INTRODUCTION
The Asia Pacific region, with its diverse geography, includes some of the world’s major energy-producing countries. However, it is notable that for energy production, conventional sources such as coal and oil are heavily relied upon. Primarily due to international agreements and climate conscious policies, nations located in the Asian subcontinent are actively switching to renewable energy sources to decrease their dependence on conventional energy sources. This has resulted in Asian nations committing to tripling the global renewable energy capacity by 2030 at the COP28 held in 2023.
The implications of this shift are not limited to environment but also expected to have significant impact in the economic forefront. It is noteworthy that over half of the global clean energy investments made in the year 2022 were centered in the Asia Pacific region. With the continuation of this positive trend, the year 2023 witnessed a record $1.8 trillion worth of global investment in energy transition – a remarkable increase of 17% from the preceding year.
Asian nations are thereby positioned at the forefront of this energy transition. Showcasing a noteworthy increase in its clean energy investments over the past three years, India is a frontrunner of the transition to cleaner energy. The country poured a massive $68 billion into clean energy in 2023– an impressive growth of 40% in comparison to 2016-2020. As a result of its continuous efforts, the country has secured a place among the top ten countries for energy transition investments.
This remarkable growth presents both new opportunities and challenges. The future of renewable energy in Asia hinges on the ability to effectively navigate the complexities of these projects through effective dispute-resolution methods.
PRIMARY DRIVERS OF DISPUTES IN THE RENEWABLE ENERGY SECTOR
The construction and Energy sectors have a well-known history of generating disputes in both commercial and investment arbitration. According to a 2023 report by a leading institute, the combined share of the newly registered cases in these sectors is 45%. The ICSID caseload paints a similar picture, with these sectors ranking among the top sectors for investment disputes. Several internal and external factors contribute to such a large number of disputes.
[A] Internal Factors:
Energy projects have diverse base sources ranging from fossil fuels and nuclear power to renewable sources. Despite this diversity, these projects share common characteristics: they are large-scale projects requiring substantial capital, extensive infrastructure development, cutting-edge technology, and decades of commitment. Due to such nature of energy projects, the contracts include provisions for adjustment over time, such as price reviews, extension of time, designs, supply chain or changes to the scope of work. While these contractual flexibilities help ensure that the project remains viable for a longer duration in the face of unforeseen circumstances, they also open a door to frequent disagreements over delays, price changes, risk allocation, and performance issues.
[B] External Factors:
Regulatory changes, geopolitical tensions and environmental factors are some of the major external factors influencing the renewable energy sector. As this sector largely depends on solar, wind and hydroelectric energy, it is vulnerable to environmental and climatic changes. Therefore, assigning responsibility could be challenging when the projects are impacted by such fluctuations unless the contractual terms provide for clear risk allocation and obligations of the parties.
The energy sector faces a number of difficulties, including price variations, as a result of regulatory changes and geopolitical tensions. Price volatility has been the primary cause of international energy disputes in the last five years, as per the Energy Arbitration Survey 2022. For instance, the ongoing conflict between Russia and Ukraine has severely impacted European energy security due to the loss of access to Russian gas. This resulted in a surge in the energy prices, causing disputes over gas supply contract, making nations rush towards finding alternative energy sources.
Sanctions are another example of the impact of these external factors. As seen in the case of Russia, sanctions can raise questions related to contractual performance, sparking disputes over whether these sanctions constitute force majeure events affecting the contractual obligation.
In order to attract foreign investments in the renewable sector, states provide incentives in the form of subsidies. However, any changes in these subsidies or revocation thereof during the subsistence of the contract significantly affect the contractual obligations, potentially giving rise to commercial as well as investment disputes. Therefore, the renewable energy sector seems to be uniquely susceptible to external factors as opposed to other sectors.
DISPUTES DUE TO THE ENERGY TRANSITION
The global transition towards renewable energy posits an increased likelihood of generating disputes within this sector. This transition adds a new layer of complexity to an already intricate landscape. This progression would also require nations to evolve new regulatory frameworks and shift to emerging technologies more suited to the renewable energy sector along with other factors such as the decommissioning of old machinery and gradual phasing out of fossil fuels.
The Energy Arbitration Survey 2022 indicates that infrastructure development and regulatory changes would be the primary sources of disputes within the renewable energy sector. Since base sources for renewable energy sectors are subject to geographical changes, it would lead to disputes arising not only in the construction phase but also extending across the operational phase as well.
The involvement of multiple stakeholders – owners, contractors, and suppliers –across different countries makes the dispute multi-jurisdictional, which is one of the key challenges of the energy sector. The lack of a common jurisdiction among different stakeholders further complicates the enforceability of contracts as well as dispute resolution. Even the minutest conflict between any of the stakeholders could paralyse the project until its resolution. The global enforceability of arbitral awards, therefore makes arbitration a suitable dispute resolution mechanism.
However, arbitration could be seen as a costly mechanism by the parties. While the adversarial nature of arbitration is much more relaxed than standard litigation, resorting to such an adjudicatory method has the potential to hamper long-term projects as prolonged conflicts may cause strain in business relationships.
Considering the indispensability of long-term cooperation amongst numerous stakeholders, swift resolution of disputes is necessary for successful completion of projects. Therefore, a hybrid dispute resolution mechanism such as ‘Med-arb’ could potentially address the challenges more effectively than the traditional arbitration mechanism.
MED-ARB AS THE SOLUTION
Mediation-arbitration (Med-Arb) refers to a hybrid approach aimed at resolving disputes by combining the benefits of mediation and arbitration. Mediation is the initial phase of dispute resolution where a neutral third party is appointed as mediator to facilitate the discussion and assist the parties in reaching at mutually agreeable solution. If mediation reaches a stalemate, shift towards arbitration takes place.
The greatest, yet lesser-known advantage of the Med-Arb approach lies in helping parties identify the invisible drivers of a dispute.
One of the greatest yet lesser-known advantage of Med-Arb is its ability to help parties in identifying the invisible drivers of a dispute. The mediation phase provides an important opportunity for parties to engage in open dialogue, and those private sessions, often called caucuses, can significantly help the parties understand the underlying cause of the dispute. The primary driver behind the resolution at the mediation stage is the looming threat of an adverse award against the party by the arbitrator which incentivises the parties to negotiate in good faith. Even if mediation doesn’t result in a resolution, it leaves parties in a much stronger position for the arbitration phase ahead. Therefore, this model is a low-risk strategy, with everything to gain and little to lose.
Another significant advantage offered by Med-Arb is a more streamlined and efficient approach when juxtaposed with standalone arbitration or mediation clauses. This approach often helps narrow down the specific issues that need to be addressed in arbitration as some of the issues get resolved during the mediation phase itself.
In a recent report, the data reveals that respondents preferred hybrid mechanisms over standalone mediation. The reason behind such preference can be attributed to the concerns surrounding the finality and enforceability of mediation settlement agreements, particularly in multi-jurisdictional disputes. The Med-Arb model can address these concerns. The parties can request the arbitrator to formalise the terms of the agreement in the form of a consent award after a successful mediation. This award would be enforceable in 172 countries that are parties to the New York Convention 1958, subject to the legislative framework of the countries. Although the Singapore Convention on Mediation aims to address these issues. However, it has only been ratified by only 14 countries so far.
Moreover, according to a 2022 Survey by a prominent institute, the desire to preserve business relationships (59%) was revealed to be the major factor behind the choice of Hybrid mode over standalone arbitration. Throughout the lifetime of a project, minor disputes are inevitable, such as delays in obtaining a permit during the construction phase or disagreements over output during the operation phase. Although Med-Arb is not the ultimate solution for preserving business relationships, it can still resolve minor conflicts at the onset of the dispute itself. If there is only an arbitration clause, then the escalation of the dispute will lead to formal adjudication by an arbitrator. On the other hand, the med-arb model will allow an attempt at dispute resolution through mediation first. The awareness among the parties that a delay in dispute resolution would jeopardize the entire project will encourage them to communicate in good faith. Indeed, parties can opt for mediation even after the dispute has arisen but the likelihood of that happening is less compared to a formal med-arb clause incorporated before the onset of a dispute.
The well-known advantage of the Med-Arb model is its flexibility. The parties can agree to have either a new arbitrator or the mediator assume the role of arbitrator to render a binding decision. The same individual for both roles allows for a deeper understanding of the dispute as well as makes the process cost and time-efficient because of the mediator-arbitrator’s familiarity with the dispute since the mediation phase. Initially, the idea of a mediator transitioning to the role of arbitrator raised concerns regarding confidentiality and potential bias. It depends on the legal framework of the jurisdiction whether the same ‘neutral’ can act as both mediator and arbitrator. The legal framework of China allows for the ‘same neutral’ in Med-Arb, however, some of the jurisdictions have imposed an express bar on this while some require express party consent. Therefore, most of the institutions provide for the independent appointment of an arbitrator and mediator unless parties agree otherwise.
CONCLUSION
The renewable energy sector is not only susceptible to internal but external factors as well. The Asian nations are the powerhouse of untapped renewable energy potential. There is a growing need to decrease the reliance upon conventional sources of energy leading to the global transition towards renewable energy. As the investments increase, there is a potential for another wave of disputes. The Med-Arb model is gaining recognition not only in Asia but in other continents as well. The International Bar Association has highlighted its potential acknowledging it as one of the significant drivers behind the growth of successful dispute-resolution practices in Asia.
The Med-Arb model is a low-risk strategy that is suitable for the renewable energy sector considering the nature and lengths of projects involved. So far, arbitration has been considered a one-stop solution for these disputes. However, it is time to reconsider this approach towards dispute resolution in the renewable energy sector.
Sourabh Sharma, Senior Editor of the Editorial Board contributed as a Research Assistant for the Blog.
This article is a part of the DNLU-SLJ (Guest Post) series, for submissions click here.
Author
Mr. Tariq Khan is a seasoned advocate who specialises in commercial litigation and arbitration. He is currently the Registrar at the International Arbitration and Mediation Center(IAMC), Hyderabad.
Ms. Isha Janwa is an Associate Counsel at the IAMC.
