Arbitration and the renewable energy sector

July 2018 | EXPERT BRIEFING | LITIGATION & DISPUTE RESOLUTION

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Not only after the US announced its withdrawal from the Paris Climate Agreement, the renewable energy sector has been confronted with new challenges. Already before the industry, which had been accustomed to broad financial support and subsidies by national governments, had to adapt to a more competitive environment.

The Paris Agreement, however, remains a landmark agreement comprising 195 member states and will continue to be an essential catalyst for the renewable energy sector in the coming years. This gives reason to take a closer look at the sector from a dispute resolution perspective.

From the early 1970s, many of the western world’s industrialised nations have engaged in the development and enhancement of new technologies in the field of renewable energies due to the respective oil and environmental crisis of the time. Ever since then, the new renewable energy sector has been growing globally. In 2015, investments in renewable energy projects reached a peak of $286bn, six times higher than in 2004. Growth rates in developing countries and emerging economies widely exceed European rates, with China currently being the most important investor in the sector. Now that the Paris Agreement has been reconfirmed by the other G20 states, investment rates are likely to continue to grow.

Due to the complexity of large-scale renewable energy projects involving multiple actors and jurisdictions, disputes are often full of twists and turns. The projects are typically characterised by contract structures with multiple sub-contracts between multiple parties referring to multiple fields of expertise and concerning multiple legal regimes. In addition, renewable energy projects require the involvement of several public authorities, as well as various consents and respective licences.

The focus of the industry, therefore, is on dispute prevention. Disputes can be best avoided by prudent contract drafting and a clear allocation of risks, as well as by implementing effective interface, project and claim management.

Currently, the renewables sector is still developing standards for industry practice. The industry presently relies on standard form and model contracts originated in the shipping and construction sectors. In order to fit the industry’s needs, these contracts often contain a significant number of amendments. This, however, increases the risk of uncertainty and confusion and can cause disputes over the meaning and effect of contractual clauses.

Where disputes cannot be avoided, it is crucial to have a dispute resolution mechanism in place beforehand. The mechanism must focus on the parties’ interest in cost and time efficiency. The main benefit of arbitration is that procedural questions, the applicable law, the place of arbitration, as well as the respective decision-making arbitrators, are open to the parties’ choice. Dispute resolution mechanisms can be made-to-measure for the specific challenges of the renewable industries sector. Customised dispute resolution instruments should take into account the typical multi-party, multi-contract and multi-jurisdiction situation regularly found in this field.

Renewable energy projects run through different phases, starting with the development phase, followed by the construction phase and, finally, the operational phase. The interests of different parties involved during these phases follow different priorities which are not necessarily in line with one another. This is reflected in the types of disputes which arise during the different phases.

During the development phase, disputes typically concern the non-completion or late completion of certain milestones that must be reached before the work can begin. These disputes typically involve permissions, grid accessibility, consents or other licences required to construct, commission, operate and maintain the project.

This may lead to regulatory and administrative disputes that are traditionally brought before national courts. Arbitration in this matter is still very uncommon, with the exception of disputes under international investment protection law.

During the construction phase, the parties’ main goal will be avoiding any delay to the construction process. Disputes in this phase arise over the scope and quality of the works, adverse weather conditions which may impede the progress of the project, as well as defects concerning logistics and interface management. Here, parties will typically want to continue the work in progress. Disputes in this phase are often settled through alternative dispute resolution (ADR) mechanisms. These measures typically compromise adjudication or expert determination, providing interim solutions that will allow the parties to swiftly continue the project work. Due to the highly specific and complex technical nature of the matters in dispute, parties will want to turn to experts in the field to manoeuvre the ADR.

During the operational phase, the output of the plant will be the focus. Since renewable energy projects largely depend on a steady cash flow generated by the plant, the parties’ interest will be to avoid any reduction in output that might undermine the profitability of the entire project.

In all phases, the multi-party and multi-contract situation is one of the biggest challenges for the dispute resolution procedure. In this context, it must be considered that disputes may arise among the various sub-suppliers and sub-contractors. They may involve a chain of contracts and trigger recourse claims, so-called ‘back-to-back disputes’.

In this case, the general contractor will want to extend the binding effect of a decision to third parties. Involving third parties in an arbitral dispute, however, can be difficult. This is because the arbitral tribunal’s jurisdiction is based on an arbitration agreement, meaning that third parties are generally not bound by the agreement. In order to bind third parties, specific provisions must be included in individual arbitration clauses referring to the joinder of third parties, or alternatively, arbitration rules must be incorporated which provide for the possibility of involving third parties. Modern arbitration rules, for example the latest version of the ICC rules, include provisions referring to multi-party and multi-contract scenarios. In any case, it is crucial to coordinate the content of the dispute resolution clauses in order to resolve the dispute in a single arbitration.

Although the parties’ focal points might differ in the light of the respective project phases, time and cost efficiency, as well as the expertise of the decisionmaker, are always the overall goals. Therefore, multi-tier dispute resolution clauses are becoming more and more popular. In multi-tier concepts, expert determinations or adjudication decisions precede the actual arbitration. Here, arbitrators must consider the binding effect of expert determinations or adjudication panels’ decisions and their enforceability, as well as the admissibility of arbitral proceedings in the aftermath of these ADR mechanisms.

There is a variety of ADR mechanisms available which allow for creative dispute resolution approaches. For example, in parallel-blind online bidding procedures, the parties indicate the figure they would be willing to pay or receive to settle the dispute using an online platform. If the respective amounts meet within a certain percentage range, the system will split the difference and the parties are deemed to have settled the matter.

After all, there is no ‘one size fits all’ approach to the resolution of commercial disputes. The parties must consider their individual needs when drafting dispute resolution clauses. Specific expertise, the importance of early resolutions and the multi-party, multi-contract scenario, as well as the enforceability of the decision, are aspects to be taken into account. Arbitration and ADR provide the flexibility to draft tailor-made solutions.

Last, but not least, another aspect which should be taken into account already at the development stage is to what extent the project is covered by the protection of international investment law. The protection of foreign investments is an increasingly important part of international economic law. Several bi- and multilateral treaties are in place to protect investments from non-commercial risks, such as unlawful expropriation, discriminatory regulations or restrictions on capital flows. The European Energy Charter Treaty (ECT), for example, provides investors with the right to make claims against the host state for violations of the investment protection granted under the treaty before an arbitral tribunal. Investors often refer to an infringement of the Fair-and-Equitable-Treatment (FET) standard when host states reconstruct or refurbish their financial support or subsidies’ regime, for example regarding feed-in tariffs. These disputes raise fundamental questions, particularly concerning the need for investment protection, on the one hand, and the host state’s right to regulate, on the other. States might refer to the Paris Climate Agreement when justifying changes to their regulation regime. Furthermore, states might also refer to human rights standards, such as the right to clean air and the right of access to clean water.

The ruling of the Court of the European Union (CJEU) in the Achmea case sparked new debates on investor-state-arbitration. This spring, the CJEU rendered a landmark decision deeming investor-state arbitration on an intra-European level incompatible with European law. The court ruled that investor-state arbitration within the EU violates the principle of sincere cooperation of Article 344 TFEU. This is because arbitral tribunals are not entitled to issue references to the CJEU for a preliminary ruling regarding the interpretation or application of EU law, pursuant to Article 267 TFEU. According to the Court, arbitrational disputes therefore do not ensure the full effectiveness of European law. Since the CJEU’s ruling refers to provisions in an ‘international agreement’ concluded ‘between Members States’, it does not limit itself to Article 8 of the Netherlands-Slovakia Bilateral Investment Treaty (BIT) that comprised the subject matter of this dispute. The ruling may therefore raise questions regarding the validity of the dispute settlement provisions in all of the 196 intra-EU BITs currently in force. Furthermore, it remains to be seen how this ruling will impact arbitrations under the ECT, to which the EU itself is a party.

Tilman Niedermaier is a partner and Sajanee Arzner is a lawyer at CMS Hasche Sigle. Dr Niedermaier can be contacted on +49 89 23807 196 or by email: tilman.niedermaier@cms-hs.com. Ms Arzner can be contacted on +49 89 23807 219 or by email: sajanee.arzner@cms-hs.com.

Tilman Niedermaier and Sajanee Arzner

CMS Hasche Sigle