The energy transition is experiencing unprecedented momentum as states and private actors pursue action against climate change, move toward net zero commitments, and look to manage heightened energy security pressures. A significant part of these efforts lies in investment in renewable energy projects, including those employing first-of-their-kind technologies. As the frequency, complexity and variety of these projects increases, so too will disputes arising from them.
There are many factors that influence parties’ decisions as to what dispute resolution method (or indeed, methods) are prescribed in their agreements, the main factors being: (a) the parties and their relationship; (b) the nature and complexity of the project; (c) the stage of the project life cycle and the necessity for speedy resolution; (d) the project’s value; (e) its location; (f) confidentiality vs transparency considerations; and (g) the type of dispute that parties envisage may arise. In this post, we provide an overview of the key dispute resolution methods we see in the renewable projects space, and how these factors feature in parties’ decisions to adopt them.
Dispute resolution methods and how they compare
- Dispute boards are panels set up to accompany the performance of a contract, and can be either standing or ad hoc bodies. They can swiftly assist in avoiding or overcoming disagreements and disputes. They are often used as part of a tiered process to encourage cooperation amongst parties, minimise costs and preserve existing relationships across the lifecycle of a construction project. These benefits make them suitable for renewables project disputes, primarily at the contractor and subcontractor level, where there is a mutual desire to ensure cooperation to achieve contractual targets.
- Expert determination is a process where one or more experts is appointed by the parties to determine the matter referred to them. Unless agreed otherwise, the expert’s determination binds the parties. Expert determinations are typically dealt with more quickly than litigation or arbitration, presenting parties with the opportunity to achieve substantial cost savings when compared to litigating or arbitrating a dispute which places significant reliance on expert evidence. This mechanism is seen frequently in the projects and construction space where disputes involve complex and technical issues. Such contracts often reserve certain types of disputes (for example on technical issues, performance levels or discrete quantification issues where liability has already been established) for expert determination in the first instance. Use of expert determination has, in fact, become so prevalent that the ICC offers services for the proposal or appointment of expert determiners and for the administration of expert determination proceedings. Where a renewable project does employ “first-of-its-kind” technology, it may be suited to an expert determination if the parties consider that resolution of their disputes will require a good understanding of that technology.
- Litigation remains an available avenue for resolving renewables disputes. Litigation is more commonly seen where the project and parties are in the same jurisdiction, and remains relatively popular, with many courts around the world being equipped to deal with these disputes, offering either a specialist construction court, or a division in which judges well-versed in construction disputes are employed (for a recent example, see our blog post on the SICC TIC List). Litigation is public in nature, and the accessibility of court documents is a key factor driving stakeholders in renewable energy projects that involve an element of state funding (which, given government focus on this space, are significant) to require disputes related to these to be heard in the courts.
- Commercial arbitration is a private form of dispute resolution, and remains one of the most popular dispute resolution methods in energy projects, including renewable energy projects. In 2020, energy disputes generated the second largest number of arbitration cases before the ICC (behind construction/engineering disputes) with 167 cases. The traditional draws of arbitration, such as its confidential nature, the wide enforceability of awards, and the ability of the parties to appoint experts to the tribunal, make it equally appealing for renewables projects, and we expect to see case numbers continue to rise. On larger-scale projects, where disputes involve huge cash outlays and often take years to resolve, arbitration is often preceded by mediation under a tiered dispute resolution clause, in the hopes that mediation will, at least, highlight the key areas of dispute.
- Investment treaty arbitration is a forum where a party, typically an investor, will pursue relief for infringement of rights and protections that arise from an investment agreement, with relief in this forum being available in addition to any contractual rights that a party may pursue. Given state actors are often involved in renewable energy projects, there have been a significant number of investment treaty arbitrations in recent years, typically arising out of the retrospective removal of state incentives for certain renewable projects. Indeed, 2016 saw the greatest number of arbitration cases filed under the Energy Charter Treaty involving renewable energy disputes, many of them claims brought against Spain, Italy and the Czech Republic relating to their adjustment of incentives such as subsidies and feed-in tariffs, in the renewable energy sector. We expect this to be no different going forward, as states continue to implement regulations seeking to both encourage and regulate development in the renewable energy space.
While renewable energy projects will undoubtedly bring with them a host of novel disputes, the suite of dispute resolution methods available in the renewable energy sector is similar to that of its more traditional counterpart. The key is for parties to consider which mechanisms are most suited to their arrangements early on, rather than allow it to be an after-thought like many other boilerplate provisions.
This is part of a series of blog posts exploring the potential impacts of energy transition and climate change on global projects disputes. Click here to see other posts in the series.