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  • Writer's pictureRitik Agrawal
    • Oct 20, 2023
    • 12 min read

A CLOSE LOOK AT ARBITRATION IN ENERGY DISPUTES

Updated: Jan 16

Author: Shravani Gupta

College: University of Petroleum and Energy Studies



Abstract

India gets its energy from a lot of different places, including coal, oil, and gas, as well as sustainable sources like solar, wind, biomass, hydro, and nuclear power. India's current energy needs are mostly met by thermal power made from coal, along with hydrocarbons and finally clean, long-lasting energy sources. Many businesses and organisations in the energy sector, especially those working with oil, gas, wind projects, solar energy, and related fields, have actively sought out alternative dispute resolution methods, such as arbitration, as the best way to settle disagreements between parties without going to court. The National Institution for Transforming India (NITI Aayog), which is the government's policy think tank, gave the draught National Energy Policy 2017. The suggested strategy aims to create a complete energy efficiency policy in India by encouraging the power ministries to work together. It has not been put into action yet, though. In this article, different types of energy disputes are looked at, along with how arbitration procedures are run in these situations.

Keywords: Energy, Solar, Hydrocarbon, Plants, Renewable.


INTRODUCTION

According to the most recent policy, India's energy sector development goals include stronger sustainability, improved safety and sovereignty, increased economic growth, and more affordable access. The NITI Aayog is expected to give the Prime Minister with a comprehensive energy policy by the end of 2018.

The energy industry is critical to our way of life. This is especially true in the well-established and mature economies of the northern hemisphere, but it is also true, if to a lesser level, in the world's least developed countries. The energy sector's acceptance of a wider range of fuels is steadily increasing. A century ago, hydrocarbon fuels such as oil and gas were the primary fuels in the world's wealthiest countries, whilst other types of wood were crucial in less developed countries. There is now a kaleidoscope of energy sources to be aware of, ranging from traditional hydrocarbon wholesalers mining coal or conventionally pumping oil and gas to the relatively new method of fracking, which includes traditional hydroelectric power, nuclear power plants, and renewable sources such as wind, solar, and wave power. These traditional hydrocarbon distributors dig coal and pump oil and gas in traditional ways.

The situation has been further aggravated by advancements in each of the aforementioned primary divisions. Wind power has historically been utilised in distant African agricultural settings, where a solitary windmill remains motionless during the scorching midday temperatures, but thereafter rotates in response to a gentle breeze, facilitating the pumping of water to sustain undernourished livestock. The utilisation of wind power has been outpaced by the proliferation of large-scale onshore and offshore wind turbines across Europe, with a particular concentration in the United Kingdom.

Numerous forms of energy are now in the nascent phases of investigation. Nuclear fusion power facilities have been in existence for half a century; yet, the concept of harnessing nuclear fusion electricity for commercial purposes remains relatively nascent. The construction of the ITER F4E nuclear fusion prototype power plant, which is both substantial in size and captivating in nature, is under underway at Cadarache, France. The funding for this initiative is provided by a consortium of nations with a shared interest in nuclear power. If all anticipated developments occur as intended, the safety, affordability, and accessibility of nuclear power will significantly improve. This has the potential to significantly impact the energy industry and result in a decrease in pricing.

The environment in which an arbitrator specialising in energy conflicts operates is characterised by constant evolution and expansion. As a consequence of this, the divergences appear to exhibit distinct characteristics compared to conflicts observed in alternative domains of commerce. In energy arbitrations, comprehension of technical facts might pose a challenge, necessitating the production of comprehensive studies and the presentation of formal arguments by specialists. In addition, it is frequently necessary to do a site visit to a geographically distant hydroelectric dam, power plant, or oil industry.


ENERGY DISPUTES AND IT’S TYPES

a) OIL AND GAS

Upstream research and development has been subject to stricter rules in the oil and gas industry since 2016. The Open Acreage Licencing Policy and the Hydrocarbon Exploration and Licencing Policy (HELP) are rules that fix the problems with the old New Exploration and Licencing Policy (NELP) in order to get the private sector involved[i].

Disputes can happen in the oil and gas business for a number of reasons, such as worries about the environment, difficulties in creating value for shareholders, complicated regulations, and trade restrictions, among other things. In the oil and gas business, contracts often have a higher number of individual foreign entities involved. The responsible person or group can be either an individual or a state-level government body. If these two companies had a disagreement over a contract, they would have to go to a national court. The other side would see the national court as a foreign court. These courts have their own set of rules, protocols, and procedures for handling domestic cases. They might not have the knowledge and experience to handle complicated foreign conflicts. The use of foreign courts to settle energy disputes is limited by the fact that the language used in these courts might not match the language used in the relevant contracts[ii].

If there isn't an arbitration agreement, any overseas contract that both parties sign means that any disagreements must be settled by laws from another country. But if the parties to the agreement include an arbitration language, they will be able to settle any legal disputes in a place that is not part of either party's country. With oil and gas contracts, it is common for the deals to cover more than one country. It is very likely that international arbitration will be the best way to settle disagreements over contracts. This is mostly because it lets all parties involved choose the appellate panel that will hear their case[iii].

b) WIND POWER PROJECTS

The Indian Renewable Energy Development Agency (IREDA) provides an additional 0.25 percent interest rate refund on onshore wind energy projects under the Ministry of New and Renewable Energy's (MNRE) Policy for Repowering of Wind Power Projects 2016. This is especially true for potential wind projects funded by IREDA. For the next ten years, India intends to sell 30 GW of solar energy and 10 GW of wind energy. However, the wind power auctions have received little interest from the corporate community.

c) SOLAR AND ONSHORE WIND

In the past few years, the renewable energy industry has grown at an incredibly fast rate. This is due in large part to several important government programmes, both financial and non-financial. To help green energy, especially solar and wind energy, grow, the government has taken big steps. They have also set the ambitious goal of making 175 GW by 2022. In 2017, competitive bidding showed that solar (INR 2.44/kWh) and wind (INR 2.43/kWh) rates were not too expensive. The government wants to slowly take away the benefits of renewable energy as it grows and makes power.

Developers of renewable energy projects, like developers of many other types of power projects, got a 10-year tax break that ended in 2019. For example, green energy projects that use the interstate transmission system will no longer be exempt from paying transmission costs and losses. This is going to happen. In the past few months, there have been more bids on solar energy projects. The Ministry of Power's 2016 Tariff Policy says that by March 2022, solar energy will make up 8% of all electricity used (not including water).


SOLAR ENERGY

In May 2018, the Ministry of New and Renewable Energy (MNRE) issued the National Wind-Solar Hybrid Policy, which seeks to maximise the use of infrastructure such as land and power transmission in regions where wind and solar energy have moderate to substantial potential[iv]. When one source's rated power capacity is at least 25 percent of the other source's rated power capacity, a wind-solar facility is considered hybrid. In addition to generating new wind-solar hybrid plants, the policy intends to integrate existing wind-solar hybrid plants. In May 2018, the Department of Energy (DOE) announced a proposal to construct 2,500,000 megawatts (MW) of interstate transmission-connected wind-solar hybrid power facilities. The Solar Energy Corporation of India Ltd. has recently awarded a contract for the construction of a 160MW solar-wind hybrid power project with a battery energy storage system. Initially, the regulation only applied to battery storage, but it has since been expanded to include all forms of storage, such as pumped hydro, compressed air, and flywheels.


HYDROCARBON

The current policy regulating the development of hydropower has been in place since 1998. The Ministry of Power (MoP) presented a proposed policy framework for hydropower projects spanning from 2018 to 2028 to the Union Cabinet for its endorsement in March 2018. The proposed policy recommends several measures, including the implementation of a reduced goods and services tax (GST) rate of 5% for engineering, logistics, and development activities related to hydropower projects. Additionally, it suggests that distribution companies should receive financial support from the central government in the form of a 4% interest subvention for a period of five to seven years during the construction phase, as well as an additional three years after the plant is commissioned. These incentives are intended to encourage the signing of hydropower contractual agreements for a minimum duration of five years, with the aim of promoting consistent annual power production.


WHY ONE SHOULD CHOOSE ARBITRATION OVER LITIGATION

Arbitration is frequently defined as being diametrically opposed to litigation. The Arbitration method, which comprises resolving the disagreement outside of the legal system, employs an unbiased third party or a panel of impartial third parties referred to as Arbitrator(s) to resolve conflicts between opposing parties. The arbitrators carefully analyse the arguments offered by the disputing parties before reaching an impartial ruling that benefits both sides[v].

Arbitration is frequently preferred over litigation due to its cost-effectiveness, speedy nature, increased dependability, and provision of enhanced confidentiality to the parties involved. One of the key advantages of arbitration over litigation is its lower cost and faster turnaround time.


CASES IN WHICH A FOREIGN JUDGEMENT MAY NOT BE ENFORCEABLE IN INDIA

As per the provisions outlined in the Code of Civil Procedure 1908 (CPC), the enforcement of a foreign decree in India is contingent upon its recognition as an Indian court decree, provided that it has been issued by a jurisdiction that maintains a reciprocal arrangement. In the case of a non-reciprocal territory, such as the United States, issuing a decree, its enforcement in India necessitates the initiation of a fresh civil litigation in an Indian court, wherein the foreign decision might be presented as evidentiary support. The Indian government has officially recognised 12 territories with which it maintains reciprocal agreements. These territories encompass countries such as the United Kingdom, Singapore, Bangladesh, the United Arab Emirates, and Malaysia.

There are, on the other hand, legal problems with a foreign judgement that make it not valid in India, which are listed in Section 13 of the Code of Civil Procedure (CPC). These flaws include the following[vi]:

1. A decision that wasn't made by a court with the right authority; If it wasn't based on the facts of the case;

2. If the legal proceedings were based on an incorrect interpretation of international law or a refusal to consider the applicability of Indian law when it was relevant;

3. If the legal proceedings in which the judgement was obtained were against the constitution;

4. If the judgment was obtained through dishonest means;

5. India's Arbitration Act says that foreign arbitration awards can be used as a court order.

Indian has signed both the Geneva Convention of 1924 and the New York Convention of 1960. The award had to be given in a country that had signed either the Geneva or New York Conventions.


ADVANTAGES OF ARBITRATION

1. Arbitration, as an alternative to litigation, has the advantages of reduced time consumption and lower financial burden. Arbitration is designed to expedite the resolution of conflicts in comparison to the traditional litigation process. In addition, it is more cost-effective compared to pursuing legal proceedings.

2. Arbitrators typically possess a greater level of expertise compared to judges, as they are selected from a pool of individuals who has specialised knowledge in a certain trade or industry. This phenomenon instills a higher level of confidence among business professionals regarding the procedural aspects and resultant determinations. In the majority of instances, insurance-related disputes are resolved through the involvement of arbitrators who possess specialised expertise in the relevant subject, as opposed to judges who typically possess a more comprehensive understanding of the matter.

3. Despite any errors in the arbitrator's interpretation of facts or application of the law, the outcome reached through arbitration is deemed conclusive and immutable, so precluding any subsequent modifications. There is a limited number of avenues for advancing the argument. International commercial arbitration not only upholds principles of fairness but also safeguards the confidentiality of the matter under consideration, so ensuring the non-disclosure of the identity of the participating parties, a feature that is not feasible in judicial processes.

4. Arbitration is perceived as a more flexible alternative to litigation. In many instances, the complexity of litigation laws surpasses that of arbitration laws. For instance, the process of litigation necessitates adherence to the principles and regulations outlined in civil court legislation as well as the guidelines stipulated in the CPR rule book. In contrast, arbitration rules exhibit a higher degree of simplicity and a reduced quantity. In the context of arbitration, procedural guidelines are not predetermined, as the discretion lies with the involved parties to determine the course of action, allowing for flexibility and the potential for mutual agreement on any matter[vii].

5. The arbitral process may exhibit a higher degree of fairness relative to the majority of the nation's courts, which are already burdened with significant caseloads. In the context of international conflicts, arbitration presents a more favourable approach for resolving disputes compared to resorting to local courts.


ARBITRATION UNDER PRODUCTION SHARING CONTRACTS

It is usual practise to include arbitration clauses within production sharing contracts (PSCs), which makes the resolution of disputes resulting from such contracts easier to accomplish through the use of the arbitration process. In the area of discovery and development operations, it is common to choose a foreign seat of arbitration and foreign governing legislation. This is primarily owing to the fact that a major proportion of applicants or bids are from overseas jurisdictions, which is why it is customary to select for a foreign seat of arbitration. The resolution of legal disagreements is most frequently accomplished through the use of international business arbitration. In cases of this sort, the Indian judicial system gives recourse solely for provisional remedies in accordance with Section 9 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act"), as well as any further appeals in accordance with Section 37 of the Arbitration Act. In addition, the Indian judicial system provides recourse solely for provisional remedies in accordance with Section 9 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act"). In addition, in accordance with Section 27 of the Arbitration Act, the courts in India may be able to provide aid in the documentation of evidence[viii].


LANDMARK CASE

Union of India v. Reliance Industries[ix]

To give you an example: Section 34 of the Arbitration Act was used by the Indian government to object to the partial ruling made by the Tribunal in the Union of India v. Reliance Industries (2018) case. In its defence, the government said that the arbitration, which included questions about royalties, cess, service tax, and audits, covered matters of public policy and could not be settled through arbitration.

The case decision made by the Delhi High Court in that situation.

If there is a dispute about whether a case should be settled by arbitration, the Delhi High Court said that the relevant arbitration law should be looked at, along with public policy and the parties' intentions as governed by the laws of the country they have the strongest ties to. The decision emphasised how important it is to carefully read all of the agreement's terms in order to figure out what the parties meant. It also looked at whether the removal of Indian laws, which was done to make arbitration easier, can be used in situations where the arbitration isn't about something that can be arbitrated. The Delhi High Court did not agree with the claims that they did not have the power to hear the case because of the choice of law clauses.

The ruling made by the Supreme Court in the above case

A special leave petition was used to take the case to the Supreme Court. After that, on May 28, 2014, the Supreme Court made a decision saying that the Section 34 case that was brought before the Delhi High Court could not go forward. The Supreme Court has said that once an award is final, it may not be enforceable in India because it goes against state policy. The Delhi High Court said that the Indian party would lose all power if the ruling was used outside of India. The Supreme Court does not agree with this. The disagreement comes from the fact that both sides have decided that English law will apply to the arbitration agreement.


CONCLUSION

It is important that India's legal framework and judicial system go through advancements in terms of functionality and operational efficiency in order for India to establish itself as a prominent international centre for the resolution of conflicts. Only then will India be able to position itself as a leader in the field of international conflict resolution. Despite this, the path leading to such progress is not a complicated one. There are a few fundamental principles that, if implemented, might significantly improve India's dispute resolution procedures and encourage more commercial faith in the country's legal system and procedures. When conducting measures to reform the legal system, it is important to keep in mind the possibility of establishing specialised commercial courts. The implementation of this policy would have a considerable impact on the workload of arbitral procedures, which would result in the resolution of claims being completed more quickly. The efficiency of an arbitral tribunal could be considerably improved by the formation of a separate panel of judges who are knowledgeable in legal issues pertaining to commercial enterprises. Based on the level of expertise displayed by its judges in the administration of cases involving energy concerns, India may in the future give serious consideration to the possibility of instituting segregation within its judicial system.


REFERENCES [i]Available at


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