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Renegotiation clause in long-term contract - what if parties cannot agree?

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In Associated British Ports v Tata Steel, the court upheld a provision in a 25-year licence which referred a failure to renegotiate terms in certain circumstances to arbitration.

The clause in question, provided that either party could serve notice on the other to renegotiate the agreed terms “in the event of any major physical or financial change in circumstances” affecting that party’s operations. If the parties could not reach agreement within six months, “the matter” was to be referred to an arbitrator.

Tata gave notice to ABP seeking renegotiation of the licence fee. ABP, however, applied to the court seeking declarations that the clause had not been validly triggered and that it was, in any event, too uncertain to be enforceable. In dismissing ABP’s application and granting a stay of the proceedings under section 9 of Arbitration Act 1996, the court gave useful guidance on how to approach clauses in long term agreements, which are challenged for uncertainty.

The judge held 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”. Only where it is legally or practically impossible to give the parties’ agreement meaning, will the court hold a clause – or contract – void for uncertainty and it should be even more reluctant to avoid a term where the contract has already been performed for a period of time.

Since it would clearly be possible to identify some changes as constituting a “major physical or financial change in circumstances”, and others as not satisfying that test, it could not be said that trigger wording was too uncertain. It might be difficult to determine whether a particular set of circumstances met the test but it would not be an impossible question to answer.

Nor could it be said that the arbitrator would be left to adjust the licence’s terms in a vacuum. Having satisfied herself that there would be some means of determining what was reasonable in the context, the judge was willing to imply a requirement that the arbitrator determine the dispute “reasonably”. The yardstick here would be the effect of the change in circumstances that triggered the renegotiation in the first place, the existing terms of the licence and the parties’ submissions in the arbitration. During the period of negotiation, the parties are free to agree whatever revisions they wish but, if the matter proceeds to arbitration because the parties cannot agree, the arbitrator’s task is not to draw up a fresh licence for them but rather to decide on the reasonableness of the terms of the licence in the circumstances.

The efforts of the English courts to seek to uphold contracts and to support the parties’ chosen dispute resolution forum – here arbitration – is encouraging but parties can certainly do more to help themselves. Had the arbitration agreement in the licence, first, provided some guidance as to its scope, including a more precise definition of the trigger, and, secondly, specified how the arbitrator was to carry out his or her task, it is likely that these applications to the court could have been avoided.