Governing Law

Every contract has a governing law, the system of rules by which the courts will interpret and enforce it, and with upstream agreements the governing law is always specified in the contract.

In the international oil industry English law is prevalent. For example, the contracts for the supply of liquefied natural gas from Malaysia and Indonesia to Japan are in English and are governed by English law. This is a remarkable vote of confidence in the English commercial law, and an excellent source of earnings for English lawyers.

But oil and gas concessions are not usually governed by English law, but by the law of the host state. Most states see a foreign governing law as incompatible with their sovereign rights. So international oil concessions are governed by local law, whatever disadvantages that may have for a foreign investor.

The oil companies used to argue for English governing law, but this was a very difficult argument to make without suggesting that local law is in some way deficient. In my view this argument has become impossible, at least in the established oil provinces.

In 1999 I was involved with a consortium of companies negotiating an oil concession in Iran, known as a Buyback. The lawyer for one of our co-venturers wanted to argue for the agreement to be governed by English law, and asked for my support. While I did not think he could possibly succeed, I said that I would not stand in his way and wished him luck.

He made his difficult case with some skill. The lead negotiator for the National Iranian Oil Company heard him with narrowed eyes, and after a pause said: “I see what you are saying, Mr N… Iranian oil is good enough for you, but Iranian law is not?”

In the long silence that followed it was clear that the point was lost.

When negotiating an oil concession I usually accept local governing law without argument. I prefer to keep my powder dry for issues that we have a chance of winning.

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See also:  To Be Honest