EI Sourcebook | 5.8 Contract Negotiations and Dispute Settlement

5.8 Contract Negotiations and Dispute Settlement

As the partial list in Section 5.6 suggests, EI contracts and licensing procedures tend to be complex and lengthy. They require special skills in their negotiation, and in the management and resolution of almost inevitable disputes. Both topics are addressed below.

Negotiations. Negotiations in the EI sector primarily focuses on contracting between a government (or its agent) and the investor. However, revisions to laws, the introduction of new legislation and regulations, or laws related to local content may also be the subject of negotiation. Given the complexity of the issues involved, and their consequence in terms of revenue and other benefits, governments should place a premium on the development of internal negotiation capacity and access to knowledgeable external expertise. This is especially important given the considerable information, skills, and resources generally available to those on the other side of the negotiating table.

Disputes. During contract negotiations and prior to the commencement of EI operations, the parties will need to address the issue of how to settle any disputes that may arise in the course of a long-term project. Differences between host governments and investors can arise over time, and eventually escalate into serious legal proceedings. There are standard ways of providing for the parties to settle their differences amicably and speedily (such as mediation, conciliation, or cooling-off periods). Failing these, parties may choose to pursue formal and binding legal proceedings. This may require the dispute to be heard by the local courts, but more often the parties will choose to submit their disputes to international arbitration: a form of private justice.^[75] The latter mechanism will be keenly sought by most IRCs.

For disputes that have a technical, scientific, or accounting character,^[76] an expert may be appointed to evaluate the dispute. This type of dispute resolution is called an expert determination. Whatever method is used, the dispute settlement mechanism will be set out in the contract, and will constitute a very important assurance to the investor that the bargain struck in the contract will be secure over time. A well-drafted dispute resolution clause will, in the event of breach, provide a means for seeking compensation through an arbitral award enforceable against the state hosting the investment. Under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), an arbitral award is enforceable through the local courts of 146 states.^[77]

In addition to breach of contract claims by investors, violations of investor rights may also give rise to a claim for a violation of an obligation under an international investment treaty. These investment treaties (typically negotiated on a bilateral basis and called Bilateral Investment Treaties (BITs)) have become increasingly popular in promoting and protecting foreign direct investment.^[78] BITs give private investors the right to initiate arbitration if obligations under the treaty have been violated by the host state government. BITs generally cover access to arbitration, the rules applicable to the arbitration and the enforcement of arbitral awards.

The most popular forums for arbitral disputes are institutions such as: the International Centre for the Settlement of Investment Disputes (ICSID) and the International Chamber of Commerce (ICC).^[79] There are also a number of regional arbitration centers that are available to assist in resolving disputes. Arbitral proceedings are often complex and have become an increasingly common forum for resolving petroleum and mining industries throughout the world.

It should be emphasized that many disputes derived from the EI sector are settled before they reach the stage of an arbitral award. This phenomenon reflects the importance of both commercial realities and the need to preserve the long-term relationships between investors and host states.

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