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Arbitration of oil and gas disputes in the upstream

petroleum sector in Kenya: a critical appraisal

Ngachu, Connie Nkirote

School of Law
Strathmore University

Recommended Citation
Ngachu, C. N. (2022). Arbitration of oil and gas disputes in the upstream petroleum sector in
Kenya: A critical appraisal [Thesis, Strathmore University]. http://hdl.handle.net/11071/12884

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 Arbitration Of Oil and Gas Disputes in The Upstream
Petroleum Sector in Kenya: A Critical Appraisal

By

Connie Nkirote Ngachu

131367

Submitted To Strathmore Law School in partial fulfilment of the requirements for the award of
Master’s in Law, Oil and Gas
Strathmore University, Kenya.

Strathmore Law School

Strathmore University

Nairobi, Kenya

May 2022
 DECLARATION AND APPROVAL

I hereby declare that this thesis is my original work and has not been previously submitted and
approved for the award of a degree by this or any other University. To the best of my knowledge
and belief, the thesis contains no material previously published or written by another person except
where due reference is made in the thesis itself.

© No part of this thesis may be reproduced without the permission of the author and Strathmore
University.

Connie Nkirote Ngachu

5th May 2022

Approval
This thesis of Connie Nkirote Ngachu was reviewed and approved by:

Dr. Francis Kariuki

Lecturer, Strathmore Law School
Strathmore University

Dr. Elizabeth Mokeira

Lecturer, Strathmore Law School
Strathmore University

Dr. Francis Kariuki

Director, School of Graduate Studies
Strathmore University
 DEDICATION

I dedicate this research work to the Almighty God, family and loved ones. Without their patience,
understanding, support and inspiration, the completion of this work wouldn’t have been possible.

ii
 ACKNOWLEDGEMENT

I would like to give special gratitude to the Lord Almighty for giving me the courage and fortitude
to undertake this research work.
Exceptional appreciation goes to my supervisor Dr. Francis Kariuki for his constructive guidance
and recommendations that shaped this research project to be what it is. I sincerely thank you for
being my guide. On a very special note, I wish to thank the Dean of LLM Studies Dr. Peter
Kwenjera, all our lecturers and the Strathmore University community for being instrumental in my
learning process.

I also wish to thank my family, friends, for their material and moral support, encouragement and
understanding during the times I was absent as I worked on this research project. Special
appreciation to the love of my life Gitau and wonderful daughter Kanana for being the wind
beneath my wings.

iii
List of Statutes

Arbitration Act, No.4 of 1995, Laws of Kenya.

Constitution of Kenya, 2010, Laws of Kenya.
Petroleum Act, No. 2 of 2019, Laws of Kenya.
Nairobi Center for International Arbitration, No. 26 of 2013, Laws of Kenya

List of International Instruments

UNCITRAL Arbitration Rules, (2010), A/65/465.

UNCITRAL Model Law on International Commercial Arbitration, (June 21, 1985), 24 I.L.M. 1302.
Convention on the Settlement of Investment Disputes Between States and Nationals of Other States,
Mar. 18, (1965), 575 U.N. (Washington Convention).
European Convention on International Commercial Arbitration, (April 21, 1961), 484 U.N.T.S. 349.
New York Convention, (10th June 1958).

Convention on the Recognition and Enforcement of Foreign Arbitral Awards, (1958), 330 UNTS
38.
International Legal Materials, Cambridge University Press, Volume 60, Issue 4, (2021), 75.
Revised version adopted by Un GA Res 65/22 in 2010, UNCITRAL Model.
Rome Convention on the Law Applicable to Contractual Obligations, (June 19, 1980), 19 I.L.M. 1492.
UNCITRAL, Report on First Session (1968) para. 40; I Yearbook

List of Cases

AES v Argentina, Decision on Jurisdiction, 26 April 2005, paras 69, 70.

Amco v Indonesia, Decision of annulment, 16 May 1986, para 63.
Amco v Indonesia, Decision on annulment, 16 May 1986, para 20.
Anne Mumbi Hinga -vs- Victoria Njoki Gathara, Civil Appeal No. 8 of 2009; [2009] eKLR.
Antoine Goetz v Burundi, Award, 10 February 1999.
Bank Mellat v. Helliniki Techniki S. A., [1984] Q.B. 291, 301, cited in Greenberg, supra note 30, at
319.
CDC v Seychelles, Decision on Annulment, 29th June 2005, para 36.

iv
Champion Trading Vs Egypt, Decision on Jurisdiction, 21 October 2003 and Aguas del Tunari
Vs Bolivia, Decision on Jurisdiction, 21 October 2005.
Compania de Aguas del Aconquija, SA & Vivendi Universal v Argentina, Decision on Annulment,
3 July 2002.
Fiona Trust& Holding Corp v Privalov [2007] EWCACiv20; [2007]1AllE.R. (Comm) 891;
[2007] Bus.L.R.686.
Geochem Middle East v Kenya Bureau of Standards [2020] eKLR.
Holiday Inns/Occidental Petroleum v Government of Morrocco, The Comparative and
International Law Journal of Southern Africa, Vol. 21, No. 2 [July 198]), 177-189.

IBM v Ecuador, Decision on Jurisdiction, 22 December 2003, paras 77-84.

Lanco v Argentina, Decision on Jurisdiction, 8 December 1998, para 39.

Maffezini v Spain, Award,13 November 2000.
Nyutu Agrovet Limited v Airtel Networks Kenya Limited and Chartered Institute of Arbitrators
[2015] eKLR.
Premium Nafta Products Ltd v Fili Shipping Co Ltd [2007] UKHL40; [2007] 4AllE.R.951; [2007]
Bus.L.R.1719.

Saipen v Bangladesh, Award, 30 June 2009, paras 174-84.

Salini v Morocco, Decision on Jurisdiction, 23 July 2001, Journal de Droit International 196
(2002), 6 ICSID Reports 400,61.

Shenzhen Food Group Co Ltd v Noble Resources Co Ltd (Singapore), No 22 of the Fourth Civil
Tribunal of the Supreme People's Court (9 June 2010).

Sté. européenne v. Yugoslavia, Sté. Européenne, International Legal Materials, Cambridge

University Press, Volume 60, Issue 4, [2021], 75.
Telenor v Hungary, Award, 13 September 2006. At paragraph 65.

Tradex v Albania, Decision on Jurisdiction, 24 December 1996, 5 ICSID Reports 47, 63;
Zhinvali v Georgia, Award, 24th January 2003, para 331.
Aguas del Tunari, SA v Republic of Bolivia

Suez, Sociedad General de Aguas de Barcelona SA, and Vivendi Universal SA v Argentine (Order
in response to a petition for Transparency and Participation as Amicus curiae of 19 May 2005)
ICSID Case No. ARB/03/19.

v
Abbreviations/Acronyms

BIT – Bilateral Investment Treaty

ECT – Energy Charter Treaty
ICSID – International Centre for Settlement of Investment Disputes
ICC – International Chamber of Commerce
UNDROIT - International Institute for the Unification of Private Law
IOC – International Operating Company
ISDS - Investor State Dispute Settlement
NAFTA – North American Free Trade Agreement
NCIA – Nairobi Center for International Arbitration
PA – Petroleum Agreement
PSA – Production Sharing Agreement
PSC – Production Sharing Contract
UNCITRAL – United Nations Commission on International Trade Law

vi
 ABSTRACT

Arbitration is a private mechanism for dispute resolution that is selected and controlled by parties
and the final determination made by an arbitral tribunal is final and binding. Upstream petroleum
operations are regulated by petroleum contracts that contain dispute resolution clauses which
outline the arbitral system that guides the arbitral process.

This study was a critical appraisal on arbitration as a way of settling oil and gas disputes in the
upstream petroleum sector in Kenya. The study was guided by two main objectives namely: to
examine the suitability of the arbitration provisions provided in the Model Petroleum Agreement
in the settlement of upstream petroleum disputes in Kenya and to interrogate the effectiveness of
arbitration provisions in international instruments in resolving upstream petroleum disputes in
Kenya.

The data reviewed was journal articles, Kenyan laws the provisions of the UNCITRAL Arbitration
Rules, the ICSID Arbitration Rules, New York Convention and notable international case law on
arbitration. The study was aimed at providing important pointers that will help stakeholders better
understand the suitability of the arbitration provisions contained in the model petroleum agreement
anchored in the Kenyan Petroleum Act.
This study has found that international law is suitable for the settlement of upstream petroleum
disputes because they anchor the cardinal principle of party autonomy and thus promote mutual
acceptance and cooperation between parties.

The study has also found that arbitration may not be tenable in resolving differences and disputes
that include third parties to a petroleum agreement. The study recommends that a policy should be
developed by the Kenyan Government to guide negotiations between the state and an investor in
petroleum agreements.

vii
 Table of Contents
DECLARATION AND APPROVAL ......................................................................................................... i
DEDICATION............................................................................................................................................. ii
ACKNOWLEDGEMENT ......................................................................................................................... iii
List of Statutes ............................................................................................................................................ iv
List of International Instruments ............................................................................................................. iv
List of Cases ................................................................................................................................................ iv
ABSTRACT ........................................................................................................................................... vii
CHAPTER ONE ......................................................................................................................................... 1
INTRODUCTION TO THE STUDY .................................................................................................... 1
1.1 Background ................................................................................................................................. 1
1.2 Statement of the Problem ................................................................................................................. 8
1.3 Purpose of the study .......................................................................................................................... 8
1.4 Objectives of the Study ............................................................................................................... 9
1.5 Research Questions ..................................................................................................................... 9
1.6 Justification of the Study ............................................................................................................ 9
1.7 Scope and limitations of the Study ................................................................................................ 10
1.8 The Methodology ............................................................................................................................ 10
1.9 Theoretical framework ....................................................................................................................... 10
(a) Delocalisation theory of arbitration .................................................................................... 11
(b) Autonomous theory of arbitration ....................................................................................... 15
1.10 Literature Review ......................................................................................................................... 16
(a) Applicable law and international arbitration ........................................................................... 17
(b) Party Autonomy .......................................................................................................................... 21
(c) Negotiations of petroleum contracts .................................................................................... 24
1.11 Chapter Summary ........................................................................................................................ 25
CHAPTER TWO ...................................................................................................................................... 28
LEGAL FRAMEWORK OF THE ARBITRATION SYSTEM PROVIDED FOR SETTLING
STATE AND INVESTOR DISPUTES IN UPSTREAM PETROLEUM OPERATIONS IN
KENYA. ................................................................................................................................................. 28
2.2 Constitution of Kenya, 2010 ........................................................................................................... 28

viii
 2.3 Petroleum Act, No.2 of 2019 ........................................................................................................... 32
2.4 Model Petroleum Agreement, Schedule 1 of the Petroleum Act, No.2 of 2019 ......................... 32
2.4.1 Party Autonomy/Agreement to Arbitrate .............................................................................. 33
2.4.2 Scope of Arbitration................................................................................................................. 33
2.4.3 Institution chosen ..................................................................................................................... 34
2.4.4 Seat of Arbitration ................................................................................................................... 35
2.4.5 Number, method of selection and qualifications of arbitrators ........................................... 36
2.4.6 Conduct of proceedings to be followed................................................................................... 36
2.4.7 Applicable law .......................................................................................................................... 37
2.5.1 Rules of procedure ................................................................................................................... 40
2.5.2 Effect of arbitral awards ......................................................................................................... 40
2.5.3 Recognition and enforcement of arbitral awards ................................................................. 40
2.5.5 Finality of Awards .................................................................................................................... 41
2.6 Conclusion ....................................................................................................................................... 41
CHAPTER THREE .................................................................................................................................. 43
THE ROLE OF INTERNATIONAL LAW IN SETTLING STATE AND INVESTOR
DISPUTES IN UPSTREAM PETROLEUM OPERATIONS THROUGH ARBITRATION. ...... 43
3.1 Introduction ............................................................................................................................... 43
3.2 UNCITRAL Arbitration Rules ...................................................................................................... 45
3.2.1 Party autonomy/Consent of parties ........................................................................................ 46
3.2.3 Applicable law .......................................................................................................................... 47
3.3 ICSID Arbitration Rules ................................................................................................................ 48
3.3.1 Part autonomy/Consent to arbitration ................................................................................... 51
3.3.2 Applicable law .......................................................................................................................... 55
3.3.3 ICSID Proceedings ................................................................................................................... 56
3.3.4 Annulment under ICSID Convention .................................................................................... 58
3.4 Non ICSID investment arbitration ................................................................................................ 59
3.5 ICSID Additional Facility .............................................................................................................. 59
3.6 The Convention on the Recognition of Arbitral Awards (New York Convention) ................... 60
3.7 Conclusion ....................................................................................................................................... 62
CHAPTER FOUR ..................................................................................................................................... 64
FINDINGS ON THE SETTLEMENT OF THIRD-PARTY PETROLEUM DISPUTES IN
KENYA .................................................................................................................................................. 64
4.1 Introduction ..................................................................................................................................... 64

ix
 4.2 Domestic settlement of upstream petroleum disputes in Kenya ................................................. 64
4.3 International settlement of upstream petroleum disputes .......................................................... 66
4.3.1 ICSID Arbitration cases .......................................................................................................... 70
4.4 Conclusion ....................................................................................................................................... 72
CHAPTER FIVE ...................................................................................................................................... 73
RECOMMENDATIONS AND CONCLUSIONS. ............................................................................. 73
5.1. Introduction .................................................................................................................................... 73
5.3 Recommendations ......................................................................................................................... 77
5.4 Conclusions ...................................................................................................................................... 78
BIBLIOGRAPHY ..................................................................................................................................... 79
Books ...................................................................................................................................................... 79
Journal Articles ..................................................................................................................................... 79
Internet Resources ................................................................................................................................ 81
APPENDICES ........................................................................................................................................... 83
Appendix A: Plagiarism Report .......................................................................................................... 83
Appendix B: Ethical Clearance Report .............................................................................................. 84

x
 CHAPTER ONE

INTRODUCTION TO THE STUDY

1.1 Background

In Kenya, the legislation guiding upstream petroleum operations is the Petroleum Act1 which is
fairly recent. The upstream petroleum industry has been in existence since the 1800’s and the
guiding principles and consequent legislation on the same has developed progressively around the
world. Upstream activities are composed of exploration, appraisal, determination of commerciality
or relinquishment and development/production stages2.

In Kenya, a Model Petroleum Agreement is contained in the Petroleum Act3 to set out the terms
of engagement between the state and investors in upstream petroleum operations in Kenya. The
Model Petroleum agreement prescribed in the Petroleum Act4 contains an arbitration clause which
defines the procedure of arbitration as a way of settling upstream petroleum disputes. The
arbitration clause found in the Petroleum Agreement defines the structure of arbitration to be used
by parties in case of a dispute5. Arbitration is provided as a means of settling disputes when parties
are unable to resolve their disputes amicably or in lieu of expert determination. According to the
Model Petroleum Agreement, either party may call for arbitration when a dispute cannot be
resolved by amicable settlement or expert determination6.

The Kenyan Model Petroleum Agreement is a creature of the law and thus may be referred to a
model contract with prescribed terms. Prescribed terms are terms and conditions, guarantees and
warranties which an Act or any other law expressly provides that may not in respect of the contract
be excluded, restricted, or modified, or may be excluded, restricted or modified only to a limited

1
Petroleum Act, No.2 of 2019.
2
https://www.extractiveshub.org/topic/view/id/30/chapterId/324.
3
Petroleum Act, No.2 of 2019.
4
Petroleum Act, No.2 of 2019.
5
Clause 53(3), Model Petroleum Agreement, Schedule 1, Petroleum Act, 2019.
6
Clause 53(3), Model Petroleum Agreement, Schedule 1, Petroleum Act, 2019.
extent7. Considering the foregoing, the arbitral process as a way of settling disputes in the upstream
petroleum sector is guided by prescribed terms rather than mutual consent of parties submitting to
arbitration by way of an arbitration agreement and thus may fall under the ambit of statutory
arbitration. Statutory arbitration is basically arbitration without an arbitration agreement
exclusively prepared and agreed on by parties but rather outlined by statute through legislative
norms8.

The Petroleum Act9 has prescribed arbitration as a means of settling disputes in upstream
petroleum operations. The Model Petroleum Agreement is anchored in the Petroleum Act10 and
thus has been given legal status as the authorized contract for execution by the Cabinet Secretary
on behalf of the Government of Kenya for upstream petroleum operations.

The Petroleum Act provides that it is mandatory for the Cabinet Secretary to negotiate, award and
execute a petroleum agreement in the prescribed form as outlined in the schedule of the Act11. The
use of model contracts anchored in law reduces the need for lengthy negotiations and increases the
State’s leverage by fixing provisions that would otherwise be up for negotiation12. The arbitration
clause provided in the model petroleum agreement is provided in legislation unlike conventional
arbitration where an arbitration agreement is mutually agreed upon, prepared, and executed by
disputing parties.

The Petroleum Act stipulates that any upstream petroleum operations shall be conducted in
accordance with the provisions of the Act and the terms and conditions of the prescribed petroleum
agreement13. Furthermore, the Petroleum Act defines a petroleum agreement as any agreement,
license, contract or other agreement between the Government and a contractor to conduct upstream
operations in accordance with the provisions of the Act14.

7
https://www.lawinsider.com/dictionary/prescribed-terms
8
Johansson T, ‘Statutory Arbitration in the Context of Arbitrability – New Possibilities for an Old Concept’
University of Helsinki, Faculty of Law, M.L Thesis, (2019).
9
Petroleum Act, No.2 of 2019, Laws of Kenya.
10
Petroleum Act, No. 2 of 2019, Laws of Kenya.
11
Section 18, Petroleum Act, 2019, Laws of Kenya.
12
Natural Resource Governance Institute, Legal Framework, Navigating the Web of Laws and Contracts
Governing Extractive Industries, NRGI Reader March 2015, page 3.
13
Section 2 of the Petroleum Act, No.2 of 2019, Laws of Kenya.
14
Section 2 of the Petroleum Act, No.2 of 2019, Laws of Kenya.

2
The Model Petroleum Agreement is prescribed by law because the Petroleum Act and stipulates
that the Cabinet Secretary shall negotiate, award, and execute a petroleum agreement on behalf of
the national government in the form prescribed in the schedule of the Act15. The legal meaning of
the word prescribed in this context means to specify with authority expressly by statute or
regulation. The question that begs an answer is how then does one negotiate a contract whose
guiding provisions are prescribed in law? Secondly, does it mean that the agreement of parties
because of negotiations contrary to the provisions stated in the prescribed contract will override
the prescribed provisions? Thirdly, does legislating contractual provisions impede or facilitate
negotiations?

As witnessed in the model petroleum agreement contained in the Petroleum Act16, it may be
inferred that the preferred system of arbitration is institutional arbitration as opposed to ad hoc
arbitration because of the request of commencement of arbitration proceedings sent to UNCITRAL
by either disputing party. Ad hoc arbitrations are guided by the Arbitration Act17 only when the
Arbitration Agreement is silent on the arbitration system selected by parties and if the arbitration
agreement provides expressly or by implication for arbitration to take place in Kenya. The
arbitration clause in the model petroleum agreement as drafted is ambiguous because one cannot
determine whether the arbitration system is preferably institutional or ad hoc arbitration.

The Arbitration Act18 stipulates the rules and procedures of domestic and international arbitration,
be it institutional or ad hoc arbitration and the same ought to be interrogated against what is
provided under the Petroleum Act19 regarding arbitration. It is noteworthy that the Petroleum Act20
stipulates that in upstream, midstream, and downstream petroleum operations, the Petroleum Act
shall prevail. The Arbitration Act will only be invoked in arbitration proceedings in petroleum
operations if the provisions do not conflict with the Petroleum Act.

15
Section 2 of the Petroleum Act, No.2 of 2019, Laws of Kenya.
16
Petroleum Act, No. 2 0f 2019, Laws of Kenya.
17
Arbitration Act, No. 4 of 1995, Laws of Kenya.
18
Arbitration Act, No. 4 of 1995, Laws of Kenya.
19
Petroleum Act, No. 2 0f 2019, Laws of Kenya.
20
Section 4 of the Petroleum Act, No. 2 0f 2019, Laws of Kenya

3
State and investor disputes are inevitable in upstream petroleum operations and international
arbitration is the most preferred method of resolving disputes in the industry21. Upstream
petroleum investments are lucrative in nature to both the state and investors who need to resolve
these disputes within a short period and fast track the implementation of the upstream petroleum
projects. Regarding upstream petroleum operations, transnational rights of parties are in focus
because even though the exploration of oil is in the host state, most times it is an International
Operating Company that conducts the operations which includes exploration, production and
development of the oil. In production sharing contracts, the contractor takes up the financial risks
of exploration production and development.

The Kenyan Model Petroleum Agreement envisages that the Contractor is a Company
incorporated in Kenya. In the petroleum industry, IOC’s have extensive expertise and capital to
undertake upstream petroleum operations. An IOC interested in conducting upstream petroleum
operations will therefore need to incorporate a Company in Kenya. Most states require that
investments are made through locally incorporated companies to prevent the local companies from
being qualified as foreign investors and thus inhibit their protection from international investment
law22.

This position has however been abandoned by various international tribunals such as the ICSID
Tribunal which has held that a juridical person incorporated in a host state but controlled by
nationals of another state may be treated as a foreign national based on their agreement. It is also
astounding that the Kenyan Model Petroleum Agreement submits to the jurisdiction of
international bodies such as UNCITRAL and ICSID on arbitration matters23.

The model petroleum agreement provides that an arbitration procedure shall commence by a
written request of either party to the UNCITRAL24. It further states that the UNCITRAL shall be
notified once a party appoints an arbitrator25. Furthermore, it provides that either party to an

21
https://globalarbitrationreview.com/guide/the-guide-energy-arbitrations/3rd-edition/article/upstream-oil-
and-gas-disputes.
22
Dozler R, Schreuer C,’ Principles of International Investment Law,2 ed, Oxford University Press, 2012,
50.
23
Champion Trading Vs Egypt, Decision on Jurisdiction, 21 October 2003 and Aguas del Tunari Vs Bolivia,
Decision on Jurisdiction, 21 October 2005.
24
Clause 53(3) of the Model Petroleum Agreement, Schedule 1, Petroleum Act, 2019.
25
Clause 53(4) of the Model Petroleum Agreement, Schedule 1, Petroleum Act, 2019.

4
arbitration agreement may write to the ICSID for the appointment of a third arbitrator when the
two appointed arbitrators fail to select a third arbitrator. It should also be noted that Kenya is a
signatory to the ICSID Convention and thus is bound by the same. This brings about some level
of confusion as to whether the arbitration system as envisaged in the model petroleum agreement
is domestic or international and whether it is institutional or ad hoc arbitration and yet the quality
and effectiveness of any law is dependent on astute drafting.

This thesis will be examining the suitability of the arbitration clause as drafted and whether parties
can vary the terms of the arbitration clause by way of negotiations. It is an arguable fact that
contractual obligations cannot be legislated and purported to allow negotiations because the
essence of legislation is to give authority for purposes of enforcement. A contract is a mutual
agreement between parties that creates obligations which are enforceable. They are basically
promises that the law will recognize and enforce. This is a common law principle adopted in
Kenya. The model petroleum agreement is prescribed in legislation, and it would be interesting to
examine if the same provisions can truly be negotiated by parties if the purpose of legislation is to
create a state of affairs that can only be changed or brought to an end by legislation26.

It is important to examine whether the arbitration provisions of the model petroleum agreement in
legislation interfere with the agreement of parties to arbitrate. The selection, intentional or
inadvertent, of a particular arbitration system demonstrates the parties’ intention which relates to
the cardinal principle of party autonomy.

In most upstream petroleum operations between a state and investor, the state insists on the use of
national laws because petroleum is extracted from their territory, however investors often argue
that national laws are not properly developed to address issues in the petroleum industry. This is
because the petroleum industry has adopted the concept of lex petrolea which encompasses rules
of customs, treaties, regional laws, principles of intergovernmental organisations, non-
governmental organisations, codes of conduct and guidelines of industry associations which

26
https://www.premiers.qld.gov.au/publications/categories/policies-and-codes/handbooks/legislation-
handbook/context/why-its-needed.aspx on 25th April 2022.

5
together regulate the various facets of oil exploration, production, transport, consumption, and
trade27.

Lex petrolea is established from decisions arising from disputes within the international oil and
gas sector where contracts, legislation and treaties that impact the petroleum sector are tested. The
concept of lex petrolea has anchorage in the principles of International Investment law in the
settlement of petroleum industry disputes28. The Kenyan model petroleum agreement seems to
adopt a nationalistic approach in the recognition of parties and the settlement of disputes through
arbitration which could be prohibitive and problematic in the real sense

In the context of arbitration, it is equally important to note the various types of arbitration. There
is ad hoc arbitration which is arbitration that is not governed by any institution selected by parties
whereby institutional arbitration is arbitration that is governed by an institution selected by
parties.29The arbitration clause in the model petroleum agreement seems to favour institutional
arbitration because the UNCITRAL and the ICSID are invited to assist in the selection of arbitral
tribunal. The dispute resolution clause also provides that if parties decide to resolve their dispute
through arbitration, they should do so in accordance with the UNCITRAL arbitration rules adopted
by the United Nations Commission on International Trade Law.

Arbitration can further be classified as domestic arbitration or international arbitration. An

arbitration is domestic when the arbitration agreement provides by implication or expressly for
arbitration in Kenya, parties to an arbitration are Kenyan nationals or are habitually resident in
Kenya, parties to an arbitration are body corporates incorporated in Kenya or have their central
management is in Kenya30.

An arbitration is international if the parties are nationals of different states, the juridical seat
selected by parties is outside the state in which parties have their places of business, where the
substantial part of the obligations of the commercial relationship are to be performed in another

27
Wawryk A, ‘Petroleum Regulation in an International Context: The Universality of Petroleum Regulation
and the Concept of Lex Petrolea’2015.
28
Wawryk A, ‘Petroleum Regulation in an International Context: The Universality of Petroleum Regulation
and the Concept of Lex Petrolea’2015.
29
Lew J, Mistelis L, Kröll S, Comparative International Commercial Arbitration, Wolters Kluwer Law and
Business, 2003.
30
Section 3(2), Arbitration Act, No.4 of 1995.

6
state or where parties have expressly agreed that the subject matter of the arbitration agreement
relates to more than one state31.

The model petroleum agreement provides that the applicable law of the arbitration clause is
Kenyan law. To this extent the arbitration would be confined to the application of domestic law.
The quagmire that exists is that sometimes investors are foreign companies that have incorporated
national companies for the purposes of bidding for upstream petroleum agreements and are in a
joint venture with international corporations. In the context of upstream petroleum operations, the
contractor is usually a joint venture which includes an operator who is issued with a license for
petroleum business32 and non-operators who have participatory interests regulated by a joint
operating agreement. The non-operators include parties that spread the risk of the upstream
petroleum operations that offer technical and financial support.

The reality is that these international corporations have their places of business is in other states
and the national companies are subsidiary companies with limited financial control and thus to this
extent the arbitration may be international.

According to Deshpande international arbitration is described as follows33:

“International arbitration is distinct from national arbitration basically because national

arbitration is subject to a law while international arbitration is not excepted in so far as the
parties by their agreement make the law of a particular nation applicable to the contract or
to any part of the contract. Even when the parties agree or the rules of conflict of laws
decide which national law is to apply to such a contract in preference to some other national
law, further refinements have been made to this concept of the national law or the proper
law applicable to the contract by virtue of the agreement of parties or by the application of
the rules of conflict of laws. Consideration of these refinements will form the subject-
matter of this article.”

31
Section 3(3), Arbitration Act, No. 4 of 1995, Laws of Kenya.
32
Section 74 of the Petroleum Act, No. 2 of 2019
33
Deshpande, V.S. “The Applicable Law in International Commercial Arbitration.” Journal of the Indian Law
Institute 31, no. 2 (1989)127.

7
 Most contractors of upstream petroleum operations consist of joint ventures with foreign
companies and thus would prefer international arbitration in the settlement of their disputes
because of its wider scope of applying international laws that protect transnational rights
of parties.

1.2 Statement of the Problem

This study is aimed at examining the suitability of arbitration provisions provided in the model
petroleum agreement set out in the Petroleum Act34 in settling state and investor upstream
petroleum disputes in Kenya. The model petroleum agreement prescribes legislative norms that
prescribe an arbitration system that may interfere with party autonomy and eventually the
suitability of arbitration.

The model petroleum agreement provides that the arbitration procedure shall commence by a
written request of either party to UNCITRAL and with a notification to the other party and the
proceedings shall commence within sixty days after receipt of request by UNCITRAL35. The
arbitration clause also provides that the International Centre for Settlement of Investment (ICSD)
can appoint an arbitrator when parties do not agree36.The clause as drafted seems to submit parties
to international bodies that will consider international law practice at all stages of arbitration
proceedings even where there is a conflict between domestic and international law. This presents
a conflict in the application of domestic law or international law because one cannot categorically
derive the intention of the legislators.

1.3 Purpose of the study

The purpose of the study is to examine the suitability of the arbitration provisions in the model
petroleum agreement that guide the settlement of disputes in upstream petroleum operations in
Kenya. This will involve the analysis of arbitration provisions in the model petroleum agreement
to establish whether they are practical and best suited in the context of upstream petroleum

34
Petroleum Act, No. 2 of 2019, Laws of Kenya.
35
Clause 53(4) of the Model Petroleum Agreement, Schedule 1, Petroleum Act, 2019.
36
Clause 53(4)(e) of the Model Petroleum Agreement, Schedule 1, Petroleum Act, 2019.

8
operations. The study will focus on arbitration provisions contained in the model petroleum
agreement in comparison with international arbitration provisions.

This analysis will point out the problematic areas and potential gaps in the Kenyan legal framework
and possible solutions.

1.4 Objectives of the Study

1. To examine the suitability of the arbitration provisions provided in the Model Petroleum
Agreement in the settlement of upstream petroleum disputes in Kenya.
2. To interrogate whether arbitration provisions contained in international instruments are apt
in the settlement of upstream petroleum disputes in Kenya.
3. To recommend policy and legislative interventions that would enhance the settlement of
disputes in the upstream petroleum industry in Kenya.

1.5 Research Questions

1. How congruent are the arbitration provisions provided in the model petroleum agreement
in the settlement of upstream petroleum disputes in Kenya?
2. How do the arbitration provisions contained in international instruments facilitate the
settlement of upstream petroleum disputes?
3. What proposals can be recommended to enhance the settlement of upstream petroleum
disputes in Kenya?

1.6 Justification of the Study

The research will establish whether the arbitration provisions of the model petroleum agreement
are functional as drafted. It will in a nutshell establish whether the arbitration provisions provided
are suitable in the settlement of disputes in the upstream petroleum industry in Kenya. The research
will also identify gaps in the arbitration provisions that impede the settlement of disputes in
upstream petroleum operations. As it would be expected, the study will be useful to the policy
makers in the upstream petroleum industry in providing insights to policy and legislation
formulation.

9
1.7 Scope and limitations of the Study

The study will review the current Kenyan laws that guide the settlement of upstream petroleum
disputes through arbitration between the state and an investor. These laws include the Petroleum
Act37 and the Arbitration Act38. This will entail the analysis of substantive and procedural
provisions established by legislation and how the same affects the settlement of upstream
petroleum disputes through arbitration.
The study will also analyse the international arbitration in accordance with the UNCITRAL
Arbitration Rules and the ICSID Convention.

The theories that will be discussed in this study will be the delocalisation theory in arbitration and
the autonomous (sui juris) theory of arbitration.

1.8 The Methodology

The methodology to be used in this research is the doctrinal research methodology because there
is need for an in-depth analysis of the current arbitration provisions in law that govern the
settlement of upstream petroleum disputes in Kenya,

The doctrinal research methodology is the most suited for this study because the focus will be on
the analysis of statute, case law and legal sources. The doctrinal research methodology will provide
a systematic exposition of the effectiveness of the existing arbitration provisions in Kenya that
guide the settlement of upstream petroleum disputes.

This study is a library and desktop study which will rely on published and unpublished materials
that include relevant primary and secondary sources in addressing the research questions. The
study will rely on Kenyan laws and policies, international investment law, UNCITRAL Arbitration
Rules, ICSID Convention Arbitration Rules, journal articles and legal position papers.

1.9 Theoretical framework

37
Petroleum Act, No. 2 of 2019, Laws of Kenya.
38
Arbitration Act, No. 4 of 1995, Laws of Kenya.

10
This thesis identifies two key theories in relation to the examination of arbitral provisions adopted
for the settlement of upstream petroleum disputes. The first key theory is the delocalisation theory
of arbitration and the second one is the autonomous theory of arbitration. These theories help to
explain the juridical nature of arbitration.

(a) Delocalisation theory of arbitration

The delocalisation theory of arbitration proposes that the role of arbitrators in arbitral proceedings
is immense, inherent and of great importance39. It also supports the view that an arbitrator is not a
substitute to a national court judge but according to one of its proponents Pierre Mayer (1995) as
one who administers justice in the name of the international community of merchants. This theory
sees arbitration as floating arbitration without restrictions of domestic laws40. This kind of
arbitration is detached from substantive and procedural laws of the seat of arbitration and national
laws of any specific jurisdiction.

The delocalisation theory argues that arbitration is a private matter and judicial intervention is not
required and unwarranted. Judicial intervention is seen to endanger delocalisation of arbitration.
This theory however acknowledges the supervisory role of national courts in the enforcement of
arbitral awards. Arbitration is removed from national systems which claim that arbitration is free
and provides that domestic law will only be applied to fulfil the enforcement of awards. In essence
this means that arbitrators are not bound by rules of forum and are allowed to select the appropriate
rules of forum.

According to Saghir, Zaherah and Ngondi, the delocalisation theory views the arbitration
procedure and any award issued to be independent and autonomous to the national law which is
also recognized by contemporary systems such as the UNICITRAL Model Law41. They observe

39
Kaznu O, ‘The significance of delocalisation Theory in the history of international Arbitration’ Bulletin,
(2015).
40
Mayer P, ‘The Trend towards Delocalisation in the Last 100 Years’ Martin Hunter and Marriot, V. Veeder
the Internationalisation of International Arbitration // the LCIA Centenary Conference, Graham Trotman/
Martinus Nijhoff, (1995), 37.
41
Saghir, Zaherah, and Chrispas Nyombi. ‘Delocalisation in international commercial arbitration: a theory
in need of practical application.’ (2016).

11
that the arbitration agreement is key to the arbitral process whereby the right to arbitrate originates
from the arbitration agreement rather than lex loci arbitri ((law of seat of arbitration).

Saghir, Zaherah and Ngondi note that the delocalisation theory is also a far-fetched reality because
it places arbitration in a legal vacuum42. They opine that the arbitration procedure should be
regulated by lex loci arbitri (law of seat of arbitration) and that judicial intervention safeguards
justice by providing the requisite checks and balances by monitoring the qualities of decisions
made by arbitrators. They state that it would be impractical to oust judicial intervention where a
party would like to challenge the arbitral process due to procedural impropriety. This was
43
witnessed in the case of Fiona Trust &Holding Corp v Privalov where assistance from the court
was sought to determine whether the arbitration clauses were wide enough to include whether the
contract that comprises the arbitration clauses was obtained because of bribery. The English court
held that arbitral clauses should be liberally construed, an approach that was echoed in Premium
Nafta Products Ltd v Fili Shipping Co Ltd44.

According to Dejan, the delocalization theory of arbitration supports a species of arbitration that
is not derived or based on a national law order45. Delocalized arbitration is basically centered on
the parties’ agreement whereby procedure must not violate fundamental norms of the arbitration
procedure. He states that as per the delocalisation theory, the arbitrator has no right to act as an
amiable compositéur and the procedural rules are subject to party autonomy which is a cardinal
principle of arbitration. Furthermore, he notes that delocalized arbitration does not put into
question the sovereignty of the state because the fact that an arbitration took place in a particular
territory cannot be denied by anyone. The delocalisation theory however propagates the concept
of non-commanding state whereby the function of the state should be supportive and not
controlling of the arbitration process.

42
Saghir, Zaherah, and Chrispas Nyombi. ‘Delocalisation in international commercial arbitration: a theory
in need of practical application.’ (2016).
43
Fiona Trust &Holding Corp v Privalov [2007] EWCACiv20; [2007]1AllE.R.(Comm)891; [2007]
Bus.L.R.686
44
Premium Nafta Products Ltd v Fili Shipping Co Ltd [2007] UKHL40; [2007] 4AllE.R.951; [2007]
Bus.L.R.1719.
45
Janićijević D, ‘Delocalisation in International Commercial Arbitration’, Faculty of Law, University of
Niš, Niš, Law and Politics, Vol. 3 No.1, (2005), 63 – 71.

12
Dejan opines that delocalized arbitration is part of a much wider principle of party autonomy where
parties are free to designate any seat of arbitration or not. State courts have limited supervisory
jurisdiction which is not absolute and automatic because they have limited grounds of intervention
into the parties’ mechanisms of dispute resolution46. This underlines the significance on parties’
autonomy where parties agree on the substantive and procedural mechanisms of dispute resolution.
According to Dejan dispute cannot be taken to a national court just because the arbitration takes
place in that country47. The court will be limited to statutory provisions pertaining to arbitrations
of an international nature. The arbitration clause that construes delocalized arbitration will take
effect because the cardinal principle of party autonomy must be appreciated. A national court
cannot assume supervisory jurisdiction if parties have not agreed on the same. He also argues that
delocalized arbitration is not domestic or international arbitration subject to national laws. It is
attached to international arbitration practice only on the basis of party autonomy which allows
parties to avoid the application of the law of any country.

According to James and Tayo, the innovation brought by the delocalisation theory of arbitration is
challenged in several areas including the reluctance to embrace substantive and procedural laws48.
Despite the increasing significance of the theory, the major difficulty is the inability to understand
the concept of completely detaching arbitration from a national legal order and thus it does not
enjoy significant growth and development.

The delocalisation theory of arbitration has provided liberation from judicial constraints imposed
by national legislation. It has also become popular at the wake of the drafting of the Convention
on the recognition and enforcement of foreign arbitral awards (New York Convention) which
emphasizes the superiority of national laws in contradistinction to laws at the international arena49.
The delocalisation theory of arbitration has become superiorly prevalent in the 21st Century as
witnessed in the International Chamber of Commerce, International Court of Arbitration where
emphasis is made on transnationalisation and party autonomy.

46
Janićijević D, ‘Delocalisation in International Commercial Arbitration’63 – 71.
47
Janićijević D, ‘Delocalisation in International Commercial Arbitration’63 – 71.
48
Dinchi L and Bello T, ‘Delocalization of Arbitration: Dynamic Change in International Commercial
Arbitration’, SSRN 3724941, (2020).
49
Wetter G, ‘Guide to the Interpretation of the 1958 New York Convention: A Handbook for Judges’,
International Court of Arbitration of the ICC, (2011).

13
James and Tayo allude that delocalisation is a shield that enables an arbitral process to be
independent of national laws at the seat of arbitration. The delocalisation theory of arbitration
propagates the reduction of involvement of national courts resulting in an award that floats in a
transnational arena50. Party autonomy is paramount in selecting substantive and procedural law in
arbitration. International law such as UNCITRAL Model Laws were drafted with the cardinal
principle of party autonomy in mind that states “subject to the provisions of this law, the parties
are free to agree on the procedure to be followed by the arbitral tribunal in conducting
proceedings.”51.

James and Tayo state that delocalisation provides that disputes are resolved through mutual
understanding and co-operation of parties and arbitral tribunals. Furthermore, they observe that an
award may be declined recognition if the procedure was not in accordance with the agreement of
parties or failing such agreement, the procedure was not in accordance with the law of the country
where the arbitration took place52. This shows that fragments of the delocalisation of arbitration
theory are progressively being assimilated. They also observe that the delocalisation theory of
arbitration has been misunderstood to mean an attempted escape from national laws of the seat of
arbitration. In the true sense the theory propagates the non-reliance of national laws in so far as
they introduce restrictions from the seat of arbitration.

The UNCITRAL Model Law provides the composition of UNCITRAL Arbitration Rules which
outline international arbitration practice. International arbitration practice comes into play at all
stages, not only as a separate source but also to interpret the arbitration agreement, the chosen
arbitration and applicable national law53 .The UNCITRAL Arbitration Rules reflected what the
drafters believed to be accepted and desired independent standards for use in international

50
Wiener J, ‘The “Transnational” Political Economy: A Framework for Analysis’,
http://www.jus.uio.no/sisu, accessed 27 March 2020.
51
Article 1, UNCITRAL Arbitration Rules, (2010), A/65/465
52
Article V (1) (d), New York Convention, (10th June 1958).
53
Lew J, Mistelis L, Kröll S, Comparative International Commercial Arbitration, Wolters Kluwer Law and
Business, 2003, 29 2-46.

14
arbitration54. Notably, among its contribution is the supportive roles of court and the augmentation
of party autonomy55.

The delocalization theory of arbitration outlined in this thesis will help to demonstrate whether the
domestic arbitration provisions in the petroleum agreement are suitable for the settlement of
upstream petroleum operations.

(b) Autonomous theory of arbitration

The autonomous theory envisages the arbitral process to be self-regulating whereby parties adhere
to the procedural laws which they have selected. The parties mutually resolve to settle their
disputes in a manner that is compliant to international arbitration practices. The autonomous theory
strongly promotes the cardinal principle of party autonomy where parties agree to subject their
disputes to arbitration and their consent is provided by way of a direct agreement. The arbitration
agreement guides the arbitration process, and it is mutually agreed on by parties for future and
existing disputes. The autonomous theory emphasizes that arbitration should focus on the goal of
arbitration and not the process of arbitration.

The autonomous theory of arbitration is the most recent theory which presumes that arbitration
evolves in an emancipated regime and hence is of an autonomous character56. According to Julian,
Loukas and Stefan the autonomous theory is an enlightened development of the mixed theory of
arbitration which has added modern forms of non-national, transnational and delocalized
arbitration. This theory does not give emphasis to the seat of arbitration and its law57.

Julian, Loukas and Stefan note that international arbitration has developed because parties sought
a flexible, non-national system regulation of their commercial dispute58. National law is seen to
have little significance to the international commercial community, and it has little influence in the
conduct of international arbitration. They also note that international commercial arbitration is

54
Lew J, Mistelis L, Kröll S, Comparative International Commercial Arbitration, Wolters Kluwer Law and
Business, 2003, 26.
55
Lew J, Mistelis L, Kröll S, Comparative International Commercial Arbitration, 27.
56
Lew J, Mistelis L, Kröll S, Comparative International Commercial Arbitration, 81.
57
Lew, Mistelis, Kröll, Comparative International Commercial Arbitration, 81.
58
Lew, Mistelis, Kröll, Comparative International Commercial Arbitration, 81.

15
used by the international business world because it can be and has been tailored for their particular
needs59.

In this context, the development of international commercial arbitration has been developed from
the process and its users and not due to national interest. The autonomous theory appreciates the
jurisdictional and contractual theory of arbitration but shifts the focus from the seat of arbitration
to reflection on the marketplace. They note that this theory will inevitably dominate arbitration in
the future because it promotes the autonomy of parties to select a regime that reflects their
commercial interests. It is noteworthy that the contractual theory emphasizes that arbitration has a
contractual character, and it has its origins in and depends, for its existence and continuity, on the
parties’ agreement60. The jurisdictional theory emphasizes that state power controls and regulates
arbitrations taking place within its jurisdiction61.

According to Rubellin-Devich “To allow arbitration to enjoy the expansion it deserves, while all
along keeping it within its appropriate limits, one must accept, I believe, that its nature is neither
contractual nor jurisdictional nor hybrid but autonomous”62. The autonomous theory of arbitration
propagates emphasis on the goal and intention of arbitration. The intention will give the distinction
between arbitration and other sources of dispute resolution. This theory also states that the analysis
of how forum rules are developed and applied is largely a descriptive process.

The autonomous theory of arbitration outlined in this thesis will help to demonstrate whether the
domestic arbitration provisions in the petroleum agreement are flexible and efficient enough to
will guide the arbitration process in a flexible and efficient manner regarding the settlement of
upstream petroleum operations.

1.10 Literature Review

The literature is reviewed thematically into three themes that include applicable law and
international arbitration, party autonomy and negotiations for petroleum contracts which are
relevant in the study

59
Lew, Mistelis, Kröll, Comparative International Commercial Arbitration, 81.
60
Lew, Mistelis, Kröll, Comparative International Commercial Arbitration, 77.
61
Lew, Mistelis, Kröll, Comparative International Commercial Arbitration, 74.
62
Rubellin-Devichi, ‘L’arbitrage: nature juridique’, (2011).

16
(a) Applicable law and international arbitration

According to Croff, parties may willingly choose not to embody an applicable law clause because
they have divergent economic and political backgrounds, and they may not be familiar or confident
in the respective national laws63. In such a case, the arbitrator will have the task of determining the
applicable law. He may apply a conflict of law system of the country which would have jurisdiction
in the absence of the arbitration clause.

If the applicable law provision is missing, an arbitral tribunal may also select the conflict of laws
system where it has a seat or the conflict of laws connected to the parties, the dispute or the arbitral
tribunal. The arbitral tribunal may also apply an international conflict of laws system or apply a
substantive law that does not have recourse to any conflict of law. When parties select a set of
rules to regulate international trade in the merchant community, no conflict of laws of any selects
a non-national legal system such as lex mercantoria64.

Contracting parties are familiar with their contractual rights and obligations and can determine
aspects that govern their relationship65. The freedom of contracting parties is what is described as
party autonomy and when parties determine the applicable law governing their arbitration
agreement, they can freely exercise this right at any point whether before or after a dispute
ensues66.

According to Mukherjee, a dispute referred to international commercial arbitration can be subject

to the law governing performance of obligations under a contract, law governing the arbitration
agreement and the law governing the arbitration proceedings (lex arbitri)67. When called upon by
parties to select the applicable law, an arbitral tribunal must be suitably equipped to make this
determination. If the parties fail to make an express choice of law, the arbitral tribunal may apply
the law the parties had intended to have chosen. Arbitrators usually adopt the guiding principles

63
Croff, “The Applicable Law in an International Commercial Arbitration: Is It Still a Conflict of Laws
Problem?”, (1982).
64
Croff, “The Applicable Law in an International Commercial Arbitration: Is It Still a Conflict of Laws
Problem?”, (1982).
65
Al-Fadhel, Faisal M. “Respect for Party Autonomy under Current Saudi Arbitration Law.” Arab Law
Quarterly, vol. 23, no. 1, (2009), 31–57.
66
Al-Fadhel, Faisal M. “Respect for Party Autonomy under Current Saudi Arbitration Law.”, 31–57.
67
Mukherjee, D. “Proper Law in International Arbitrations Involving Contractual Claims: When Parties Fail to
Choose.”, National Law School of India Review, vol. 20, no. 1, (2008), 62–75.

17
anchored in the Rome Convention which states that a choice of law must be expressed or
demonstrated with reasonable certainty by the terms of the contract or the circumstances of the
case68.

If parties have not indicated their choice of law, the governing law of the country which is most
closely connected may be applied. This is usually the law of the country where the transaction in
question is closely related. Another options that an arbitral tribunal may consider is the place of
the contract’s performance, the place where parties reside or carry business and the subject matter
of the contract69. In international commercial arbitration, a presumption is made that such a
connection is established with the law of the corporate seat or principal seat of business of parties
whose performance characterize the contract70.

In international arbitration the choice of law is the choice of forum as provided by the maxim qui
indicem forum eligit ins71. The place of arbitration may be selected based on the geographical
convenience and the reputational of arbitration services provided by the institution and it is not
connected to the law of the place. An arbitral tribunal makes a choice of law guided by the conflict
of laws rules of the seat of arbitration72. Whenever feasible, the arbitral tribunal should ask parties
to delve into the matter and suggest the law they deem appropriate for governing the contract, if
they have not already done so73.

An international arbitral tribunal may also use international conventions to guide on the selection
of applicable law if a party whose law is identified as applicable to the dispute is a party to a
particular treaty or convention.

Some scholars opine that an arbitral tribunal seated within a certain state act under the legal order
of that state, and he must apply the local conflict of law rules of that state. This is a contradictory

68
Rome Convention on the Law Applicable to Contractual Obligations, (June 19, 1980), 19 I.L.M. 1492.
69
Mukherjee, D. “Proper Law in International Arbitrations Involving Contractual Claims: When Parties Fail to
Choose.”,62-75
70
Mukherjee, D. “Proper Law in International Arbitrations Involving Contractual Claims: When Parties Fail to
Choose.”,62-75
71
Mukherjee, D. “Proper Law in International Arbitrations Involving Contractual Claims: When Parties Fail to
Choose.”,62-75
72
Mukherjee, D. “Proper Law in International Arbitrations Involving Contractual Claims: When Parties Fail to
Choose.”,62-75
73
Engle R, “Party Autonomy in International Arbitration: Where Uniformity Gives Way to Predictability”, 15
Transnational Law 323, 347 (2002), 348.

18
to an accepted principle in international arbitration that an arbitral tribunal does not get its authority
from a national legal order like a national judge. However, according to Greenberg, international
arbitration has lex fori at the place of arbitration74. International arbitration is seen to be “floating
in the transnational firmament” detached from the municipal system of law75.

In international arbitration a tribunal needs to ascertain whether the conflict of law rules of various
national systems connected with a particular case converge towards a single domestic law and to
apply such law to the substance of the dispute76. An arbitral tribunal may also resort to the law of
the country that would have been able to exercise jurisdiction in the absence of an arbitration
agreement. This requires a comprehensive analysis of the various conflict of laws rules to
determine the country that has jurisdiction.

The Washington Convention 1965 requires an arbitral tribunal to apply the law of the contracting
state along with other applicable rules of international law77. According to the European
Convention of 1961 an arbitral tribunal has the freedom to apply the rules of conflict of laws that
it deems applicable78. The UNCITRAL Arbitration rules provide that when parties fail to designate
the applicable law the arbitral tribunal shall apply the law determined by the conflict of laws rules
which it considers to be applicable79.

According to Mukherjee, in determining the proper law of the dispute in international commercial
arbitration, an arbitral tribunal may also have regard for customary international law or lex
mercantoria. Lex mercantoria evolved from a body of rules relating to commercial transactions of
traders living in the roman empire. The sources of lex mercantoria include general principles of
international conventions, acts of international organisations, codes of conduct, customs and
usages of trade. In 1994, the International Institute for the Unification of Private Law (UNDROIT)
gave form and substance to lex mercantoria by publishing the “Principles of International

74
Greenberg S, “The Law applicable to the Merits of International Arbitration”, 8.V.J 315, 319 (2004)
75
Bank Mellat v. Helliniki Techniki S. A., [1984] Q.B. 291, 301, cited in Greenberg, supra note 30, at 319.
76
Derains Y, “Public Policy and the Law Applicable to the Dispute in International Commercial Arbitration ‘,
ICCA Council for Commercial Arbitration Congress Series, No.3 227, 233 (Pieter Sanders ed., 1987).
77
Article 42, Convention on the Settlement of Investment Disputes Between States and Nationals of Other States,
Mar. 18, (1965), 575 U.N
78
Article 7, European Convention on International Commercial Arbitration, (April 21, 1961), 484 U.N.T.S. 349.
79
Article 28(2), UNCITRAL Model Law on International Commercial Arbitration, (June 21, 1985), 24 I.L.M.
1302.

19
Commercial Contracts”80. The UNDROIT principles are frequently referred to in international
commercial arbitration81.

Muigua opines while there are those who argue for a third legal order to be lex mercantoria,
international arbitration has gained popularity as the primary way through which international
companies resolve their transnational problems82. The growth in international commercial
arbitration is mainly attributed to globalization and the impracticability of traditional justice
system83. He observes that the international legal regimes for international commercial and
investment arbitrations have been established, and progressively refined with the express goal of
facilitating international trade and investment by providing a stable, predictable, and effective legal
framework in which these commercial activities may be conducted84. This is justified on the
grounds that enforcement of international arbitral agreements promotes the smooth flow of
international transactions by removing the threats and uncertainty of time-consuming and
expensive litigation85.

If parties do not expressly provide for the applicable law in an arbitration clause, the arbitral
tribunal is invited to decide on the same and the outcome can be varied depending on the selection
of the conflict of law rules adopted by the arbitral tribunal. The express provision of a domestic
applicable law may not favour international contracts because of transnational rights of parties.
The parties should choose the applicable law because they can determine the law that suits their
commercial relationship.

The choice of applicable law in arbitration is therefore fundamental because it guides the arbitral
tribunal in knowing the intention of parties on the issue of the governing law of the contract, the

80
Mukherjee, D “Proper Law in International Arbitrations Involving Contractual Claims: When Parties Fail to
Choose.” National Law School of India Review, vol. 20, no. 1, (2008), 62–75
81
Fabrizio Marrella, “Choice of Law in Third-Millennium Arbitrations: The Relevance of the UNIDROIT
Principles of International Commercial Contracts”, 36 V and. J. Transnational L. 1137, 1157 (2003).
82
Muigua K., “Effective management of Commercial Disputes: Opportunities for the Nairobi Centre for
International Arbitration”, Journal of cmsd, vol.1(1), (2017), 92.
Muigua K., “Effective management of Commercial Disputes: Opportunities for the Nairobi Centre for International
83

Arbitration”,93
84
Muigua K.: Nurturing International Commercial Arbitration in Kenya”, 2021, http://kmco.co.ke/wp-
content/uploads/2021/10/Nurturing-International-Commercial-Arbitration-in-Kenya.pdf
85
Muigua K.: Nurturing International Commercial Arbitration in Kenya”, 2021, http://kmco.co.ke/wp-
content/uploads/2021/10/Nurturing-International-Commercial-Arbitration-in-Kenya.pdf

20
governing law of the arbitration agreement and the law that governs the arbitration proceedings.
The express provision of the applicable law by the parties makes this determination easier by an
arbitral tribunal who cannot go against the agreement of parties.

(b) Party Autonomy

According to Al-Fadhel, arbitration plays an important role in settling disputes arising from
commercial parties86. He writes that countries have worked on accepting the establishment of
arbitration to work in parallel with courts to protect party autonomy. The basic standards of party
autonomy adopted in legislation ought to promote an efficient modern legislation in the arbitration
field. The supportive role of courts in arbitration is paramount in the arbitration process because it
facilitates the recognition and enforcement of arbitral awards when called upon to do so by parties.
The whole approach of party autonomy is consistent with public policy notion that parties to an
arbitration agreement should have freedom to choose how their arbitral tribunal should be
structured and how their cases are conducted, and arbitral awards issued.

The doctrine of party autonomy finds an agreement to arbitrate fundamental to commercial

arbitration as it records parties ’agreement to submit to arbitration. Courts usually derive their
authority from statutory provisions and arbitral tribunals derive their authority from arbitration
agreements. The parties to an arbitration agreement ought to have full capacity while concluding
the agreement. The Egyptian Arbitration law has assured that it anchors the doctrine of party
autonomy by providing that judicial action that has not been sanctioned by parties to an arbitration
agreement will be precluded.

Croff in his writings opines that international commercial arbitration has been successful because
it provides an alternative to a court process in international contracts87. He also states that the need
for a neutral and effective system has led parties to find that international commercial arbitration
as suitable in resolving disputes and differences88. International arbitration does not derive its

86
Al-Fadhel, Faisal M. “Respect for Party Autonomy under Current Saudi Arbitration Law.” Arab Law
Quarterly, vol. 23, no. 1, (2009), 31–57.
87
Croff J. “The Applicable Law in an International Commercial Arbitration: Is It Still a Conflict of Laws
Problem?” The International Lawyer, vol. 16, no. 4, (1982), 613–645.
88
Croff J. “The Applicable Law in an International Commercial Arbitration: Is It Still a Conflict of Laws
Problem?” The International Lawyer, 613–645.

21
authority from a nation but from the agreement of parties. He argues that all international legal
systems accept the doctrine of party autonomy without any restrictions. Parties should select the
applicable law that governs their contract and arbitration agreement89.

Some authors conclude that an arbitrator must apply the law chosen by parties without checking if
any conflict of laws rule limits that freedom. It is noted that parties cannot endow themselves with
requirements that are unobtainable under the law that has the closest connection with their
agreement. The choice of law selected by parties should therefore be applied without limitation by
arbitrators as it respects the doctrine of party autonomy.

Croff also notes that party autonomy sometimes is limited in application even if it is generally
acceptable in most jurisdictions but opines that this argument is irrelevant because in international
practice the law with the closest connection of the agreement is usually applied. It would be
inappropriate for an arbitrator not to apply the law chosen by parties.

Party autonomy is a doctrine that is widely accepted in most jurisdictions, and it has also been
entrenched in domestic legislation of some countries. This position is firmly supported by
international law and its application is not limited and thus the reason why parties prefer the
application of international law in commercial arbitration. In some jurisdictions the application of
the doctrine of party autonomy is limited in application by legislation where a court may interfere
in an arbitration process. The interference of a national court may slow down the settlement of a
dispute by way of arbitration. In addition, most domestic laws do not support the application of
the conflict of laws rules in arbitration as witnessed in the Kenyan Arbitration Act90.

According to Mukherjee a choice of law is a choice of forum. The applicable law provision in an
arbitration clause is therefore important because it guides the arbitral tribunal in identifying the
law that guides the conduct of proceedings, which conflict of laws rules are to be applied if they
are sanctioned by domestic law and the role of national courts in the recognition and enforcement
of arbitral awards.

89
Croff J. “The Applicable Law in an International Commercial Arbitration: Is It Still a Conflict of Laws
Problem?” The International Lawyer, 613–645.
90
Arbitration Act, No. 4 of 1995, Laws of Kenya.

22
The drafting of arbitration provisions is therefore critical because this determines whether they are
suitable and applicable in context of the industry. This study focuses on the upstream petroleum
industry and accesses whether the arbitration provisions in the Kenyan model petroleum agreement
are suitable and interrogates whether international arbitration facilitates the settlement of upstream
petroleum industry and what Kenya can borrow from international systems of arbitration.

According to Muigua, there is the need to draft arbitration clauses in a clear manner to avoid
misinterpretation and uncertainty which always draws the attention of courts leading to
unnecessary interference91. It has been noted that even when an African state has become a party
to a relevant treaty such as UNCITRAL Law, there might still be the perception that its courts
could not be relied on to apply the text correctly or in good faith, with a further argument that
national legal frameworks are not conducive for the constitution of arbitral tribunals and to the
conduct of arbitration, permitting the ‘local court’ to interfere unduly in arbitral proceedings92.

In Kenya, the model petroleum agreement is the essential instrument to be negotiated by the state
and investor who are desirous of entering into an agreement for upstream petroleum operations.
There is limited study on the legal status of the arbitration provisions in the model production
sharing contracts anchored in law and whether they are suitable enough to facilitate negotiations
between parties. Given the nature of upstream petroleum operations, dispute resolution
mechanisms are critical because the level of investment is high, and time means money in this
industry. It is therefore critical that differences and disputes are concluded in an efficient and
expeditious manner.

Party autonomy is a cardinal doctrine in arbitration according to Croff and Al- Fadhel, and it should
not be limited in application even by domestic law. Most scholars support the notion that party
autonomy promotes the success of arbitration because it gives power to the parties to mutually
determine how they will resolve their disputes and differences. Based on various scholarly writings
it is also evident that arbitration provisions in a model petroleum agreement should advocate for
mutual agreement regarding the selection of the applicable law.

91
“Muigua K.: Nurturing International Commercial Arbitration in Kenya”, 2021, http://kmco.co.ke/wp-
content/uploads/2021/10/Nurturing-International-Commercial-Arbitration-in-Kenya.pdf
92
Muigua K., “Role of The Court Under Arbitration Act 1995: Court Intervention Before, Pending and
Arbitration in Kenya”, Kenya Law Review, (2010),10.

23
(c) Negotiations of petroleum contracts

It is important to understand the nature of the negotiation processes in petroleum contracts to

establish whether the cardinal principle of party autonomy is adopted by parties. According to
Radon, “negotiation processes in petroleum contracts are not only about distributing rents, but also
about distributing risk. Decisions to invest are made in environments of uncertainty. This implies
that actors use judgment and make trade-offs and that no single model result can be achieved.
Three factors influencing negotiation processes can be identified: Geological factors, political risks
and market context. Contracts are formulated based on actors’ relative bargaining strengths,
influenced by these three factors93”.

Radon also notes that the more general literature on petroleum contract negotiations in Africa tends
to focus on the unequal relations between governments and international oil companies due to
asymmetry of information and negotiation experience in favor of the oil companies94 .

Pederson however points out that the relations between a government and an oil company are
dynamic and shift over the course of a project cycle once an oil company has invested heavily in
infrastructure for exploration and production because the government has the upper hand, pointing
to the reemergence of an ‘obsolescing bargain’95.He points out that information on contract
negotiation processes is sparse in literature and that in Tanzania, only one of the contracts has been
disclosed under disclosure requirements for Canadian listed Companies: Pan African Energy96.
This disclosure, however, does not include the negotiations before the signing of the Production
Sharing Contract and exploration license.

Amade and Amana in their writings note that the effectiveness of a petroleum agreement is
achieved only through host state control and vigilance97. They observe that a petroleum agreement

93
Radon J., "The ABCs of Petroleum Contracts. License-Concession Agreements, Joint Ventures and
Production-Sharing Agreements”, A Reporter's Guide to Energy and Development, (ed), (2005), 61-80.
94
Radon J.," How to Negotiate an Oil Agreement." In Escaping the Resource Curse, Columbia University
Press, New York, 2007.
95
Pedersen H.R., “The politics of gas contract negotiations in Tanzania: a review”, Danish Institute for
International Studies, (2015).
96
Pedersen H.R., “The politics of gas contract negotiations in Tanzania: a review”, Danish Institute for
International Studies, (2015).
97
Amade R. and Amana S., “State Objectives and Petroleum Development Contracts”, The Journal of
International Issues, Vol. 17, No. 2, (2013), 80-107.

24
involves the inflow of foreign credit with repayment secured on future oil production and that the
choice of PSCs by an evolving economy is often influenced by the wish to avoid risk agents and
the absence of petroleum technology98.

In the case of the petroleum agreement between Nigeria and Ashland, the state lacked technical
expertise in geology, petroleum engineering and business management99. The overall objective of
a state as a party to a petroleum agreement is to secure corporate development and a continuous
search for achieving this should be explored100. Institutional reforms aimed at removing the
dependence of a host state on foreign capital and skill will provide control and management of
petroleum contracts101.

From the scholarly writings it is evident that negotiations in petroleum contract shift depending on
the bargaining power of the host state or the contractor which could oust party autonomy.
Negotiations are dynamic and policy direction would be instrumental in creating a negotiating
equilibrium.

1.11 Chapter Summary

Chapter One - Introduction to the study

This is the first chapter of the study which contains an overview of the background, statement of
the problem, purpose of the study, objectives of the study and research questions. It outlines the
justification of the study, the scope and limitations of the study. This chapter also describes the
methodology and theoretical framework used in the study. It contains a literature review on two
thematic areas in line with the objectives of the study: party autonomy and applicable law in
arbitration. The chapter summary of the study is also included in this chapter.

Chapter Two: Legal framework of the arbitration system provided for settling state and
investor disputes in upstream petroleum operations in Kenya.

98
Amade R. and Amana S., “State Objectives and Petroleum Development Contracts”,103.
99
Amade R. and Amana S., “State Objectives and Petroleum Development Contracts”,103.
100
Amade R. and Amana S., “State Objectives and Petroleum Development Contracts”,105-106.
101
Amade R. and Amana S., “State Objectives and Petroleum Development Contracts”,106.

25
This chapter describes and analyses the legal framework of the arbitration system provided in the
Petroleum Act regarding upstream petroleum operations. This chapter on one hand explains the
petroleum legal framework in Kenya which includes the Constitution of Kenya 2010, The
Petroleum Act and the Model Petroleum Agreement. The Model Petroleum Act is discussed in the
context of the arbitration clause and a comparison is given with the provisions of the Arbitration
Act which is the substantive legislation of arbitration in Kenya.

Chapter Three: The role of international law in settling state and investor disputes in
upstream petroleum operations through arbitration.

This chapter describes and analyses two types of international arbitration systems as provided in
the ICSD Convention and the UNCITRAL Arbitration Rules. The description is centered on the
cardinal principle of arbitration which is party autonomy and the applicable law that guides an
arbitration proceeding and its outcome. It also discusses the Convention on the Recognition and
Enforcement of foreign arbitral awards which binds parties to recognize and enforce arbitral
awards made from a different territory through their domestic courts.

Chapter Four: Findings on the Settlement of Petroleum Disputes in Kenya.

This chapter discusses and analyses the settlement of petroleum disputes in Kenya as outlined in
Chapter two and three. It also discusses and analyses how petroleum disputes can be resolved in
Kenya and how the arbitration provisions of the model petroleum agreement should be adjusted to
support the same.
Chapter Five: Recommendations and Conclusions.

This chapter discusses the existing arbitration system provided in the Model Petroleum Agreement
in Kenya vis a vis the international arbitration system provided in the ICSID Convention and the
UNCITRAL Arbitration Rules. The focus of the discussions will be in relation to party autonomy
and applicable law in arbitration. Due to the nature of upstream petroleum operations which
involve transnational rights of parties due to the existence of joint ventures on the part of the
Contractor, the discussions will be guided by the theoretical framework which supports a
delocalized and autonomous arbitration system. It outlines the gaps in the arbitration system
outlined in the Kenyan Model Petroleum Agreement in comparison with the international

26
arbitration outlined in the ICSID Convention and UNCITRAL rules and gives recommendations
on how to cure those gaps.

27
 CHAPTER TWO
LEGAL FRAMEWORK OF THE ARBITRATION SYSTEM PROVIDED FOR
SETTLING STATE AND INVESTOR DISPUTES IN UPSTREAM PETROLEUM
OPERATIONS IN KENYA.
2.1 Introduction
This chapter describes and analyses the legal arbitration framework of upstream petroleum
operations in Kenya. According to the Natural Resource Governance Institute, a well-designed
legal architecture should provide rules for how state institutions are structured; how companies
acquire and manage licenses; the fiscal terms governing payments between companies and the
state; environmental management; relationships between extractive projects and neighboring
communities; the behavior of public officials active in the sector; public information disclosure
and accountability; and how the government will manage natural resource revenues.

In the Kenyan context, the exploitation of petroleum is governed by the Constitution of Kenya,
2010, Petroleum Act, No. 2 of 2019 and the Model Petroleum Agreement. Moreover, whilst
examining the legal framework of the arbitration system provided for the settlement of upstream
petroleum disputes between the state and the investor, it is also important to interrogate the
Arbitration Act, No. 4 of 1995.

The legal framework for upstream petroleum operations has been described and analysed in a
hierarchical manner as follows: the Constitution of Kenya, 2010, the Petroleum Act, No.2 of 2019,
the Model Petroleum Agreement, Schedule 1 of the Petroleum Act, No.2 of 2019 and the
Arbitration Act No. 4 of 1995.

2.2 Constitution of Kenya, 2010

The Constitution is the supreme law of Kenya which provides the fundamental principles of
governance that binds all persons and state organs at both levels of Government102. To appreciate
the exploitation of petroleum in Kenya, it is paramount to examine the provisions of the

102
Article 2, Constitution of Kenya, 2010

28
Constitution of Kenya, 2010 regarding the same. The exploitation of petroleum is for the purposes
of economic growth, and this includes the exploration, development, and production of oil.

According to the Constitution all land belongs to the people of Kenya collectively as a nation, as
communities and as individuals and the same is classified as either public, private or community
land103. It is noteworthy that the Constitution of Kenya, 2010 stipulates that all minerals and
mineral oils are public land104. The key national values and principles of governance that guide the
exploitation of petroleum are citizen participation, non-discrimination, protection of marginalized
groups, protection of human rights, social justice, equity, transparency, accountability, and
sustainable development105.

The exploitation of petroleum ought to be done in a sustainable way without a negative impact on
the environment. The Constitution of Kenya, 2010 strongly affirms the foregoing because it
provides that every person has a right to a clean and healthy environment and that the environment
should be protected for the benefit of both the current and future generations. In addition, the state
must ensure that there is sustainable exploitation, utilization and management of the environment
and natural resources whilst ensuring equitable sharing of the accruing benefits106.

The state is required to enact legislation that ensures that the investment in land use benefits the
local community and their economies107. Upstream petroleum investments in Kenya are done
through petroleum agreements that are entered into by the Cabinet Secretary on behalf of the
Government of Kenya and an investor. These petroleum agreements must also be ratified by
parliament which is the supervisory arm of Government that ensures that the principles of the
Constitution regarding exploitation of natural resources are adhered to108.

The Constitution of Kenya helps to safeguard petroleum as a natural resource by ensuring that the
exploitation of natural resources does not cause depletion. This helps to advance sustainable
development through economic, social, and environmental pillars. The economic pillar supports
the creation of jobs, growth in Government revenue, growth in gross domestic product and poverty

103
Article 61(1), Constitution of Kenya, (2010).
104
Article 61(1), Constitution of Kenya, (2010).
105
Article 10, Constitution of Kenya, (2010).
106
Article 69, Constitution of Kenya, (2010).
107
Article 66, Constitution of Kenya, (2010).
108
Article71(1), Constitution of Kenya, (2010).

29
eradication. Secondly, the social pillar supports provision of basic infrastructure needed for human
development such as food, education, healthcare, electricity and motorable roads. Lastly, the
environmental pillar supports the protection of land, air, water and natural resources from
degradation and pollution.

Arbitration is an alternative dispute resolution mechanism that is recognized by the Constitution

of Kenya which shall be promoted in the exercise of judicial authority109. Judicial authority is
derived from the people of Kenya because the sovereign power belongs to the people of Kenya110.

Arbitration is a private mechanism for dispute resolution that is selected and controlled by the
parties. The recognition of arbitration in the Constitution helps to cement the supportive role of
courts in the finality and enforcement of arbitral awards. This position was supported by the
Supreme Court of Kenya in the case of Geochem Middle East v Kenya Bureau of Standards where
the court upheld the decision made by the high court which stated inter alia:

“It is not the function nor the mandate of the High Court to re-evaluate such decisions of
an arbitral tribunal, when the Court was called upon to determine whether or not to set
aside an award…if the Court were to delve into the task of ascertaining the correctness of
the decision of an arbitrator, the Court would be sitting on an appeal over the decision in
issue. Considering the public policy of Kenya, which loudly pronounces the intention of
giving finality to arbitral awards, it would actually be against the said public policy to have
the Court sit on an appeal over the decision of the arbitral tribunal” [Paras. 39-41]”111.

Article 159(2) provides that the judiciary shall be guided by the principles of reconciliation,
arbitration, mediation, and traditional dispute mechanisms. To this extent, the principles of
arbitration that promote the finality of arbitration awards ought to be supported by the judiciary in
recognizing and enforcing arbitral awards. This position was taken by the Court of Appeal in the
case of Nyutu Agrovet Limited -vs- Airtel Networks Limited where the court dismissed an appeal
to set aside an arbitral award under Section 35 of the Arbitration Act. The court held:

109
Article 159 (1)(c), Constitution of Kenya, (2010).
110
Article 1, Constitution of Kenya, (2010).
111
Geochem Middle East v Kenya Bureau of Standards [2020] eKLR.

30
“‘The principle on which arbitration is founded, namely that the parties agree on their own, to take
disputes between or among them from the courts, for determination by a body put forth by
themselves, and adding to all that as in this case, that the arbitrators’ award shall be final, it can be
taken that as long as the given award subsists it is theirs. But if it is set aside as was the case here,
that decision of the High Court is final remains their own. None of the parties can take steps to go
on appeal against the setting aside ruling. It is final and the parties who so agreed must live with it
unless, of course, they agree to go for fresh arbitration. The High Court decision is final and must
be considered and respected to be so because the parties voluntarily choose it to be so. They put
that in their agreement. They desired limited participation by the courts in their affairs and that has
been achieved. Despite the loss or gain either party may impute to, the setting aside remains where
it falls. The courts, including this Court, should respect the will and desire of the parties to
arbitration (emphasis added).”112

Furthermore, in the case of Anne Mumbi Hinga -vs- Victoria Njoki Gathara, the Court of Appeal
expressed that the right of appeal does not accrue automatically under Section 35 of the Arbitration
Act considering challenging an arbitral award but only in the circumstances provided in Section
39 of the Arbitration Act. The Court of Appeal opined that:

“We therefore reiterate that there is no right for any court to intervene in the arbitral process
or in the award except in the situations specifically set out in the Arbitration Act or as
previously agreed in advance by the parties and similarly there is no right of appeal to the
High Court or the Court of Appeal against an award except in the circumstances set out in
Section 39 of the Arbitration Act.”113

In contrast to settling disputes and differences through arbitration as provided in the Model
Petroleum Agreement, the Constitution provides a different pathway for addressing potential
human rights claims. The Constitution provides that every person has the right to institute court
proceedings claiming that a right or fundamental freedom in the Bill of Rights has been denied,
violated, or infringed, or is threatened114. This is a constitutional provision that cannot be derogated
by any other law and can be exercised by any party who claims a human rights violation as a result

112
Nyutu Agrovet Limited -vs- Airtel Networks Limited, Civil Appeal No.61 of 2012 (2015) eKLR.
113
Anne Mumbi Hinga -vs- Victoria Njoki Gathara, Civil Appeal No. 8 of 2009; [2009] eKLR.
114
Article 22(1), Constitution of Kenya, (2010).

31
of petroleum activities. In such a case the court would have to entertain the matter and exercise
judicial authority as outlined in the Constitution115.

2.3 Petroleum Act, No.2 of 2019

The Petroleum Act116, consolidates the entire petroleum value chain which includes upstream,
midstream, and downstream operations. The Act prevails over any other law on matters upstream,
midstream & downstream operations117. According to the Petroleum Act, all disputes between
parties to a petroleum agreement arising from upstream petroleum operations are required to
explore alternative dispute resolution mechanisms in first instance as provided in the petroleum
agreement which include amicable settlement, expert determination, and arbitration118. Any other
disputes from an upstream regulated function may be submitted before the Energy & Petroleum
and Regulatory Authority (EPRA) in first instance for determination. If a party is dissatisfied with
decision of the Authority he may appeal to Energy &Petroleum Tribunal.119

2.4 Model Petroleum Agreement, Schedule 1 of the Petroleum Act, No.2 of 2019

The Petroleum Act provides that the Cabinet Secretary shall negotiate, award, and execute a
petroleum agreement on behalf of the government of Kenya in the form prescribed in the Schedule
to the Act120. The model petroleum agreement prescribed in the schedule of the act is also referred
to as a model Production Sharing Contract. It outlines the rights and obligations of a successful
contractor and the state regarding upstream petroleum operations. The parties to a production
sharing contract are the state and a contractor. In the petroleum industry, the contractor is usually
a joint venture that spreads the financial and operational risks of upstream petroleum operations.
The relationship between the parties to a joint venture is regulated by a joint operating agreement
that outlines the participatory interest of parties in form of shares. 121

115
Article 160(1), Constitution of Kenya, (2010).
116
Petroleum Act, No. 2 of 2019, Laws of Kenya.
117
Section 4, Petroleum Act, No.2 of 2019.
118
Section 117(1), Petroleum Act, No.2 of 2019.
119
Section 117(2), Petroleum Act, No.2 of 2019.
120
Section 18, Petroleum Act, No.2 of 2019.
121
Petroleum Act, No.2 of 2019.

32
This study is examining the arbitration provisions122 outlined in the model petroleum agreement.
According to the model petroleum agreement, a party may resolve a dispute through arbitration if
it is not resolved amicably or through expert determination. The arbitration clause set out in the
petroleum agreement provides the arbitration system selected by Kenya in resolving state and
investor disputes in upstream petroleum operations.

Whilst developing arbitration clauses, it is important to include the essential ingredients such as
agreement to arbitrate, scope of arbitration, institution chosen, seat of arbitration, number and
method of selection of arbitrators, procedure to be followed and enforcement of awards. The
preceding ingredients will be analysed hereunder in relation to the arbitration clause provided in
the model petroleum agreement.

2.4.1 Party Autonomy/Agreement to Arbitrate

The arbitration clause in the petroleum agreement does not expressly provide the agreement to
arbitrate. This is because the petroleum agreement is prescribed by law and the terms and
conditions are mandatory and thus require compliance from parties. The agreement to arbitrate
usually expresses the parties’ intention to subject their disputes to arbitration rather than a national
court which is in line with the cardinal principle of party autonomy.

2.4.2 Scope of Arbitration

The dispute resolution clause outlines that any differences or disputes may be referred to amicable
settlement in the first instance. If the dispute is not settled amicably, it may be referred to expert
determination or arbitration. This means the scope is regarding upstream petroleum operation
disputes that are not settled amicably and may be addressed through arbitration. It is noteworthy,
however that there are upstream petroleum operation disputes that are not arbitrable such as
disputes that emanate from third parties to a Petroleum Agreement such as the community who
may be affected by the upstream petroleum operations. Other dispute resolution mechanisms such
as mediation, reconciliation and traditional dispute resolution mechanism would therefore be

122
Clause 53(3) of the Model Petroleum Agreement, Petroleum Act. No. 2 of 2019, Laws of Kenya.

33
suitable, and this is not provided under the dispute resolution clause in the model petroleum
agreement.

2.4.3 Institution chosen

The arbitration clause provides that an applicant party is required to send a written request to
UNCITRAL as a way of commencing arbitration proceedings with a notification to the defending
party. The arbitration proceedings are expected to commence sixty days after the request is sent to
UNCITRAL. It is however not clear why the proceedings commence without the approval of
UNCITRAL. It would be expected that a request is done by an applicant party to receive some
form of approval. Nonetheless, the arbitration clause stipulates that the arbitration process will be
done in line with the UNCITRAL Arbitration Rules. The UNCITRAL Arbitration rules were
formulated to guide ad hoc arbitration where parties have not selected an institution to conduct the
arbitration proceedings. They are however also used by certain institutions that administer
arbitration such as the International Chamber of Commerce.

The disputing parties are also required to inform the secretariat of the UNCITRAL about their
appointment of an arbitrator. An applicant party may also request the UNCITRAL to appoint an
arbitrator when the defending party fails to appoint one within thirty days after the notice to
commence arbitration proceedings is received by UNCITRAL. According to the UNCITRAL
Arbitration rules, the Secretary General may be selected by disputing parties to appoint an
arbitrator. Moreover, a disputing party may request the ICSID to appoint a third arbitrator when
the two appointed arbitrators fail to mutually select a third arbitrator.

The ICSID may also be selected as an appointing authority by disputing parties according to the
ICSID convention. The center maintains a panel of conciliators and a panel of arbitrators.
According to the ICSID Convention an arbitral tribunal is formed once a request is made to the
center and it is always subject to the agreement of parties who may want a sole arbitrator or an
uneven number of arbitrators123. If parties fail to agree on this, then they are required to each select

123
Article 37, ICSID Convention.

34
an arbitrator and the third one who is the chairman has to be appointed by the agreement of
parties124.

2.4.4 Seat of Arbitration

The arbitration clause provides that the applicable law of the arbitration clause is Kenyan law
which implies that the seat of arbitration shall be Kenya. The seat of arbitration governs the
arbitration proceedings and has a bearing on the national courts that would exercise supervisory
jurisdiction over the arbitration. The seat of arbitration also helps to determine the nationality of
the arbitral award issued by an arbitral tribunal. In this context, the Kenyan courts would exercise
supervisory jurisdiction and the arbitral award would be enforceable in Kenya. The concept of lex
arbitri is synonymous with the seat of arbitration and subject to the consent of parties and the same
is explained by Deshpande as follows125:

“Strangely enough, a distinction has developed between the substantive law applicable to the
contract and the law applicable to the conduct of the arbitration called lex arbitri. The only
explanation for such a distinction seems to be that the situs of the arbitration may be outside the
country the legal system of which is the proper law of the contract. No other explanation for the
development of the concept of lex arbitri is available. How has this result come about? The
explanation seems to be historical. International commercial arbitration developed under the
influence of the commercially advanced nations and the international arbitral institutions
established by them. Among such institutions are the International Chamber of Commerce, Paris,
the American Arbitration Association and the London Court of Arbitration, the International
Chamber of Commerce (ICC) Paris being the oldest and more widely used than the others till
recently.

The basic practice of the ICC was that the arbitral tribunal was formed of three arbitrators. Two
arbitrators were nominated by the two parties to the dispute and the chairman was appointed by
the ICC Court of Arbitration. To ensure neutrality and impartiality the chairman would be chosen
from a country other than the countries of the two disputants. The place of arbitration would be in

124
Article 37(2)(b), ICSID Convention.
125
Deshpande, V.S. “The Applicable Law in International Commercial Arbitration.” Journal of the Indian Law
Institute 31, no. 2, (1989),127.

35
the country from which the chairman was chosen. Thus, the choice of the place of arbitration by
the arbitral tribunal and by the ICC Court of Arbitration was purely accidental. Such a choice could
not be attributed to the intention of the parties.”

The Arbitration Act, No. 4 of 1995 provides that parties are free to select the seat of arbitration
and the location of the hearing. If they fail to do so the same shall be determined by the arbitral
tribunal having regard to the circumstances of the case and the parties. In essence the arbitral
tribunal will first determine whether the arbitration is domestic or international to identify the seat
of arbitration which will determine the rules of forum126. The model petroleum agreement does
not have a seat of arbitration provision however it states that the applicable law of the arbitration
clause is Kenyan law. This implies that the seat of arbitration is Kenya.

2.4.5 Number, method of selection and qualifications of arbitrators

The arbitration clause provides that the number of arbitrators shall be three and each disputing
party shall appoint an arbitrator and notify the other party and UNCITRAL. The two appointed
arbitrators shall subsequently appoint a third arbitrator by mutual consent. If the defending party
does not appoint an arbitrator thirty days after receiving the notice of intention to commence
arbitration proceedings, the applicant party may request the UNCITRAL to appoint the third
arbitrator. If the applicant party does not appoint an arbitrator within 30 days after issuing the
notice to commence arbitration proceedings it will be deemed as if he has withdrawn his
application. The arbitration clause is silent on the qualifications of arbitrators however stipulates
that they should not be of the same nationality as either the applicant or defending party.

2.4.6 Conduct of proceedings to be followed

The conduct of proceedings to be followed during arbitration proceedings has not been expressly
stipulated in the arbitration clause. The applicable law however is the Kenyan law and therefore
the conduct of proceedings may be guided by the Civil Procedure Act to regulate the proceedings
and the Evidence Act to regulate witness or documentary evidence. It is however noteworthy that
the model petroleum agreement provides that disputes resolved by arbitration should be done in

126
Section 21, Arbitration Act, No. 4 of 2005, Laws of Kenya.

36
accordance with the UNCITRAL arbitration rules adopted by the United Nations Commission on
international Trade Law127. The rules that will guide the arbitral proceedings will therefore be in
accordance with the UNCITRAL arbitration rules.

2.4.7 Applicable law

The choice of applicable law is fundamental in arbitration because it determines the legal rules to
be applied in arbitral conduct, arbitral proceedings, the governing law of the contract and the
choice of law rules in selecting the law, whether domestic or international law. The arbitration
clause in the model petroleum agreement provides that the applicable law is Kenyan law128. The
arbitral conduct and proceedings will therefore be guided by Kenyan Law.

There is however a conflict as to which applicable law is selected because the model petroleum
agreement also provides that a dispute to be resolved by arbitration should be in accordance with
the UNCITRAL arbitration rules adopted by the United Nations Commission on International
Trade129.

In most model petroleum agreements, the applicable law provision is not provided in the arbitration
clause. In the case of the Seychelles petroleum agreement, the applicable law is not provided in
the arbitration clause.

“Arbitration Clause. (1) Where the Government or any authority of the Government and
the Company fail to settle a dispute touching on or concerning the interpretation or
performance of this Agreement or the rights or liabilities of any of the Parties under this
Agreement, the Government and the Company hereby consent to submit the dispute for
arbitration in accordance with the rules of the [International Chamber of Commerce]
[International Centre for Settlement of Investment Dispute {ICSID}] before a board of one,
or more than one (but not being an even number) arbitrator appointed in accordance with
the said rules.

127
Clause 53(1) Petroleum Agreement, Schedule 1 of the Petroleum Act, No. 2 of 2019.
128
Clause 53(3)(8) Petroleum Agreement, Schedule 1 of the Petroleum Act, No. 2 of 2019.
129
Clause 53(1) Petroleum Agreement, Schedule 1 of the Petroleum Act, No. 2 of 2019.

37
 (2) Any reference in this Agreement to the effect that a matter constitutes a dispute under
this Clause shall not be construed as in any way derogating from the generality of subclause
(1).
(3) Any award rendered pursuant to subclause (1) shall be binding upon the Parties
submitting the dispute to such arbitration”130.
In the case of the Model Petroleum Agreement of Ghana, the applicable law in the arbitration
clause is also not provided.

“Arbitration Clause 24.1 Except in the cases specified in Article 26.4 any dispute or
difference arising between the State and G-NPC or either of them on one hand and
Contractor on the other hand in relation to or in connection with or arising out of any terms
and conditions of this Agreement shall be resolved by consultation and negotiation. In the
event that no agreement is reached within thirty (30) days after the date when either Party
notifies the other that a dispute or difference exists within the meaning of this Article or
such longer period specifically agreed to by the Parties or provided elsewhere in this
Agreement, any Party shall have the right subject to Article 24.8 to have such dispute or
difference settled through international arbitration under the auspices of the Arbitration
Institute of the Stockholm Chamber of Commerce, Stockholm, Sweden.
24.2 The tribunal shall consist of three (3) arbitrators. Each Party to the dispute shall
appoint one (1) arbitrator and those so appointed shall designate an umpire arbitrator. If a
Party's arbitrator and/or the umpire arbitrator is not appointed within the periods provided
in the rules referred to in. Article 24.5 below, such Party's arbitrator and/or the umpire
arbitrator shall at the request of any Party to the dispute be appointed by the Arbitration
Institute of the Stockholm Chamber of Commerce.
24.3 No arbitrator shall be a citizen of the home country of any Party hereto and shall not
have any economic interest or relationship with any such Party.
24.4 The arbitration proceedings shall be conducted in Stockholm, Sweden, or at such other
location as selected by the arbitrators unanimously. The proceedings shall be conducted in
the English language.

130
http://petroseychelles.com/index.php/legal-issues/model-petroleum-agreement on 25th April 2022.

38
 24.5 The arbitration tribunal shall conduct the arbitration in accordance with the arbitration
rules of the United Nations Commission on International Trade Law ("UNCITRAL") of
December 15, 1976, except as provided in this Article. For purposes of Article 33.1 of said
UNCITRAL rules, the arbitration tribunal shall decide in accordance with the provisions
of this Agreement.
24.6 If the opinions ions of the arbitrators are divided on issues put before the tribunal, the
decision of the majority of the arbitrators shall be determinative. The award of the tribunal
shall be final and binding upon the Parties.
24.7 The right to arbitrate disputes arising out of this Agreement shall survive the
termination of this Agreement”131.
2.5 Arbitration Act No. 4 of 1995

The Arbitration Act132 is the substantive law that guides the arbitration process in Kenya.
Regarding petroleum agreements, the Petroleum Act prevails over any other law however when it
is silent on matters arbitration, the Arbitration Act133 ought to be activated to give legislative
direction. The Arbitration Act134 would be invoked in its entirety if the arbitration is a domestic ad
hoc arbitration.

To identify the type of arbitration, one must deduce whether the arbitration is ad hoc or institutional
and consequently whether the arbitration is domestic or international by analysing the arbitration
provisions in the arbitration clause. By doing this the rules of forum can be identified and applied
accordingly. The Arbitration Act therefore helps parties to identify the nature of their arbitration
and the rules that apply accordingly.

The Arbitration Act states the extent of court’s role in arbitration matters and provides that the
court shall not intervene on matters regulated by the Act135. In support of this provision the
Arbitration Act enumerates the recourse one has when an arbitral award is issued. An aggrieved
party may proceed to the high Court to set aside an arbitral award however the court must be
satisfied that the subject matter of the dispute is not arbitrable or the arbitral award is against public

131
https://www.resourcedata.org/dataset/rgi-ghana-model-petroleum-agreement on 25th April 2022.
132
Arbitration Act, No.4 of 1995, Laws of Kenya.
133
Arbitration Act, No. 4 of 1995, Laws of Kenya.
134
Arbitration Act, No.4 of 1995, Laws of Kenya.
135
Section 10, Arbitration Act, No. 4 of 2005, Laws of Kenya.

39
policy in Kenya136. The court will not be looking at the correctness of the arbitral award because
it would then be sitting as an appellate court but rather the arbitrability of the dispute. This position
is supported by the High Court in the case of Nyutu Agrovet Limited v Airtel Networks Kenya
Limited and Chartered Institute of Arbitrators where it stated inter alia:

“[77] In concluding on this issue, we agree with the Interested Party to the extent that the only
instance that an appeal may lie from the High Court to the Court of Appeal on a determination
made under Section 35 is where the High Court, in setting aside an arbitral award, has stepped
outside the grounds set out in the said Section and thereby made a decision so grave, so manifestly
wrong and which has completely closed the door of justice to either of the parties. This
circumscribed and narrow jurisdiction should also be so sparingly exercised that only in the
clearest of cases should the Court of Appeal assume jurisdiction.”137

2.5.1 Rules of procedure

The Arbitration Act provides that parties are free to select the rules of procedure. If parties fail to
select the same, the choice of law will be construed by the arbitral tribunal as the substantive law
of that state and not the conflict of laws rules138. The rules of procedure usually regulate the
arbitration proceedings in the collection of evidence and conduct of proceedings.

2.5.2 Effect of arbitral awards

The Arbitration provides that an arbitral award shall be final and binding upon parties unless
otherwise agreed on by parties139. This provision prescribes that one cannot appeal against an
arbitral award because it is final and binds all parties.

2.5.3 Recognition and enforcement of arbitral awards

136
Section 35(b), Arbitration Act, No. 4 of 2005, Laws of Kenya.
137
Nyutu Agrovet Limited v Airtel Networks Kenya Limited and Chartered Institute of Arbitrators [2015]
eKLR.
138
Section 32A, Arbitration Act, No. 4 of 2005, Laws of Kenya.
139
Section 32A, Arbitration Act, No. 4 of 2005, Laws of Kenya.

40
A domestic arbitration shall be recognized as binding and upon application in writing to the High
Court140 shall be enforced141.An international arbitral award shall be recognized as binding and
enforced in accordance with the provisions of the New York convention or any other convention
to which Kenya is a signatory142.It is noteworthy that Kenya is a contracting party to the New York
Convention having acceded to the same on 10th February 1989143.

These provisions support the principle of the supportive role of domestic courts in recognizing and
enforcing domestic and foreign awards when called upon to do so.

2.5.5 Finality of Awards

The petroleum agreement stipulates that the decision made by majority of the arbitrators shall be
final and binding to all parties and shall also be enforceable under the laws of Kenya144. The arbitral
awards issued to parties should therefore be complied with by parties and the national courts can
enforce them when called upon to do so by any party. This position was supported by the Supreme
Court of Kenya in the case of Geochem Middle East v Kenya Bureau of Standards145 where the
court upheld the decision of the high court which stated that it did not have the mandate to re-
evaluate the decision of an arbitral tribunal due to the public policy in Kenya that gives finality to
arbitral awards.

2.6 Conclusion

The Constitution of Kenya supports the exploitation of petroleum in a sustainable way to the
benefit of current and future generations. It also supports arbitration as an alternative dispute
resolution mechanism which shall be promoted in the exercise of judicial authority. The courts
play a supportive role in the recognition and enforcement of arbitral awards. Equally the
Constitution being the supreme law of Kenya provides that any person can institute court
proceedings for the enforcement of human rights. This means that human rights violations that

140
Section 36(1), Arbitration Act, No. 4 of 2005, Laws of Kenya.
141
Section 37 of the Arbitration Act, No. 4 of 1995, Laws of Kenya.
142
Section 36(2), Arbitration Act, No. 4 of 2005, Laws of Kenya.
143
https://www.newyorkconvention.org/countries
144
Clause 53(6) Petroleum Agreement, Schedule 1 of the Petroleum Act, No. 2 of 2019
145
Geochem Middle East v Kenya Bureau of Standards [2020] eKLR.

41
arise from upstream petroleum activities can be addressed by the courts without limiting them to
the dispute resolution mechanisms provided in the model petroleum agreement.

The Petroleum Act consolidates the upstream, midstream, and downstream operations and prevails
over any other law. It also provides the tiered dispute resolution mechanisms in the settlement of
disputes and differences. The model petroleum agreement anchored in the Petroleum Act is the
essential contract to be negotiated for upstream petroleum operations. The arbitration clause
contained in the model petroleum agreement is however ousts the principle of party autonomy.
This is because it provides express fundamental provisions that should be left to the decision of
parties. The applicable law provision should be decided by parties and should not be expressly
provided because it may hinder negotiations if the state is a party to a petroleum agreement and
the applicable law is the law of the state.

The arbitration clause provides that the arbitral proceedings will be conducted in compliance with
UNCITRAL Arbitration rules and provides that the applicable law for arbitration is Kenyan law.
This provides an international legal system and domestic legal system for the conduct of arbitral
proceedings which may be a complex issue for an arbitral tribunal to deal with in an investor-state
upstream petroleum dispute.

42
 CHAPTER THREE

THE ROLE OF INTERNATIONAL LAW IN SETTLING STATE AND INVESTOR

DISPUTES IN UPSTREAM PETROLEUM OPERATIONS THROUGH ARBITRATION.

3.1 Introduction

This chapter describes the UNCITRAL Arbitration Rules and the ICSID Arbitration Rules that are
used in international arbitration. It also analyses the role these international instruments have
played a role in the settlement of upstream petroleum disputes such as the New York Convention.

State and investor disputes in the petroleum industry are usually inevitable. This is because a state
which intends to exploit its petroleum reserves usually attracts investors using favourable terms to
conduct the upstream petroleum operations and thereafter abandons those very terms. This
scenario is not new in the petroleum industry and has been witnessed around the world which is
the biggest source of state and investor disputes. The likely circumstance is that a State has no
technical expertise to conduct upstream petroleum operations and thus seeks this expertise from a
qualified and experienced investor.

The disputes that arise between a state and an investor are usually financial and non-financial
disputes. Financial disputes arise when the state feels that they should get a greater percentage
from the profit petroleum whereas the investor feels that he has taken a higher risk and thus needs
to be properly compensated146. The non-financial disputes are those that involve an imbalance
between the benefits accruing to the local community and the state which include the
environmental, health, safety, labour, and employment rights147.

Regarding the Kenyan context, the relationship between the state and an investor is regulated by
the petroleum agreement which is also referred to as the production sharing contract. Production
sharing contracts were introduced in the petroleum industry in 1960’s as a way of giving the state

146
Doeh D, “International Oil and Gas Industry Disputes.” Arbitration Journal, 20th June 2019
https://journal.arbitration.ru/reviews/international-oil-and-gas-industry-disputes on 25th April 2022.
147
Doeh D, “International Oil and Gas Industry Disputes.” Arbitration Journal, 20th June 2019
https://journal.arbitration.ru/reviews/international-oil-and-gas-industry-disputes on 25th April 2022.

43
more control and direct participation in petroleum production148. Upstream petroleum operations
usually involve multiple contracts and parties. This is because other than having the right to mine,
the investor may enter multiple service contracts to undertake the upstream petroleum operations.

The technical expertise required for upstream petroleum operations usually involves international
companies who enter into joint operating agreements with the investor to conduct the same. The
investor enters into these joint operating agreements to spread the risk associated to the upstream
petroleum operations and thus the transnational nature of the rights of parties cannot be ignored.
The nature of disputes that may arise are cross border and involve multiple parties and contracts
with a wide range of claims under joint operating agreements, cost recovery disputes, service
contract disputes, insurance/re-insurance cover disputes, petroleum price reviews, pre-emption
rights, expropriation, and environmental damage149.

The multiplicity and transnational nature of such investments has since the late 1950’s led many
states to enter into bilateral investment treaties (BIT’s) for Investor State Dispute Settlement
(ISDS)150. The BIT’s enables an investor to seek international arbitration to avoid domestic courts
of the host state which may be unfavourable to the investor. The development of ISDS has been
managed by the International Center for the settlement of Investment Disputes (ICSID). Due to
the globalization of the petroleum business and the signing of BIT’s the ISDS claims have
increased since the 1990’s151. An investor who initiates international arbitration under a BIT or
other similar treaty has a choice to do so under the ICSID or UNCITRAL arbitration rules152.

A substantial percentage of international arbitration cases are energy cases. According to the
London Court of International Arbitration, about 22% of the disputes before it is energy related

148
Doeh D, “International Oil and Gas Industry Disputes.” Arbitration Journal, 20th June 2019
https://journal.arbitration.ru/reviews/international-oil-and-gas-industry-disputes on 25th April 2022.
149
Doeh D, “International Oil and Gas Industry Disputes.” Arbitration Journal, 20th June 2019
https://journal.arbitration.ru/reviews/international-oil-and-gas-industry-disputes on 25th April 2022.
150
Doeh D, “International Oil and Gas Industry Disputes.” Arbitration Journal, 20th June 2019
https://journal.arbitration.ru/reviews/international-oil-and-gas-industry-disputes on 25th April 2022.
151
Doeh D, “International Oil and Gas Industry Disputes.” Arbitration Journal, 20 th June 2019
https://journal.arbitration.ru/reviews/international-oil-and-gas-industry-disputes on 25th April 2022.
152
Doeh D, “International Oil and Gas Industry Disputes.” Arbitration Journal, 20th June 2019
https://journal.arbitration.ru/reviews/international-oil-and-gas-industry-disputes on 25th April 2022.

44
disputes153 .This goes to show that international arbitration is favoured by most parties in the
energy sector which includes the petroleum industry.

The existence of an investment is a cornerstone of ICSID’s jurisdiction, yet the ICSID convention
does not describe the term investment154. Several tribunals have however settled for a list of
descriptors that are typical to investments which include: a substantial commitment, a certain
duration, an element of risk and the significance for the host state’s development155.

3.2 UNCITRAL Arbitration Rules

The UNCITRAL Model Law 1985 was introduced to create uniformity in the standards of
International Arbitration by introducing the concepts of party autonomy and the supportive role of
courts to the arbitration process. The model law has been domesticated and adopted in several
jurisdictions whereby new legislation is influenced by the model law. The United National
Commission on International Trade Law (UNCITRAL) developed the UNCITRAL Arbitration
rules for ad hoc arbitration because of the need for a neutral based arbitration156.

The UNCITRAL Arbitration Rules were developed to be suitable for a capitalistic and socialist,
developed and developing, common law and civil law jurisdictions157.The UNCITRAL Arbitration
Rules have achieved international recognition and are used widely and have been adopted in
institutional arbitration by some institution because of their autonomous nature158.These rules deal
with everything in an arbitration process from the formation of an arbitral tribunal to the rendering
of an award.

153153
Doeh D, “International Oil and Gas Industry Disputes.” Arbitration Journal, 20th June 2019
https://journal.arbitration.ru/reviews/international-oil-and-gas-industry-disputes.
154
Rudolf Dolzer and Christoph Schreuer, “Principles of International Investment Law”, Second Edition,
Oxford University Press, 2012.
155
Rudolf Dolzer and Christoph Schreuer, “Principles of International Investment Law”, Second Edition,
Oxford University Press, 2012.
156
Lew J, Mistelis L, Kröll S, Comparative International Commercial Arbitration, Wolters Kluwer Law
and Business, (2003), 26, 2-34.
157
Lew J, Mistelis L, Kröll S, Comparative International Commercial Arbitration, Wolters Kluwer Law
and Business, (2003), 26, 2-34.
158
Lew J, Mistelis L, Kröll S, Comparative International Commercial Arbitration, Wolters Kluwer Law
and Business, (2003), 26, 2-35.

45
The UNCITRAL Arbitration Rules are a comprehensive set of rules that may be selected by parties
to regulate their arbitration proceedings to resolve disputes that are arising out of their commercial
relationship. They were initially adopted in 1976 for the settlement of a wide range of disputes
which include private commercial disputes where parties have not selected an institution to
conduct their arbitration proceedings, investor-state disputes, state to state disputes and
institutional arbitration. They were revised in 2006 and consequently in 2010 and have been
effective since August 2010. The innovations that were included in the last revised version were
rules on multi-party arbitrations, joinder, liability, procedure to object experts appointed by an
arbitral tribunal, reasonableness of cost of arbitration and treaty-based arbitration.

The salient features of arbitration in relation to the UNCITRAL Arbitration Rules are discussed
below:

3.2.1 Party autonomy/Consent of parties

The UNCITRAL Arbitration Rules were developed in line with the concept of party Autonomy.
These Rules embody the spirit of party autonomy as they recognise the need for parties to agree
that their disputes whether contractual or not be referred to arbitration under the rules159. The
guiding principle is the consent by parties to subject their future and existing disputes to arbitration
in line with the UNCITRAL Arbitration Rules. The consent of parties is expressed through an
arbitration agreement or an arbitration clause which expressly states that the arbitration process
will be guided by the UNCITRAL Arbitration Rules.

The pertinent questions in relation to party autonomy have always been: Do parties actually have
absolute freedom to determine the arbitration process? To what extent has this been achieved in
the resolution of disputes having international concerns? And lastly, is party autonomy a myth or
reality?160. The consent is indispensable to any process of dispute resolution outside the national
courts161.

159
https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/arb-rules-revised-2010-
e.pdf
160
Sunday F. “The Doctrine of Party Autonomy in International Commercial Arbitration: Myth or Reality?”
Afe Babalola University Journal of Sustainable Development Law & Policy (2015), 6.
161
Allan Redfern and others, Law and Practice of International Arbitration, 4th edn, London: Sweet and
Maxwell, (2004) 131.

46
3.2.3 Applicable law

Regarding the applicable law, the UNCITRAL Arbitration Rules provide that an arbitral tribunal
will apply the applicable law designated by parties to the substance of the dispute162. An arbitral
tribunal is at all times expected to decide matters in accordance with the terms of the contract of
parties and takes into account applicable trade practices. The arbitral tribunal shall only decide the
applicable law that applies to a dispute by agreement of parties. It becomes an amiable compositeur
or ex aequo et bono by agreement of parties or when it applies the conflict of laws rule in
international law.

The UNCITRAL does not conduct arbitration because the same is no within its mandate. It
however developed the UNCITRAL Arbitration Rules to guide ad hoc arbitration proceedings.
Some countries have domesticated some aspects of the UNCITRAL Arbitration Rules in their
arbitration laws.

The United Nations Commission on International Trade Law (UNCITRAL) from the outset
manifested great interest in the subject of international commercial arbitration and included this
subject as a priority topic in the programme of work adopted in 1968 at its first session163. In 1975,
the UNICITRAL discussed and gave special attention to the relationship between the UNCITRAL
Arbitration Rules and institutional arbitration. This was because in 1974, the rules were developed
for ad hoc arbitration and institutional arbitration. Due to the prevailing views that supported the
removal of institutional arbitration from the scope of UNCITRAL Arbitration Rules, UNCITRAL
complied with these views but allowed for parties to appoint an institution or a person to be an
appointing authority as specified in the rules.

The Iranian settlement referred to the use of UNCITRAL rules for disputes involving banks and
other parties while seeking the return of Iranian assets of the late Shah and the obligations of the
United States government164. The UNCITRAL Arbitration Rules were developed to create a useful
mechanism for resolving international commercial disputes because they can be applied in

162
https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/arb-rules-revised-2010-
e.pdf
163
UNCITRAL, Report on First Session (1968) para. 40; I Yearbook.
164
Coulson R. “Iranian Settlements Use UNCITRAL Arbitration Rules.” Business Law Memo, vol. 1, no. 4,
(1981), 4.

47
different economic, legal, and social systems. The rules also dictate that an arbitral tribunal should
respect the choice of applicable law selected by parties. This notion supports the doctrine of party
autonomy and would lead to an increase in their use in international contracts with foreign
parties165.

3.3 ICSID Arbitration Rules

The ICSID arbitration rules are contained in the ICSID convention which was adopted on 18th of
March 1965 in Washington and entered into force on 14th October 1966. This convention created
the ICSID whose aim is to promote economic development through creation of a favourite
investment climate. The ICSID provides institutional support for investment arbitration cases
which includes provision of a hearing venue, selection of arbitrators, conducting arbitration
proceedings and facilitating financial arrangements surrounding the arbitration administered by
ICSD.

Petroleum investments are usually considered to be large scale investments that involve both the
interests of the stare and the investor. The kinds of interests in these investments cannot be
sufficiently addressed by domestic legislation due to the nature of the projects which involve
transnational interests. Over a period, the desire of a host state to control its resources has led to
the adoption of production sharing contracts. In production sharing contracts, states can exercise
their permanent sovereignty over natural resources and transfer the risk of failure to find suitable
oil to investors. The investor’s incentive however is the recovery of exploration costs where
commercially usable reserves are found. The state and the investor negotiate on a formula which
often leads to the decrease of the rights of the investor over the oil. Parties in such an investment
agreement may agree to subject their future or existing disputes to the ICSID for international
investment arbitration.

The ICSD has a comprehensive set of procedural rules that guide investment arbitration which
contains financial regulations, institutional rules and administrative rules. These rules and
regulations were adopted by the ICSID’s Administrative Council166. For ICSID to assume

165
Coulson R. “Iranian Settlements Use UNCITRAL Arbitration Rules.” Business Law Memo, vol. 1, no. 4,
(1981), 4.
166
International Commission for Settlement of Investment Disputes Convention, Revised version,
adopted by Un GA Res 65/22, (2010).

48
jurisdiction over an investment arbitration, there must exist an investment dispute of a legal nature
between a state party which is a contracting party to the ICSID Convention and an investor of
another sate that is also a contracting party to the convention. The state party and the investor
must also consent to the jurisdiction of the ICSID which can be by way of a direct agreement,
consent by national legislation of a host state, treaty between host state and the investor’s state of
nationality, consent through BIT’s and consent through multilateral treaties.

According to the ICSID convention, parties can only proceed to investment arbitration if an
amicable settlement has initially been sought by parties. The parties to an investment dispute are
the host state and a foreign investor. The jurisdiction of the ICSID extends to contracting parties
who give consent to submit to the center’s jurisdiction. The host state must fulfil certain
requirements of a contracting state before the call of arbitration. The foreign investor deals with a
central organ of Government and any acts of violation which will be attributable to the central
government even if they are committed by territorial entities. It is noteworthy that Kenya is a
contracting party to the ICSID Convention having ratified the same on 3rd January 1967167.

The foreign investors are usually juridical persons (corporations) or individual persons. To gain
access to dispute resolution under ICSID convection the host state must be a party to the BIT and
the investor must demonstrate it is a national of the other party state. In the case of individual
investor, he must demonstrate he is a national of a contracting state at the parties’ consent to the
center’s jurisdiction and that a request for arbitration has been registered by the center. The
individual’s nationality is usually determined by domestic legislation168. Investors who hold
nationality of the host state are barred from bringing claims before the center for determination,

In regard to a juridical person, it must have nationality of a contracting state party to the ICSID
convention on the day the parties consented to submit to ICSID jurisdiction. This is usually
determined by the place of incorporation and the seat of business. Locally incorporated companies
that are under foreign control can also have an investment dispute settled by the ICSID. A foreign
shareholder of the locally incorporated company can institute an international claim before the
center.

167
https://icsid.worldbank.org/about/member-states/database-of-member-states
168
Telenor v Hungary, Award, 13 September 2006. At paragraph 65.

49
The domestic courts of parties do not have influence over the ICSID proceedings in that they
cannot stay proceedings, influence proceedings, compel for evidence or set aside an ICSID award.
The proceedings of the ICSID are also not threatened by non-cooperation of a party and their
awards are final and binding and cannot be reviewed except as provided by the ICSID convention.
The ICSID has its own enforcement mechanisms and breach leads to the revival of the right to
diplomatic protection by the investor’s state of nationality169.

The jurisdiction of ICSID can only be activated if there is an existence of a legal dispute concerning
an investment. In RDC v Guatemala a dispute was described to be a conflict of views on points of
law and fact that requires sufficient communication between parties for each of them to know the
others’ views and oppose them170. The legal nature of the dispute concerns the existence or scope
of a legal right or obligation and the same was outlined in the case of Suez v Argentina171.The
dispute must also relate to an investment, and this was held by the ICSID Tribunal in the case of
Fedax v Venezuela172 and CSOB v Slovakia173. An investment has not been specifically described
by the ICSID convention however the descriptors are a substantial commitment for a certain
duration which involves an element of risk and has a significance for the host state’s
development174.

Arbitration is a dispute resolution mechanism that is accepted world over and was initially
preferred as a mechanism that could stimulate growth and investment in developing countries by
providing a degree of assurance to businesses contemplating investment in the region175. This
premise was accepted worldwide, and the availability of formal arbitration proceedings
mushroomed for the settlement of commercial and investment disputes particularly in the

169
Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law, Second Edition,
Oxford University Press, 237.
170
Railroad Development Corp (RDC) v Guatemala, Second Decision on Jurisdiction, 18 May 2010 at
Paras 129, 126-38
171
Suez, Sociedad General de Aguas de Barcelona SA, and InterAguas Servicios Integrales del Agua SA v
Argentina, Decision on Jurisdiction, 16 May 2006, paras 34-7 at 37.
172
Fedax v Venezuela, Decision on Jurisdiction, 11 June 1997, para 24 See also Siemens v Argentina,
Decision on Jurisdiction, 3 August 2004, para 150.
173
CSOB v Slovakia, Decision on Jurisdiction, 24 May 1999, para 72.
174
Rudolf Dolzer and Christoph Schreuer, “Principles of International Investment Law”, Second Edition,
Oxford University Press, 2012.
175
Luke Eric Peterson, “Bilateral Investment Treaties and Development Policy-Making”, International
Instruments for Sustainable Development, (2004), 9,21-37.

50
development world176. In the 1950’s many states incorporated arbitration into Bilateral Investment
treaties because this offered an alternative to seeking a remedy from a host country’s domestic
court which was frequently biased or ineffective177. Due to this, arbitration allowed an investor to
bring international cause of action against a state.

The world bank created the International Centre for Settlement of Investment Disputes (ICSID)
under the auspices of the ICSID Convention to conduct handle investment disputes178. The ICSID
Arbitration Rules were particularly developed to guide arbitration matters which were brought
before the ICSID Tribunal. which was more claims were brought by investors because arbitration
was seen to be favourable. ICSID would be a neutral forum for dispute resolution for investment
disputes and an alternative to an investor bringing a claim before a domestic court. It was generally
accepted that domestic courts in many developing countries because they were unreliable, bias
when the complainants lodged a complaint against the government itself179. The proliferation of
BIT’s led to the use of ICSID arbitration. A BIT is “an agreement made between two or more
sovereigns that safeguards investments made in the territory of the signatory countries180. Investors
had a high level of success as complaining parties with extremely large damage awards that
domestic courts of host state were internationally obliged to enforce the arbitral awards181.

The salient features of an investment arbitration as per the ICSID arbitration rules are briefly
described below:

3.3.1 Part autonomy/Consent to arbitration

Party autonomy is a cardinal principle that requires parties to agree on the settlement of their
existing and future disputes through arbitration. The ICSID tribunal cannot establish its own

176
Kownacki, Nicolle E. “Prospects for ICSID Arbitration in Post-Denunciation Countries: An 'Updated'
Approach.” UCLA Journal of International Law and Foreign Affairs, vol. 15, no. 2, (2010), 529–560.
177
Kownacki, Nicolle E. “Prospects for ICSID Arbitration in Post-Denunciation Countries: An 'Updated'
Approach.” UCLA Journal of International Law and Foreign Affairs, vol. 15, no. 2, (2010), 529–560.
178
The International Center for the Settlement of Investment Disputes, Bretton Woods Project, (July 10,
2009).
179
Carlos G. Garcia, All the Other Dirty Little Secrets: Investment Treaties, Latin America, and the
necessary Evil of Investor-State Arbitrations, 16 FLA.J. International L. 301, (2004), 313-314.
180
Jean E. Kalicki, ICSID Arbitration in the Americas, The Arbitration Review of the Americas, (2007).
181
Carlos G. Garcia, All the Other Dirty Little Secrets: Investment Treaties, Latin America, and the
necessary Evil of Investor-State Arbitrations, 16 FLA.J. International L. 301, (2004), 313-314.

51
jurisdiction and thus is determined by either consent by direct agreement of parties, consent
through host state legislation, consent through BIT’s and consent through multilateral treaties.

Consent by direct agreement involves the inclusion of a compromissory clause in a contract stating
that future and existing disputes arising from the investment will be subjected to international
arbitration through the ICSID. The parties are also free to give a scope of the consent to arbitration
an investment dispute by delimiting the consent to arbitration. Consent through host state
legislation may offer consent to arbitration to foreign investors in general terms however not all
reference to investment arbitration in domestic legislation amounts to consent to jurisdiction. If
domestic legislation is not express it shows that further action is required by the host state to
express the host state’s consent to international arbitration, and this is supported by the case of
Tradex V Albania182.

Consent though Bilateral Investment Treaties requires that the contracting host state to the BIT
offers consent to arbitration to the investors who are nationals of the other contracting party. The
arbitration agreement is perfected through the acceptance of that offer by the eligible
investor183.The scope of consent to arbitration in BIT’s varies and may provide consent to “all
disputes concerning investments” or “any legal dispute concerning an investment184.An arbitral
tribunal is not limited in applying the BIT substantive provisions because the consent clauses
envisage disputes that are in connection to an investment contract. In the case of Salini v
Morocco185, Article 8 of the applicable BIT defined ICSID’s jurisdiction in terms of the difference
of an investment186. The Tribunal noted that the terms of this provision were very general and
included not only a claim for violation of the BIT but also a claim based on contract: Article 8

182
Tradex v Albania, Decision on Jurisdiction, 24 December 1996, 5 ICSID Reports 47, 63; Zhinvali v
Georgia, Award, 24th January 2003, para 331.
183
Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law, Second Edition,
Oxford University Press, Page 257.
184
Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law, Second Edition,
Oxford University Press, Page 260.
185
Salini v Morocco, Decision on Jurisdiction, 23 July 2001, Journal de Droit International 196 (2002), 6
ICSID Reports 400,61.
186
Italy-Morocco BIT, Art 8.

52
obliges the State to respect the jurisdictional choice arising by reason of breaches of the bilateral
agreement and of any breach of a contract which binds it directly187.

Equally in the case of Compania de Aguas del Aconquija, SA & Vivendi Universal188 the ad hoc
committee held that:

“Article 8 deals generally with disputes relating to investments made under this Agreement
between one contracting party and an investor of the contracting party. It is those disputes which
may be submitted, at the investors option, either to national or international adjudication. Article
8 does not use a narrower formulation, requiring that the investor’s claim allege a breach of the
BIT itself. Read literally, the requirements for arbitral jurisdiction in Article 8 do not necessitate
that the claimant allege a breach of the BIT itself: it is sufficient that the dispute relate to an
investment made under the BIT. This may be contrasted, for example, with Article 11 of the BIT
dealing with state-state dispute settlement, which refers to disputes concerning the interpretation
or application of his agreement, or with Article 1116 of the NAFTA, which provides that an
investor may submit to arbitration under Chapter 11, a claim that another party has breached an
obligation under specified provisions of that Chapter.”189

The conditions for institution proceedings by the ICSID include the consent for investor-state
arbitration without exhausting local remedies such as domestic courts and the same is supported
by the ICSID Tribunal in the case of Amco v Indonesia190, Lanco v Argentina191, IBM v Ecuador192,
AES v Argentina193 and Saipen v Bangladesh194. In these cases, the jurisdiction of ICSD’s
jurisdiction on matters brought before it by an investor before exhausting local remedies was
challenged. The ICSD tribunal held that Article 26 of the ICSD Convention excludes the
requirement of exhausting local remedies before a claim on behalf of the investor is brought before

187
Salini v Morocco, Decision on Jurisdiction, 23 July 2001, Journal de Droit International 196 (2002), 6
ICSID Reports 400,61.
188
Compania de Aguas del Aconquija, SA & Vivendi Universal v Argentina, Decision on Annulment, 3 July
2002.
189
Compania de Aguas del Aconquija, SA & Vivendi Universal v Argentina, Decision on Annulment, 3 July
2002,55.
190
Amco v Indonesia, Decision of annulment, 16 May 1986, para 63.
191
Lanco v Argentina, Decision on Jurisdiction, 8 December 1998, para 39.
192
IBM v Ecuador, Decision on Jurisdiction, 22 December 2003, paras 77-84.
193
AES v Argentina, Decision on Jurisdiction, 26 April 2005, paras 69, 70.
194
Saipen v Bangladesh, Award, 30 June 2009, paras 174-84.

53
it for determination and thus pronounced that it had jurisdiction to hear the cases. This means that
an investor who has an investment claim against a state may proceed to the ICSID Tribunal without
exhausting local remedies. What are the pros and cons of this?? An investor including one in
upstream petroleum activities may proceed directly to the ICSID Tribunal for arbitration against
an ICSID member state without pursuing domestic dispute resolution mechanisms. The ICSID
Tribunal however requires that both parties give consent before proceedings commence because
they are not automatically bound to arbitration in every conceivable dispute against them195.

Proceeding directly to the ICSID Tribunal could be beneficial to an investor who prefers to settle
a dispute through international arbitration which would consider the transnational rights of the
investor. Conversely, proceeding directly to the ICSID Tribunal would be unfavorable to a state
party when domestic dispute mechanisms such as mediation, reconciliation and traditional dispute
resolution mechanisms are suitable in settling disputes involving third parties who are affected by
the upstream petroleum operations and not parties to a petroleum agreement.

African states have generally accepted ICSID jurisdiction by ratifying the ICSID convention and
agreeing to specific investment contracts and bilateral treaties to submit disputes to ICSID196.
Under the ICSID convention the jurisdiction is based on the written consent of parties to a contract
to submit disputes to the center197. The two types of clauses that show consent by parties may be
identified as a state agrees with an investor in a specific investment contract that they will submit
all their disputes to ICSID arbitration or whereby a state expresses unqualifies willingness to
submit investment disputes to ICSID arbitration198. The initiative is thus with the investor to take
advantage of the unqualified willingness of the state to bring an investment claim before ICSID.

There also instances where a state may show reluctance to submitting to ICSID for arbitration as
witnessed in the case of Holiday Inns/Occidental Petroleum v Government of Morocco. The
Government of Morocco had entered into investment contracts with Holiday Inns SA of Glarus
(Switzerland) and Occidental Petroleum Corporation and their mother companies, Holiday Inns of

195
Kownacki, Nicolle E. “Prospects for ICSID Arbitration in Post-Denunciation Countries: An 'Updated'
Approach.” UCLA Journal of International Law and Foreign Affairs, vol. 15, no. 2, (2010), 529–560.
196
Agyemang, AA. “African States and ICSID Arbitration.” The Comparative and International Law Journal of
Southern Africa, vol. 21, no. 2, (1988), 177–189.
197
Article 25(1), ICSID Convention.
198
Agyemang, AA. “African States and ICSID Arbitration.” The Comparative and International Law Journal of
Southern Africa, vol. 21, no. 2, (1988), 177–189.

54
America, and Occidental Petroleum (OPC) for the establishment of a joint venture for the
construction of hotels199 for the construction of hotels. On 5th December 1966 the Moroccan
Government and Holiday Inn of Glarus and Occidental Petroleum Corporation which contained
an ICSID arbitration clause.

Due to performance issues of the joint venture, Holiday Inns of Glarus and Occidental Petroleum
Corporation invoked the ICSID jurisdiction. The Government of Morocco challenged the
jurisdiction of ICSID stating that Switzerland, the nationality of Holiday Inns Glarus had not
ratified the ICSID convention at the time thy executed the contract on 5th December 1966.
Furthermore, they stated that the Company was not incorporated in Switzerland at the time they
signed the agreement and thus could not be a national of Switzerland. The tribunal emphatical
rejected the arguments of Morocco and held that:

“The tribunal is of the opinion that the convention allows parties to subordinate the entry into force
of an arbitration clause to the subsequent fulfilment of certain conditions, such as the adherence of
the states concerned to the Convention, or the incorporation of the company envisaged by the
agreement. On this assumption, it is the date when the conditions are definitely satisfied, as regards
one of the Parties involved, which constitutes in the sense of the Convention the date of consent
by that party. As for the date of consent contemplated by Article 25(2) (b) of the Convention, it
will automatically be the date on which the two corresponding consents coincide”200.

The ICSID tribunal concluded that the only reasonable interpretation of the Basic Agreement is to
hold that parties when signing the Agreement envisaged that all necessary conditions for the Center
would be fulfilled and their consent would at that time become fully effective201.

3.3.2 Applicable law

Foreign investments are regulated by domestic and international law. The substantive international
law that protects foreign investments is BIT’s, multilateral treaties (NAFTA & ECT) and

199
Lalive, “The first ‘World Bank’ Arbitration (Holiday Inns v Morocco), Some Legal Problems” (1980),
51 BYIL 123 142 147.
200
The Comparative and International Law Journal of Southern Africa, Vol. 21, No. 2 (July 1988), 177-
189.
201
The Comparative and International Law Journal of Southern Africa, Vol. 21, No. 2 (July 1988), 177-
189.

55
customary international law that includes the doctrine of denial of justice, the law on expropriation
and the rules relating to the nationality of individuals and corporations202.

In most foreign investments the domestic legal order of the host state will regulate the commercial
relationship between parties in relation to commercial law, company law, property law,
administrative law, labour laws and tax laws. The applicable law is however agreed upon by parties
and they may opt to include national laws which will be guided by the hierarchical order of laws
of the host state. The ICSID convention has provided that the tribunal will apply the law designated
by parties and this firmly supports the cardinal principle of party autonomy203. If the agreement
does not state, the choice of law the ICSID Tribunal will make this determination considering the
circumstances of the investment.

The ICSID convention provides that the tribunal will apply the host state law and applicable rules
of international law. Where the result of application of domestic law and the application of
international law is the same, the ICSID tribunals are usually comfortable with applying either
law204. Whereas, when the result of application of domestic law is different from application of
international law, the doctrine of the supplemental and corrective function of international vis-à-
vis domestic law is invoked and this argument is buttressed in the decision of the tribunal in the
case of Amco v Indonesia.

Article 42(1) of the Convention authorizes an ICSID tribunal to apply rules of international law
only to fill up the lacunae in the applicable domestic law and to ensure precedence to international
law norms where the rules of the applicable domestic law are in collision with such norms205.

3.3.3 ICSID Proceedings

202
Lew J, Mistelis L, Kröll S, Comparative International Commercial Arbitration, Wolters Kluwer Law
and Business, (2003).
203
Lew J, Mistelis L, Kröll S, Comparative International Commercial Arbitration, Wolters Kluwer Law
and Business, 2003,
204
Lew J, Mistelis L, Kröll S, Comparative International Commercial Arbitration, Wolters Kluwer Law
and Business, 2003.
205
Amco v Indonesia, Decision on annulment, 16 May 1986, para 20.

56
ICSID proceedings are self-contained and denationalised because they are independent of any
national law including the tribunal’s seat206. The proceedings are usually initiated by a request for
arbitration directed to the Secretary General of ICSID207 which is made by either the investor or
host state. The request must be in the official language of ICSID i.e., either English, Spanish or
French and a prescribed fee of US$ 25000 is payable upon lodging the request. A determination
of the center’s jurisdiction is thereafter made by the Secretary General of ICSID and if satisfactory,
the request is registered, and a notification issued to parties.208

The arbitral tribunal is then constituted which is usually of three arbitrators. Each part is required
to appoint an arbitrator and the third one is selected by both parties and is usually the president of
the arbitral tribunal. If the parties are unable to constitute the arbitral tribunal in 90 days, either
party may request the Chairman of the ICSID’s Administrative Council209 to make the outstanding
appointments. The arbitrators who are appointed to serve in the arbitral tribunal must not be
nationals of the state party or co-nationals of the investor whichever the case may be even in party
appointed arbitrators.

The arbitrators who are appointed must have the proper competence and capacity to discharge their
duties and they must have the proper independence from the parties and suffer no conflict of
interest. A party may propose the disqualification of an arbitrator on the grounds of conflict of
interest. The unchallenged arbitrators are the ones who decide on the disqualification and when
they fail to agree, the Chairman of ICSID’s Administrative Council makes that determination.

The existence of a professional relationship with a party however does not automatically disqualify
an arbitrator. In the case of Compania de Aguas del Aconquija, SA & Vivendi Universal v Argentina, the
adhoc committee held that:

“The mere existence of some professional relationship with a party is not an automatic basis for
the disqualification of an arbitrator or committee member. All circumstance needs to be considered

206
Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law, Second Edition,
Oxford University Press, Page 278.
207
http://icsid.worldbank.org/ICSID/ICSID/RulesMain.jsp
208
Lew J, Mistelis L, Kröll S, Comparative International Commercial Arbitration, Wolters Kluwer Law
and Business, 2003.
209
Under Article 5 of the ICSID Convention, the President of the International Bank for Reconstruction
and Development is ex officio Chairman of ICSID’s Administrative Council.

57
to determine whether the relationship is significant enough to justify entertaining reasonable
doubts as to the capacity of the arbitrator or member to render a decision freely and
independently.”210.

3.3.4 Annulment under ICSID Convention

ICSID awards are final and not subject to annulment or scrutiny from any domestic court because
the institution has its own review mechanism that can be exercised by parties. A party that makes
a request for annulment of an ICSID award to the Chairman of ICSID’s Administrative Council211
who constitutes an ad hoc committee. The ad hoc committee comprises of three persons who
determine the application for annulment that is made by a party.

The request for annulment must be made within 120 days after the award is issued. The ad hoc
committee may stay the execution of the arbitral award pending the determination of the
application for annulment212. The stay of execution of the arbitral award is automatic if it is
included in the application for annulment before the constitution of the ad hoc committee. A party
may apply for a partial or full annulment of the arbitral award.

An annulment is concerned about the legitimacy of the process of the decision and not the
substantive correctness of the arbitral award213. The effect of an annulment is merely removing the
decision of the arbitral tribunal without replacing it. Conversely an appeal of an arbitral award is
concerned about the legitimacy of the arbitral process and the substantive correctiveness of the
arbitral award. An ad hoc committee under the ICSID convention is unable to determine the merits
of a case like in an appeal process and thus would limit itself to an annulment of an arbitral award.
After annulment parties are free to resubmit their dispute before a different arbitral tribunal for
determination.

In the case of CDC v Seychelles, the function of annulment was described as:

210
Compania de Aguas del Aconquija, SA & Vivendi Universal v Argentina, Decision on Annulment, 3 July
2002, 27.
211
The President of the World Bank holds this office ex officio.
212
Article 52(5) of the ICSID Convention.
213
Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law, Second Edition,
Oxford University Press, Page 302.

58
“This mechanism protecting against errors that threaten the fundamental fairness of the arbitral
process (but not against incorrect decisions) arises from the ICSID Convention’s drafters desire
that awards be final and binding, which is an expression of customary law based on the concepts
of pacta sunt servanda and res judicata and is in keeping with the object and purpose of the
Convention. Parties use ICSID arbitration (at least in part) because they wish a more efficient way
of resolving disputes rather than is possible in a national court system with its various levels of
trial and appeal, or even in non-ICSID Convention arbitrations (which may be subject to national
courts review under local laws and whose enforcement may also be subject to defenses available
under, for example, the New York convention.”214.

The ICSID convention provides five grounds for annulment, and they are contained in Article
52(1) of the ICSID Convention, and they are inter alia: improperly constituted arbitral tribunal,
arbitral tribunal acting ultra vires, corruption on the part of an arbitrator, gross departure from
fundamental rules of procedure and when the award fails to state its ratio decidendi.

3.4 Non ICSID investment arbitration

The settlement of state and investor disputes is mainly handled by the ICSID however this is not
the only institution that handles investment arbitration because not all parties are contracting
parties to the ICSID Convention. Other international institutions such as the International Chamber
of Commerce or the London Court of International Arbitration handle state and investor
arbitration. Theses arbitrations are conducted under the UNCITRAL Arbitration Rules of 1976
(revised in 2010) and under the International Chamber of Commerce Arbitration Rules of 1998
(revised in 2011). The common elements in the arbitral procedures conducted by the International
Chamber of Commerce and the London Court of International Arbitration are that parties can
control the composition of the arbitral tribunal and the applicable law in the proceedings. The
arbitral tribunals can also decide on their own competence and may determine the arbitral
procedures when parties fail to prescribe the same.

3.5 ICSID Additional Facility

214
CDC v Seychelles, Decision on Annulment, 29th June 2005, para 36.

59
In 1978, the Administrative Council of ICSID created the Additional Facility open to parties that
submit to its jurisdiction in certain cases which are outside the ICSID’s jurisdiction215. The ICSID
additional Facility handles cases where either the host state or the investor is not a contracting
party to the ICSID Convention. The Additional Facility arbitration proceedings receive support
from ICSID, and the proceedings are not governed by the ICSID Convention but the Additional
Facility rules.216

3.6 The Convention on the Recognition of Arbitral Awards (New York Convention)
The New York convention was developed by the UNCITRAL Secretariat and came into effect on
7th June 1959. The convention seeks to provide uniform legislative standards for the recognition
and enforcement of arbitral awards. It seeks to provide legislative standards for recognition of
arbitration agreements, recognition and enforcement of foreign awards by domestic courts217. In
doing so the convention, obliges parties to ensure that foreign awards are generally acceptable and
can be enforced within their jurisdictions by their domestic courts. A contracting state while
consenting to be bound by the convention may declare that the application of the convention is in
respect to awards made in the territory of another state and commercial relationships that are legal
in nature.

The New York Convention has outlined seven grounds in which a foreign award will not be
recognized. These grounds include incapacity of parties, invalidity of arbitration agreement, due
process, scope of arbitration, jurisdiction of the arbitral tribunal, arbitrability and public policy218.
This goes a long way in guiding contracting states on reasons that render foreign award to be
unenforceable.

Parties are also required to recognize all arbitral awards as binding and enforceable under their
jurisdiction when called upon to enforce them under lex fori. The convention has facilitated the
removal of stringent conditions for recognition and enforcement of foreign awards by domestic

215
Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law, Second Edition,
Oxford University Press, Page 240.
216
Lew J, Mistelis L, Kröll S, Comparative International Commercial Arbitration, Wolters Kluwer Law
and Business, (2003).
217
Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958).
218
Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958).

60
law in comparison with it219. It has also ensured that parties prescribe procedures for the
enforcement and recognition of foreign awards where the convention is silent.

The New York Convention is applied to enforce foreign awards in various jurisdictions as
witnessed in the case of Sté. européenne v. Yugoslavia, Sté. Européenne where the Government of
Yugoslavia had appealed against a decree of the District Court at Rotter dam which denied
recognition and enforcement of the arbitral award rendered in Lausanne on the ground of
Yugoslavia's sovereign immunity220. The Court of Appeal at the Hague at Netherland overturned
the decision of the district court stating that the New York Convention does not exclude arbitral
awards made against a state when the other party is a physical or legal person221. It held that
Yugoslavia cannot plead sovereign immunity because the same would only occur when both
parties were states and the context of their dispute involved government acts.

This rationale was confirmed by the Supreme Court of the Netherlands on 26 October 1973. 44 As
stated in the decision:

“ it is possible to observe in international treaty practice, doctrine and local case law a
tendency to limit the cases in which a state can invoke immunity before a foreign court;
this development has notably been caused in part by the fact that the governments of many
countries have increased their activities in a sector of social relations which is governed by
private law, and, in connection therewith, have entered into transactions with private
individuals on a basis of equality; in such cases, it appears to be reasonable to grant to the
party dealing with the state the same measure of protection under the law as when such
party would have dealt with a private individual; on the ground of these considerations, it
must be assumed that the immunity from jurisdiction to which a foreign state is entitled
under current international law does not extend to cases in which a state has acted in a
manner as meant above; The request for permission of enforcement of the award in
question could only then be considered to conflict with the immunity from execution to

219
Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958).
220
Cappelli-Perciballi, Lionello. “The Application of the New York Convention of 1958 to Disputes Between
States and Between State Entities and Private Individuals: The Problem of Sovereign Immunity.” The
International Lawyer, vol. 12, no. 1, (1978), 197–207.
221
Article 1(1) Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York,
1958).

61
 which a foreign state is entitled under international law if it had to be decided that
international law opposes every execution of foreign state assets situated in the territory of
another state; however, such rule of international law does not exist; consequently, the
ground cannot lead to cassation, whatever may be the meaning of the Court of Appeal's
reasoning of this point”222;

These decisions have shown the application of the New York convention in recognizing and
enforcing arbitral awards even in cases where a state does not want to effect a foreign arbitral
award by invoking the state immunity principle under international law. This is a milestone in the
protection of private individuals in commercial transactions with states223

3.7 Conclusion

The UNCITRAL Arbitration Rules and ICSID arbitration rules have embedded the cardinal
principle of party autonomy which is critical in the settlement of disputes through arbitration. The
comprehensive set of rules sustain the principle of agreement of parties in the conduct and selection
of the applicable law of their arbitration proceedings that promotes the autonomous nature of
arbitration.

ICSID arbitration includes investment disputes that widens the scope for dispute resolution and
does not limit it to commercial disputes. It also provides a neutral ground for an investor to bring
a claim because the proceedings are self-contained and denationalized. ICSID arbitral awards are
final and are not subject to scrutiny to domestic courts because they have their own review
mechanisms. It is also noteworthy that the ICSID tribunal applies domestic law and applicable
rules of international law and thus the risk of bias to international law is reduced.

The New York convention is applied to promote the supervisory role of courts in the recognition
and enforcement of foreign arbitral awards in domestic jurisdictions. This is a milestone in creating
confidence in the international arbitration process because foreign arbitral awards become

222
Sté. européenne v. Yugoslavia, Sté. Européenne, International Legal Materials, Cambridge University
Press, Volume 60, Issue 4, [2021], 75.
223
Cappelli-Perciballi, Lionello. “The Application of the New York Convention of 1958 to Disputes Between
States and Between State Entities and Private Individuals: The Problem of Sovereign Immunity.” The
International Lawyer, vol. 12, no. 1, (1978), 197–207.

62
enforceable without limitation. International law is robust in application because of its
comprehensive rules and procedures that prevents rigidity of arbitration that promotes the
delocalized nature of arbitration.

63
 CHAPTER FOUR

FINDINGS ON THE SETTLEMENT OF THIRD-PARTY PETROLEUM DISPUTES IN

KENYA

4.1 Introduction

This chapter will discuss other suitable dispute settlement mechanisms that facilitate the settlement
of upstream petroleum disputes in Kenya. It will also draw its findings from chapter two and three.
Chapter two has described and analysed the legal and institutional framework of the arbitration
system used in the settlement of upstream petroleum disputes in Kenya while chapter three has
described and analysed the role of international law in the settlement of upstream petroleum
disputes through arbitration. The findings from these chapters will be discussed in line with the
settlement of third-party disputes.

4.2 Domestic settlement of upstream petroleum disputes in Kenya

In Kenya, the settlement of upstream petroleum disputes is outlined in the model petroleum
agreement. A scrutiny of the provisions in the Petroleum Act show that a contractor could be a
corporation that is incorporated in Kenya. By this description the parties to a petroleum agreement
would therefore be nationals of Kenya and as per the Arbitration Act, the arbitration would be
domestic in nature. When an arbitration is domestic, the applicable law would be Kenyan law. To
this extent the arbitral awards issued by an arbitral tribunal would be recognized and enforced by
the national courts of Kenya.

It is also noteworthy that the dispute resolution clause in the model petroleum agreement only
provides for amicable settlement, expert determination, and arbitration for the settlement of all
differences and disputes in relation to upstream petroleum operations. Mediation and conciliation
are alternative dispute resolution mechanisms which have been left out in the model petroleum
agreement. These alternative dispute resolution mechanisms usually advocate for soft bargaining,
and they are suitable for differences and disputes of a social nature.

In upstream petroleum operations, it should be noted that the contractor requires a social license
to operate to prevent operational disruptions. The discovery of petroleum in a country raises the

64
expectations of the citizenry who expect to benefit directly from the exploitation of the natural
resources. If these expectations are not handled correctly by the state and the contractor, this could
lead to human rights violations and stoppage of exploration activities.

According to the United Nations guiding principles the management of human rights risks ought
to be integrated during state and investor negotiations. To identify, prevent, mitigate and account
for how business enterprises address human rights issues, they should carry out human right’s due
diligence224. The human rights due diligence should cover adverse human rights impacts that the
business enterprise may cause or contribute to during its operations or business relationships and
the same should be ongoing due to the dynamic nature of human rights risks which may evolve
over time225.To achieve this the parties should adequately prepare and have the capacity to address
human rights implications of projects during negotiations. The responsibilities for the prevention
and mitigation of human rights risks should be clarified and agreed upon before conclusion of the
contract.

An upstream petroleum project should have an effective community engagement plan through its
life cycle starting at the earliest stages. Individuals that are impacted by the project activities but
not party to the contract should have access to an effective non-judicial grievance mechanism226.
These non-judicial mechanisms should include negotiation, mediation and conciliation which are
suitable for disputes of a social nature.

These mechanisms are recognized by the Constitution of Kenya and can empower communities
who are often in a weaker bargaining position compared to the government and investor227. Social
issues are best handled with the participation of all concerned citizens through the provision of a
grievance mechanism which is a routinised state based or non-State-based, judicial or non-judicial

224
Principle 17, United Nations Guiding Principles on Business and Human Rights, HR/PUB/11/04,
(2011).
225
Principle 17, United Nations Guiding Principles on Business and Human Rights, HR/PUB/11/04,
(2011).
226
Principle 31, United Nations Guiding Principles on Business and Human Rights, HR/PUB/11/04,
(2011).
227
Kariuki F, Kerecha G, Kirwa J, “Handling Extractives Related Grievances in Kenya: A guide for Judicial
Officers.” Extractives Baraza, (2019).

65
process through which grievances concerning business-related human rights abuse can be raised
and remedy can be sought228.

International dispute resolution mechanisms however bring a dispute to a forum far beyond the
reach of domestic, administrative, or legal systems. The absence of a requirement to exhaust
domestic remedies risks erroneous interpretations of domestic law without the benefit of a
domestic courts interpretation if the applicable law selected by parties is international. The
international tribunals that conduct international arbitration for example are closed to the public
and individuals from a host state. This means thy cannot access the tribunals with ease and this
hinders participation of the affected persons. In Kenya we have the NCIA whose function includes
administering domestic and international arbitrations as well as alternative dispute resolution
techniques under its auspices229. NCIA is more accessible to third parties affected by upstream
petroleum operations to participate in international dispute mechanisms.

4.3 International settlement of upstream petroleum disputes

The petroleum industry prefers international arbitration in the settlement of upstream petroleum
disputes. It is considered suitable in addressing transnational rights of parties in international
commercial transactions. International arbitration allows parties to select international arbitration
instruments to regulate their arbitration proceedings. According to this study, the international
instruments for arbitration include the UNCITRAL Arbitration Rules and the ICSID Arbitration
Rules which promote the principle of party autonomy. These international instruments allow
parties to select an applicable law that is suitable for their arbitral proceedings. International law
is wide enough to protect transnational rights of parties because international arbitration
instruments were developed due to the globalization of commercial activities.

An ad hoc arbitration system is an arbitration that is not conducted by an institution. The model
petroleum agreement has outlined that all differences and disputes of parties may be resolved
through arbitration and in accordance with the UNCITRAL Arbitration rules adopted by the United
Nations on International Trade Law230. The UNCITRAL arbitration rules were developed for ad

228
Principle 25, United Nations Guiding Principles on Business and Human Rights, HR/PUB/11/04, (2011).
229
Section 5(b), Nairobi Center for International Arbitration Act, No. 26 of 2013, Laws of Kenya.
230
Clause 53(1), Model Petroleum Agreement, Petroleum Act No.2 of 2019, Laws of Kenya.

66
hoc arbitration and to this extent the preferred arbitration system to be used by parties is ad hoc
arbitration231.

The UNCITRAL Arbitration Rules were developed with the cardinal principle of party autonomy
and the realization of the globalization of commercial transactions that would require a flexible
and robust arbitration system232. The Kenyan model petroleum agreement’s arbitration clause
provides that arbitration shall commence when a party sends a request to the UNCITRAL
secretariat233. Moreover, the parties are required to send a notification to the UNCITRAL
secretariat when they appoint an arbitrator, and the applicant party may request UNCITRAL to
appoint an arbitrator when the defending party fails to do so234. This shows that the legislator has
appointed UNCITRAL as an appointing Authority which is allowable under the UNCITRAL
Rules235.

Institutional arbitration is also a preferred system of arbitration because the settlement of disputes
is governed by the arbitration rules adopted by the institution that is selected by parties. This makes
it easier for parties because the institutions conducting the arbitration proceedings have
predetermined arbitration rules and this need not be expressly provided. Parties who submit to the
jurisdiction of institutions also benefit from the experience of the arbitral tribunal in settlement of
disputes. The decisions made by the arbitral tribunals usually are consistent because previous
decisions have a persuasive effect notwithstanding that the arbitral awards issued are case and
parties’ specific.

Some institutions also use the UNCITRAL Arbitration rules, and this widens the arbitration system
that can be used by the arbitral tribunal. The jurisdiction of the ICSD Tribunal is invited during
the selection and appointment of arbitrators. It is not clear which arbitration system is preferred
whether ad hoc or institutional arbitration however one can note that the legislator appreciates
international arbitration systems to facilitate the settlement of petroleum disputes.

231
UNCITRAL, Report on First Session (1968) para. 40; I Yearbook
232
Lew, Mistelis, Kröll, Comparative International Commercial Arbitration, 2012.
233
Clause 53(1), Model Petroleum Agreement, Petroleum Act No.2 of 2019, Laws of Kenya.
234
Clause 53(4)(c), Model Petroleum Agreement, Petroleum Act No.2 of 2019, Laws of Kenya.
235
Dietz, John P. “Introduction: Development of the UNCITRAL Arbitration Rules.” The American Journal of
Comparative Law, vol. 27, no. 2/3, (1979),449–452.

67
The applicable law in the arbitration clause of the Kenyan model petroleum agreement if Kenyan
law236. This provision is usually a fundamental provision and an express selection by legislation
can hinder party negotiations. It is unlikely that a state would concede the application of its own
law and therefore the arbitration clause found in the Kenyan model petroleum agreement ought to
provide that parties should agree on the applicable law that governs their arbitration process. This
will help to cement party autonomy by giving the parties the freedom to agree upon the suitable
applicable law.

Some international treaties have their own applicable law clauses in case parties do not prescribe
their choice of law preference. If an arbitration agreement does not state, the applicable law
concisely this may lead to the application of domestic law interpretation as witnessed in some
cases as hereunder:

“In the case of Shenzhen Food Group Co Ltd v Noble Resources Co Ltd (Singapore) (2010), 26
the parties agreed that disputes arising from the performance of the contract shall be submitted to
arbitration by either side. If the purchaser is the defendant, the dispute shall be submitted to the
Hong Kong International Arbitration Centre; if the vendor is the defendant, the dispute shall be
submitted to The Grain and Feed Trade Association in London for arbitration. Disputes arising out
of the contract shall be resolved in accordance with English law. The Supreme People's Court
found that because there was neither stipulation concerning the laws applicable to the validity of
the arbitration agreement nor a specific stipulation to the place of arbitration, pursuant to Article
16 of the Supreme People's Court's Interpretation of the People’s Republic of China Arbitration
Law (2006), the laws of the forum – i.e., the laws of the People’s Republic of China would apply.
It further found that while the main contract's arbitration clause referred to two arbitration
institutions, the clause was still valid because it clearly identified which one of the two would be
used. Thus, the People's Courts did not have jurisdiction over those disputes that were subject to
the valid arbitration agreement”237

236
Clause 53(8), Model Petroleum Agreement, Petroleum Act No.2 of 2019, Laws of Kenya.

237
Shenzhen Food Group Co Ltd v Noble Resources Co Ltd (Singapore), No 22 of the Fourth Civil Tribunal
of the Supreme People's Court (9 June 2010).

68
In the case of foreign investments, it is witnessed that both domestic and international law regulates
arbitration. This is because the investment transactions occur in the host state’s jurisdiction and
equally the host state’s legal system. The application of international law gives the investor
confidence that the international minimum standards in the investment transactions will be
observed238. In combining the host state law and international law in dealing with the applicable
law, most bilateral investment treaties apply a formula list: (a) the host state’s law: (b) the Bilateral
Agreement itself as well as other treaties: (c) any contract relating to the investment: and general
international law239. If a host state is bound by international law obligations an arbitral tribunal
could rule that international law is applicable as witnessed in the case of Antoine V Burundi240
where the tribunal held that:

“A complimentary relationship must be allowed to prevail. That the Tribunal must apply
Burundian law is beyond doubt since this is also cited in the first place by the relevant provision
of the Belgium-Burundi treaty. As regards international law, its application is obligatory for two
reasons. First, because, according to the indications furnished by the Tribunal by the claimants,
Burundian law seems to incorporate international law obligations which it freely assumed under
the Treaty for the protection of investments”241.

An arbitral tribunal may also apply the host state and international law taking into account the
provisions of the agreement, the terms of other agreements concluded by parties, the law of the
contracting party whose territory the investment was made, including its rules on the conflict of
laws, and general principles of international laws242. In the case of Maffezini v Spain243 the tribunal
applied the host state law in some questions and international law in some questions. The tribunal
applied international law for the question of attribution244, and the Spanish Law on Public
Administration and Common Administrative Procedure to elucidate the structure and functions of

238
Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law, Second Edition,
Oxford University Press, Page 288.
239
Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law, Second Edition,
Oxford University Press, Page 290.
240
Antoine Goetz v Burundi, Award, 10 February 1999.
241
Antoine Goetz v Burundi, Award, 10 February 1999, 98.
242
Argentina-Spain Bilateral Investment Treaty, 13 November 2000.
243
Maffezini v Spain, Award,13 November 2000.
244
Maffezini v Spain, Award,13 November 2000, 50,52,57,77,83.

69
the entity245. On the issue of an environmental impact assessment, the tribunal applied international
law246, Spanish legislation,247a European Community directive,248 and the Bilateral Investment
Treaty.

The development of third-party participation in the arbitral process, the submissions of amicus
curiae briefs, has occurred in ICSID arbitrations249. ICSID arbitration is governed by the ICSID
Convention and ICSID Arbitration Rules. The recognition of the need to harmonize trade and
environmental objectives and to encourage public discussion and debate regarding these issues has
led investment treaty arbitration to depart from rules and practices that govern international
commercial arbitration250.

4.3.1 ICSID Arbitration cases

1. Aguas del Tunari, SA v Republic of Bolivia251

“The dispute arose out of Bolivia's privatization of water and sewage services, the concession for
which was awarded to the claimant. The claimant commenced the project, but soon faced strong
opposition and protests by citizens and eventually abandoned the project. The claimant then filed
the claim arguing, inter alia, that the Bolivian government breached various provisions of the
Netherlands/Bolivia BIT through various acts and omissions including the rescission of the
concession. In August 2002, several environmental NGOs and individuals filed petitions for status
as amicus curiae.48 Their requests included: (a) standing to participate as parties; (b) submission
of amicus curiae briefs; (c) attendance at all hearings; and (d) public disclosure of the materials of
the case. However, the tribunal rejected all these requests. In a letter from the president of the
tribunal,49 he stated that the tribunal unanimously decided that the requests were 'beyond the
power or the authority of the Tribunal to grant'. According to the tribunal, 'it is manifestly clear'
that it does not have the power to grant the request for access to hearings and the documents of the

245
Maffezini v Spain, Award,13 November 2000,47-49.
246
Maffezini v Spain, Award,13 November 2000,67.
247
Maffezini v Spain, Award,13 November 2000,68,69
248
Maffezini v Spain, Award,13 November 2000,69
249
Ishikawa T., “Third Party Participation in Investment Treaty Arbitration”, The International and
Comparative Law Quarterly, Vol. 59, No. 2, (2010), 373-412
250
Ishikawa T., “Third Party Participation in Investment Treaty Arbitration”, The International and
Comparative Law Quarterly, Vol. 59, No. 2, (2010), 373-412
251
Aguas del Tunari, SA V Republic of Bolivia ICSID case No. ARB/02/3

70
proceedings without the agreement of the parties. As for the request for the amicus curiae
submission, the arbitrators were of the view that 'there is not at present a need to call witnesses or
seek supplementary non-party submissions at the jurisdictional phase of its work'. The proceedings
of this case were discontinued in March 2006 at the request of both parties, following the
settlement of the dispute”252.

2. Suez, Sociedad General de Aguas de Barcelona SA, and Vivendi Universal SA v Argentine253

“This is the first case in which the tribunal acknowledged that it has the power to accept amicus
curiae submissions under the ICSID Convention. The dispute related to the privatization of the
public service of water provision. The claimants argued that certain measures the Argentine
government adopted in response to Argentina's economic and financial crisis injured their
investments. Five NGOs filed a 'Petition for Transparency and Participation Amicus Curiae', in
which they made several requests to the tribunal including: (a) access to the hearings; (b) an
opportunity to submit amicus curiae briefs; and (c) unrestricted access to the materials of the case.
The tribunal issued an order on 19 May 2005 and concluded that it had the power to accept amicus
curiae sub missions under article 44 of the ICSID Convention. The tribunal explained the virtue
of accepting amicus curiae submissions as follows: The acceptance of amicus submissions would
have the additional desirable consequence of increasing the transparency of investor-state
arbitration. Public acceptance of the legitimacy of international arbitral processes, particularly
when they involve States and matters of public interest, is strengthened by increased openness and
increased knowledge as to how these processes function...through the participation of appropriate
representatives of civil society in appropriate cases, the public will gain increased understanding
of ICSID processes”254.

252
Ishikawa T., “Third Party Participation in Investment Treaty Arbitration”, The International and
Comparative Law Quarterly, Vol. 59, No. 2, (2010), 382
253
Suez, Sociedad General de Aguas de Barcelona SA, and Vivendi Universal SA v Argentine (Order in
response to a petition for Transparency and Participation as Amicus curiae of 19 May 2005) ICSID Case
No. ARB/03/19.
254
Ishikawa T., “Third Party Participation in Investment Treaty Arbitration”, The International and
Comparative Law Quarterly, Vol. 59, No. 2, (2010), 382-383

71
4.4 Conclusion

The domestic settlement of third-party disputes is preferable in the context of petroleum disputes
because aggrieved parties can access local institutions with ease as opposed to an international
institution which may be far away and difficult to access. There is also comfort that local
institutions are better placed at interpreting and domestic law that would reduce the risk of bias. It
is also notable that international tribunals such as ICSID Tribunal have embraced the participation
of a third party as an amicus curiae but the same is not automatic and is limited to public interest.

The settlement of third-party petroleum disputes is preferable through alternative dispute

resolution mechanisms such as mediation, reconciliation, and traditional dispute mechanisms
because it allows active participation of third parties affected by the activities under a petroleum
agreement. Equally, in Kenya, the Constitution provides that the judiciary shall be guided by the
principles of reconciliation, arbitration, mediation, and traditional dispute mechanisms255. This
enhances the supportive role of courts in applying alternative dispute resolution mechanisms in
settling disputes.

255
Article 159(2), Constitution of Kenya, 2010, Laws of Kenya.

72
 CHAPTER FIVE

RECOMMENDATIONS AND CONCLUSIONS.

5.1. Introduction

This chapter presents the findings and analysis of data reviewed, conclusions and
recommendations for this research. The methodology and objectives of this research were
recognized during the review of data and implemented. The data reviewed was journal articles,
Kenyan laws that guide upstream petroleum operations and arbitration, the provisions of the
UNCITRAL Arbitration Rules, the ICSID Arbitration Rules, the Convention on the Recognition
and enforcement of Foreign Arbitral awards and notable international case law on arbitration. The
findings will further be conferred to identify if the study questions and objectives were adequately
addressed and satisfied. The findings are presented in two sections as follows: applicable law and
party autonomy.

The research was based on a critical analysis of the arbitration provisions contained in the model
petroleum agreement anchored in the Petroleum Act. It also involved a critical analysis of the
UNCITRAL Arbitration Rules, ICSID Arbitration rules and the New York Convention. The
research was divided into five chapters for logical flow of the study.

The first objective of the study was to examine the suitability of the arbitration provisions provided
in the model petroleum agreement in the settlement of upstream petroleum disputes in Kenya. The
preferred arbitration that is provided is ad hoc arbitration because there was no selection of a
specific institution to conduct the proceedings. This study found that the arbitration clause invites
the UNCITRAL and ICSID tribunal to select arbitrators. Firstly, The UNCITRAL can be selected
by parties to be an appointing authority, however it does not conduct arbitration proceedings.

The need to send a non-specific request before the commencement of arbitral proceedings to
UNCITRAL is unclear. Secondly, this study has established that institutional international
arbitration may be suitable for the settlement of upstream petroleum disputes however the selection
of the arbitration system should be left to the agreement of parties. Moreover, institutions that
conduct international arbitration such as ICSID have a set of existing rules that guide arbitration
proceedings and therefore there is also no need of outlining the rules or conduct of proceedings.
73
This study has found that the arbitration provisions in the model petroleum agreement are not
suitable because the preferred arbitration system cannot be categorically construed.

This study finds that the arbitration clause provision outlining the applicable law as Kenyan law
fails to recognize the nature of upstream petroleum operations which is usually between a state
and a contractor who is a joint venture. A joint venture may include a national corporation as the
lead operator and international corporations as non-operators. Joint ventures are established to
spread the high risk of upstream petroleum operations to parties who own a participating interest
in the joint venture. The petroleum industry is global in nature, and it requires parties to adhere to
internationals standards in the exploration, production, and development of petroleum for it to
attract a viable market. The oil that goes for production is also sold in the international market and
the benefits accrue to the state and the contractor as per the production sharing contract.

This study established that delocalising arbitration would help prevent the application of stringent
provisions of domestic law. The parties to a petroleum agreement should therefore determine and
agree upon the applicable law which would be preferable to all parties taking into consideration
their interests in the suitable arbitration system that would facilitate the settlement of upstream
petroleum operations in a flexible and expeditious manner.

The Petroleum Act256 provides that all differences and disputes should be solved amicably in the
first instance. If amicable resolution does not work, parties may call for expert determination or
arbitration in lieu of expert determination. This study has established that there are disputes or
differences which are not amenable for resolution through arbitration. This includes disputes
include third parties such as disputes between the community and the contractor. An arbitration
process is a private process between parties to a particular contract and does not involve third
parties. Disputes between the community and the contractor are inevitable and there ought to be
a dispute resolution mechanism that address such disputes and differences.

This study also finds that the Kenyan model petroleum agreement is an essential model agreement
to be negotiated by the state and an investor who is desirous of undertaking upstream petroleum
operations. As much as there is a possibility of the parties departing from what has already been
provided after negotiations, there are some arbitration provisions which are difficult to negotiate.

256
Section 53, Petroleum Act, Kenya Laws of Kenya.

74
A choice of law provision is a fundamental arbitration provision that guides an arbitration process.
If this arbitration provision is already pre-determined in a model petroleum agreement, it would
be difficult to derogate from what is provided. The state is a party to this petroleum agreement and
would therefore champion the law of the state.

Conversely, the investor usually gets an upper hand during negotiations because he shoulders the
total financial burden and risk of the upstream petroleum operations and thus has a higher
bargaining power. The ability of the investor to fundamentally change the arbitration provisions
in the model petroleum agreement brings into question the legal status of the model petroleum
agreement anchored in legislation. It also brings into questions whether the arbitration provisions
in the model petroleum agreement are suitable as drafted and would be generally acceptable to
both the contractor and state in the context of upstream petroleum activities.

The second objective was to interrogate whether arbitration provisions contained in international
instruments are apt in the settlement of upstream petroleum disputes in Kenya. The study
established that international arbitration is preferred in the petroleum industry because it is a
dynamic dispute resolution mechanism. Notwithstanding, the principle of party autonomy is
extensively anchored in international law which is universally accepted by parties.

The UNCITRAL arbitration Rules and the ICSID arbitration rules selected as sources of
international law discussed in the study show that party autonomy takes center stage in arbitration
because the agreement of parties’ guides everything in the arbitration process from the selection
of an arbitral tribunal, the rules of forum applied by the arbitral tribunal in conducting proceedings
and the final determination made by the arbitral tribunal.

The use of international law for the settlement of petroleum disputes according to the autonomous
theory of arbitration will create a flexible and non-national system regulation of the commercial
dispute by way of arbitration. The goal should be the settlement of a dispute in a flexible and timely
manner and by mutual acceptance and cooperation of parties. This supports the autonomous theory
of arbitration which looks at this as the goal of arbitration and opines that international law can be
tailored to fit the needs of parties because it respects the cardinal doctrine of party autonomy.

This study has found that party autonomy helps to protect transnational rights of parties where a
contractor is a joint venture that constitutes international corporations. The agreement by parties

75
facilitates the suitability of arbitration provisions and makes them effective in the settlement of
disputes in upstream petroleum disputes. The settlement of existing and future disputes is
expedited because party autonomy promotes co-operation of parties whilst protecting their
interests.

International law provides a wider set of rules that would facilitate the settlement of upstream
petroleum disputes because it does not confine parties to domestic law provisions and
interpretations. International bodies that apply international law in the settlement of upstream
petroleum disputes have also adjudicated upon numerous cases that expose them to the real issues
faced by the industry.

This study also finds that international arbitration instruments are developed with party autonomy
principles in mind and thus are preferred by disputing parties. An arbitration agreement should
therefore include the agreement of parties on all issues such as the selection of the rules of forum,
the selection of the applicable law, the selection of the arbitral tribunal, the conduct of proceedings,
the place of arbitration and the seat of arbitration.

This study has found that the applicable law is fundamental in arbitration proceedings because it
influences the legal order used by the arbitral tribunal in conducting the arbitration proceedings d.
It also influences the recognition and enforcement of arbitral awards. The applicable law is also
fundamental where parties have not expressly provided certain terms and conditions in the
arbitration agreement because the same influences the arbitral tribunal when it becomes an amiable
compositeurs.

The applicable law clause should therefore provide that parties will agree upon the applicable law
to be applied regarding the arbitration agreement to cement party autonomy. Prescribing an
applicable law in the arbitration clause of the model petroleum agreement would interfere with
party autonomy and consequently the delay negotiations between parties because the same is a
fundamental provision in an arbitration agreement. The applicable law guides the arbitral tribunal
in the interpretation of the arbitration provisions that are espoused in the arbitration agreement.

Nonetheless, this study also established that the New York Convention which is a source of
international law, provides for the recognition and enforcement of foreign awards. This means that
awards made outside the territory of a state are recognized as final and binding and domestic courts

76
would enforce them when called upon. This flexibility allows parties to have their seat of
arbitration in any place and the awards made by an arbitral tribunal will be recognized and enforced
by domestic courts of states who are parties to the New York Convention.

This study also finds that international bodies such as UNCITRAL and ICSID are selected as
appointing authorities in the arbitration clause of the model petroleum agreement. The need to
choose these international bodies instead of local arbitration centers that undertake or facilitate
international arbitration is still unclear. It is noteworthy that there exists the Nairobi Center for
International Arbitration established under the Nairobi Center for International Arbitration Act
whose role includes facilitating international arbitration by offering parties technical and
administrative assistance257 .

5.3 Recommendations

The third objective of the study was to recommend proposals to the arbitration provisions
contained in the model petroleum agreement and policy interventions that would enhance the
settlement of disputes in the upstream petroleum industry in Kenya. The study recommends the
following:
1. The arbitration clause should be amended to include a provision which states that parties
will agree upon whether they will undertake ad hoc arbitration or institutional arbitration
for the settlement of their differences or disputes and the corresponding legal instrument
that will regulate the arbitral proceedings.
2. The arbitration clause should also be amended to prescribe that parties will agree upon the
applicable law that will regulate their arbitration agreement.
3. The Petroleum Act should be amended to prescribe that differences and disputes in relation
to or in connection with the contract that involves a third party shall be resolved through
negotiations, mediation, or conciliation in the first instance.
4. A policy should be developed by the Kenyan Government to guide negotiations between
the state and an investor in petroleum agreements.

257
Section 5(j), Nairobi Center for International Arbitration Act, No. 6 of 2013, Laws of Kenya.

77
 5. The Kenyan Government should undertake institutional reforms to remove dependence of
the state on foreign capital and technical skills to provide better management of petroleum
contracts.
6. Further research is required to scrutinize the legal status of the model petroleum agreement
anchored in legislation.
5.4 Conclusions

The conclusion of this chapter is based on the findings of chapters based on the literature reviewed
in previous chapters and in particular chapter one, two and three and four. From the study it can
be concluded that party autonomy is very fundamental in attaining a successful arbitration process
because of mutual agreement and cooperation of parties. The nature of upstream petroleum
operations involves transnational rights of parties, and this helps to determine the suitable
applicable law for arbitration clauses. Parties to an arbitration agreement should select the arbitral
system and the choice of law that will be applied by an arbitral tribunal during arbitration.

78
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APPENDICES

Appendix A: Plagiarism Report

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Appendix B: Ethical Clearance Report

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