February 3, 2014

A place for international arbitration in assessing and enforcing pollution liability?

A jurisdiction can have, on paper, the most sophisticated liability regime in the world. There are plenty of precedents available to create such a regime. However, if, in reality, what happens is that a governmental or public body picks an astronomical figure out of the air and declaims its determination to recover that amount when either there is no reasonable, scientifically justifiable basis for that figure or the oil company knows that it is just a ‘try-on’ and will be able to do some back-room deal for a fraction of that amount, or the claim is essentially dropped by the next person to take charge of the case a few months later, this all breeds contempt for the system.

The worst thing that any legal regime can be is to be not taken seriously. The respect that is commanded by a legal system is not a function of the words in the statute book, but a function of the quality of the people who operate and enforce it. If respect for the system is lost it is not won back by enacting the equivalent of the US OPA without monetary limits.

Some commentators have suggested that because the oil and gas exploration and production industry is global and because pollution incidents may well have a wider impact than on the immediate jurisdiction in which they occur, regulation and liability in respect of pollution ought to be promulgated and enforced at an international, rather than a national level. Furthermore, the lack of consistency in and variable quality of how pollution incidents are dealt with from a regulatory and liability standpoint from jurisdiction to jurisdiction does not assist in the achievement of the same high standards of operational behaviour across the globe. For example, it might be suggested that an operator may be more diligent in the Mexican Gulf than he is off the coast of West Africa.

The problem with any form of international agency or tribunal is that countries do not tend to like giving up sovereignty over things of such national importance as control over their oil and gas industry, including when things go wrong with it. It would be unrealistic to expect ‘buy-in’ to such a concept. The point about pollution is that it has the potential to inflict harm on the very fabric of a country. It is probably not very attractive to many governments to devolve responsibility for assessing what that harm is and how it is best remedied to an ‘international’ body. It would not be a vote- winner.

What a particular country could do, if it felt it was appropriate and politically feasible, is to refer a particular pollution dispute to an international arbitration tribunal under respected institutional rules such as the ICC or LCIA. This could be achieved by putting an arbitration clause in the licence agreement or agreeing to arbitration once the dispute arose. Furthermore, the substantive law governing the question of liability and quantum need not necessarily be domestic law. It could be agreed that, for example, the US OPA is to be applied mutatis mutandis where domestic law is under-developed. The substantive content of the OPA can be applied anywhere in the world. The rationale for this is that questions of liability and quantum could be determined by a tribunal of internationally recognised and respected lawyers and industry experts who could determine the dispute according to a modern and coherent set of legal rules free from the pressures and distractions that the domestic judiciary might experience.

In terms of the ‘loss of sovereignty’ objection, this could be partly met by the fact that the state would be able to choose at least one of the arbitrators.

The other advantage of arbitration is that if the parties dispense with any right to appeal on a point of law they may have under the particular jurisdiction’s arbitration law (the equivalent of. s.69 of the UK’s Arbitration Act 1996), the award is effectively final, binding and immediately enforceable. Moreover, if the state were to win the arbitration, it would, by virtue of the New York Convention, be able to enforce the award in virtually every country in the world where the operator had assets (leaving aside issues that may arise because of its corporate structure).

The advantage of this method of dispute resolution for the operator is that it could have, perhaps, more confidence that the matter would be adjudicated upon impartially without political interference and that it would not be as bogged down in the local courts, for years or decades, as it might otherwise be.

Of course, international arbitration is no panacea.

First, it would not be able to accommodate the claims of private parties unless they agreed to it after the event. Such claimants might be unwilling to agree to arbitration because of a feeling that they would be giving away an advantage or because of cost (although cost problems could be overcome).

Second, although there is no real conceptual difficulty with an arbitral tribunal imposing civil penalties, the idea of it imposing criminal fines (or even prison sentences) would be very problematic. The consideration and imposition of criminal liability would need to be left to the domestic courts. This could entirely defeat the purpose of referring the matter to arbitration in the first place because there could well be parallel proceedings dealing with precisely the same evidence and issues in the local domestic courts. Furthermore, findings in arbitrations are, in principle, not binding on courts. This could render nugatory the speed advantage of arbitration as well as give rise to problems of inconsistent decisions on the same facts.

Third, having agreed arbitration, there is nothing in practice to stop either the state or the operator challenging the arbitration agreement or any award if one or other party felt it could derive some advantage from that. There are numerous examples of states and private entities making repeated challenges to arbitration agreements and awards (e.g. capacity challenges, jurisdiction challenges, serious irregularity challenges, fairness challenges, bias challenges) that go on for years because they suddenly decide they do not want to arbitrate after all especially when the get the sense that things are not going their way. This could mean everything gets bogged down in the domestic courts (or another court somewhere else in the world) and rendered completely uncertain for years anyway.

The very same objections that apply to a state devolving responsibility for dealing with ‘state affairs’ to an international ‘court’ apply to an arbitral tribunal. However, arbitration would be on a ‘case by case’ basis, rather than a wholesale transfer of responsibility.

Referring pollution disputes to international arbitration is something which should not be dismissed out of hand but it is unlikely to provide a solution to all the short- comings that might exist in a particular domestic legal system.

In conclusion, liability regimes worldwide are already about as aggressive as they can be and, in recent cases, probably over-aggressive. This is counter-productive and in any event is unlikely to be the route that generates the most substantive improvements, which is directly encouraging the spending of more money on prevention.