The Disputes over the Renegotiation Clause

By Liang Peng

The vast majority of international investment contracts provide for dispute resolution by arbitration- whether ad hoc or institutional arbitration. The parties often resort to the arbitral tribunal over renegotiation disputes. But, the tribunal can only decide on renegotiation clauses if it has the power to do so. In some cases, the contract contains no express link between the renegotiation clause and the arbitration clause. In other cases, the arbitral tribunal is not just authorized to decide general disputes arising from the contract, instead, the contract expressly provides that the parties also have the right to call on the arbitral designated in the contact to decide on the adjustment of the contract on behalf of the parties, if negotiations on adaptation foreseen in the contract have failed, such as Lemire v. The Government of Ukraine.[1] Therefore, it is a case by case question.

In general, the disputes related to renegotiation clauses before international arbitration may cover the following issues:

The Existence of the Trigger Event

The function of a renegotiation clause depends above all on the trigger event defined by the parties. However, due to the long-time span of petroleum contracts and complexity of situations, it’s nearly impossible to include all circumstances which will happen in future. The openness of such definition gives the rise of disputes over the existence of the trigger event. In these cases, one of the parties may dispute the existence of an event or change of circumstances within the terms of the agreement and whether the conditions for a renegotiation are in fact present. Have the contractor’s rights or interests really been detrimentally affected by the legislative measure? Is the detrimental effect ‘significant’? To the extent that there is no definition of the effects in the contract, there is a risk of these questions arising and proving troublesome.[2] If the parties disagree to the precondition of the renegotiation, the third-party like arbitral tribunal has to step in. The decision on this matter will often lead to the beginning of the procedure of renegotiation.

The Obligations of Renegotiation

This is another problematic issue the arbitral tribunal often faces. Generally, the renegotiation clause often provides a renegotiation process without saying promise to reach agreement. Words like ‘good faith’,’ best efforts’, and ‘contractual equilibrium’, are too vague to define and parties are unlikely to have the same opinion due to the conflicting of interests. It’s therefore an obligation of the tribunal to give every word in the contract a meaning. With the development of international arbitration, some general principles are recognized by international business community. For example, in the Aminoil case, the tribunal cited the International Court of Justice’s (ICJ) view on the content of an obligation to negotiate in the North Sea Continental Shelf Cases,[3] and added at the general principles that ‘ought to be observed in carrying out an obligation to negotiate’ were, in no particular order:

(1)  Good faith;

(2)  A sustained upkeep of the negotiations over a period appropriate to the circumstances;

(3)  An awareness of the interests of the other party; and

(4)  A persevering quest for an acceptable compromise.[4]

With respect to the first principle, the parties will be required to conduct the negotiations in good faith irrespective of whether a good faith requirement is expressly included in the renegotiation provision. If they fail to do so, this will be taken into account in any arbitral proceedings that follow from any failure of the renegotiation process. The other three principles express the Aminoil tribunal’s view that while an obligation to negotiate is not an obligation to agree, the obligation to negotiate exists within a ‘well-defined juridical framework’ which can involve ‘fairly precise requirements’.[5] Obviously, a failure to reach an agreement does not mean that the parties have failed in their duty to negotiate.

The Consequences of a Failure to Reach an Agreement

What’s the consequence if the parties fail to reach agreement in renegotiation? This is an important issue in that without obligations to reach agreement, the party suffering from damages may get nothing after a long process of renegotiation. Therefore, the consequences of a failure to reach an agreement are related to the substantive aspect of the renegotiation clause.

This is particular unfair in some cases that foreign investors often were pressured to give up some interests to the HCs under some situations even after renegotiation was conducted, because the obligation to negotiate does not mean  the obligation to agree. In many cases, the investors have to compromise with the government because they can not simply walk away from the project and terminate the contract after the mass infrastructure has been built to develop natural resources.

There are several possible consequences following a failure to reach an agreement:

 If there’s nothing to say about the failure to reach an agreement, and the renegotiation was not linked to arbitration clause, the contract will be the original one, no change occurs.

Where the tribunal is empowered to govern the renegotiation disputes, providing clear contractual terms about the restoration of contractual interests between the parties, the tribunal may adapt the contract for the parties. But, this may not be preferred by most arbitral tribunals as we discussed below. In practice, it’s difficult to meet the requirements for an adaptation of an ongoing contract.  

Another consequence is that the party may choose to terminate the contract after a failure to reach an agreement during renegotiation. In some cases, the tribunal has to decide the compensation issue after the termination of a contract. [6]

In conclusion, the dispute over the renegotiation clause can be divided into the procedure aspect (including the trigger event, obligation to renegotiate), and the substantive aspect (the consequences of a failure to reach an agreement), which makes renegotiation clauses effective way to achieve economic equilibrium.

As to international arbitration, the procedure aspect of the renegotiation clause is to provide a fair and equitable chance for the parties to continue a project without ending the relationship on the basis of economic equilibrium, while the substantive aspect serves as a remedy to restore the economic equilibrium. The two aspects are both in pursuit of economic equilibrium.

NUTSHELL:

This is the 2nd in a 3-part series of articles on Renegotiation clauses. The first installment  examines the structure of Renegotiation clauses while this article has focused on highlighting the fact that disputes can and do arise in the process of negotiation due to the complexities arising from long-term contracting. An understanding of trigger events and the obligation to negotiate; as well as the consequences of not reaching an agreement are discussed in this article. For more information on this article and to view Liang's professional profile, click here.-->

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[1] Stefan, Kroll., Supra note p 450.

[2] Peter D Cameron, International Energy Investment Law- the pursuit of Stability (2010) p85.

[3] North Sea Continental Shelf (Federal Republic of Germany/Denmark), ICJ Rep 1969, 4, 47, (1969).

[4] The Government of the State of Kuwait v. The American Independent Oil Company (Aminoil), ILM 1982 1014. Berger also lists 19 obligations that should govern the parties during a contract renegotiation Berger (2003).

[5] See Aminoil Award, supra note 1004, Para 24.

[6] In Aminoil case, the parties agreed that the restoration of the parties to their positions before the termination of the Concession would be impracticable. Therefore, the task of the tribunal was limited to the determination of the amount of compensation to be paid to Aminoil for the termination of the Concession. See Stefan Kroll, supra note p 431.