ENERGY DISPUTE RESOLUTION IN LATIN AMERICA: INTERNATIONAL COMMERCIAL ARBITRATION

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development and Investment
(Apr 2009)
CHAPTER 20B
ENERGY DISPUTE RESOLUTION IN LATIN AMERICA: INTERNATIONAL COMMERCIAL ARBITRATION¹
Mauricio Almeida Prado ²
Silvia Julio Bueno de Miranda ³
Daniel Aun ⁴
L.O. Baptista Advogados
Sao Paolo

Mauricio Prado is a partner of Brazilian Law firm L.O. Baptista Advogados practicing international and domestic arbitration in different fields as energy, construction, capital markets and Mergers & Acquisitions. Mr. Prado has a Phd from the University of Paris-X, summa cum laude. His thesis about "impracticability of performance in the international business law" was published in France and Belgium ("Le hardship dans le droit du commerce international", Paris/Bruxelles, E. Bruylant, 2003). Mr. Prado is also an author of "International Transfer of Technology Agreements" published in Brazil in 1997. He is Professor at Law in the Fundação Getúlio Vargas where he teaches negotiation and business Law. Furthermore, he has been a local and international speaker at several conferences in the areas of arbitration, construction and comparative law.

1. Introduction

International commercial arbitrations involving energy conflicts experienced considerable development in Latin America over the last decade. Following an extensive restructuring of the energy sector, which included the privatization of holders of public services in several countries of the region, and permitted the entry of foreign capital in the sector, the need for a dispute resolution system outside the local courts emerged.

This paper analyzes the characteristics of Latin America energy commercial arbitrations. It begins by exploring the reasons why arbitration is considered the most appropriate means for solving energy disputes in Latin America. Then it turns to an overview of the current international commercial arbitration framework in the region, followed by a brief analysis of the local approaches to the subject in some countries of the region. Finally, it examines some important features of energy arbitrations, focusing on practical issues that should be taken into account when adopting this method in Latin America.

2. Why Use Arbitration to Solve Energy Disputes in Latin America?

[Page 20B-2]

An important characteristic of the energy field that has influence on the choice of the dispute resolution system is the high degree of State intervention.

The energy sector raises deep concerns on the States for various reasons:

• As essential services, public utilities related to the energy sector, which often involve scarce natural resources, play a crucial role in the State's political, social and economic development, and deal with governments' responsibility for ensuring universal access to energy and the continuity of the provision of these services;

• In view of the demographic and economic growth that increases the demand for energy, States' attention in the long term are drawn to strategies aimed at the development of new technologies related to alternative and renewable energy (biofuels, biomass and wind energy, among others);

• Debates regarding the use of nuclear power generation, which is still viewed with reservation in Latin America, also raise the States' attention to military questions;

• As a result of increasing concerns regarding environmental protection, States continuously raise the level of requirements to issue environmental licenses for the construction and operation of power plants;

• The energy sector is a valuable source of employment generation and requires that States enact labor regulations in order to provide workers with proper protection against labor accidents, which are not so infrequent in the energy industry;

• The huge amount of transnational investments surrounding the implementation of energy-related infrastructure projects (the construction of gas pipelines and cross border power plants, for instance), usually involve the execution of international contracts involving States or State entities.

As a result, in addition to developing their typical functions in connection with the regulation of the sector - i.e. being responsible for setting the applicable legal framework, by means of enacting commercial, administrative, tax, investment, environmental, intellectual property and labor laws, and fixing the prices applicable to the sector-, States play additional roles on this field.

[Page 20B-3]

States are frequently owners of the assets and facilities linked with energy generation and act as co-investors in energy projects, together with the private sector. It is quite common that State-owned entities (a national oil company or a gas company, for example) enter into Concession Agreements, Production Sharing Agreements (PSA), Joint Operating Agreements (JOA), Public-Private Partnerships (PPP), or related agreements, with private companies, so as to explore projects in the energy field.⁵ Within this context, it is also usual that the State provides considerable funding for the construction of the project through structured project financing operations.

The State and its entities may also participate in the project as a contracting party, either executing concession and similar agreements or acting as a customer - as it does in Power Purchase Agreements (PPA).

The above-mentioned situations lead to a wide range of contractual arrangements specially designed to regulate relations between States or State entities and private parties. While negotiating and drafting these contracts, the parties must take into account a variety of controversies that might emerge from their relationship, and choose an appropriate method to resolve their disputes efficiently.

2.1. Dispute Resolution Methods

In order to address each of the mentioned concerns, the method of dispute resolution provided for in these contracts shall combine:

• neutrality;

• the use of a technical approach;

• the possibility of adopting international standards for the proceedings;

• decisions with a high degree of enforceability.

2.1.1. Judicial Courts

Local courts are the most traditional method of dispute resolution in Latin America, but they are perceived as inadequate for the settlement of energy disputes, especially by private parties. Among their fears are the risk of politicization of the dispute and the lack of local court independence in disputes against the host State, which, as mentioned above, is almost always involved, at some extent, in the controversy. The lack of familiarity of the local judges with the subject matter, together with the long time that these courts usually take to render a decision, also raise a great deal of concern. In

[Page 20B-4]

summary, the use of local courts to settle energy disputes in most places of the world is not only unattractive to investors, but not advisable.⁶

2.1.2. International Commercial Arbitration

International commercial arbitration has been increasingly used for settling Latin American energy disputes. Arbitral proceedings may be conducted in a country other than the host country, preferably in a seat recognized for a reduced intervention of the local courts in the arbitration procedure. Arbitrators may also be chosen among citizens from a third country,⁷ bringing desired neutrality to the procedure. Arbitration allows for a technical approach to the subject of the dispute, since the parties can choose as arbitrators people who have expert knowledge in the sector - which is very important when dealing with such a specific and complex sector as energy. Parties may also decide upon the applicable laws to the dispute, and adopt international standards⁸ to limit the application of the many "anomalies" of the domestic law systems. The New York Convention,⁹ adopted by most Latin American States,¹⁰ facilitates the recognition and enforcement of arbitral awards in countries other than the one where the award was rendered.

2.1.3. Investment Disputes

In many Latin American States, disputes involving foreign investors may and have been settled in accordance with the rules of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, which established the

[Page 20B-5]

International Centre for the Settlement of Investment Disputes (ICSID).¹¹ This article, however, will focus on commercial arbitrations.

3. Overview of the Commercial Arbitration Legal Framework in Latin America

This chapter presents an overview of the commercial arbitration framework in the region, focusing on the current legal environment and the behavior of the respective courts towards arbitration.

3.1. Legal Framework in Latin America

The environment in Latin America has significantly improved, and most of the legal obstacles to ensuring the validity of arbitration agreements and awards have been removed.¹²

Latin American States have ratified the main international arbitration conventions, namely the Panama Convention¹³ and the New York Convention. Many States have also recently amended their arbitration legislation, several by adopting the UNCITRAL Model Law on International Commercial Arbitration.

Notwithstanding this basic framework, and despite the similarities regarding history, legal systems and traditions, Latin America cannot be considered a homogenous region when it comes to arbitration. Indeed, as this chapter will demonstrate, the States' approaches to the subject are not only very diverse,¹⁴ but have been changing quickly. It is currently very difficult, if not impossible, to identify particular trends in the region as a whole when it comes to arbitration, like it used to happen when the Calvo doctrine¹⁵ was regionally in vogue.

From time to time, however, it is possible to identify the rising of similar trends in some Latin American States. Based on those trends and on the current stage of development of arbitration in these States, we have placed...