Oil & Gas: Price review clause not unenforceable ‘agreement to agree’ 

The oil and gas industry continues to experience a significant number of natural gas and LNG price review (or ‘reopener’) disputes. This could be viewed as an inevitable consequence of the common practice of including provisions in long-term energy contracts to renegotiate price, quantity or other factors over time. In Associated British Ports v Tata Steel UK Ltd [2017] EWHC 694 (Ch) the High Court considered whether such clauses were unenforceable ‘agreements to agree’.

The oil and gas industry will be relieved that the answer was that they were not. However, the case serves as a useful reminder as to what makes such clauses enforceable (or unenforceable).

Facts

Associated British Ports (“ABP”) is the owner and operator of Tidal Harbour facilities at Port Talbot in Wales. Around March 1995 it entered into a new licence agreement with Tata Steel UK Limited (“Tata”) (the “Licence Agreement”). Under the Licence Agreement, iron ore and other commodities that Tata uses in its steel works are imported through the Tidal Harbour. The Licence Agreement sets out the rights and obligations of Tata and ABP as regards Tata’s use of the Tidal Harbour facilities.

Clause 22 of the Licence Agreement contained a renegotiation provision of the type found in many long-term contracts. It stated:

“It is hereby agreed between the parties that in the event of any major physical or financial change in circumstances affecting the operation of [Tata's] Works at Llanwern or Port Talbot or ABP's operation of the Tidal Harbour on or at any time after the 15th day of September 2007 either party may serve notice on the other requiring the terms of this Licence to be re-negotiated with effect from the date on which such notice shall be served. The parties shall immediately seek to agree amended terms reflecting such change in circumstances and if agreement is not reached within a period of six months from the date of the notice the matter shall be referred to an Arbitrator (whose decision shall be binding on both parties and who shall so far as possible be an expert in the area of dispute between the parties) to be agreed by the parties or (if the parties shall fail to agree) to be appointed on the joint application of the parties or (if either shall neglect forthwith to join in such application then on the sole application of the other of them) by the President for the time being of the Law Society.”

In February 2016, Tata purported to give notice under such clause of a major financial change in circumstances and asked ABP to negotiate some amendments to the Licence Agreement (including a 50 per cent reduction of the fee payable by Tata to ABP). The rationale for such renegotiation was that certain factors, including a doubling in the imports of steel to Europe, a quadrupling of imports from China, increased tariffs by the United States and a strong pound had all reduced the competitiveness of UK-manufactured steel.

ABP contended that such factors did not fall within the definition of a “major financial change in circumstances” since such circumstances regularly impact the steel industry and ABP applied to the English court for a declaration that, as an ‘agreement to agree’, the clause was invalid, being too uncertain to be enforceable. Tata applied for ABP’s claim to be stayed under section 9(1) of the Arbitration Act 1996 on the grounds that the dispute was properly to be resolved by arbitration under Clause 22 of the Licence Agreement.

Decision

In rejecting ABP’s arguments, Rose J found that the wording of Clause 22 of the Licence Agreement was not so uncertain as to be unenforceable. The words amounted to a binding obligation to refer any dispute regarding renegotiation of the terms of the Licence Agreement to arbitration. Therefore ABP’s claim should be stayed in favour of arbitration.

Rose J also decided that (absent agreement between the parties) it would be for an arbitrator to determine whether the matters set out in Tata’s February 2016 notice amounted to a “major physical or financial change in circumstances” entitling Tata to a revision of the terms of the Licence Agreement, and that the scope of any such arbitration would include determination of the licence fee payable under it.

In reaching her conclusion, Rose J noted that where a clause is challenged for being uncertain, it must be decided on its own facts rather than transposing “a decision in a case in respect of one set of words in one contract to another”.

Rose J highlighted the line of case law that confirms that the courts should strive to give some meaning to contractual clauses agreed by the parties if it is at all possible to do so. She also noted Leggatt J’s assertion in Astor Management AG & ors v Atalaya Mining plc & others [2017] EWHC 425 (Comm)) that “the role of the court in a commercial dispute is to give legal effect to what the parties have agreed, not to throw its hands in the air and refuse to do so because the parties have not made its task easy. To hold that a clause is too uncertain to be enforceable is a last resort”.

The clause clearly fell within a category of cases where the courts are particularly reluctant to find that a clause was void for uncertainty since the contract had been performed by the parties over a long period of time. Importantly, the inclusion of the clause made commercial sense for the parties who were in a long-term relationship of mutual interdependence. The 15 September 2007 earliest date for renegotiation indicated the half way period of the Licence Agreement and represented the first opportunity to reassess the relationship between the parties.

The court considered whether the phrase “any major physical or financial change in circumstances” was too uncertain for an arbitrator to determine whether the arbitration clause has been validly triggered and whether it was possible to define the boundaries of a class so as to determine whether something was or was not a major physical or financial change in the circumstances. Rose J noted that “provided one can posit some changes which would definitely fall within the scope of the phrase "major physical or financial change in circumstances" and some changes which clearly falls outside it, then the phrase is sufficiently certain to be enforceable even though it may be difficult in the abstract to draw the precise divide between changes falling on either side of the line”.

The court held that the wording and context of Clause 22 point to the kinds of changes that can trigger the right to seek a revision of the Licence Agreement. Meanwhile the questions that an arbitrator would be obliged to consider in determining whether a major change in circumstances had occurred were not impossible to answer. Therefore the clause was not too uncertain as to be unenforceable.

Comment

Many long-term energy contracts contain provisions that allow for the renegotiation of price or quantity. Perhaps this is most regularly seen in legacy natural gas and LNG sale and purchase agreements, where parties commonly make provision for price reviews or ‘reopeners’.

A price review provision will usually – but not always – require condition(s) to be satisfied before a review can take place. These condition(s) are sometimes referred to as ‘trigger events’.

Trigger events vary from contract to contract. However, they regularly contain generic wording/a requirement for an event such as “a significant change in the energy market”. English law has a strong tradition of: (i) enforcing such renegotiation provisions; and (ii) accepting that arbitrators are well placed to resolve issues, such as repricing, that the courts have traditionally considered outside their jurisdiction. In this respect the Arbitration Act 1996 specifically empowers arbitrators to resolve ‘differences’ as well as ‘disputes’, which is generally understood to cover such issues as price reviews.

This case serves as a helpful reminder that:

• First, English law will seek to uphold renegotiation or price review clauses in long-term contracts, where performance has commenced, wherever it is possible to do so.

• Second, it will be assisted in doing so if the clause contains objective criteria for the ‘trigger’ and or renegotiation objective. An objective criteria to ‘trigger’ a review and/or define the result of the review need not be specific. The courts have previously decided a ‘reasonable price’ would be sufficient to define a new price.
• Third, an arbitration clause mechanism in a contract will assist the court in finding that a renegotiation provision is enforceable by ensuring that, if the parties cannot agree the issue, then it will be resolved by an arbitrator.

The case is also a reminder that, where there is an arbitration clause, the above issues should be resolved by an arbitrator and not the courts. In the event court proceedings are commenced, they will be stayed for arbitration.