is not yet “operative”; and/or
iv. In any event, the arbitration provisions are too vague and imprecise and are incapable of being performed; and/or
v. The whole agreement (including any dispute resolution agreement) is now frustrated and/or null and void; and/or
vi. What has happened is not covered by the arbitration clause as its inability to perform is not caused by a breach of contract but is due to the effect of the decree.
In addition, BOS claims that Sir Theodore cannot act as his firm is paid a monthly retainer by APE, and that he has acted on a number of very similar claims in the past and is not therefore “independent”.
Part 1
You are asked to advise Sir Theodore what steps he must take in order to consider each of the above arguments, and what law and/or rules should be applied to determine each point, and whether in fact he should accept the mandate in this case, and any possible risks and how those risks can be mitigated.
Part 2
Following your advice, Sir Theodore interprets the reference to the United Nations Committee on International Trade to mean that the arbitration must follow the UNCITRAL Arbitration Rules 2010 and concludes that the arbitration agreement was valid and binding under English law. In addition, he concludes that, under the general principles of law, BOS (as a state-owned company) could not be distinguished from the Government, and therefore that the Government shall be treated as being party to the agreement and thus within the jurisdiction of the arbitration agreement and the Tribunal.
Sir Theodore decides he has full competence and authority to hear the case as sole Arbitrator and declares this by notice to the parties, giving notice and instructions for and the date of the first hearing. At the same time, he submits a “Disclosure Notice” indicating that members of his firm been instructed previously by APE on various “unrelated matters” but that this does not raise any issues of conflict or impact on his ability to act. He does not however mention his previous appointments on similar matters/disputes, one of which is ongoing and involves APE’s parent company.
Advise BOS and the Government what steps they could take, where and on what grounds (identifying the relevant applicable law), and whether there are any time constraints in order to contest Sir Theodore’s jurisdiction, individual ability to act and /or exercise of powers Also advise on the implications of NOT taking any action, and whether they can and should boycott the arbitration, and the possible implications of doing so
