Deciding new contract terms by arbitration
ASSOCIATED BRITISH PORTS v TATA [2017]
It is well known that ‘agreements to agree’ are unenforceable. This case sought to avoid such a vacuum by referring a failure to agree terms to an arbitrator to decide how certain contract provisions were to be varied and apply throughout the remainder of the agreement. The question was whether such a mechanism was effective.
Facts:
- Associated British Ports (“A”) owns and operates the Port Talbot tidal harbour. Tata (“T”) owns the steel works at Port Talbot. In 1995, the parties concluded a licence agreement governing T’s use of the harbour for a period of 25 years (“Licence”).
- Clause 22 provided that: “... in the event of any major physical or financial change in circumstances affecting the operation of [the steel works] … or [the tidal harbour] … on or at any time after [date] 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”.
- The clause in question also provided that:
- the arbitrator’s decision regarding any amended terms was binding on the parties; and
- the identity of the arbitrator was to be agreed by the parties or if the parties failed to agree, an arbitrator was to be appointed on the application of one of the parties by the President for the time being of the Law Society.
- In February 2016, T gave notice under clause 22 of a major financial change in circumstances and asked A to negotiate amendments to the Licence, including a reduced fee for use of the tidal harbour. T argued that challenging conditions in the market for steel products amounted to a major financial change in circumstances for the purposes of clause 22.
- A maintained that clause 22 was void for uncertainty because the triggering event, ‘any major physical or financial change in circumstances’, was too uncertain. It also argued that there were no or insufficient objective criteria to guide the arbitrator in deciding how to amend the Licence terms.
Decision:
- The Court held that the arbitration clause in the Licence was valid and effective. It was a commercial contract that had already been substantially part performed. Therefore, the Court said it should be particularly reluctant to find that a clause was void for uncertainty. When the parties entered into the Licence in 1995, they did not intend either party to bear the risk that its terms would remain completely unchanged throughout the entire 25 year duration.
- In the Court's view, provided it was possible for there to be some changes which would definitely fall within the scope of the phrase ‘major physical or financial change in circumstances’ and some that would clearly fall outside it, then the clause was sufficiently certain to be enforceable. This was the case even though it might be difficult to draw a precise dividing line in the abstract.
- The lack of any objective criteria by which the arbitrator was to decide how to amend the terms of the Licence could be rectified by implying a requirement of ‘reasonableness’ into the clause. The arbitrator would be able to determine what was ‘reasonable’ by reference to all the circumstances, including:
- the existing terms of the Licence;
- the nature of the physical or financial change that had triggered the arbitration; and
- the submissions of the parties.
- It was also concluded that the authority of the arbitrator included the right to determine a new licence fee.
Points to note:
- Arbitration clauses enabling an arbitrator to adjust contract terms are relatively uncommon in mainstream commercial contracts. This decision reflects the reluctance of the Courts to declare an agreement as being void for uncertainty where it has already been substantially part performed.
- If such a mechanism is to be adopted, it would typically be sensible for the parties to document in the contract itself some criteria and/or parameters to guide the decision making of the arbitrator rather than just leaving the arbitrator to decide on the basis of what is ‘reasonable’.
- It remains to be seen how often contracting parties are prepared to use such a mechanism. Many will simply refuse on the basis that they are simply not prepared to place such important issues in the hands of a third party.
- The matter will now presumably be referred to an arbitrator if the parties cannot agree. If such a reference is made, it will be interesting to see how the arbitrator interprets the phrase ‘financial change in circumstances affecting the operation of [the steel works]’.