I. Introduction and background

1. Arbitration is frequently chosen to resolve disputes in the energy sector and particularly those relating to price fluctuations. The recent spiraling then plunging of energy prices has given it renewed interest, 1 not only in the context of power purchase agreements but also concession and investment contracts.

This issue of the ICC International Court of Arbitration Bulletin contains a number of hitherto unpublished decisions in ICC cases relating in particular to price clauses in energy contracts. By way of introduction to these decisions, the present commentary seeks to identify the main trends that have emerged from arbitral decisions in this field and to alert practitioners to the drafting of contractual clauses. It is hoped that our comments and the following decisions will be instructive on the extent to which rises and falls in energy prices may lead to the indexation, adaptation or renegotiation of energy contracts, and on the powers conferred on arbitrators in this connection.

Our commentary aims above all to be practical. For a discussion of the disputes, reference is made to those case studies and decisions that stand out as the most noteworthy.

In energy contracts, more than elsewhere, price clauses seek to strike a necessary balance between stability and predictability. They often lead to the sharing of risks, as reflected in take-or-pay clauses.

In other situations, the price of energy may have a role to play in determining the compensation due for being denied the right to develop and exploit an oil well2 or for being unable to exploit a gas field. 3

No matter how sophisticated price clauses may be (with complex algorithms, revision and adaptation provisions, etc.), adjustments are often indispensable in the long term due to the inevitable volatility of energy markets. This is precisely where arbitration comes in as a means of resolving the differences between the viewpoints of the various [Page52:] players. Although the awards rendered in this field are often kept discreet, there is ample evidence to show how indispensable arbitration is here.

Which are the clauses most frequently invoked for the purpose of renegotiating, attacking or even reneging on an energy contract, and what has been the response from ICC arbitral tribunals? How can arbitrators adapt prices if they do not dispose of the facts they need to know? How can arbitrators attempt to restore the original balance in the contract if they lack the indexes and other information needed to do this? These are some of the questions we will attempt to answer in this article.

Our study of arbitral awards has also shown that some energy contracts contain pathological clauses, the existence of which may increase the parties' frustration if the arbitral tribunal is thereby prevented from accomplishing its duties to the full.

II. Contractual clauses used to challenge and renegotiate energy prices

2. It can be seen from energy contracts and arbitral awards that there are essentially four categories of clauses upon which the challenge or the renegotiation of energy prices can be based. They are as follows:

i) force majeure

ii) hardship, changing circumstances

iii) indexation, adaptation, stabilization

iv) take-or-pay

The borders between these different kinds of clauses are sometimes difficult to define. In some contracts, the different categories are mixed up, and in some arbitrations they are referred to successively or alternatively.

Below we will look at how they have been perceived and handled in ICC cases in particular.

i) Force majeure

Although force majeure clauses are often invoked in energy contracts, claims based on such clauses in arbitration proceedings rarely succeed as their application is subject to strict conditions.

By definition, force majeure renders the performance of a contract impossible. This is what distinguishes it from hardship, which makes the performance of the contract more onerous or difficult. force majeure interrupts the performance of the contract and the parties cannot be pursued for contractual default.

Most energy contracts contain such clauses, which generally specify the situations that fall into this category and the effects they have on the contract. 4 Below are some examples.

'force majeure' means any unforeseen event or circumstance, the occurrence of which is beyond the reasonable control of the affected Party, and which could not be avoided or prevented with due care and at reasonable expense, and which have the effect of making it impossible or unlawful for the affected Party to perform all or any of its [Page53:] obligations hereunder. force majeure events shall include but shall not be limited to the following: . . .

For the purposes of this contract, force majeure shall be taken to mean any event outside the control of the Party concerned, which could not reasonably be foreseen or, if foreseen, that could not be reasonably avoided and the consequences of which could not be overcome by the means which should be open to the Parties as prudent and reasonable operators, and which prevents the Party concerned from performing all or part of its obligations under this Contract. Cases of force majeure, when they fulfill the conditions set out above, shall include but not be limited to: . . .

Consequences of Force majeure

All Natural Gas, the delivery or taking of which has been prevented by force majeure, shall, unless otherwise agreed, be deducted from the amounts required to be made available and taken under this Agreement.

3. It is not surprising that at the time of the first oil crisis such clauses were frequently relied on as a means of escaping contractual obligations.

ICC arbitral tribunals have ruled that neither increases nor decreases in oil prices, no matter how large or unexpected, can be considered to constitute force majeure.

In case 2216, 5 it was held that a Norwegian company's refusal to take possession of crude oil due to a sharp and significant drop in the price of oil and a change in the exchange rate parity could not be justified by force majeure.

In case 2478, 6 the arbitral tribunal decided that a Romanian company's refusal to deliver fuel on account of an increase in the price of oil and a change in the exchange rate parity between the currencies concerned (franc and dollar) was unjustified. On the other hand, the Romanian authorities' decision to cancel the permits allowing the fuel to be exported was acknowledged to constitute force majeure.

Likewise, in case 2508, 7 a seller who alleged that an increase in the price of oil on the world market entitled it to withhold deliveries of the agreed quantities was held to be at fault.

4. Such clauses may nonetheless prove useful in energy contracts in the event of specific events beyond the parties' control. For example, we know of contracts for the delivery of liquid natural gas (LNG) or oil that listed the closure of the Suez Canal as a situation of force majeure.

Difficulties of a different kind were encountered in the transportation and delivery of oil reported in ICC case 11265. 8 The respondent tried to justify as a case of force majeure its failure to perform due to problems relating to rail transport and the availability of trucks. It is interesting to note that the arbitral tribunal referred to the UNIDROIT Principles to dismiss the defence based on force majeure:

128. . . . Article 7 of the Contract principally contains an open list of events qualifying as force majeure, but does not give a definition of force majeure, simply referring to usages in the context of the list it contains. Article 7.1.7 of the UNIDROIT Principles, for its part, [Page54:] contains a general definition of force majeure. Hence, in the view of the Arbitral Tribunal, Article 7 of the Contract should be read in the light of the rule laid down in Article 7.1.7 of the UNIDROIT Principles.

129. Three conditions need to have been fulfilled in order to satisfy the requirements of Article 7.1.7. The event referred to must have been unpredictable, on the basis of an assessment made at the time the contract was concluded and seen from the perspective of a normally diligent and reasonable professional; the alleged obstacle must result from an event beyond the debtor's control or influence; and lastly the event must be of such a kind that the debtor could not reasonably be expected to anticipate or overcome it or anticipate or overcome the consequences thereof. The Arbitral Tribunal considers that these conditions are not satisfied in the present case and that the Respondent has not been faced with any of the events mentioned in Article 7 of the Contract. Consequently, the Arbitral Tribunal is of the opinion that the transport problems encountered by [the Respondent] do not constitute a case of force majeure.

The arbitral tribunal went on to note the following:

135. . . . As shown by the evidence, the Respondent's reasons for not organizing transportation by lorries sooner were clearly related to the higher cost of road transport, added to which, in the case of transport to [Town A], there was little logic in this alternative, which required the products to be transferred from one lorry to another . . . The transportation by lorry was therefore not arranged until assurance had been obtained from the Claimant that the latter would cover the additional cost represented by such transport . . . Besides, it is beyond doubt that [Respondent] weighed up the amount it could be required to pay as a penalty under Article 6 of the Contract against the additional cost of transportation by lorries, and preferred to take the risk of having to pay a penalty . . .

5. The recent rise in electricity and gas prices, which, through the formulae used for their calculation, are linked to the price of oil, have reignited controversy. Some operators and buyers have alleged force majeure in an attempt to escape their obligations.

ii) Hardship and changes in circumstances

6. No less popular in energy contracts are clauses relating to hardship and changes in circumstances. 9 The accent here is on a change in the balance of the contract, as brought out in Article 6.2 of the UNIDROIT Principles. 1011[Page55:]

Such clauses are suited to long-term energy contracts, where they are combined with stabilization clauses. 1213 Circumstances that are beyond the will of the parties or outside their control and occur after the conclusion of the contract may indeed seriously upset the balance of the consideration given by each party to the contract or render its performance more costly or difficult. 1415

Below are some examples of such clauses commonly inserted in energy contracts:

Changes in Circumstances

In the event of unforeseeable events or events which were excluded from the Parties' forecasts, including any substantial changes to taxes and duties, which could have the effect of undermining the economic basis of the existing market or prejudice one or other of the Parties, the Parties shall come to an agreement, in the spirit in which the present agreement was concluded, to make the necessary adjustments so as to replace one or other of the provisions of the present contract under the conditions of balance comparable to those which existed at the time of entering into the present contract. In the absence of an agreement, the Parties may refer their dispute to arbitration (as set out in article . . .).

Changes in the Contract

If, after entering into the electricity supply contract, one or other of the parties suffers unexpected harmful consequences as a result of changes in the technical or economic context and such consequences cannot in all fairness be borne by the party concerned, both parties will try to agree on ways of adapting the contract to such changes in all good faith. This possibility does not entitle them to withdraw from the contract and the other rights and obligations resulting from the contract will remain totally unaffected.

Hardship Clause

In the event that substantial and unexpected changes of an economic or technical nature affect the energy and/or . . . market, and such changes are of an exceptional nature and depart greatly from historical situations, making it significantly harder to honour the undertakings made under the present Contract, considering the reason why they have been made, the Consumer and the Supplier undertake to consult with each other to find a solution to the problem that upholds their respective interests.

If the Consumer invokes the present clause and alleges that these changes mean that continuing production of . . . would create an unbearable economic burden for the Consumer, the purpose of the parties' consultations will be to limit the Consumer's [Page56:] obligation to take delivery and the Supplier's corresponding obligation to supply, which limit shall not exceed . . .

Adaptation

In case of a substantial change in the circumstances existing at the time of the conclusion of the contract, which has an influence on the equilibrium of the economic and reciprocal interests of the Parties, the contractual conditions will be accordingly adapted to the changed circumstances.

Depending on the type of energy contract (PPA, supply contract, swap agreement, LNG slots, concession, etc.), the parties must determine:

(a) the circumstances that will trigger the application of the clause, e.g. external factor beyond the parties' control;

(b) how the clause will be renegotiated and implemented, e.g. the role and powers of an arbitrator or expert in adapting or renegotiating the clause, 161718 what basis the arbitrator should use to establish and restore the initial balance, and whether or not the hardship clause applies to the price provisions;

(c) the situations in which the contract can be terminated, e.g. when it cannot be adapted.

As we shall see below, the better the initial balance of the contract is described in the clause and the preamble to the contract, the easier it will be for the arbitrator to fulfil his or her role.

Conversely, if there are no indications whatsoever on how the price of the energy is calculated or on the contractual balance, then-as happened recently in a case relating to the price of uranium-the arbitral tribunal may be prevented from rendering a suitable award. In such a situation, it is those who drafted the contract who are above all to blame.

We know of a recent case in which a hardship clause came into operation in a contract for the supply of gas to be used for producing electricity. The algorithm for determining the price of the gas, which had been devised ten years before, indexed the price of the gas 100% to the price of coal. 19 A rise in the price of oil caused gas and then electricity prices to soar. The gas supplier found itself in an unbearable situation due to the huge increase in the price it had to pay to import the gas. On the other hand, the margin made by the electricity manufacturer shot up correspondingly. The parties thus found themselves in a situation that was completely out of balance when compared with their situation at the outset. They had tried to stabilize gas prices by linking them to coal, which was regarded as a stable reference at the time. However, the upset in the contractual balance caused by the failure to include in the algorithm an indexation to oil products (as often happens, e.g. to gas oil, low sulpur oil, high sulphur fuel oil, etc.) made [Page57:] it necessary to renegotiate the contract. Indexation to coal prices proved inadequate for the purpose of restoring the contractual equilibrium, which could be achieved only by bringing the hardship clause into play.

iii) Indexation and adaptation clauses20

7. These clauses, which are most commonly found in long-term energy contracts, allow parties to introduce a degree of automatization into the review of energy prices through such means as price-break clauses, price review mechanisms, changes in indicators and price re-opener clauses. 21

As rightly pointed out in ICC case 3344, 22 the main difference between an adaptation clause and a hardship clause lies in the automatic nature of the price change. The parameters used in the contract for the purpose of indexation or adaptation are objective and lead to an unequivocal solution.

8. There are indexation clauses containing provisions on the substitution or disappearance of the index or the index no longer being representative of the market.

The price is fixed and not reviewable for the duration of the Contract and will be increased automatically with the amount of taxes, duties, royalties, charges, allowances, certificates or contributions of any nature, issued by Public Authority that would be directly or indirectly charged to the Supplier, in the framework of the sale of Electrical Energy.

Price - Substitution and Adjustment of Indices

If at any time either Party can show that in respect of any of the indices at any time or from time to time required to the used in the calculation of the Contract Price

i) such index is no longer published and is unlikely to be published again in the foreseeable future, or

ii) such index is changed with respect to the basis of calculation or such index no longer reflects the actual prices of the commodity/capacity that it refers to at the place and time that it refers to or the quality or type of the commodity/capacity that such index refers to has changed materially and not only temporarily, or

iii) the relevant figures representing such index have been computed or published in error, or

iv) such index has become controlled or unduly influenced by the government of the country where such index is published,

then that Party may notify the other Party of such circumstances and the Parties will forthwith meet and endeavour to agree upon an appropriate amendment to or replacement of such index which will as nearly as possible achieve the objectives of the original index.

If within (2) months from the date of the said notice no such agreement has been reached, then (at the request of either Party) the matter shall be referred to an arbitrator/expert for determination in accordance with the provision (x) . . .

In any determination to be made by an arbitrator/expert hereof, such determination shall comply with the intention of the Parties that this Agreement shall not be terminated [Page58:] because of any of the events mentioned in Article . . . hereof, but that it is intended that such adjustments to the existing indices be made or that such substitute indices be used as are necessary so that the adjusted indices or the substitute indices will in effect be as nearly comparable to the effects sought from the original indices as any reliable data then available will allow.

Price Adaptation

It is agreed between the parties that in case significant changes in primary energy costs, and in particular gas prices, would occur and make the electrical power purchased by the Buyer not competitive towards electrical energy based on such primary energy, the partners shall find a mutual agreement to adapt the prices of delivery accordingly. If such agreement cannot be reached within 2 months, the parties are entitled to refer the matter to arbitration.

In its agreement concerning the delivery and acceptance of electricity, the European Federation of Energy Traders (EFET) 23 provides for a fallback mechanism in the event that a relevant price source fails to announce or publish information necessary for determining the commodity reference price, or in the event of the temporary or permanent objective unavailability of any relevant commodity reference price, or the temporary or permanent closing of the price source of any relevant commodity reference price. In such cases, the alternative settlement price will be determined according to (a) the fallback reference price (first alternate commodity reference price), then (b) the negotiated fallback, and finally (c) the dealer fallback.

It was a change in the index used for determining the price of gas that was at the heart of the dispute in ICC case 10351. 24 The parties' contract linked the price of the natural gas to the breakeven prices of a basket of crude oil as published by Platts. The contract contained a price review clause. A change in the Platts formula led to the dispute between the parties.

The extract from the partial award reproduced in this issue is highly instructive as regards how the arbitrators went about determining what the parties intended when choosing the frame of reference to be used for fixing the price of gas. The arbitrators inferred from the successive changes to the price formula in the contract and from various other indicators that the parties deliberately chose not to link the price of LNG to the prices of competing products, namely oil gas and fuel. The award states as follows:

156. If we consider the circumstances in which Rider No. 7 was made, this tells us a lot about the interpretation of the contractual price formula currently in force. It highlights the tensions between the gas producer, concerned about changes in oil prices, and the gas purchaser, anxious to sell within its gas market the quantities it undertook to buy in the very long term (take-or-pay) . . .

157. More specifically, it shows that, when they negotiated Rider No. 7, the parties were aware that the indexation of the price of LNG to Platts' FOB breakeven prices did not mean that they were being indexed to a basket of products in competition with natural gas. This is attested by the following facts.

The tribunal went on to conclude that 'the rise in the FOB breakeven prices following the introduction of Platts' new formula does not justify the use of a substitute index according to Article . . . The step change observed is not the result of a change in the nature of the FOB breakeven prices'. The arbitrators found that, given the intention of the parties, the index had not disappeared or changed in nature. [Page59:]

This award shows that parties would be well advised to define as precisely as possible the role assigned to the arbitral tribunal in seeking a replacement index, as shown in some of the clauses quoted above. 25

9. Adjustment clauses have also given rise to arbitration proceedings. Despite the fact that such clauses are predictable and that they operate automatically as part of the contract, their implementation has been a cause of dispute. As we saw in the case discussed above, where the price of gas was indexed solely to coal prices, the hardship clause was made to prevail over the indexation clause in order to correct the contractual imbalance caused by the indexation. 2627

There is much to be learned about adjustment and review clauses from two awards published for the first time on the following pages. Rendered seven years apart, the two awards relate to the same long-term contract for the sale of gas and involve changes in economic circumstances. The contract contained both a price adjustment clause, operating quarterly, combined with a price review clause, operating triennially in the event of a change in economic circumstances. The first award28 was rendered in 1999 and deserves particular attention for three reasons.

The first concerns the way in which the arbitrators analyze and dissect the seven prerequisites for a price review, namely:

- a change during the price review period,

- a change in the economic circumstances,

- a relevant change in the economic circumstances,

- a significant change,

- beyond the control of the parties,

- an adjustment,

- burden of proof.

The award contains several enlightening statements about economic circumstances:

The second prerequisite for an application of Article 6.10(a)(1) is that the economic circumstances have changed in the country of the buyer. The words 'if the economic circumstances . . . should change' cover any fluctuation, variation or modification. Examples of such changes are a devaluation or revaluation of the [currency], a changed competitive situation, a tax on one or several sources of energy, an imposed price control and a changed legal environment with an economic effect, e.g. new environmental requirements. [Page60:]

. . . . . . . . .

The words 'in particular' in Article 6.10(a)(1) imply that not only changes in the market value of natural gas may be relevant for an adjustment of the contract price. An adjustment of the contract price may have regard to changes of the economic circumstances other than those which influence the market value by the application of the opportunity cost principle, as used to determine the market value by assessing the factors causing a buyer to exchange one source of energy for another. One example of a change in the economic circumstances unrelated to the value of natural gas might be the entry of a powerful and independent competitor on the [Buyers' State] market, . . . which would not necessarily change the market value of gas, but may nevertheless influence the price of gas. Another example could be the introduction of a governmental price control forcing sellers of gas to end-users in [Buyers' State] not to exceed a certain price, so that sellers were unable to obtain the market value of gas. In this situation, the market value of gas as such is not affected for the time being, but a significant change, not reflected in the price provisions, in the meaning of Article 6.10(a)(1) would nevertheless have occurred.

The second reason why this award is noteworthy concerns the recurrent question of how the price adjustment and review clauses combine with each other (e.g. whether one has priority, is subsidiary or is complementary). In the case in question, the arbitral tribunal conducted a subtle analysis and found as follows:

Therefore, a relevant economic change as referred to in Article 6.10(a)(1) only occurs if there has been a fluctuation, variation or modification in the economic circumstances in [Buyers' State] not reflected in the price calculated according to the price adjustment formula in Articles 6.1-6.4.

On the complex price review clause, extending to several paragraphs, the following statement was made:

Therefore, the Arbitral Tribunal concludes that a consolidation of both paragraphs has to take place. Such a consolidation entitles the buyer to invoke Article 6.10(a)(2) if an application of Article 6.10(a)(1) leads to a result where he cannot economically market the natural gas. Accordingly, the second paragraph therefore works as a protection of the buyer against upward adjustments of the price considering his market situation.

An application of the second paragraph requires a comparison of the situation of the buyer and the end-user market for 'all competing sources of energy'. However, the price the buyer pays to his various suppliers of gas should not be taken into account. On the other hand, a gas to gas competition between the buyer as reseller and other competing and independent suppliers of gas in the [Buyers' State] market should be regarded as 'competing sources of energy'.

The application of Article 6.10(a)(2) is further limited to situations where the buyer uses sound marketing practices and efficient operations of the business. This requirement may be used by the seller as a protection in cases where the buyer wants to invoke the second paragraph claiming that he cannot economically market the gas.

The third reason why this award is of particular interest is the possible effect of a new tax on another product (fuel) competing with the product that is the subject of the price clause (gas). On this question, the arbitral tribunal decided as follows:

In order to succeed with their claim, the Respondents furthermore have to prove that the oil tax caused a significant change of the economic circumstances not reflected in the price provisions of the [Contract]. As the oil tax was introduced [date], it would, in the view of the Arbitral Tribunal, have been more appropriate to measure its effect subsequent to that date as only a change caused by the introduction of the oil tax and not any other factors should be taken into account. An assessment of the changes in the [Page61:] prices during the whole price review period does not reflect the relative impact of the oil tax.

10. In 2007, an award was rendered in another ICC case29 relating to the same long-term contract for the sale and supply of gas. The dispute turned on the interaction between the indexation clause and the price review clause within one and the same contract.

The price provisions in the parties' contract (Arts. 6.1-6.4) led to an increase in the price of gas during the price review period, as a result of indexing gas prices to gas oil and heavy fuel oil quotations. The buyer was unable to pass this large increase on to the end consumers of gas and was forced to grant sizeable reductions and discount in order to maintain its market share. It therefore asked the arbitral tribunal to order a decrease in the price to reflect the changes in the economic circumstances of its market (value of natural gas in the end-user market of the buyer). After a very careful analysis of the clauses and their purpose in light of the parties' intentions, the arbitrators acceded to the claimants' request for a price reduction.

The lessons to be learned here transcend the confines of the case.

In relation to the purpose of the indexation clause, the arbitrators stated as follows:

88. . . . The purpose of this indexation of the contract price was to reflect any increase or decrease of the prices for the major alternate energies against which natural gas was competing in the energy market in [Buyers' State]. This would ensure that the gas delivered to the Buyers would stay competitive in times of decline in oil prices, and that the Seller would benefit from higher gas prices in times of increase of the prices for the competing fuel oils and thus receive the highest price obtainable under existing energy market conditions, at least on a medium-term basis.

They then went on to consider the price review clause and the reference to which it was linked ('the value of Natural Gas'), and rightly pointed out as follows:

114. In the absence of a clear contractual basis for attributing a special meaning to the term 'the value of Natural Gas' as argued by Respondent, the Arbitral Tribunal has to rely on the general principle of [the contract law of the State whose law is applicable] that provisions in contracts between commercial parties shall be interpreted in accordance with the plain and ordinary meaning of the words thereof as read in the particular context in which the relevant terms are used by the Parties.

From this, they came to the following conclusion:

Accordingly, in the absence of a particular provision in the [Contract] as to the meaning of 'the value of Natural Gas', the Arbitral Tribunal considers that this expression should be interpreted as referring to the ordinary market value of gas, and that the market value of gas is to be determined on the basis of prices obtained or obtainable in actual transactions in the various market segments constituting the end user market of the Buyer.

The arbitrators then expressed their view on the sensitive question of whether or not changes in 'the value of Natural Gas' should take account of the price of products further down the production circuit, i.e. in this particular case, the price of electricity produced by the gas:

123. The Arbitral Tribunal agrees that mere fluctuations of prices for products made by input of gas by end users are generally not relevant when determining the market value of natural gas. This also applies to prices for electricity produced at power plants. However, [Page62:] the legal position is different if changes in the regulation and structure of the [Buyers' State] electricity market and the resulting changes in the prices of electricity, would have as consequence that electricity generally available in the market has become a 'competing' source of energy in relation to natural gas as used at power plants. If the changes in the electricity sector mean that end users of gas actually may cover energy needs by buying electricity in the market instead of using gas, the electricity available in the market has become a directly competing primary source of energy with consequences also felt in the gas market. In such a competitive environment, the electricity prices would in fact be an element which is likely also to influence the volumes of the gas traded and/or the ordinary prices obtainable in the gas market. Such a development would no doubt also be relevant when considering, in accordance with Article 6.10(a) second sub-paragraph of the [Contract], whether the price provisions 'allow the Buyer to economically market the Processed Gas delivered hereunder in competition with all competing sources of energy in the end user market'. In the opinion of the Arbitral Tribunal, sources of energy that actually are competitive to gas, must be judged on the basis of the situation as developing during the relevant price review period.

Lastly, the arbitrators considered the method to be used for quantifying market under-recovery. As there were both merits and weaknesses in the figures provided by each of the parties, the arbitral tribunal decided to base its opinion on the cross-check method:

155. In the opinion of the Arbitral Tribunal, the results of this cross-check method warrant the conclusion that during the price review period the increase of [Contract] price significantly exceeded the increase of the market value in the end users' market. However, it also appears to the Arbitral Tribunal that, unavoidably, some degree of uncertainty will attach to any precise quantification of the extent of such change on the basis of the evidence submitted by the Parties. This being the case, the Arbitral Tribunal considers that it is clearly preferable to base the quantification of the extent of change on the arithmetic average of the results of the cross-check calculations described above, rather than on an evaluation and assessment of the various arguments put forward by each of the Parties when supporting or disputing the quality and accuracy of each of the two particular sets of data submitted by the Parties. As mentioned above, the sets of data submitted by the Parties have both merits and weaknesses, and the expert witnesses of the Parties were unable to agree which set of data was the most illustrative and reliable.

iv) Take-or-pay (TOP) clauses and penalties

11. TOP clauses originated in the gas sector but have penetrated other sectors, including the electricity sector.

As the production of gas and liquid natural gas is a high-risk activity, due to heavy investments, uncertainty over reserves, and high transport costs, etc., long-term gas contracts spread the risks between the producer and the buyer. These include the volume risk (also called the production risk) and the price risk (also called the market risk). 30 The buyer undertakes to take delivery of a minimum quantity at a set price. TOP clauses also incorporate an element of flexibility, for example by allowing amounts not taken in a given year N to be offset against successive years (carry forward) or previous [Page63:] years (carry back), or through the right to resell, with or without cost and with or without the help of the seller's trading platform.

Another variant is the take-and-pay (TAP) clause, where the buyer additionally undertakes to take delivery.

Such clauses have given rise to disputes, sometimes between States, which are very often referred to arbitration. These disputes have related to the legality of such clauses and their scope, and have sometimes led to the renegotiation of the contract. 3132

An example of a simple TOP clause is the following:

Minimal supply quantity: During the supply period, the Seller shall make available and deliver to the Buyer, and the Buyer shall take and purchase from the Seller, the annual minimum quantity of Natural Gas.

12. A dispute over a clause similar to this was at the centre of another ICC case33 concerning the sale and supply of crude oil. The claimant sought penalty payments from the respondent as provided in the master supply agreement, following the respondent's failure to take delivery of the agreed quantity of Russian Export Blend Crude Oil (REBCO).

The parties' annual contract contained the following price calculation formula, quoted verbatim:

The price for the deliveries in a given month of YCQ [Yearly Contract Quantities] in US Dollars FOR US Barrel shall be one third (1/3) of the sum of 3 arithmetic averages of all the mean quotation be published in Platt's Crude Oil Marketwire (Platt's) for the month of delivery for URAL(MED.), IHVY(SIDI) and SUEZBLEND respectively (Contract Price).

This was a typical basket price formula.

In accordance with what the arbitrators considered to be customary practice between the parties, a differential was applied to this contractual price:

Whatever the real basis for the determination of the Contract Price may have been, the evidence presented in the course of the proceedings shows that a differential had regularly been included into the price determination. This practice had been adopted right from the beginning and been followed constantly.

From its observations on the parties' behaviour, the arbitral tribunal inferred (i) that it was the parties' intention to depart from the written contract:

In any event, however, and much more important for the outcome of these arbitration proceedings, the Parties followed from the outset a practice that significantly departed from the contracts they had made in writing. The existence of such practice and the modification of the nature of the [master supply agreement] that resulted therefrom will be analyzed below.

and (ii) that a change could be made to the contract without having to follow the procedure contractually provided for this purpose: [Page64:]

By agreeing to an oral or tacit amendment to their contract, parties are therefore deemed to have simultaneously waived the requirement of form that had been stipulated in their contract . . . For an amendment to a contract to be effective, it is therefore sufficient that evidence regarding the intention of the parties to make an amendment exists. As pointed out above, such intention may be derived from the conduct of the parties subsequent to the conclusion of the contract, and, as regards the present case, there is no doubt that Claimant is prevented by its conduct from relying on such 'modification in writing' clause.

The arbitral tribunal found that these changes to the contract's key clause on prices had important consequences when it came to determining whether or not contractual penalty payments should be made:

As a result, the [master supply agreement] had clearly become a framework agreement, fixing certain terms and conditions for sale contracts yet to be made. Without entering into complete sale contracts, there was no obligation for [Respondent] to take off certain quantities of crude oil under the [master supply agreement], failing which it would have to pay a penalty. Accordingly, the termination of this framework agreement . . . could not result in an obligation for [Respondent] to pay penalties.

This is doubtless one of the most important lessons to be learned from this award, namely that a contractual practice relating to the price clause can affect the compulsory nature of a delivery agreement and, by way of consequence, its provisions setting minimum quantities to be taken by the buyer.

III. Conclusion

13. There is much to be learned from arbitral decisions on energy contracts and, in particular, their price clauses.

These decisions show how important it is for contracts to be drafted in such a way as to allow the true intention of the parties to be understood. It is this intention that informs the arbitrators' reasoning when it is necessary to replace one index by another, or to adapt or revise the price of energy when, for example, new economic circumstances have emerged.

Arbitrators give particular attention to the behaviour of the parties and especially to how they have performed the contract and any changes to the written contract that may be implied by their behaviour. In this regard, reference may be made to a long-standing decision concerning implied acceptance or acceptance following unequivocal silence, in relation to new oil prices. 34

1
See K. Culotta & M. Hwang, 'Uncertain LNG price environment turns focus on price revision clauses', LNG Journal, April 2008, p. 25.

2
E.g. ICC case 11073, see p. 86 below.

3
E.g. ICC case 9151, see p. 65 below.

4
G. Block, 'La force majeure dans les contrats d'énergie', Europ'Energies, May 2007, p. 10.

5
Award rendered in 1974, see S. Jarvin & Y. Derains, eds., Collection of ICC Arbitral Awards 1974-1985 (Kluwer Law & Taxation/ICC Publishing, 1990) 224.

6
Award rendered in 1974, see S. Jarvin & Y. Derains, eds., Collection of ICC Arbitral Awards 1974-1985 (Kluwer Law & Taxation/ICC Publishing, 1990) 233.

7
Award rendered in 1976, see S. Jarvin & Y. Derains, eds., Collection of ICC Arbitral Awards 1974-1985 (Kluwer Law & Taxation/ICC Publishing, 1990) 292.

8
See p. 89 below.

9
Hence discussions on new references for gas prices. See especially K. Faïd & J.P. Favennec, 'Prix du gaz et prix du pétrole : vers le découplage' (Paper presented to conference organized by AIE and DGEMP, February 2002), < www.iea.org/Textbase/work/2002/forum/Favedoc.pdf>. ('On the other hand, it is quite likely that some indexation formulae will move away from oil and rely more on spot and forward prices for gas and on the price of electricity.')

10
UNIDROIT Principles of International Commercial Contracts, Art. 6.2.2: 'There is hardship where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party's performance has increased or because the value of the performance a party receives has diminished, and (a) the events occur or become known to the disadvantaged party after the conclusion of the contract; (b) the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract; (c) the events are beyond the control of the disadvantaged party; and (d) the risk of the events was not assumed by the disadvantaged party.'

11
J.O. Rodner, 'Hardship under the UNIDROIT Principles of International Commercial Contracts' in G. Aksen, K.-H. Böckstiegel, M.J. Mustill, P.M. Patocchi, A.M. Whitesell, eds., Global Reflections on International Law, Commerce and Dispute Resolution, Liber Amicorum in honour of Robert Briner (ICC, 2005) 677.

12
P. Bernardini, 'Stabilization and Adaptation in Oil and Gas Investments' (2008) 1:1 The Journal of World Energy Law & Business 98.

13
G. Block, 'Les clauses de hardship et d'adaptation dans les contrats d'énergie', Europ'Energies (March 2008) 11.

14
F.R. Fucci, 'Hardship and Changed Circumstances as Grounds for Non-Performance or Adjustment of Contracts: Practical Considerations in International Infrastructure Investment and Finance' Transnational Dispute Management, Vol. 4, No. 5 (September 2007).

15
A. Al Faruque, 'Renegotiation and Adaptation of Petroleum Contracts: The Quest for Equilibrium and Stability' (2008) 9:2 The Journal of World Investment and Trade 113 at 128: 'The hardship clause attempts to create a system of "internal regulation" designed to protect the financial equilibrium of their agreements from the undesired effects of a constantly changing economic environment and provides a form of "safety net" designed to mitigate the effects of extraordinary unforeseeable changes in the circumstances surrounding the contract. Hardship clauses create either an obligation to use best endeavours to renegotiate in good faith with a view to alleviating the difficulty or an automatic variation of the contract in a predetermined form. However, contractual practice suggests that mere a [sic] hardship situation does not imply an obligation to revise the contract, unless the parties explicitly provide for that.' (footnotes omitted)

16
M. Polkinghorne, 'Predicting the Unpredictable: Gas Price Re-Openers' (2008) IBLJ/RDAI: '. . . if, for example, a clause provides for a price formula linked to a basket of fuel, can the renegotiation reflect changes in the end-market where gas-to-gas competition has become a significant player? Can an element be added to the initial formula? In such cases, the requesting party may well allege that including a changed or new fuel index in the price formula better reflects the competitive situation in the end-user market and hence would comply with the renegotiation formula provided in the contract. The opposing party, on the other hand, would doubtless argue that there is no contractual basis for changing the best substitutes as agreed in the price formula. The arbitrator will have to find a way to answer such claims, and it may well be that the relevant contract clause provides little guidance in this regard.'

17
Given the restrictive nature of the decisions on account of the implied power arbitrators have to adapt even long-term contracts, it would be wise to specify this power and its limits in the contract, as in Article 6.2.3(4) of the UNIDROIT Principles of International Commercial Contracts.

18
Kuwait v. Aminoil (1982) 21 I.L.M. 976.

19
'The gas price will be indexed. The only relevant index will be the coal index . . .'

20
A. Al Faruque, supra note 15; K.P. Berger, 'Renegotiation and Adaptation of International Investment Contracts: The Role of Contract Drafters and Arbitrators (2003) 36 Vanderbilt Journal of Transnational Law 1347; J. Paulsson, 'L'adaptation du contrat' Rev. arb. 1984.249; P. Bernardini, 'Adaptation of contracts', ICCA Congress Series No. 1, VIIth International Arbitration Congress, Hamburg, 7-11 June 1982 (Kluwer, 1982) 211.

21
C. Petersen, 'Gas Natural Aprovisionamientos, SDG, S.A. v. Atlantic LNG Company of Trinidad and Tobago and Price Reopener Clauses in an Uncertain Environment for LNG Pricing', Paul Hastings (March, 2009).

22
Award rendered in 1981, see S. Jarvin & Y. Derains, eds., Collection of ICC Arbitral Awards 1974-1985 (Kluwer Law & Taxation/ICC Publishing, 1990) 440.

23
EFET general agreement concerning the delivery and acceptance of electricity, version 2.1.a (2007), Art 15.

24
ICC case 10351, see p. 76 below.

25
See also A. Kolo & T. Wälde, 'Renegotiation and Contract Adaptation in International Investment Projects: Applicable Legal Principles and Industry Practices', Transnational Dispute Management, Vol. 1, No. 1, section E, p. 24: 'Contracts as a rule contain some automatic variation in response to external factors - e.g. indices (for prices, for inflation/interest rates). If certain indices used (for oil & gas sale price valuation or relating to inflation) disappear or become unsuitable, there is often a provision according to which the parties will negotiate to determine a new index - when no agreement ensues, usually a third-party is empowered to determine the disputed issue.'

26
Cf. the common law doctrine of frustration: 'The presence of a price escalation clause in a contract may make a court more reluctant to conclude that a sudden increase in prices has frustrated the contract.' Wates v. GLC, 1983, (1984) 25 Building Law Reports 1.

27
J.O. Rodner, supra note 11 at 689: 'The right to request renegotiation is not admissible when there is a hardship clause that provides for a form of automatic adaptation of the contract (such as a price adjustment clause applicable in the case of devaluation), unless the clause "did not contemplate the events giving rise to adaptation" [Art. 6.2.3, comment 1]. It is logical that if a hardship clause provides that the contract shall be adapted in the light of certain circumstances, then there is no need to request renegotiation. Further, there is not need to go to a court to determine if it is reasonable to terminate the contract or adapt it, for the automatic adaptation provisions in the contract simply need to be applied.'

28
ICC case 9812, see p. 69 below.

29
ICC case 13504, see p. 93 below.

30
G. Block, 'Les clauses take-or-pay dans les ventes d'énergie', Europ'Energies (October, 2007) 12; G. Block et al., 'Le consommateur industriel' in Le nouveau marché de l'énergie (Anthémis, 2007), Pt III, subsection 7 at 263 (clauses relating to quantity-take-or-pay, take-and-pay and contractual variants thereof); P. Griffin, 'Take-or-pay Contracts in Liberalized Markets', Natural Gas (May, 1999) 8; P. Hodges, '"Take or Pay" and "Send or Pay": A Perspective on Recent Litigation' (1997) 15 Oil and Gas Law and Taxation Review 469; H. Davey, '"Take or Pay" and "Send or Pay": A Legal Review and Long-Term Prognosis' (1997) 15 Oil and Gas Law and Taxation Review 419; E. Marseglin, 'Take-or-Pay Litigation-The Producers' Perspective: Part 2' (1987/88) 6 Oil and Gas Law and Taxation Review 125.

31
G. Coop & L. Gouiffès, 'Arbitration and Pricing Mechanisms in International Gas Sale Contracts', Oil, Gas, Energy Law Intelligence (OGEL), Vol. 1, No. 2 (March 2003).

32
Europe'Energies, December 2009, p. 2: 'E.ON wins price arbitrage in Norway and the Netherlands. Recently, E.ON's CEO, Wulf Bernotat, indicated that his group takes less gas than the minimum amount stipulated in its take-or-pay contracts and that it will probably take longer than 2010 to catch up on the missing amounts. E.ON told analysts that it did not wish to abandon its take-or-pay supply contracts. In Germany, which is its principal market, the group has entered into numerous contracts to sell gas to manufacturers incorporating take-or-pay commitments on their part, which reduces its supply risk.'

33
ICC case 12936. The following quotations are from the final award of 2005, unpublished.

34
ICC case 3344, see supra note 22.