Commercial Space Industry Prepares for Increased Future Disputes Risk: Why Contracts Should Consider Including an International Commercial Arbitration Clause

On 29 September 2022, a panel discussion on new development in space law and arbitration was held in the context of the second World Arbitration Update conference (see www.worldarbitrationupdate.com). The key take-away from the panel discussion was that the space industry is currently booming and that it will face a likely rise in the number of disputes between commercial space actors.

During the panel discussion, it was explained that the space industry is expected to reach USD 1 trillion in revenue by 2030. One of the main drivers of this rapid increase in revenue is the drastic decrease in launch costs. Between 1970 and 2010, launch costs remained essentially the same (USD 16,000 per kilogram for heavy payload), but recently SpaceX has brought this down to USD 2,500 with the Falcon 9, and there are projections that launch cost may further drop from USD 1,500 to a dramatic USD 100 by 2040. This decrease in launch costs has opened up the playing field to a variety of commercial actors, including start-ups, which operate vastly differently than the traditional governmental actors.

The new entry of commercial actors in the space industry will inevitably result in more disputes with claims related to various commercial agreements such as satellite manufacturing, launch and operation agreements, insurance claims, space tourism claims, IP licensing disputes and M&A claims. Such organizations typically have quarterly reporting obligations, business plans to deliver and financial undertakings to third parties. They will have a more short-term view on claims and liabilities in comparison with governmental organizations. Consequently, these commercial actors will be less inclined to avoid disputes. Unlike governmental actors, they will seek procedures that allow them to resolve their disputes as fast as possible, and the prejudiced party will seek to translate any losses into immediately available financial compensation. 

Also, there are currently more than 1,000 start ups active in the space industry, which will probably lead to a significant consolidation wave. In view of the sometimes-experimental nature of their activities, projections, business plans and representations could be off mark, with a risk of disappointed purchasers and post M&A claims. 

Commercial actors should therefore consider carefully what dispute resolution clauses they will include in future agreements. When deciding between various options, the inclusion of a dispute resolution clause providing for international arbitration should be particularly considered for commercial actors in the space industry for the following reasons:

• arbitration can be transnational and therefore more disconnected from a specific state. Space disputes can become political because they concern dual use goods or strategic assets. This can lead to parties to fail to behave in line with the agreement, but instead behave more in line with state interests. A significant number of the major players in the industry are state agencies such as NASA, which means that even if you have a commercial contract, you are essentially still dealing with a government. State courts may not be the best forum for dispute resolution in those situations, especially when judges are appointed by the government;
• As opposed to proceedings before state courts, arbitration proceedings can be conducted in any chosen language, which can avoid substantial translation costs;
• The parties to arbitration proceedings can typically each nominate the members of the arbitral tribunal. This allows them to have specialized persons or in their view trustworthy persons on a tribunal, which are verifiably independent and unrelated to any of the parties;
• Arbitration proceedings are typically confidential, which can be key in a high-tech industry where patents and technology may make all the difference; and
• Incidents in space happen far away with limited live access to the scene of the event. Arbitration allows for expert witnesses to play an active role in enlightening the tribunal on technical aspects whilst leaving the advocacy to the lawyers. It also allows for controlled document production which can be essential if the relevant data is in the possession of a single party.

In order to tailor arbitration clauses to the space law industry, expertise can be drawn from the aviation sector or the maritime industry.

In the aviation sector, a clear difference has operated between certain state-to-state and commercial arrangements. For example, traffic rights and technical standards have remained solidly in the non-commercial sphere. In contrast, dealings in the supply chain have become fully privatized, while dealings with customers and consumers are regulated by liability caps and presumptions. This rationalization has contributed greatly to the commercial development of the industry and the use of international arbitration to resolve disputes. 

In the maritime industry, certain shipping (read: launching) agreements have become very formatted and many of those are resolved by specialized counsel, experts and arbitrators, with speed of resolution and experienced counsel and arbitrators often being key. Maritime law also deals with a number of state responsibilities for commercial activities and operations on the high seas, including recently for deep sea mining, which may offer useful examples for the expected space and moon mining activities.

The expertise to carefully design the proper dispute resolution clause can certainly build-upon and learn from the lessons learned from the aviation sector and maritime industry. The expertise can now be applied to the developing disputes resolution field of space law.

In sum, when entering into commercial space agreements, commercial space actors should review any proposed dispute resolution clause closely and seek assistance from legal counsel where necessary to ensure professional, speedy and confidential resolution of any future dispute that may arise.

For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.