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Dispute resolution is a critical yet often overlooked aspect of international project finance. It is commonly considered a routine matter, briefly addressed in financing term sheets through the inclusion of a standard dispute resolution clause, whether it be arbitration or court proceedings. This cursory approach contrasts sharply with the complex realities of international projects. They involve a multitude of participants ranging from sponsors to lenders, contractors, off-takers and others, all from different jurisdictions, each engaged in several agreements.
>> authors: Jelena Arsić, Nataša Lalatović-Đorđević <<
In project finance, where "contract is king", the interrelated nature of transaction documents means that a disagreement in any one of them can impact the entire project. This becomes even more pronounced in the dynamic landscape of the Western Balkans.
Take, for instance, a renewables financing project in one of the ex-Yugoslavian countries. Often it would involve a Chinese EPC contractor who has already established a dispute resolution setup with the project company. Lenders, keen to leverage their home advantage, often prefer accessing courts in their own jurisdictions or in global financial hubs like London, where English law and courts are the norm. Meanwhile, the Power Purchase Agreement (PPA) contractor introduces another jurisdiction and dispute resolution forum into the mix. If the EPC contractor fails to meet the completion date, this can create a cascading effect under both the facility agreement and the PPA, potentially activating each of their dispute resolution clauses.
As with any international contract, parties generally opt for one of two main dispute resolution forums: domestic courts or international arbitration. The twist? If these forums are different in a set of independent but interconnected agreements, their disputes might end up being heard across several venues, leading to concurrent proceedings and potentially contradictory decisions in various jurisdictions. It could be that of the bank, sponsor, project company or even a neutral ground.
Experienced project finance parties know the risks of choosing the wrong forum. Choosing courts might seem sensible in some instances. But local courts, such as those in the Western Balkans, may falter with complex and multiparty transactions, especially when dealing with contracts in different languages, governed by different laws, or when having to manage simultaneous disputes. Even the English courts are not always the safe option due to the lack of mutual recognition between certain Western Balkans counties and the UK which can render English court judgments unenforceable.
In regional deals, arbitration thus often emerges as a more practical choice for resolving project finance disputes. The acknowledged benefits are that it offers a neutral, uniform and streamlined mechanism for resolving multiparty disputes. It benefits from the finality and easier enforceability of arbitral awards compared to domestic judgments. Furthermore, parties can appoint arbitrators with specific industry expertise. Obviously, this all applies only if the parties have agreed upon a correct and effective arbitration clause. Yet, these commonly acknowledged benefits only scratch the surface. Project finance is full of less obvious considerations that demand attention. Which rules or forum will govern key documents like the EPC contract, associated guarantees or PPA? Where will arbitral awards be enforced and how will this impact the project's stakeholders across different jurisdictions? Can disputes under various agreements be joined under the chosen arbitration rules? These considerations are vital for an effective enforcement in project finance, especially in a region as legally diverse as the Western Balkans.
Far from being a routine and tick-box exercise, drafting dispute resolution clauses in project finance is a strategic and project-specific task. Understanding the project's global structure from the beginning is essential. Parties must carefully assess dispute resolution clauses in key transactions, aiming for consistent forum selection and streamlined enforcement. This approach transcends separate contract negotiations, compelling parties to adopt a broader perspective right from the start.
authors: Jelena Arsić, Nataša Lalatović-Đorđević