Dispute resolution clauses in energy projects in Latin America
In recent years, the number of infrastructure projects in the energy sector in Latin American countries has increased, and therefore, the possibility of disputes arising relating to them. In this article we discuss primarily dispute resolution clauses and the key points to be taken into account when agreeing on them.
Projects in progress range from the construction of conventional and renewable power plants and transmission lines to the development of systems for storage of energy in batteries in the electricity industry, as well as the construction and operation of natural gas transport and storage systems and oil exploration and production contracts.
Since they are long-term projects with multiple parties (including the State itself or state or semi-state agencies), involving distribution of complex risks, it is not surprising that disputes often arise relating to these projects, the legal and technical sophistication of which is undeniable. Thus, the terms of the dispute resolution clause agreed on by the parties are of vital importance.
This article illustrates some of the most important specific features to be taken into account when designing, negotiating and agreeing on dispute resolution clauses in energy projects in Mexico, Colombia, Peru and Chile, as well as the latest trends in the inclusion of alternative dispute resolution mechanisms (ADRM) in this type of contracts.
In Mexico, the dispute resolution clauses that we find in contracts relating to the construction, equipment, operation and maintenance, and asset management of energy projects, mainly refer ultimately to commercial arbitration. It is not surprising that private investors feel more comfortable resolving their disputes in an arbitral forum and that, therefore, arbitration has been adopted as a further incentive for such investors.
The State electricity and oil companies, CFE and PEMEX, and state agencies such as the National Hydrocarbons Commission have adopted commercial arbitration as the general rule for dispute resolution.
The CFE standard electricity contracts for long-term auctions concluded in 2017 include tiered dispute resolution clauses which provide first of all for negotiation in good faith, the referring of the dispute to an ‘expert’ in the case of technical or operational matters or matters relating to payments owed under the contract, or otherwise to arbitration, in accordance with the Rules of the London Court of International Arbitration (LCIA).
As the years have passed, the CFE has followed this line, incorporating other alternative dispute resolution mechanisms in its standard contracts in other business areas. For example, it is common to see in contracts with CFE the inclusion of the concept of “expert specialist” for the resolution of technical and administrative disputes.
However, as in the case of the dispute resolution clauses included in electricity contracts concluded arising from auctions, in the case of the more recent contracts concluded by CFE, this division of technical and administrative disputes has sometimes rendered the concept of expert specialist of little use, since it is very difficult to filter purely technical or administrative disputes. Most of the time there is a legal element and an element of contractual interpretation that must be ultimately resolved by arbitration. Therefore, the party concerned must evaluate on a case-by-case basis the advisability of embarking on a procedure before the expert specialist although knowing that eventually the dispute will very probably go to arbitration.
In the case of the National Hydrocarbons Commission, the standard contracts for exploration and extraction of hydrocarbons used in the “Rounds” include tiered dispute resolution clauses that provide for a formal conciliation process as a prerequisite for the parties being able to go to arbitration. This is subject to the fact that either of the parties can treat the conciliation as terminated and go to arbitration at any time, which in accordance with the UNCITRAL Arbitration Rules, will be heard in Spanish, will be held in The Hague in the Netherlands and will be managed by the Permanent Court of Arbitration of The Hague.
These clauses state most categorically that arbitration will not be admissible for administrative rescission. Any dispute relating to the administrative rescission of contracts must be resolved exclusively by the Federal Courts of Mexico, but it is clarified that the contractor can commence proceedings in an arbitral tribunal only so that the existence of loss and damage is determined and, where relevant, assessed, arising from a ground or grounds for administrative rescission definitively considered to be unfounded by the federal courts.
This exclusion of administrative rescission as an iure imperi act not subject to arbitration complicates the effectiveness of the dispute resolution clause since it is difficult to envisage scenarios in which the dispute is not per se related to administrative rescission.
A similar issue is noticed in contracts with PEMEX and CFE that were concluded before the entry into force of the PEMEX Law and the CFE Law and to which the provisions of the Law on Public Works and Related Services (LOPSRM) apply. There, although the contracts include an arbitration clause, the LOPSRM denies access to arbitration in cases of administrative rescission and early termination.
On the other hand, in contracts relating to energy projects concluded between private companies (EPC, BOP, TSIA, AMA, etc.), we notice that arbitration clauses are also prevalent. However, before any party is entitled to commence arbitration proceedings, a mandatory negotiation procedure for a limited period is usually agreed. In these contracts we also often notice the inclusion of the concept of “independent expert” to resolve purely technical disputes. Downstream, in contracts with subcontractors, we also notice a greater willingness to include arbitration clauses, thanks to the recent popularity of arbitration proceedings for low claims.
Finally, in contracts relating to macro-projects, we notice a moderate trend towards the inclusion of dispute boards which are created from the commencement of a project for the purpose of issuing immediate decisions, promptly and in situ without halting the project.
In Colombia, the principal characteristic of the performance of energy projects is the absence of contracts with State entities, since there is an open market so that private agents can undertake this type of projects, agreeing on the dispute resolution clauses and mechanisms that they consider appropriate for the project in question. However, for the purpose of promoting the development of projects from nonconventional sources, the State has organized three auctions for the award of contracts for the sale of energy, which have the characteristics of a competitive process in which buyers and sellers interact to assign amounts of electricity and form prices, which reflect the costs of the supply and the willingness to pay of the demand and the purpose of which is to provide certainty regarding the revenue that a generation project will have. As part of the last auction, CLPE No. 03-2021, long-term energy supply contracts were allocated to nine generating companies with 11 generation projects with a net effective capacity of 793 MW from solar projects, which signed contracts with 53 resellers.
At the above-mentioned three energy auctions, a different draft long-term energy supply contract was arranged. However, with regard to the regulation of the dispute resolution framework, the three drafts of the auctions have the same structure and regulation in relation to the direct arrangement, amicable settlement and arbitration. For this reason, a model is presented stating that an attempt must be made to resolve any disagreement or dispute that arises between the parties, relating to the execution, performance, interpretation, termination or settlement of the contract, by a direct arrangement mechanism between the parties, without constituting a procedural prerequisite to gain access to the courts, in accordance with the following rules:
- The party wishing to file the claim shall send written notice to the other party stating the reasons for the claim, its petitions the subject of the claim and seeking performance of the obligations under the contract.
- The party receiving the claim can respond within 10 days, from the receipt of the written request, in which it may state that it agrees to the petitions in the terms in which they were drawn up or expressing its disagreement.
- If the party receiving the claim does not agree to the petitions made, replies outside the period indicated in this section or fails to respond, the direct arrangement mechanism will be deemed to have been conducted and the other two mechanisms established in the contract can be commenced: amicable settlement and arbitration, depending on the case.
The amicable settlement will be activated when the parties have not been able to resolve disagreements by direct arrangement and in the cases which are expressly specified in the contract, so that the resolution of such disagreements is submitted for the decision of an amiable compositeur, in accordance with the following rules:
- The amiable compositeur will sit in the city of Bogotá D.C., in the Arbitration and Conciliation Center of the Bogotá D.C. Chamber of Commerce.
- The procedure will be conducted in Spanish.
- The procedure will be handled by an amiable compositeur selected by a draw which will be held in advance by the Arbitration and Conciliation Center of the Bogotá D.C. Chamber of Commerce from among those appearing on its lists and taking into account the requirements or qualifications demanded by the case.
- The amiable compositeur must resolve the dispute within 60 business days, from the total payment of the fees and administration expenses to the Arbitration and Conciliation Center of the Bogotá D.C. Chamber of Commerce.
If no decision of the amiable compositeur is issued within this period, he/she will cease to have authority to resolve the specific dispute, which may be submitted by either of the parties for the decision of an arbitral tribunal, without it being necessary for the direct arrangement mechanism to be conducted again for such purpose.
The period referred to in this paragraph may be extended up to a term equal to the initial period, by the amiable compositeur, provided that the complexity of the case so requires.
- The amiable compositeur’s decision will be binding on the parties and will have the legal effects of a settlement.
- The procedure applicable will be that provided in the rules of the Arbitration and Conciliation Center of the Bogotá D.C. Chamber of Commerce and, in the absence of such provision, Law 1563 of 2012 will apply.
The third and final mechanism provided by the contract for the resolution of disputes between the parties is arbitration, which settles any disagreement or dispute that arises between them, relating to the execution, performance, interpretation, termination or settlement of the contract, which cannot be resolved by them directly and which does not require the amicable settlement mechanism to be adopted in advance. It must follow the following rules:
- The arbitral tribunal will sit in the city of Bogotá D.C., in the Arbitration and Conciliation Center of the Bogotá D.C. Chamber of Commerce.
- The procedure will be conducted in Spanish.
- The arbitral tribunal will be formed by three arbitrators, in the case of larger claims, or by one arbitrator if the claim is for a smaller amount.
- Arbitrators will be appointed by the parties by mutual agreement. If the parties fail to reach an agreement regarding the appointment of the arbitrators within thirty (30) days from the date on which either of the parties notified in writing to the other its intention to proceed to form the arbitral tribunal, the arbitrators will be appointed by the Arbitration and Conciliation Center of the Bogotá D.C. Chamber of Commerce from among those appearing on its lists and taking into account the requirements or qualifications demanded by the case, or at the request of either of the parties.
- The arbitral tribunal will decide according to law.
- Whatever the decision of the arbitral tribunal, it will be binding on the parties and will have the effect of res judicata, subject to the appeals established in the applicable legislation.
- The procedure applicable will be that provided in the rules of the Arbitration and Conciliation Center of the Bogotá D.C. Chamber of Commerce and, in the absence of such provision, the General Code of Procedure, Law 1563 of 2012, will apply.
In Chile the only participants in the electricity generation market are private companies, which are owners of its entire infrastructure. This could give rise to the misconception that the State does not intervene, but it does, and to a great extent.
In the generation market a distinction is drawn between two types of customers, those that can freely negotiate their prices, and therefore it is called “free market”, and captive customers of energy distributors, whose prices are set by price decrees issued by the competent authority.
Customers of one or other market are distinguished by the maximum power of their electrical installations. Customers with maximum power exceeding 2000 kW are free, and those below that power are captive or regulated customers. There is a customer segment, i.e., those whose power is greater than 500 kW and less than 2000 kW, which can choose one or other market.
In relation to the free market, the State does not intervene at all, and each party is free to agree on the dispute resolution clause that regulates their disputes. The usual approach is an arbitration clause, with an arbitrator appointed by the Chamber of Commerce of Santiago de Chile, a private institution that is used extensively in the market. Those clauses usually provide for a mediation mechanism, and the Chamber of Commerce itself promotes them.
In the regulated customer segment, as is to be expected, there is intense State regulation. Chilean law provides that energy distributors must have supply contracts as generating companies which enables them to satisfy five years in advance the entire consumption of their customers subject to price regulation.
The above-mentioned supply contracts are the result of public tender processes. The law entrusts to the National Energy Commission, the Chilean electricity regulator, the task of designing, coordinating and managing such public tender processes. The design of those processes includes determining all the clauses of the supply contracts, so that neither the distributors nor the generating companies whose tenders are successful are free to agree the terms of those contracts.
Thus, the peculiar situation arises of a supply contract signed between two parties, in which none of them is free to agree on the contractual terms, including the dispute resolution clause.
The generating company is free to contract, but if it agrees to contract, it must comply with the contract determined in advance by the National Energy Commission. For distributors the signature of the contract is a legal obligation, and if they fail to sign, they may be held liable for an infringement.
Thus, they are compulsory contracts which show the power of the State to regulate the economic activity related to the supply of electricity for regulated customers.
These compulsory contracts have been the most successful expression of State regulation in the development of the renewable energy market in Chile, and are responsible for the exponential increase of these investments within the country. A significant part of the new investments in relation to generation has been due to the leverage that various generating companies have obtained with the backing of the supply contracts tendered out. These contracts tendered out accounted at the time for over 50% of the country’s electricity consumption, this percentage having fallen in recent years, since now they account for nearly 40%.
Those regulated supply tender processes are currently criticized by the generation industry due to the lack of flexibility of the contracts to adapt to changing market conditions. This has even been shown by the fact that at least two companies to which those tenders were awarded are now experiencing serious financial problems, and are suspended on the short-term market, without being able to meet their contractual commitments.
The National Energy Commission not only determines the clauses of those contracts, but also various laws have been published, many of them after several of the contracts now in force, which have altered some of their contractual terms, in particular in relation to the time of payment of the agreed price. Those laws have been used, as far as possible, not to alter the financial terms of the contract, but they have not always been as successful as was desired, and often generating companies have accumulated large debts to distributors, seriously affecting the continuity of their revenue from these contracts.
A common problem in the regulation of those contracts arises from constant delay in publishing the price decrees that set the price for the end customer.
Under one of those laws indicated above, as long as the price for the end customer is not set, the prices agreed between generating entities and distributors are not adapted to the new financial terms provided for in the contracts. Thus, although all contracts are set in U.S. dollars, and they have clauses indexed to fuels or inflation at six-month intervals, those clauses never operate that frequently, since they require publication of a price decree to determine those new prices.
Although the delay of those decrees holds the companies harmless in economic terms, since the regulation takes into account the payment of interest, this significantly alters the continuity of the flows received by generating companies.
In relation to dispute resolution clauses, contracts between generating entities and distributors provide for a structure very similar to that described in the case of Colombia: prior mediation mechanism, and then an arbitration clause.
Although this might seem reasonable, the dispute resolution mechanism is of very little use in practice, given the particular nature of those contracts.
As we have previously described, the intense State regulation of these contracts greatly reduces the importance of the dispute resolution mechanism, since that clause does not include the regulatory authority as a party to the contract.
Thus, it is of little use to the generator to sue the distributor when it is the regulatory authority that actually applies and enforces the contract. The contracts tendered out are an input for the respective price decrees, but the price decrees ultimately determine the prices that must be paid between generator and distributor.
So much so that the law points out that distributors cannot receive any revenue for these contracts. The revenue of the distributors is only from the rents assigned to their installations, but they cannot obtain revenue from the sale of energy to the end customer. Thus, distributors are merely recipients of collections from generating companies and of the payments that are made by end customers, being a mere intermediary of the electricity supply contract.
Furthermore, the law expressly forbids distributors to agree changes in prices with generating companies, except in the cases expressly regulated by law. Those few cases, related to generally applicable regulatory changes, require the consent of the National Energy Commission. The only thing that the generator and the distributor can agree in the resolution of a dispute, and provided that the National Energy Commission authorizes it, will be the change of the duration of the contract and possibly the volumes contracted.
Thus, the arbitration clause is useful only as a mechanism for collecting debts between the generator and the distributor. No other dispute may be the subject of arbitration, since it can never be enforced against the authority, which is not a party to the arbitration.
By way of summary, although in Chile there are supply contracts between generating companies and distributors that provide a dispute resolution clause, its usefulness is very limited, given the considerable State intervention existing in that contractual relationship.
In Peru, the development of electricity projects comes mainly from private investors, who sign a concession contract with the State (represented by the Ministry of Energy and Mines). This contract acts as the enabling title to carry out the activity, through which the clauses that will be applicable for the development of the project are agreed, either in the subsectors of generation, transmission and/or distribution of electricity. These agreements include a clause for the settlement of disputes that may arise between the parties, so that a third party may settle such disputes.
Within these concession contracts, the following process is proposed:
- The contract seeks that the conflicts and controversies arising between the parties be solved, in a first instance, through direct treatment, which is configured as a step prior to the initiation of an arbitration process. Such direct dealing involves direct and good faith negotiations between the parties, in which both parties will seek to amicably solve the problems and/or disputes that may arise regarding the performance, interpretation, validity and/or execution of the contract.
- In the event that the direct dealings are unsuccessful within a period that could range from 15 to 60 working days (depending on each contract), the parties must define whether the dispute is of a technical or non-technical nature.
- It should be noted that only in transmission concession contracts, as part of the direct treatment, the participation of a third party called "amiable compositeur" or an "International Special Commission" (depending on the nature of the dispute) is foreseen, who is in charge of the elaboration and proposal of a dispute resolution formula for the parties.
- In the case of a dispute of a technical nature, and only with respect to electricity transmission concession contracts, it will be resolved by an expert in the field, appointed by mutual agreement between the parties. The work of the expert will be to evaluate the specific case by means of the information provided for such purposes by the parties and, with this, to present a conciliation proposal. In case it is not accepted, they shall submit a preliminary decision that may be commented by the parties. Subsequently, the expert will issue a final decision that will be binding on the parties.
- In the case of electricity generation and distribution concession contracts, in the case of disputes of a technical nature, this will be resolved by conscientious arbitration carried out by a tribunal of experts.
- In the case of a dispute of a non-technical nature, with respect to the three types of concessions, these will be resolved by means of arbitration at law, as long as it does not involve matters in which the Supervisory Body of Investment in Energy and Mining (OSINERGMIN) is competent. If it is verified that it is not competent, the parties will submit to the national arbitration jurisdiction (usually before the Arbitration Center of the Lima Chamber of Commerce) or international (commonly before the ICSID) - institutional arbitration - depending, in most cases, on the economic amount in dispute.
It is also important to point out that, in the past, the State has promoted the installation of power generation plants with renewable energy resources, also known as RER plants. Such promotion was materialized through public tenders through which the State awarded one or several RER plants (existing or in project) an energy supply contract for the National Interconnected Electric System (SEIN), providing it with a premium for such supply.
Within the framework of the supply contracts described above, it can be observed that the parties included a dispute resolution clause similar to those contained in the concession contracts, with the only difference that there is no express mention of the existence of a "direct treatment" phase, prior to the initiation of an arbitration process.
Summarizing the contracts reviewed, we can conclude that the Peruvian case provides for the existence of the Dispute Avoidance and Adjudication Board (DAAB) through the formula of "amiable compositeur" or "International Special Commissions". Likewise, the participation of expert experts is also foreseen in the case of the settlement of disputes related to technical issues.
Finally, considering its advantages and disadvantages, for the Peruvian case, the constitutional and legal regulations in force promote that the controversies between the parties involved in a concession contract in the electricity sector be resolved within an arbitration process (national or international) and, therefore, outside a jurisdictional process in charge of the Peruvian Judiciary.