The Role of Bifurcation in an Arbitral Hearing and its Real World Applications

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In a major decision, an arbitral tribunal in the International Chamber of Commerce (“ICC”) has issued a ruling on the liability of YPF, the state-controlled energy company of Argentina, for its role in the suspension of natural gas exports to Brazil. The claim that YPF unlawfully rescinded its contracts was brought forward by AES Uruguaiana and by Transportadora de Gas del Mercosur in 2009. They are reportedly seeking $1.6 billion dollars in compensation. YPF is controlled by the Argentinian government following its nationalization last year – another dispute that is currently also in arbitration.

It is important to note that the ruling was on liability only. The parties to this arbitration employed an oft-used strategy of bifurcating the arbitration into two phases: a liability phase and a damages phase. The goal of this strategy is to reduce cost, maximize efficiency, and promote settlement. By deferring discovery and hearings on the issue of damages until after a decision is rendered on the liability phase, the parties are able to gauge the merits of their case without delving into complicated issues on the quantification of damages.

Here, YPF knows that it has been held liable (a decision that it may still appeal). The question that remains is the measure of its exposure. Now that both parties know this, they can return to the negotiation table to try to fashion a settlement. If they are unable to agree on one, they will proceed to a shorter hearing where the tribunal will determine the amount of damages that is owed. In either event, the parties have saved many resources by not yet litigating the issue of damages and still retain the option of avoiding those expenses by settling the dispute. This scenario shows why bifurcation is a mechanism that more and more parties employ from the outset of their arbitrations.

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