The next time you are negotiating an international energy related contract it may be worth looking beyond the typical choices when it comes to selecting the arbitral rules to insert into your arbitration clause.  One such further option has been produced by the Permanent Court of Arbitration, who have designed a set of arbitration rules specifically for disputes relating to natural resources and/or the environment and which merit consideration as an alternative to the more common sets of arbitral rules (e.g. ICC, LCIA, or ICDR).

What is the Permanent Court of Arbitration?

For many, this is the first question.  The Permanent Court of Arbitration (PCA) was founded in 1899 by international treaty (the  Convention for the Pacific Settlement of International Disputes) and was intended to provide a forum where states could resolve their disputes without recourse to war.  Although it has had some success in inter-state arbitrations, it has recently sought to expand its remit to include investor-state and investor-investor disputes.  The PCA is housed in the Peace Palace in the Hague which also hosts the International Court of Justice (ICJ), although the PCA is a separate body from the ICJ and is not part of the United Nations.  The PCA is administered by a team of qualified and experienced multilingual counsel and administrators known as the International Bureau.  The role of the Bureau is to facilitate the resolution and administration of those disputes which either call expressly for the PCA’s involvement, or alternatively where the parties have asked for the PCA’s assistance on an ad-hoc basis.  The PCA also acts as the designator of the arbital appointing authority under the UNCITRAL Rules where the parties cannot agree, and can itself be selected by the parties to act as appointing authority.  This institution is, in our view, a much under-utilized tool in the international arbitration arsenal.

The Natural Resource Rules

The PCA’s Optional Rules for Arbitration of Disputes Relating to Natural Resources and/or the Environment (the Natural Resource Rules) are based on the globally accepted UNCITRAL Rules, with modifications to facilitate both use of the Rules in natural resources disputes and the administration of such disputes by the PCA.  Although they are drafted with investor-state disputes (e.g. conflict with a government under a production sharing or concession agreement) predominately in mind, they can equally be used for investor-investor disputes (e.g. a dispute between the parties to a Joint Operating Agreement). 

Mindful of the frequently complex nature of natural resource disputes, the Rules allow for one, three or five person tribunals (the default is three).  Whilst a five person tribunal would not be commonly necessary outside of state-state disputes, it might have advantages where a particularly complex dispute would benefit from a strong mix of lawyers and industry experts on the panel.  Also being mindful of the often multi-party nature of natural resource exploitation contracts, the Rules (unlike the UNCITRAL Rules) provide a clear structure for the nomination of arbitrators where there may be multiple claimants and/or respondents.

As you might expect, where the party appointed arbitrators cannot agree on a chair nomination (or in the case of a five person tribunal, two additional arbitrators and a chair) the PCA will make the appointments itself.  The advantage the Rules bring however, is that the PCA is mandated to maintain a list of ‘persons considered to have expertise in the subject-matter’ for which the Rules have been designed.  Whilst the PCA is not limited to nominating from that list, it does mean that in the event of a failure to agree you are more likely than not to get an appointment who is not only a respected arbitrator but who will also have some specific expertise relevant to the dispute in question.  The PCA also maintains a similar list of appropriate expert witnesses should the Tribunal wish to appoint an expert to assist it.  These lists are compiled on the basis of both nominations of Member States (who generally select specialists with a background in government, academia and international litigation) and on the recommendation of the PCA Secretary General.

The Rules also seek to highlight possible means of resolving non-contentious but complex technical matters at an early stage.  They suggest that the tribunal might request the parties to provide a non-technical document summarizing and explaining the background to any scientific, technical of other specialized information which the tribunal considers to be necessary to fully understand the matters in dispute.  Such a document, particularly if agreed between the parties, can be a valuable mechanism to save time at any hearings and allow issues to be narrowed.

Finally the Rules establish a mechanism for protecting confidential information, including the concept of a tribunal appointed expert who is allowed to see confidential information which would be too sensitive for one party to disclose to the other party or the tribunal.  In such circumstances the expert would review the sensitive information and produce a sanitized report on the basis of it, available to all parties.  Such a facility may prove especially useful in an arbitration to which competitors are party.

What other advantages do the Natural Resource Rules offer?

As the PCA is a creature of international treaty (to which 105 countries are party, including oil & gas rich states such as Bolivia, Brazil, DR Congo, India, Iraq, Nigeria, the Russian Federation, Saudi Arabia and Venezuela), it may well prove to be a more palatable alternative than other commonly adopted sets of procedural rules, which are sometimes perceived to have a Western bias (and are accordingly resisted by developing states).  In addition, in the event of a dispute the parties can benefit from a highly efficient secretariat who will support the proceedings, without having to comply with the more lengthy procedural steps required under the ICC Rules (the International Bureau will also generally prove to be cheaper than the ICC Secretariat).  On the subject of costs it is also worth noting that a PCA-administered arbitration can use the hearing and meetings rooms at the Peace Palace free of charge.

How do I select the Natural Resource Rules?

The PCA recommends the following draft clause:

Any dispute, controversy, or claim arising out of or relating to the interpretation, application or performance of this agreement, including its existence, validity, or termination, shall be settled by final and binding arbitration in accordance with the Permanent Court of Arbitration Optional Rules for Arbitration of Disputes Relating to Natural Resources and/or the Environment, as in effect on the date of this agreement. The International Bureau of the Permanent Court of Arbitration shall serve as Registry for the proceedings.  The number of arbitrators shall be [insert ‘one’, ‘three’, or ‘five’].  The language(s) to be used in the arbitral proceedings shall be [insert choice of one or more languages]. 

This should of course be tailored to the specific needs of your transaction, and we would recommend it also worth considering inclusion of clauses to deal with (i) failures by a party to appoint an arbitrator, (ii) express waivers of sovereign immunity for enforcement proceedings and (iii) an agreement between the parties that any dispute will be commercial in nature.  Vinson & Elkins model clause for the adopting the PCA Natural Resource Rules is available on request.

For further advice as to the application of these Rules or any other arbitral issue, please contact James Lloyd Loftis, Alden L. Atkins, or Guy Stanford Lipe.  For more information, visit the V&E; International Dispute Resolution website.