Arbitration Jurisdiction in EPC Projects: How LegaTech Tackled Pathological Clauses

In large EPC construction projects, determining the proper dispute resolution forum is crucial. When contracts contain ambiguous clauses or responsibilities are transferred among parties, it can lead to serious jurisdictional challenges. Recently, LegaTech represented an EPC contractor in a case that combined both problems: pathological clauses and a transfer of obligations from an owner to an employer.

Vague Dispute Resolution Clauses: “Pathological Clauses”

One of the central hurdles in this dispute involved a poorly drafted dispute resolution clause.

• Dual Pathways: The clause suggested both arbitration and litigation as potential forums.
• Resulting Ambiguity: Known as a “pathological clause,” this vague language created confusion, requiring the arbitration tribunal to decide if it even had jurisdiction over the matter.

Transferring Responsibilities: Owner vs. Employer

A further complication arose when the project owner transferred its responsibilities and obligations to an employer closely linked to the owner.

• Legal Ambiguities: Determining whether the employer was bound by the original obligations caused disputes about liability and project delays.
• Separability Principle: While arbitration agreements are generally treated as separate from the main contract, the question was whether the new employer automatically inherited the duty to arbitrate.

Confirming Arbitration Jurisdiction: Terms of Reference

To resolve the uncertainties, both parties agreed to a terms of reference at the start of arbitration:

1. Clear Jurisdiction: The document clarified the scope of disputes the tribunal would address.
2. Binding the Employer: The tribunal examined the assignment documents and found the arbitration agreement also transferred to the employer, confirming that the employer was bound to resolve disputes through arbitration.
3. Proceeding with Evidence: Once jurisdiction was confirmed, the tribunal considered project delays and how the employer managed its obligations.

Lessons Learned: Ensuring Clarity in EPC Contracts

1. Draft Dispute Clauses Carefully
   • Avoid Pathological Clauses: Clearly specify whether disputes go to arbitration or litigation or set clear criteria for choosing.
2. Beware of Transfers and Assignments
   • Check Arbitration Agreements: Confirm whether obligations and dispute resolution commitments pass to new parties.
3. Use a Terms of Reference
   • Reduce Ambiguity: A well-drafted terms of reference can streamline arbitration proceedings and confirm tribunal jurisdiction.

Conclusion: Arbitration as an Effective Forum

Despite the initial confusion, the arbitration tribunal upheld its jurisdiction and addressed the core disputes. The case underscores how thorough legal analysis of contract language, combined with careful procedural steps, can bring clarity to complex construction disputes. By resolving ambiguities early and confirming arbitration as the proper forum, LegaTech enabled the parties to focus on critical project issues and, ultimately, move forward with confidence.