What are the potential disputes hotspots?

The anticipated upcoming exponential transition from fossil fuels to cleaner energy will likely result in disputes arising from both the transition away from fossil fuels and the adoption of cleaner energy.

The following areas are likely to be particularly fertile sources of disputes:

• Decommissioning of fossil fuels: according to the recent energy arbitration survey report published by Queen Mary University of London (the QMUL Energy Report),⁵ a significant majority of the respondents anticipate the decommissioning of oil and gas infrastructure assets as a significant source of disputes. These could arise for example when retiring or repurposing connected oil and gas infrastructure results in stranding other assets, or when the swift pivot towards renewables leads businesses to choose to strategically exit projects in breach of contract or seek to renegotiate existing terms. In such situations, there is often a clash between the interests and exit strategies of the project partners.
• Involvement of smaller-scale investors: the respondents to the QMUL Energy Report also noted that an increasing number of smaller, less experienced investors are entering the clean energy space, which will likely lead to a growing proliferation of disputes. These investors are not as familiar with government regulation and do not have established relationships with energy businesses, unlike the traditional fossil fuels operators. In the circumstances, and given their shorter-term investment goals, such investors are often prepared to escalate disputes more readily than the traditional players.  Given the economic and legal uncertainties, the contractual terms for such joint ventures need to be carefully and thoroughly negotiated to balance each partner’s different interests and objectives, so as to mitigate the risks of potential disputes.
• Design and construction: most of the respondents to the QMUL Energy Report also saw design and performance issues as a key driver of energy disputes in the near future. These are likely to arise from construction defects as well as delay and timing issues around bringing projects online and operating them at the contractually stipulated capacity. Delay issues have been exacerbated by the pandemic which led many projects to suffer significant delay in achieving project milestones and commercial operation dates (COD), leading to follow-on financing issues.
• Change in government policy and law: most renewables projects benefit from some form of government subsidy or support, particularly in the initial phases when there is a strong push to transition away from fossil fuels. The subsequent revocation or dilution of such support may give rise to investment disputes against the state or disputes between commercial parties. The following notable regulatory changes have occurred in the APAC region in the last two years alone:
  
  • In February 2023, China introduced an export ban on core solar panel technologies to retaliate against the ban imposed by the United States on semiconductor exports to China and to prevent India from obtaining China’s solar technology.
  • In June 2022, Indonesia imposed a green-energy export ban to prioritise the domestic need to increase Indonesia’s clean energy mix for electricity.
  • In October 2021, Malaysia imposed a renewable energy export ban, primarily to suspend its export of renewable energy to Singapore. Although this ban was lifted on 10 May 2023, it is a stark reminder that government policy and law can change at a moment’s notice.
• Price volatility of raw materials and geopolitical tensions: countries such as China and Indonesia are dominant producers of the essential raw materials (such as lithium, nickel and manganese) for manufacturing electronic components to construct renewables infrastructure and to transport the produced renewable energy. The price volatility of such raw materials, coupled with geopolitical tensions, can result in supply chain issues and related disputes. In 2022, the average price of battery-grade lithium carbonate increased by 147% and reached a five-year high at US$37,000/tonne. Since the beginning of 2023, lithium prices have dropped by nearly 50%. This is owing to the EU’s and the United States’ initiatives to bolster lithium processing capacity and the increasing efforts of battery supply chains to process lithium outside China. China, however, still accounts for nearly 60% of global processing for lithium and any geopolitical tensions capable of affecting China’s lithium export policy could unleash a storm of disputes.
• Development and deployment of new technology: many renewables projects involve the development and deployment of new and untested technology, making it difficult for contracting parties to properly allocate risk at the outset. The issue is compounded where relatively inexperienced project partners who lack transferable experience from the oil and gas industry are involved.
• Joint venture (JV) disputes: energy is usually a protected industry and local input and involvement are often required. JV disputes between local and foreign partners are common and can unfortunately sometimes be exploited to fan the flames of political unrest locally.

What role can arbitration play in resolving such disputes?

Energy projects by their very nature involve a complex contractual web of multinational parties, which may include state-owned or state-controlled entities. Parties may prefer to keep the details of such commercial arrangements confidential, particularly if proprietary technology is involved or if things go awry on high profile projects. Furthermore, as a condition to investing, foreign investors often require sufficient safeguards to ensure minimum standards of fairness and justice in the resolution of any disputes which may arise. Having regard to these considerations, arbitration is well suited as a forum for resolving such energy disputes:

• Technical expertise: disputes relating to renewable projects often involve complex technical issues, including those pertaining to design, construction, delay and quantum (see, for example, the dispute between the backers of Sun Cable’s ambitious Australia-Asia PowerLink Project). Such issues may require a degree of technical specialism which a judge in a domestic court may not necessarily possess. Parties to an arbitration may select arbitrators with a proven track record of technical expertise or whatever other qualification is deemed necessary for the adjudication of their dispute.
• Enforceability: energy projects typically involve parties of different nationalities with assets scattered worldwide. Parties who choose to arbitrate their disputes can take advantage of the New York Convention,⁶ which facilitates the recognition and enforcement of arbitral awards in the contracting states. Most of the key APAC countries, such as Australia, China, India, Indonesia, Japan, Malaysia, the Philippines, Singapore, South Korea, Thailand and Vietnam, are signatories to the New York Convention. In contrast, there is presently no equivalent to the New York Convention for court judgments, which are therefore subject to disparate enforcement mechanisms in different jurisdictions.
• Neutrality: energy can often be a highly politicised issue, particularly when renewable energy projects involve a partnership or JV between a foreign and local partner (e.g., a governmental or provincial body). In such cases, it may be inadequate to rely on the local courts where the project is situated to resolve disputes which may arise, not least because of concerns over a lack of impartiality by the local judiciary. Selecting arbitration in a neutral seat gives foreign parties and investors more confidence by ensuring safeguards for neutrality, technical expertise and minimum standards of fairness and justice.
• Confidentiality: international commercial arbitration is private and confidential, unlike litigation proceedings, which are typically open to the public. Arbitrating parties can therefore keep their commercial arrangements, including trade secrets and sensitive information, private.
• Flexibility: parties to an arbitration have the flexibility to tailor the dispute resolution process to suit the specific dispute at hand. If done properly, this enables parties to avoid expending unnecessary time and costs going through motions which do little to advance the resolution of their dispute. Parties may, for example, agree for their dispute to be determined on paper only, without requiring an expensive hearing with witnesses. Parties can also agree to do away with the discovery process if they do not expect to uncover documents which will materially affect the outcome of the case.
• Adaptability: the key arbitral institutions are quick to adapt their rules to reflect evolving best practices. In the last decade, key arbitral institutions globally have adapted their rules to speed up the resolution of disputes (such as by introducing expedited procedures and early dismissal rules) and to better deal with multi-party and multi-contract disputes (such as by introducing joinder and consolidation rules). Measures such as these incorporate the perceived benefits of court litigation into arbitration proceedings, thereby providing parties with the best of both worlds.

Could mediation be a game-changer?

There is an increasing recognition that, given the uncertain outcome and time and costs involved, it is not always in the parties’ best interests to pursue litigation and arbitration proceedings all the way until a judgment or award is issued. Rather, litigation and arbitration proceedings are regularly used as catalysts for arriving at mutually acceptable resolution of disputes.

Mediation is a structured negotiation process whereby a neutral third party (the mediator) assists disputing parties in discussions with the aim of, among other things, identifying the issues in dispute, exploring options for resolving the dispute and achieving agreement regarding the whole or part of the dispute. Unlike a judge or arbitrator, the mediator does not impose a binding decision on the parties, although they may sometimes offer a non-binding view as to the strength of a party’s position.

Since mediation involves discussion and compromise between the parties, it is a useful tool for dealing with disputes in long term contractual relationships, as is often the case for energy projects. Mediation provides an avenue for parties to preserve working relationships despite acrimonious disputes, which is particularly crucial in Asia, where mutual respect and honour are prized.

The efficacy of mediation as a dispute resolution tool is bolstered by the Singapore Convention on Mediation (the Singapore Convention),⁷ which seeks to establish a framework akin to the New York Convention for the effective cross border recognition and enforcement of commercial mediated settlement agreements. The Singapore Convention has, to date, been signed by Australia, China, India, Malaysia, the Philippines, Singapore and South Korea.

Singapore: the hub for resolving APAC disputes?

Singapore is already a popular forum for resolving APAC related disputes, be it via litigation or arbitration. Its popularity largely stems from the fact that it is an established common law jurisdiction with a reputable judiciary and stable government, and is a renowned global hub for trade and shipping. From a pragmatic perspective, Singapore’s location makes it particularly well suited as a forum for resolving disputes relating to projects in the APAC region due to its geographical proximity to the projects and likely locations of key witnesses and documents. Singapore’s diverse, multicultural population also means that its legal community is alive to and well placed to handle cultural sensitivities.

Singapore’s popularity as an arbitral seat is reflected by its ranking in 2022 as the second most popular seat after London for energy-related international commercial arbitrations, ahead of Paris, Hong Kong, Dubai and New York.⁸ The responses to the QMUL Energy Report revealed that Singapore is particularly popular for APAC related disputes, with parties from Australia, China, India and Southeast Asia regularly nominating Singapore as the arbitral seat. This is unsurprising since Singapore’s International Arbitration Act largely adopts the UNCITRAL Model Law⁹ and will therefore be familiar to parties from other jurisdictions. Singapore is also a signatory to the New York Convention and the Singapore Convention, ensuring that issued arbitral awards and commercial mediated settlement agreements benefit from the cross border recognition and enforcement regime.

The most notable arbitral institution in Singapore is the Singapore International Arbitration Centre (SIAC). A survey report published in May 2021 by Queen Mary University of London ranked SIAC as the most preferred arbitral institution in APAC and second only to the International Chamber of Commerce (ICC) globally.¹⁰ Apart from SIAC, the ICC and American Arbitration Association-International Centre for Dispute Resolution (AAA-ICDR) also have offices in Singapore.

Conclusion

Against the backdrop of the anticipated upcoming rapid transition from fossil fuels to renewable energy globally and particularly within the APAC region, market participants would be well advised to give careful consideration to the terms of the proposed dispute resolution clauses when negotiating contracts. Simply accepting standard terms presented to “seal the deal” now could lead to much pain down the road if the dispute resolution clause is not fit for purpose.

1. The member states of the Association of Southeast Asian Nations (ASEAN) are Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.
2. What is renewable energy?
3. 56% of world’s energy to be generated in APAC region by 2030
4. A more comprehensive list can be found here
5. Queen Mary University of London and Pinsent Masons, ‘Future of International Energy Arbitration Survey Report’ (20 January 2023).
6. United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958).
7. United Nations Convention on International Settlement Agreements Resulting from Mediation (New York, 2018).
8. Queen Mary University of London and Pinsent Masons, ‘Future of International Energy Arbitration Survey Report’ (20 January 2023) p. 29.
9. UNCITRAL Model Law on International Commercial Arbitration (1985), with amendments as adopted in 2006.
10. Queen Mary University of London and White & Case, ‘2021 International Arbitration Survey: Adapting arbitration to a changing world’ (May 2021) p. 9.

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