Hydrogen: Preparing an Effective Dispute Resolution and Exit Strategy

7 minute read | January.16.2024

Previously, the Orrick team has written about some of the potential areas for dispute within the Hydrogen sector.  In this piece, we consider why it is important to not only have an effective exit strategy in case a project breaks down, but also why the “boilerplate” governing law and jurisdiction clauses deserve more consideration as part of an exit strategy.  Within this article, we use the term “exit strategy” as meaning a strategy for exiting under the dispute resolution mechanisms of the contract.

Contemplating the possibility of a dispute is critical from the outset

Although parties enter into a project in the hope that it will be a great success, it is necessary for them to be prepared for all eventualities. Breakdowns in relations between parties, shifts in commercial climates, or technical issues, among other matters, may result in one or more project parties concluding that it is necessary to cut their losses and exit the project.  The question then comes as to how they may best do that.

Parties, when their interests diverge, can agree to replacing one of the parties via a buyout in the case of joint ventures or through novation or assignment of a commercial contract; however, disputes may be unavoidable in some instances. An effective dispute resolution and exit strategy will ensure that a party is protected to the fullest extent possible when such disputes occur.

The perils of paying insufficient attention to legal provisions

Commercial considerations—e.g., construction, feedstock and electrolyser costs and the project bottom line—are central drivers of any project and, as such, are matters that parties will take seriously from the beginning. However, legal provisions, which can be just as important, often only receive scant consideration.

Key legal provisions include the legal system of the producing country, as well as the “boilerplate” governing law and jurisdiction clauses within a contract. Not giving due consideration to such clauses at the drafting stage can be perilous and could even leave a party with little or no recourse. The main risks of not paying sufficient attention to key legal provisions include the following:

Jurisdictional Risks

One of the parties may be bound by a contract that is subject to the jurisdiction of a foreign court which may be unfamiliar to that party and prove difficult to navigate in the event that a dispute arises. Some national courts may be unpredictable, slow or perhaps even corrupt/biased. These risks are further heightened when state-connected entities are on the other side of a dispute.

Procedural Issues

If a dispute is before the national courts of a country, then the relevant legal procedure of that country shall apply, and the national court shall supervise the process of the dispute. This can present issues to companies who are unfamiliar with the local regime. Likewise, any nuances regarding procedure, such as the availability of anti-suit injunctions (which are very rare in certain jurisdictions, such as France and Germany), require careful navigation.

Enforceability of Judgments

Even if a party is successful in a dispute before the courts, the enforceability of a judgment may pose problems. Judgments against a state entity in its home national courts may be difficult to enforce. Whilst judgments from the national courts of some countries (for example, the UK, states across the U.S., and Germany) will be readily enforceable elsewhere, judgments of the national courts of other countries may be less readily enforced.

Considerations for negotiating dispute resolution clauses

Effectively drafted governing law and jurisdiction clauses can be invaluable as part of an exit strategy, allowing parties, should they have a dispute, to resolve it in the most efficient and legally sound manner. Selecting a predictable governing law, such as English law or New York law, mitigates against the aforementioned jurisdictional, procedural and enforceability risks. 

Likewise, it is possible to mitigate against an unpredictable legal regime and court altogether by selecting arbitration before a well-respected institution, such as the ICC International Court of Arbitration (ICC) or the London Court of International Arbitration (LCIA), who will administer the arbitration on behalf of the parties.

Parties selecting arbitration as the preferred dispute resolution mechanism will need to, in their negotiations, pay attention to selecting the seat of arbitration. The “arbitral seat” selected will govern the procedure of the arbitration, whilst the courts of the seat will have a supervisory jurisdiction over the arbitration. The selection of a reasonable arbitration seat (such as London or New York) will reinforce the predictability and efficient conduct of an arbitration.

For example, if London is selected as the arbitral seat, English law will be the law governing the procedure of the arbitration, the English Arbitration Act 1996 will apply, and the English courts will have a supervisory jurisdiction over the arbitration. If a party then challenges an award in that arbitration then the matter will be brought before the English courts.

Parties should consider many factors in deciding whether a particular court or perhaps arbitration with an appropriate seat is more advantageous. But the ease of enforcement of arbitral awards is a compelling reason to opt for arbitration.

Arbitration often offers the best avenue for enforcing awards

In addition to an effective arbitration clause adding legal certainty, resolving disputes through arbitration affords benefits when it comes to the enforcement of any award. The New York Convention provides for mutual recognition and enforcement by the courts of one country in respect of foreign arbitral awards.  Therefore, so long as both the country in which the award was rendered and the country in which enforcement is sought are signatories to the New York Convention, enforcement is straightforward.

Consider the following hypothetical: A & B enter into a joint venture for a green hydrogen project located in Chile. A dispute arises and the parties proceed under the dispute resolution provisions detailed in Scenarios 1 and 2.

Scenario 1 (Chilean national courts)

Say the joint venture documents contain a jurisdiction clause in favour of the Chilean national courts. Aside from questions about how easily A & B can navigate the Chilean litigation process, upon any judgment by the Chilean courts, it will be necessary to make the judgment enforceable. If the successful party is seeking to have the judgment recognised and enforced outside of Chile (e.g., as the opponent has significant assets outside of Chile), then it would need to undertake the necessary formalities abroad, which will likely involve various applications and submissions to the national courts of the jurisdiction in which enforcement is being sought. Such efforts can take significant time and result in sizeable legal costs.

Scenario 2 (ICC arbitration with London seat)

Now suppose that the joint venture documents contain a jurisdiction clause in favour of an ICC arbitration seated in London. Upon the ICC tribunal rendering an award, the successful party may seek to enforce such award in any New York Convention signatory state.

These examples demonstrate that the route of enforcing an arbitral award is often quicker and cheaper than going through national courts. Parties need to consider which route (i.e., court vs. arbitration) might lead to the optimum dispute resolution process for them at the drafting stage.

How can we help?

Our arbitration team has significant experience in dealing with high-value, multi-jurisdictional and large-scale disputes across the globe in a variety of industries.  Amongst other matters, our team has significant experience, both in the English courts and before arbitral tribunals around the globe, in the conduct of complex and international energy disputes including joint venture disputes, construction issues, questions on the quality and specification of products, and issues with regard to energy tariffs and incentives.

The dynamic team at Orrick can draw on its expertise on both the transactional side and the contentious side to work with our clients as they adapt to changes in their business and manage the risks and potential disputes that arise along the way.  Any project should be established with the benefit of advice from the start to reduce risks and ensure that, if the project does go south, there is an exit strategy in place to minimise damage.

If you have any questions about disputes and potential issues in the Hydrogen sector or wish to discuss a matter further with us, please contact Mark Beeley, Sarah Stockley or Ben Stafford.