Arbitration: The Underused Alternative for Oil and Gas Disputes
Source:
Texas Lawyer
Date:
June 17, 2015
Hon. Glen M. Ashworth (Ret.)
Resolution Centers
Arbitration clauses are a staple in
international energy contracts and oil
and gas cases are the largest category of
cases filed with ICSID, the World Bank’s
arbitration division (26 percent of recent
cases filed, 39 percent counting other
energy cases). Likewise, oil and gas
cases frequently come before panels
of all major international arbitration
institutions. Yet the oil and gas industry
too often avoids arbitration. Two widely
used oil and gas form contracts—the
AAPL Joint Operating Agreement and
the Producers 88 oil and gas lease—
almost never mention arbitration.
This article looks at why lessees,
lessors, equity investors, operators, and
other oilfield parties should consider
wider use of arbitration.
Arbitration is better than commonly
believed. The benefits of arbitration
often outweigh the costs. Myths about
delay, cost, and risk because of a limited
ability to appeal are overblown and have
led to an inefficient avoidance of this
flexible consensual procedure.
1. What delay? Arbitration gives
parties the power to shorten the longest
part of a lawsuit, the discovery process,
and set time limits for trial. Complaints
about arbitration generally overlook the
great delay in civil litigation, including
appeals. Arbitration makes appeals less
common and quicker to decide because
of the intentionally narrow, deferential
standard of review.
Parties can secure appeals
by selecting provider rules that
include a right to appeal, or by filing
in jurisdictions whose state law, or
federal interpretations of the Federal
Arbitration Act, adheres to a broad
interpretation of “manifest disregard”
as a basis for reversal. JAMS, for
example, has its Optional Arbitration
Appeal Procedures, CPR an Appellate
Arbitration Procedure, and the AAA
Optional Appellate Arbitration Rules.
Parties may well find that they prefer
an appeal before arbitrators rather than
before a court of appeals, even though
the latter is available “for free.” Indeed,
there should be nothing stopping parties
who have tried a case to judgment in
civil court from agreeing to appeal in
one of the arbitral forums.
Delay in arbitration often results
from a failure to take advantage of the
flexibility available in a well-structured
arbitration. Arbitration gives parties
Arbitr Ation : t he Under Used Altern Ative for
o il And GAs d isp Utes by GLEN M. ASHWORTH, JOHN BURRITT MCARTHUR and DICK WA TT
ALTERNATIVE DISPUTE RESOLUTION
JUNE 17, 2015
www .te xaslawyer .com
Hon. Glen M. Ashworth (retired) is a full-time arbitrator and mediator with JAMS in Dallas.
John Burritt McArthur is an arbitrator with his own office.
Dick Watt is a founder of Watt Beckworth Thompson & Henneman.more control over pacing and invites
party participation.
Speed is a dominant value in
arbitration. The major arbitration rules
limit discovery, trial, and time for award
compared to state and federal courts.
Arbitration gives parties a great deal of
power over their case.
Parties can further increase speed
by expressly agreeing with each other,
after the arbitration is initiated, to A.
forego many or all depositions, requests
for admission, and interrogatories; B.
use computer searches and sampling
to narrow document production; C.
use affidavits instead of direct testimony;
D. “hot tub” experts and, for daring
parties, jointly hire a single neutral
expert in each expert area; and E. adopt
even tighter time limits on discovery
and the hearing. Parties tend to be
most satisfied with procedures they
help design.
2. Why overpriced? The biggest
costs are controllable. Arbitration does
include the cost of arbitrators and
sometimes a provider fee. Threshold
jurisdictional skirmishes and battles
over the scope of arbitration can
increase cost. But savings in discovery,
trial time and limited appeal should far,
far outweigh these costs.
In addition, significant arbitration
costs appear only in a small number of
cases. Most cases settle in arbitration
just as in litigation. When settlement
occurs, the arbitrators will have spent
very little time on the case. In cases
that do go all the way on the merits, the
tighter focus and greater speed should
significantly outweigh any added costs.
A case tried to arbitrators, like a
bench trial, should also require less
preparation and explanation than a jury
trial, providing a significant cost saving.
Arbitrators should be sophisticated in
commercial relationships, contracts and
market concepts, and often are selected
for a specific expertise. This is especially
helpful in technical disputes such as
those involving the oil and gas industry.
3. Unfair awards and lack of appeal?
A third complaint about arbitration is
most important because it goes to the
quality of justice: the worry that there
is no effective appeal from even very
unfair awards.
Current practice indicates this
perceived problem is exaggerated.
Skilled, principled arbitrators are readily
available through such organizations
as JAMS, AAA, and FedArb and from
the ranks of independent arbitrators.
Providers require advanced training and
enforce strict ethical guidelines. Their
rosters include a significant number of
respected former judges. Using panels
for large cases provides a check on
individual arbitrators.
4. The overlooked benefit: preserv -
ing the relationship. Parties often for-
get that arbitration can benefit their
relationship, too. The impact of litiga-
tion on the ongoing business relation-
ship of the parties is often one of the
biggest costs of a lawsuit. A plaintiff
may win every penny sought, but ruin
goodwill laboriously developed over
decades. An arbitration that is quick,
held before experts, and does not
involve the aggressive questioning
common in jury trials is more likely to
preserve the relationship.
5. Agreeing to arbitrate after a
dispute has arisen. Arbitration need
not be agreed to only during initial
contract negotiations. Parties should
be open-minded about negotiating such
clauses after disputes arise, too. In many
ways, the parties are best equipped
to customize procedures after their
dispute has begun.
Once they know what is at stake, the
parties are in a better position to decide
how much time and money they want
to invest on case preparation and trial,
determine the skills and background
their arbitrators should have, and know
whether they want an appeal. They
should know whether the case needs
full or limited discovery. Even if parties
differ on some factors, they each may
value different arbitral benefits and
arbitration may provide each what they
most desire.
There are many reasons why
arbitration should be the go-to procedure
for many of the disputes that arise in the
oil and gas industry. The process can
be tailored to the needs of the parties,
and many common objections to using
arbitration are based on myths that
do not hold up to scrutiny. Whether
it’s through an arbitration clause in
an initial contract, or one chosen after
a dispute arises, arbitration provides
significant benefits to parties.
Reprinted with permission from the June 17, 2015 edition of the TEXAS LA WYER © 2015 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is
prohibited. For information, contact 877-257-3382 or reprints@alm.com. #651-06-15-15
JUNE 17, 2015
Arbitration clauses are a staple in international energy contracts and oil and gas cases are the largest category of cases filed with ICSID, the World Bank's arbitration division (26 percent of recent cases filed, 39 percent counting other energy cases). Likewise, oil and gas cases frequently come before panels of all major international arbitration institutions. Yet the oil and gas industry too often avoids arbitration. Two widely used oil and gas form contracts—the AAPL Joint Operating Agreement and the Producers 88 oil and gas lease— almost never mention arbitration. This article looks at why lessees, lessors, equity investors, operators, and other oilfield parties should consider wider use of arbitration. Arbitration is better than commonly believed. The benefits of arbitration often outweigh the costs. Myths about delay, cost, and risk because of a limited ability to appeal are overblown and have led to an inefficient avoidance of this flexible consensual procedure. 1. What delay? Arbitration gives parties the power to shorten the longest part of a lawsuit, the discovery process, and set time limits for trial. Complaints about arbitration generally overlook the great delay in civil litigation, including appeals. Arbitration makes appeals less common and quicker to decide because of the intentionally narrow, deferential standard of review. Parties can secure appeals by selecting provider rules that include a right to appeal, or by filing in jurisdictions whose state law, or federal interpretations of the Federal Arbitration Act, adheres to a broad interpretation of "manifest disregard" as a basis for reversal. JAMS, for example, has its Optional Arbitration Appeal Procedures, CPR an Appellate Arbitration Procedure, and the AAA Optional Appellate Arbitration Rules. Parties may well find that they prefer an appeal before arbitrators rather than before a court of appeals, even though the latter is available "for free." Indeed, there should be nothing stopping parties who have tried a case to judgment in civil court from agreeing to appeal in one of the arbitral forums. Delay in arbitration often results from a failure to take advantage of the flexibility available in a well-structured arbitration. Arbitration gives parties Arbitration: The Underused Alternative for Oil and Gas Disputes by GLEN M. ASHWORTH, JOHN BURRITT MCARTHUR and DICK WATT A L T E R N A T I V E D I S P U T E R E S O L U T I O N JUNE 17, 2015 w w w . t e x a s l a w y e r . c o m Hon. Glen M. Ashworth (retired) is a full-time arbitrator and mediator with JAMS in Dallas. John Burritt McArthur is an arbitrator with his own office. Dick Watt is a founder of Watt Beckworth Thompson & Henneman. more control over pacing and invites party participation. Speed is a dominant value in arbitration. The major arbitration rules limit discovery, trial, and time for award compared to state and federal courts. Arbitration gives parties a great deal of power over their case. Parties can further increase speed by expressly agreeing with each other, after the arbitration is initiated, to A. forego many or all depositions, requests for admission, and interrogatories; B. use computer searches and sampling to narrow document production; C. use affidavits instead of direct testimony; D. "hot tub" experts and, for daring parties, jointly hire a single neutral expert in each expert area; and E. adopt even tighter time limits on discovery and the hearing. Parties tend to be most satisfied with procedures they help design. 2. Why overpriced? The biggest costs are controllable. Arbitration does include the cost of arbitrators and sometimes a provider fee. Threshold jurisdictional skirmishes and battles over the scope of arbitration can increase cost. But savings in discovery, trial time and limited appeal should far, far outweigh these costs. In addition, significant arbitration costs appear only in a small number of cases. Most cases settle in arbitration just as in litigation. When settlement occurs, the arbitrators will have spent very little time on the case. In cases that do go all the way on the merits, the tighter focus and greater speed should significantly outweigh any added costs. A case tried to arbitrators, like a bench trial, should also require less preparation and explanation than a jury trial, providing a significant cost saving. Arbitrators should be sophisticated in commercial relationships, contracts and market concepts, and often are selected for a specific expertise. This is especially helpful in technical disputes such as those involving the oil and gas industry. 3. Unfair awards and lack of appeal? A third complaint about arbitration is most important because it goes to the quality of justice: the worry that there is no effective appeal from even very unfair awards. Current practice indicates this perceived problem is exaggerated. Skilled, principled arbitrators are readily available through such organizations as JAMS, AAA, and FedArb and from the ranks of independent arbitrators. Providers require advanced training and enforce strict ethical guidelines. Their rosters include a significant number of respected former judges. Using panels for large cases provides a check on individual arbitrators. 4. The overlooked benefit: preserving the relationship. Parties often forget that arbitration can benefit their relationship, too. The impact of litigation on the ongoing business relationship of the parties is often one of the biggest costs of a lawsuit. A plaintiff may win every penny sought, but ruin goodwill laboriously developed over decades. An arbitration that is quick, held before experts, and does not involve the aggressive questioning common in jury trials is more likely to preserve the relationship. 5. Agreeing to arbitrate after a dispute has arisen. Arbitration need not be agreed to only during initial contract negotiations. Parties should be open-minded about negotiating such clauses after disputes arise, too. In many ways, the parties are best equipped to customize procedures after their dispute has begun. Once they know what is at stake, the parties are in a better position to decide how much time and money they want to invest on case preparation and trial, determine the skills and background their arbitrators should have, and know whether they want an appeal. They should know whether the case needs full or limited discovery. Even if parties differ on some factors, they each may value different arbitral benefits and arbitration may provide each what they most desire. There are many reasons why arbitration should be the go-to procedure for many of the disputes that arise in the oil and gas industry. The process can be tailored to the needs of the parties, and many common objections to using arbitration are based on myths that do not hold up to scrutiny. Whether it's through an arbitration clause in an initial contract, or one chosen after a dispute arises, arbitration provides significant benefits to parties. Reprinted with permission from the June 17, 2015 edition of the TEXAS LAWYER © 2015 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is