Significance Of Arbitration Clause In Oil & Gas Contracts
Critically evaluate the significance of an ‘Arbitration Clause’ in the context of an Oil & Gas contract. Comment on it’s value as far as dispute resolution is concerned.
For more than a century, the oil and gas agreements has been the source of widespread litigation to address disputes that seem to be an inseparable part of the lease relationship. The most important dispute resolution techniques that are employed for resolving disputes are litigation and negotiation. The oil and gas relationship can be improved by incorporating an arbitration clause that states the formal mediation and negotiation process prior to arbitration (Dupont et al. 2015). This essay includes the significance of arbitration clause in the context of Oil and gas contract in relation to disputes in the oil and gas industries.
It is high time that one should quit drafting contracts that are optimum in nature. Instead, it may be more beneficial if the focus remains on the efficient dispute resolution techniques to manage disputes that appear to be inseparable as part of the oil and gas agreements. If the dispute is inevitable in nature, then it is advisable to have an internal dispute resolution mechanism that may help in the improvement of the relationship (Jones 2015). Arbitration clause is the most frequent dispute resolution technique that is adopted as part of the oil and gas agreements (Spalding and Kim 2015). Arbitration is the process in which both the parties to the contract and their appointed lawyers play a very important role in resolution in case of any dispute. The technique of arbitration can be selected at the time of contract formation or establishment of oil and gas agreement (Sewell 2014). The parties to the agreement select the arbitrator, who in case of any dispute, shall assume the role of the arbitrator and will become the main decision maker (Temple and Desgranges 2014). The parties to the agreement shall select the person who possesses knowledge and experience regarding the issue in dispute. Arbitration as compared to litigation is inexpensive, faster and confidential and allows the arbitrator to focus on the dispute while considering the practices and traditions of the industry (Koivumaeki 2015). However, sometimes the process of arbitration may become lengthy, complex and costly as compared to the process of litigation (Duncan 2013). If the parties, as part of their arbitration agreement have a clause that allows them to resort to litigation in case arbitration fails, then a complicated situation may be avoided. Of all the different dispute resolution methods, arbitration has the strongest legal basis with the force of applying the law in force that is existing statutes in the United Kingdom (Leal-Arcas et al. 2015).
Process of Arbitration
Once the parties have decided that arbitration is an alternative to litigation in their existing oil and gas agreement, the next task is to draft a provision in the agreement as per which all the permutations of the litigations should be eliminated (Sewell 2014). To create an arbitration clause that is broad in nature, the parties to the contract may choose the following language:
“The parties to this oil and gas lease agree to resolve by arbitration all disputes between them which arise out of the terms of the contract, lease relationship or any other dispute related to the terms of the lease contract (Butt and Siregar 2013).”
Having an arbitration clause as part of the oil and gas agreement has many benefits than commonly believed. Arbitration clause helps in avoiding the costs, delay and risks that is associated with any given dispute (Kulander 2014). Arbitration clause gives the authority to shorten the lengthy part of the lawsuit, the process of discovery and set limits for the trial. Having an arbitration clause as part of the oil and gas agreement makes appeal easier and quicker due to the narrow and deferential standard of review (Belyi 2013). Parties can secure their authority of appeal by including a clause as part of the agreement according to which, they have the right to appeal. Additionally, parties to an oil and gas agreement can also appeal as per their federal or state laws, provided they have a clause in their agreement that specifies the same (Kuznetsov 2015). However, it is often seen that parties prefer appealing before their arbitrators rather than in the Court of Appeals, even though applying in the Court of Appeal is available free. A well structured arbitration clause, allows the parties to reach a flexible conclusion, without allowing any of the parties to take advantage of the arbitration process (Blyschak 2013). Arbitration clause allows the parties to have control over swiftness and facilitates in party involvement.
“Speed” is a very important factor in the process of arbitration. The process of arbitration limits trial, discovery and time for award as compared to federal or state courts. Arbitration clause helps in giving power to the parties over their case (Davis 2015). Moreover, the parties may enhance the speed of dispute resolution by expressly agreeing with each other once the initiation of arbitration takes place. The parties may allow the process of speedy arbitration trial in any of the following ways: give up all requests for interrogations, use computer for searching and analysis instead of using document production, use affidavits instead of testimony, hiring experts who have knowledge about the subject matter in dispute and adopt stringent time limits on hearing and discovery. (Newman and Hill 2014)
Drafting an Arbitration Clause that is Broad in Scope
Having an arbitration clause as part of the oil and gas agreement allows controlling costs that may be very expensive in nature (Kulander 2014). Arbitration certainly includes the cost of arbitrators and a provider fee. If the dispute is in relation to jurisdiction and scope of arbitration the cost of the arbitration may increase (Butt and Siregar 2013). Nevertheless, if savings are made in the form of discovery, limited appeal and trial time it outweighs other costs. Arbitration costs appear only in small number of cases, other cases settle dispute through arbitration just as in proceedings (Leal-Arcas et al. 2015). When the stage of settlement is reached, the arbitrators do not have to incur a lot of time on the case. In cases that go on the merits, a greater speed outweighs any other costs. It is however important that arbitrators who are appointed for a oil and gas dispute should have knowledge about contracts, commercial relationships and market concepts related to the oil and gas industry (Duncan 2013). This becomes important, especially in cases where the dispute is related to a technical part involving the oil and gas industry. Hence, it is advisable to rely on the process of arbitration for settling disputes in oil and gas industry as the subject matter of the dispute is restricted in this agreement (Temple and Desgranges 2014). Parties to the contract are often worried about the effect of appeal that it may be lead to unfair awards. However, it has been seen that this problem is exaggerated, as skilled arbitrators having sufficient knowledge in the field of oil and gas industry are available as independent arbitrators often declare awards that are fair in nature (Sewell 2014).
Arbitration clause, as part of the oil and gas agreement, helps in preserving relationship between the parties to the contract. Parties to the contract, forget that having an arbitration clause can benefit their relationship, as well (Dupont et al. 2015). The impact that litigation may have on the relationship between the parties is one of the biggest costs of a lawsuit. The plaintiff may win all the compensation that he has claimed for, however, he may ruin goodwill that he has developed laboriously over centuries or decades. This is when the process of Arbitration becomes helpful as it does not involve antagonistic questioning that is common in jury trials to preserve relationship between the parties to the contract (de Oliveira 2015).
Since the parties have agreed to arbitrate with each other once a dispute has arisen, nevertheless, it need not be agreed only during initial negotiations of contract. Parties should be open- minded to an extent that they agree negotiating even after the dispute has arisen (Jones 2015). Parties are best equipped to modify procedures in arbitration even after the dispute has started. Once the parties become aware of what is at stake, they are in a better position to decide how much money and time they shall require investing on case trial and preparation (Spalding and Kim 2015). Additionally, they also take into consideration the background and skills that their arbitrators should possess. The parties should be aware whether the case needs limited or full discovery. Even if differences occur, the parties may value benefits in the process of arbitration and they usually get what they desire as an outcome of the process of arbitration (Sewell 2014).
When parties, who are part of a single state, enter into an agreement, opting to resolve a dispute via arbitration clause the local courts decide the dispute. Depending upon the place where the arbitration clause is entered into, the common law, the applicable law or any other law becomes applicable to the process of arbitration (Temple and Desgranges 2014). Since, the parties who are part of the oil and gas agreements are from different jurisdictions, they will take into consideration the local system of law and local judiciary mechanisms. This shall make the parties to the contract not only comfortable having control over the rules that shall be applicable in any given dispute but also appoint an arbitrator having expertise, professionalism and honesty in their appropriate fields (Koivumaeki 2015). With the disadvantages of litigation associated within the oil and gas industry, businesspersons are seeking efficient schemes that shall enhance the time and cost of litigation. However, this is applicable only in cases where the dispute is not pertaining to any question of law (Duncan 2013). Hence, it may be said that arbitration clause provides flexibility in its procedure. Parties to the dispute agree with the most suitable procedure that is apt for the dispute in question. It is not limited to the application of rules by Court that is expected to be best suited for any commercial dispute (Sewell 2014).
Oil and gas contracts often support including an arbitration clause as part of the contract as it enhances the ability to determine disputes by an autonomous arbitrator in an autonomous country. The underlying factor of popularity in international disputes of arbitration is that it eases the enforceability of the award that is declared (Butt and Siregar 2013). Enforcement of an award as a judgment of a court is difficult as compared to the process of arbitration. Court proceedings are public this means that judgements and statements of case are publically available whereas arbitration is private. The hearings are private and awards are held confidential. In the context of oil and gas industry, it is important to keep the awards private, as the subject matter of the dispute might be sensitive inn nature (Kulander 2014). In some circumstance, publicity is a requisite, primarily if a smaller country puts pressure on a high profile company; commercial parties prefer the privacy of arbitral proceedings (Butt and Siregar 2013).
Controlling Costs through Arbitration
Hence, it may be said that there are many reasons why arbitration clause should be a part of oil and gas contracts as they enhance the dispute resolution procedure that take place in the oil and gas industry. The process can be altered as per the needs of the parties, and several objections to using arbitrations are based on myths that have no validity. Whether it’s in the course of an arbitration clause as part of the initial contract, or one that is chosen after the dispute has taken place, arbitration provides extreme benefits to the parties in the contract. Through this essay, it may be said that the author has explained the advantages of arbitration clause in the context of oil and gas contract as far as dispute resolution is concerned.
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