August 25, 2016

Global oil price volatility ‘legal tips’ - dispute resolution

The financial pressures caused by the low oil price has led to a significant increase in the number of disputes in the industry, at all levels in the contractual chain. Dispute resolution Partner, David Leckie, outlines his top 'legal tips' to consider when considering litigation/arbitration.

Global oil price volatility survey - dispute resolution findings

Industry drivers

While the oil price may recover eventually, significant changes to business models and operational strategies are likely to result from the seismic impact of innovation on the sector, from the shale revolution to greater investment in renewables.

The need for greater agility is clear. While over a fifth (21%) of our survey respondents say they will be focussing on smaller and/or more flexible capital-light projects as their number one strategy, virtually none (1%) thought they would instead focus on fewer but larger projects with heavy capital.

Impact on business

If the squeeze on profitability continues, the widely expected increase in claims and disputes seems inevitable. As one of our survey respondents put it, keeping cash flow positive, deferring large investments and minimising operating costs is essential. Changes to operational arrangements as a result of cost-cutting, the shelving of planned projects and lack of investment in existing operations, could all have a major impact on relationships across the supply chain.

According to our survey, the cancellation or breaking of agreements is expected to be the biggest cause of disputes for 86% of respondents, followed by companies or suppliers becoming insolvent and unable to fulfil their obligations (81%). Two-thirds (67%) think payment issues will be a major trigger for claims and a third (31%) see failure to perform obligations to the required standard or timeframe as a critical pressure point.

Business response

Current attitudes to litigation/arbitration in the industry have changed significantly over the past 12 to 18 months. As a result of the financial pressures faced by the industry, companies are far more bullish than they used to be. There is, as a result, significantly more contentious correspondence between parties, some of which ultimately leads to the commencement of proceedings. Some of the most common flash points for disputes include non-payment of invoices, termination of contracts (purportedly for cause but in fact for convenience), declarations of force majeure and JV/PSA disputes.

Clearly, any decision to commence proceedings must be carefully risk assessed by management and legal. The direct costs of litigation/arbitration are significant, not to mention the hidden costs of extensive management time, reputational issues etc.

The stakes are high, particularly if the dispute is under English law where the loser will almost always be ordered to pay most of the winner’s legal costs. At the same time, companies are often faced with the stark choice of either having to write the amount in issue off/pay the sum demanded or litigate/arbitrate. In many situations the only way forward is to commence proceedings and then seek to resolve the dispute by way of alternative dispute resolution, such as mediation. A key issue to consider before commencing any proceedings is whether any judgment/award can be enforced. In international disputes this is a very complex issue which needs to be addressed at the outset, to avoid pouring good money after bad.

To watch the previous video in the series, click here