Although international commercial arbitration procedures are confidential, the biggest cases are rarely secret; they are disclosed by domestic court actions, securities disclosures, lawyers, companies involved in the case and trade press. Therefore, the biggest international arbitration procedures and awards are known, analyzed and even ranked. According to Arbitration Scorecard of American Lawyer magazine of July 2011, one of the ten biggest arbitral awards of the period 2010-11 has been the arbitral award rendered in the dispute between the Algerian state-controlled company Sonatrach and the Spanish Gas Natural Fenosa. This ICC arbitration seated in Geneva has been with 2.1 billion dollars award one of the most important of the last years. This decision has not been complied or enforced because the award has been challenged by a negotiation between the parties. Challenging an arbitral award by negotiation is not an exception in international arbitration and brings new opportunities to the companies to settle a dispute increasing new ties and finding new alliances between them.
This arbitration follows a dispute between Sonatrach and Gas Natural relating to the price and volumes of natural gas supplies. Sonatrach, which provides a quarter of gas to the Spanish market through its North African pipeline, began arbitration in 2007 when Gas Natural refused to pay higher prices. This dispute was settled the first time through an ICC arbitration in Geneva where Gas Natural Fenosa was represented by Freshfields and Sonatrach was represented by Bredin Prat. The court ruled in August 2010 that it recognized the right of Sonatrach to boost the price of gas supplied to Spain since 2007 through the Maghreb Europe pipeline, which crosses Morocco and extends into Spain and Portugal.
Consequently, the arbitral tribunal confirmed the Algerian company’s right to revise its price formula. Gas Natural was ordered to pay the difference between the old and the new rates for all the gas received under both contracts in the relevant periods. The award, extremely adverse for the Spanish company, had two main consequences: the first , an increase of 30% of gas supplies between 2007 and 2009; this quantity was measured with an estimation by Gas natural around 1,5 billion USD, and the other consequence was the modification of the base to fix supplies in the future. The company never quantified this second point.
The strategy of the board of Gas Natural was to gain time to find a new settlement because, even if the award was full and final, a negotiation between parties is always possible in commercial arbitration. To win time the Spanish company started an action for annulment of the arbitral award in Switzerland justice in September 2010 and obtained precautionary measures by the Swiss tribunal. Simultaneously, the Spanish company tried to analyze the cost of comply the award and tried to develop a new relationship with the new board of the Algerian company by discrete discussions.
One year after the award, in August 2011, a press release of the Spanish company stated: “Gas Natural Fenosa adds the Algerian state-owned energy company, Sonatrach, as shareholder following the capital increases”. Furthermore, in this press release, the Spanish company informed that parties accepted to give up every pending case and so this represented the annulment of the award. Thus, Sonatrach has taken a stake in Gas Natural Fenosa after the Spanish company’s Board approved a capital expansion. Sonatrach will pay €514m for a 3,85 percent holding, which represents 38,183,600 new stock.
This deal represents a reversal in relations between these two companies, which have strong commercial ties and common interests but also a series of disputes in recent years.
Moreover, the recent acquisition of a stake in leading Spanish utility by Algerian state-owned energy company Sonatrach, has underlined the intensification of business transactions and links between companies in gas and oil. Portugal may have seen an influx of Angolan investment in the last few years with sizeable shareholding in companies like Galp and Millennium BCP and maybe more in the next months. But the deal of Sonatrach in Spain is the first in Spain. Algeria, a member of the Organization of Petroleum Exporting Countries, has a production capacity of 1.4 million barrels a day of oil and exports about 60 billion cubic meters of gas a year.
This negotiation of an arbitral award is not an exception in dispute resolutions in international business transactions. A study of 2008 by Price Waterhouse Coopers shows the importance of settlement after an arbitral award. This study confirms that 40% of the companies negotiate the arbitral award against 30% who said that they do not negotiate the award. The study also shows that the nationality of the companies counts and so South American, Japanese and UK corporations rarely negotiate the award. However, Swiss, Mexican and US companies are more used to negotiate the award.
Settlement post arbitral award is referred to as an agreement reached by the parties after the tribunal has rendered the award, which is often full and final. This settlement post arbitral can modify or adjust the award, changing the terms of its performance for example by a new, less important amount but with a prompter payment. In many situations this kind of settlement is convenient for both parties.
The winning party can often use the arbitral award to put pressure on the losing party, whether through explicit or implicit threats of commercial reprisal or noncooperation, or through the threat of adverse publicity. If such pressure fails, the winning party may have to seek execution by court proceedings on the bank accounts or other assets of the losing party. If the award has been deposited or registered, it may then be enforced as though it were a judgment of the court, if the country of the arbitration is member of the New York Convention.
A losing party can comply with the award, use it as a basis for negotiating a settlement, or may challenge the award. However, the basis for challenge, stated in articles 5 to 7 of the New York Convention, are few indeed. The principal successfully way to challenge an arbitration award deal is for procedural issues. Challenges on procedural issues may be made, for example, where the arbitrator failed to decide an issue submitted by the parties, failed to allow a continuance of the hearing even though good cause was shown, or considered and decided issues beyond the scope of the agreement or submission by the parties.
Thus, in several situations, for the losing party it could be more interesting to substitute damages for a specific performance or to pay a substantial amount over a period of time. For the winning party, renegotiating the award could be more interesting than spending time and lawyer’s fees for the enforcement. Moreover the negotiation of the award and a new settlement could allow parties to find new ways of collaboration for a new business and keep the working relations after the dispute.
The arbitral award has a market value, in the sense that it could be considered as credit title and even been sold to third parties. Some corporations revealed that they prefer to sell the arbitral award to some companies or funds specialize in recovering the damages covered by the arbitral award. In other cases the award is sold with the whole business. These cases confirm the interesting debate in the international arbitration community, especially in investment arbitration against states, to have the sense to sell the award to another company, fund, or law firm specialized in the enforcement. These are some examples where the award is sold with a 50% or 75% of the amount of the award.
Actually, the reasons to get a settlement after an arbitral award are the same as before but it is easier after the award because the award gives a reference point of negotiation, an “anchor point”. The enforcement could have some negative consequences for the losing party or the relation between the companies; the reputations and sometimes is more interesting negotiate a specific performance more than money, and the fees of the lawyer for the enforcement. Basically, companies decide to negotiate the award to save time and money. Even if the enforcement is possible, as we know by the New York Convention of 1958, in some situations companies prefer to save time, money and moreover keep the working relations with the other company by a discrete negotiation.
Moreover, the negotiation can be partial and touch just a part of the award, because it is always possible to enforce partially an award under the New York Convention.
Hence, settlement post arbitral award is a common practice adopted by companies involved in an arbitration procedure. At the post award stage, the settlement is generated by various factors, including time and cost efficiencies and the will to maintain a working relationship with the other company. To all the known classical advantages of international arbitration: speed, cost, confidentiality and freedom to choose a neutral and competent arbitrator, we can add the negotiation of the award between the parties after the award is released. The case Sonatrach v. Gas Natural Fenosa shows this advantage of the arbitration: the possible negotiation of the award and the possibility to reach new solutions in order to settle the conflict and develop new projects, new transactions and more business.
Eduard Beltran is LLM candidate in the program of International Business Regulation, Litigation and Arbitration at New York University School of Law, attorney at law member of the Barcelona Bar and former deputy head of the international cooperation office of the French ministry of justice, responsible for the legal cooperation between Europe and Latin America.