Get Your Clause Into It

International and multifaceted, the oil and gas industry is no stranger to conflict. In negotiating and closing a complicated transaction, a dispute resolution clause may often be an afterthought. Should a dispute arise however, a properly drafted clause that reflects commercial reality between contracting parties may prove to be invaluable.

Dispute Resolution Clauses:

Dispute resolution clauses are an agreement between contracting parties setting out how disputes are to be resolved before they arise. These clauses may provide for arbitration in the event of a dispute, or a tiered mediation/arbitration process. Dispute resolution clauses can offer a controlled and adaptable process, maintenance of privacy and commercial sensitivity, and timely resolution of conflict.

Drafting Considerations:

Drafting considerations are many, including specifying the trigger which activates the process. With multi-layered logistical concerns, businesses in the oil and gas industry need to resolve disputes that arise as quickly and effectively as possible. In most cases, a tiered dispute resolution clause that allows for escalation of the process can offer maximum effectiveness. For example, the dispute can initially be referred to senior managers of the parties to the contract for discussion and resolution, failing which the matter can be referred to mediation, failing which the matter can be arbitrated. Such a tiered process gives parties flexibility and timely options for resolving disputes.

For certainty, parties should also specify the applicable rules and procedural code that will apply to the process. Given the nature of the industry, parties should also acknowledge the maintenance of rights under the contract, notwithstanding the agreement to mediate or arbitrate, and the continuation of commercial activity pending the outcome of the process.

Process options should also be considered in drafting, including the manner of appointment of a mediator, arbitrator or arbitration board. Designating the place of mediation or arbitration may assist with controlling costs, and mandated scheduling for the filing of materials, hearing, and in the case of arbitration the rendering of a decision will assist with procedural certainty. Payment of expenses can be stipulated based on outcome, and limitation on recourse/reference to courts following the conclusion of the process will also allow parties greater control with ensuing commercial certainty.

Arbitration Versus Mediation:

Tiered dispute resolution clauses may escalate from mediation through to arbitration. Mediation is a consensual process where parties agree to resolve a dispute. It can be facilitative or interventional. The process is only binding if parties agree to resolution, and as parties must agree for a resolution to occur, there is generally no winner or loser. With arbitration, the process may be triggered by contract or by consent, however the resolution is not by consent. A decision is imposed by an arbitrator,
and generally there is a winner and a loser.

Arbitration Versus Litigation:

The decision making process in arbitration is similar to litigation in that a decision is imposed on the parties, however that is where the similarity ends. Court files and trials are with very limited exception open to the public, whereas the arbitration process is private and commercially sensitive. Parties also can generally control the process and the appointment of the decision maker. Arbitration can also offer flexibility of location, decreased costs and finality.

Arbitration Awards – Finality & Enforcement:

With the exception of international arbitration where there is generally no right of appeal, courts do retain a limited review function of arbitration awards. Parties can seek to exclude appeal and review rights by agreement. Once finalized, arbitration awards can be enforced as an order of the court with all ensuing rights and remedies.

Alternate Dispute Resolution – Benefits:

Unlike litigation, dispute resolution offers contracting parties commercial adaptability, timeliness, flexibility and privacy, as well as the prospect for preservation of existing business relationships. ”Alternative” dispute resolution is no longer alternative. Arbitration and mediation are the primary vehicles for resolving commercial disputes. These processes can be predictable with foresight and considered drafting.

A partner in Cox & Palmer’s St. John’s office, Peter Shea carries on a varied litigation, dispute resolution and risk management practice. Peter has formal training in alternative dispute resolution, and is a rostered arbitrator for the Canadian Insurance Claims Managers Association. He can be reached at pshea@coxandpalmer.com