There are a number of dispute resolution methods that companies can use in their international agreements. They can use one or several of them together. Some are better than others depending on the circumstances. Whatever companies choose, they need to draft their dispute resolution clause so that the different methods work properly together. Otherwise, a company will receive some unpleasant surprises at the time of the dispute. The various types of dispute resolution methods include:
- Negotiation
Negotiation between the parties at the time of a dispute usually happens as a matter of course. A provision for negotiation may or may not be drafted into an agreement. It can be formalized as part of a multi-step dispute resolution process. If it is, the agreement needs to set a clear time frame when each step is finished. Otherwise, failure to complete one step can be used as an obstacle to get to a binding process. It is the least expensive of any dispute resolution method and potentially the most commercially viable solution. But it needs the full co-operation of the parties and a great deal of objectivity and detachment in the parties’ behavior to avoid negative emotions and entrenched views that get in the way of a settlement. It should not be the only dispute resolution method relied upon since it may likely result in no resolution.
- Mediation
Mediation requires the parties to be well prepared and committed to the process, their decision makers at the table, and a skilled mediator to work properly. When that happens, mediation can be a very effective and successful dispute resolution tool. The focus is on the real interests of the parties, not their contractual or legal entitlements.
Mediation is faster and cheaper than arbitration and has a high success rate of settlement. Mediation can cost less than 5% of the cost of an arbitration dealing with a similar dispute, take less than 15% of the time of an arbitration and have a success rate in the 75% to 85% range. Mediation is frequently used in local settings. Despite those obvious advantages, it is still infrequently used in international disputes. There are a number of reasons for mediation not being widely used in international business disputes including lack of familiarity with the process, differences in culture, language and values, and the large distances separating the parties. Finally, successful mediation requires compromise from all parties involved and some disputes simply do not lend themselves to compromise.
An important thing to remember about mediation is that it is not a legally binding process. The results of mediation only become binding with a signed settlement agreement. The enforceability of these settlement agreements will increase as more countries ratify the Singapore Convention on Mediation, which presently has more than 50 signatory countries. As a result, mediation will likely grow as a useful and worthwhile international dispute resolution tool.
- Expert Determination
Expert determination has been most often used in economic valuations or technical assessments in energy disputes. The decision of an expert is not enforceable as an arbitration award but only as a contract between the parties in court systems around the world. It would require the written agreement of the parties. It is most effective in highly technical matters, but has difficulty when there are matters of both fact and law being disputed (which is the case for many disputes).
- Dispute Review Board
Dispute review boards usually consist of a three member board that is appointed for the duration of a project. They have proven to be quite effective in the construction industry, but have not spread to the energy sector in any significant manner. If they were used, they would be most effective in the construction of large energy infrastructure projects. A number of institutions provide assistance and services in this area.
- Litigation
Litigation in the courts is the most familiar dispute resolution tool to lawyers. It is most frequently used in the domestic energy business with parties from the same jurisdiction (in particular in the U.S., Canada, the UK and Australia). It is not the preferred forum for international disputes for a number of reasons including problems in enforcing court judgments in foreign jurisdictions, cost and length of trials, and aversion to local courts by foreign investors. As a result, it is rarely chosen as a dispute resolution mechanism in international energy agreements. It is sometimes chosen when all the parties come from the same jurisdiction and they are all comfortable with the courts of their home country.
- Arbitration
Arbitration is the most widely accepted and used dispute resolution method in the international energy sector. It is a legally binding process that provides the most flexibility to parties in how they want to resolve their dispute. Arbitration provides many advantages including allowing parties to choose their arbitrators, selecting the kind and extent of their arbitration process, and choosing the venue and forum where the arbitration will be held. It also has the advantage of the recognition and enforcement of arbitral awards in foreign jurisdictions, which court judgments generally do not have. Along with that flexibility comes a number of problems, including that adverse parties can make the process look a lot like litigation resulting in high costs and time consuming processes. Companies can adopt a number of strategies to manage time and cost concerns in international arbitration. Despite some of its shortcomings, when given a choice between the only two legally binding dispute resolution processes available—local courts and arbitration—international businesses always choose international arbitration.