Claimants and Respondent were parties to a long-term gas sales and purchase contract, which contained provisions for price adjustments and reviews. Price adjustments were made on a quarterly basis and price reviews upon request. An initial price review was requested by Respondents (sellers) in 1992. An amendment was made to the original contract increasing the gas price due to changes in the economic circumstances in the buyers' country. A second price review was requested some years later by both sides. As no agreement could be reached, the matter was referred to arbitration.

The contract underlying this dispute is the same as that underlying the dispute in case 13504.

'Article 6.10 stipulates a price review mechanism. The Article reads as follows:

Price Review

(a) If the economic circumstances in the country of the Buyer which are beyond the control of the Parties should change significantly compared to what is reflected in the prevailing price provisions under Articles 6.1-6.4 hereof, then each Party shall be entitled to an adjustment of the price provisions under Articles 6.1-6.4 hereof, reflecting such changes, in particular the value of Natural Gas in the end user market of the buyer as such value can be obtained by a prudent and efficient gas company.

In any case the price provisions hereunder shall allow the Buyer to economically market the Processed gas delivered hereunder in the market of the Buyer in competition with all competing sources of energy in the end user market always assuming sound marketing practices and efficient operations on the part of the Buyer.

(b) Either Party shall be entitled to request a review of the price provisions under Articles 6.1-6.4 hereof for the first time with effect as of 1 April 1992 or earlier if necessary in order to perform a price review six (6) months prior to start of deliveries, for the second time with effect as of 1 October 1995 and thereafter with effect as of 1 October every three (3) years after 1 October 1995. In addition each Party shall be entitled to request a review of the price provisions under Articles 6.1-6.4 hereof once within each such three-year interval with effect from the first day of the month next following the request for price review, provided that the total number of such additional requests shall be limited to three (3) for each Party during the term of this Agreement. Any request for price review shall be made in writing substantiating the reasons for it and shall be made before the date of effectiveness of such price review and shall be ineffective if received by the other Party after such date.

Following a request for price review under this Article, the Parties shall meet to examine whether or not an adjustment of the said price provisions is justified.

(c) Each Party shall provide all necessary information to substantiate its own claim. No Party shall be required to disclose any business secrets nor to provide such information as the other Party may need to substantiate its claim.

(d) Failing agreement within a period of one hundred and twenty (120) days from the request for review, either Party may refer such matter to arbitration under the provisions of Article 15 hereof for decision in accordance with the criteria contained in lit. (a) above.

(e) If and as long as, with respect to any price review hereunder, no agreement has been reached and no arbitration award has been made and taken effect, this Agreement shall remain in full force and effect and the rights and obligations of the Parties, including, without limitations, the obligations of the Seller to sell and deliver and the obligations of the buyer to take and pay for at the applicable price Processed gas as provided for under this Agreement, shall remain applicable unchanged and unadjusted.

(f) If the rights under this Article 6.10 are exercised by the Buyer against the Seller they shall also be exercised against all other Associated Sellers under their [Contracts] with the Buyer as of the same date.

If any rights under Article 6.10 lit. (b), second sentence, are exercised by any of the Associated Sellers as of a certain date, then the Seller shall not be permitted to exercise such rights as of any other date and an additional request made by one or more Associated Sellers, but not by the Seller shall be counted also against the number of additional requests allowed for the Seller.

All negotiations under this Article 6.10 shall be conducted by the Buyer and the Seller jointly with all other Associated Sellers by or against whom a price review under their [Contract] with the Buyer is requested.

. . . . . . . . .

On the basis of the grounds and circumstances invoked by the parties, the statements made, the expert opinions and other evidence submitted, the Arbitral Tribunal has drawn the following conclusions:

VII.1 Price adjustments and reviews

According to the [Contract], the agreed price may change in three different ways: First, the price is adjusted on a quarterly basis according to Articles 6.1-6.4. Second, each party is entitled to request a price review under Article 6.10(a) according to Article 6.10(b)(1) first sentence at three-year intervals. Third, each party has the additional right under Article 6.10(a) according to Article 6.10(b)(1) second sentence to request a price review once within each such three-year interval, provided that the total number of such additional requests are limited to three for each party during the term of the [Contract].

VII.2 Interpretation of Article 6.10(a)(1)

According to Article 6.10(a)(1), each party is entitled to an adjustment of the contract price if economic circumstances, beyond the control of the parties, in the country of the buyer should change significantly compared to what is reflected in the price provisions under Article 6.1-6.4. If such change has occurred, the contract price should be adjusted to reflect the change, in particular the value of natural gas in the end user market of the buyer as such value can be obtained by a prudent and efficient gas company.

(i) Change during the price review period

The first prerequisite is that a change has occurred during the price review period preceding the date of adjustment. This understanding of the [Contract] is supported by the wording of Article 6.10(a)(1) under which an adjustment shall reflect "such changes". In addition, the implementation of price review provisions in Article 6.10(a)(1) only dealt with changes that had occurred, when, on 7 July 1994, the parties concluded Amendment No. 4 explicitly referring in Section B to changes in the economic circumstances in the country of the buyer in the period from 1 October 1985 up to 1 April 1994.

(ii) Change in the 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.

(iii) Relevant change in the economic circumstances

In order to find out if a change is relevant for a price review, the provision stipulates that comparison with the prevailing price provisions of the contract shall take place. According to Articles 6.1-6.4, the price shall be calculated by using the base price (P0), passthrough factors, conversion factors from metric tons to cubic meters, and the prices for gasoil and heavy fuel oil with a sulphur content of less than 1 per cent, as reported by [State organization] weighted in proportions 57 and 43 per cent, respectively. In the adjustment formula, the changes of the prices for gasoil and heavy fuel oil in comparison with the base price for gas (P0) are the relevant factors. According to Article 6.3, the reference period for the prices and indices is the period of three months immediately preceding each recalculation date, and, according to Article 6. 1, the recalculation shall occur quarterly. 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.

(iv) Significant change

Not every relevant change in the economic circumstances triggers the application of Article 6.10(a)(1). The change also has to be significant, which means that a less important change is excluded. As a price review according to Article 6.10(a) may necessitate expensive and time consuming efforts in order to establish the relevant facts for the assessment of the new (P0), the "significance" should be limited to more substantial changes. The parties have by their claims in the present proceedings indicated when they consider the changes significant . . . Taking the conduct of the parties into account, the Arbitral Tribunal considers that a change, which implies an adjustment of P0 with approximately 15 per cent, is without any doubt a significant change in the terms of the [Contract].

(v) Beyond the control of the parties

The significant change in the economic circumstances should be beyond the control of the parties. This prerequisite excludes changes within a sphere where it is possible for one or both parties to influence or command a certain event, including, but not limited to, contractual relationships.

(vi) The adjustment of the Contract price

If all of the above-mentioned prerequisites are fulfilled, a party is entitled to an adjustment of the contract price. Such an adjustment should reflect the significant change of the economic circumstances that previously has occurred, and, in particular, the value of natural gas in the end user market of the buyer as a prudent and efficient gas company can obtain such value. 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.

(vi) Burden and degree of proof

An application of Article 6.10(a)(1) implies that the burden of proof is on the party requesting a price review. The test for the degree of proof should be whether it is more likely than not that the prerequisites are fulfilled. Therefore, the party requesting a price review has to prove that it is more likely than not that a change in the relevant economic circumstances has occurred during the price preview period preceding the adjustment date, that the change is beyond the control of the party, that it has not been reflected in the price provisions of the contract, that the change is significant and that the requested adjustment of the price reflects such a change.

VII.3 Interpretation of Article 6.10(a)(2)

The wording of Article 6.10(a)(2) is ambiguous. This paragraph uses the words "price provisions hereunder", whereas the first paragraph uses the words "price provisions under Articles 6.1-6.4 hereof". Therefore, "hereunder" may be understood as below or in the following and therefore as a reference to the subsequent provisions. However, in the same sentence "hereunder" is used as a reference to delivery of gas which implies a reference to the whole Contract. This invites an interpretation to the effect that "price provisions hereunder" refer to all provisions in the contract dealing with the price. Moreover, the price provisions indicated in the following Article 6.10(b) include Articles 6.1-6.4 together with any changes that may arise out of an application of the price review mechanism.

At first sight Article 6.10(a)(2) appears to be independent of Article 6.10(a)(1). The words "in any case" are used, which according to a literal reading indicates that the paragraph is intended as a general "catch all" provision. Moreover, the text appears in a separate paragraph, which invites the conclusion that it should be applied independently and not in conjunction with Article 6.10(a)(1).

However, accepting Article 6.10(a)(2) as an independent price review provision leads to the following inconsistencies in relation to the other provisions of Article 6.10:

Article 6.10(a)(2) does not state how the price should be adjusted if the buyer cannot economically market the natural gas due to the current contract price. Possibly, the price should be reduced in such a way that it allows the buyer to economically market the gas, but this does not follow from the wording and does not conform with the agreed price review mechanism on a three-year basis calling for an adjustment of the price provisions in Articles 6.1-6.4.

Secondly, the question concerning when the buyer is entitled to raise the issue of "non-marketability" in Article 6.10(a)(2) is not answered by that paragraph. Article 6.10(b) gives either party a right to request a review of the price provisions which is inconsistent with a right for only one of the parties to invoke an economic circumstance as a basis for his request.

Finally, if the second paragraph is interpreted as an independent price review provision and the price as a result of such a review is reduced, the Contract does not enable the seller, in a subsequent price review, to get a higher price for the gas other than by an application of Article 6.10(a)(1), which, inter alia, requires a significant economic change not reflected in the price adjustment provisions in Articles 6.1-6.4. That would imply that the buyer had a right unrelated to the mechanism of Article 6.10(a)(1) for a reduction of the price on the basis of non-marketability at the same time as the seller's only possibility to get a higher price, when the market again changes, would be subject to all the requirements of that paragraph.

Thus, the relation between Articles 6.10(a)(1) and (2) on the one hand and 6.10(b) on the other defeats an interpretation that Article 6.10(a)(2) should be regarded as a basis for a price review independent of 6.10(a)(1).

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.

VII.4 Interpretation of Articles 6.10(b), 6.10(c) and 6.10(d)

When a party wants to request a price review due to changes in the economic circumstances, the party must fulfil the requirements in Article 6.10(b)(1) last sentence. The price review request must be made in writing. It must also be received by the other party before the date of effectiveness of such price review. Moreover, the party must substantiate the "reasons" for the request. A minimum requirement must be that a party identifies the circumstance(s) in the request, so as to enable the other party to determine whether it is appropriate to enter into price review negotiations about such circumstance(s). Absent any other agreement between the parties, it is not sufficient only to request a price review without identifying any circumstance(s) at all, but only reserve the right to invoke not yet identified circumstances. If, however, a party in its price review request alleges that an identified circumstance has had an impact not reflected in the price provisions under Articles 6.1-6.4, it must be assumed that the price request may include other not specifically mentioned circumstances, provided they are within the scope of the request for price review and sufficiently connected to the identified circumstance(s). If the above-mentioned requirements are not fulfilled, the price request does not fulfill the requirements in Article 6.10(b)(1) last sentence and therefore becomes wholly or partly "ineffective".

The purpose of Article 6.10(c) and (d) is merely to set forth a price review procedure starting with "substantiation" of the claim according to Article 6.10(c) and barring arbitration proceedings during a time period of 120 days for settlement discussions among the parties according to Article 6.10(d). Thus, a party failing to provide convincing arguments cannot be precluded from initiating arbitral proceedings and submitting additional or different "substantiation" in support of the request, provided that any such further substantiation is within the scope of the price review request. Moreover, the period of 120 days does not have any bearing upon the time for initiation of arbitral proceedings or the proof required, but merely reflects the time period which the contracting parties have found appropriate as a mandatory negotiation period.

Article 6.10(c) stipulates that each party shall provide all necessary information to substantiate its own claim, and no party shall be required to disclose any business secrets nor to provide such information as the other party may need to substantiate its claim. The Claimants have referred to this provision as an explanation of their difficulties to submit evidence in support of their own claims and have instead offered to make the evidence available to the Arbitral Tribunal or to an independent expert, but not to the Respondents. The motion of the Claimants for the appointment of such an expert was rejected by the Arbitral Tribunal on the basis that a fair trial necessitates that all evidence be made available to both parties. Article 6.10(c) purports to protect business secrets of each party, but does not relieve a party from his obligation to substantiate his claim to the satisfaction of the other party or, alternatively, prove his case in arbitral proceedings in accordance with applicable rules of evidence, which with respect to burden of proof, are unaffected by this provision.

VII.5 The Claimants' claim according to Article 6.10(a)(2)

As stated above, the Arbitral Tribunal has found that an allegation of "non-marketability" under Article 6.10(a)(2) cannot be used by the Claimants as an independent basis for its request for price review, but can only be invoked as a defense against the Respondents' request for price increase according to Article 6.10(a)(1). Moreover, the Claimants in their written price review request neither mentioned non-marketability nor indicated any other circumstance than the impact of the forthcoming gas tax, which has been submitted as a request separated from the non-marketability claim. The Arbitral Tribunal finds that the non-marketability claim does not fulfil the requirements of Article 6.10(b)(1) last sentence.

. . . . . . . . .

Therefore, the Arbitral Tribunal rejects the Claimants' claim based on Article 6.10(a)(2) in its entirety.

VII.6 The Claimants' claim according to Article 6.10(a)(1)

The Claimants have in this arbitration invoked several asserted changes in the economic circumstances as basis for the claim for a reduction of the market price according to Article 6.10(a)(1). These circumstances are: (i) the reaction in the end-user market based on the awareness of the intention by the Government to impose a tax on natural gas, (ii) the change in the border value of processed gas, (iii) the change in the movements in [Buyers' State] oil prices relative to [neighbouring] oil prices which indicate a decline in the [Buyers' State] oil prices and (iv) the decline in the premium of natural gas.

In their written price review request . . . the Claimants stated that the reason for the request was the fact that the economic circumstances in [Buyers' State] had changed significantly since 1 April 1994 compared with the situation that was reflected in the price provisions in Articles 6.1-6.4. In particular, the Claimants stated that "such changes include the [Buyers' State] government's intention to introduce a surtax on natural gas . . ." and that "such tax will increase the consumers price of natural gas and will therefore worsen the competitive position of natural gas". According to the request, the changes were "beyond the parties' control and deteriorate the value of natural gas in the end user market". The Claimants reserved their position by the words "does not prejudice us from introducing other relevant issues".

As the Arbitral Tribunal has concluded above, a reservation of the right to introduce other relevant issues does not, absent an agreement between the parties, fulfill the requirements of Article 6.10(b)(1) last sentence, as that provision requires that the party requesting a price review substantiate the reasons for the request by at least identifying the relevant economic circumstances. The Respondents, in their written request . . ., made the same kind of reservation as the Claimants when they stated that the letter did not "prejudice us from introducing other relevant issues". The fact that the Claimants and the Respondents both made a reservation could not be interpreted as an agreement among the parties not to apply the formal requirements applicable to a price review request.

Therefore, the Arbitral Tribunal holds that such a reservation does not entitle any of the parties to introduce other matters than those stated in the request, and concludes that it has not been proven that the Respondents accepted that other economic circumstances than the explicitly mentioned forthcoming gas tax in the request should be dealt with in the price review as of 1 October 1995.

Therefore, only the issue of the forthcoming gas tax fulfills the requirements of Article 6.10(b)(1) last sentence. This is not disputed by the Respondents.

The amounts claimed by the Claimants in respect of the gas tax is calculated on the basis of the weighted average increase of the costs of natural gas and the corresponding change of value of natural gas, which allegedly occurred when the gas tax came into force . . . According to the Claimants, this has been done to simplify the quantification of the decrease of the market value when the tax was enacted taking into account that a change occurred already during the price review period preceding the date of adjustment.

The Arbitral Tribunal is of the opinion that the Claimants, in order to succeed with this claim, must prove that the forthcoming gas tax constituted a significant change in the economic circumstances during the price review period 1 April 1994 to 30 September 1995, which was not reflected in the prevailing price provisions under Articles 6.1-6.4. In this respect, both parties have introduced extensive evidence, and, in particular, technical experts reports and expert witnesses statements, inter alia in respect of the market value of natural gas in the end user market in [Buyers' State] and on how the market during the price review period assessed the effect of the forthcoming gas tax.

The main assertions of the Claimants are: (i) that the intention of the [Buyers' State] government to impose a gas tax was known during the price review period, (ii) that end-users therefore tended to defer decisions whether to opt for gas or oil until the gas tax was determined by the government, and (iii) that for some companies the declared intention of the government led to a choice of oil instead of gas and, consequently, changed investment decisions for some potential customers. The evidence introduced by the Respondents . . . substantiate [sic] according to the Respondents: (i) that the market, based upon the available information during the price review period, could not know if a gas tax would be introduced, (ii) if comparable taxes would be introduced or increased on other competing fuels, (iii) when the intended tax on gas would be introduced, and (iv) in particular the tax rate.

Nevertheless, the declared intention of the [Buyers' State] government to introduce a gas tax may have caused some uncertainty regarding the future competitiveness of natural gas. However, the Arbitral Tribunal finds that the Claimants have not been able to prove that the announced intention constituted a change-and even less a significant change-in the economic circumstances . . .

Therefore, the Arbitral Tribunal rejects Claimants' claim based on Article 6.10(a)(1) in its entirety.

VII.7 The Respondents' claim according to Article 6.10(a)(1)

. . . . . . . . .

iii) The oil tax claim

According to Article 6.10(a)(1), Respondents are entitled to an adjustment of the contract price if in [Buyers' State] the economic circumstances, beyond the control of the parties, change significantly compared to what is reflected in the price provisions under Article 6.1-6.4. If these prerequisites are fulfilled, Respondents are entitled to an adjustment of the contract price. Such adjustment should reflect the change that has occurred. In particular, the adjustment should reflect the value of natural gas in the end user market of the buyer as such value can be obtained by a prudent and efficient gas company.

The market value of gas is conceptually something different from the price of gas. Prices are negotiated and agreed in the marketplace, but the market value is a theoretical figure which, according to the opportunity cost principle, makes an end-user indifferent with respect to the choice of gas compared with the choice of the most competitive alternative energy available to the end-user. Therefore, the market value is the value at which the total costs of the gas at the burner tip of the end-user and the total costs of the alternative energy source incurred by the end-user are equal on an annual basis.

When calculating the market value of natural gas, the capital and operating costs for gas and the alternative fuel, as well as the fuel costs of the alternative fuel, have to be considered. The theoretically affordable gas cost is the mathematical difference between on the one hand the sum of the capital, operating and fuel costs for the alternative fuel and, on the other hand, the sum of the operating and capital costs for gas. The sum of the theoretically affordable gas costs and the premium-as calculated on the basis of the assumed willingness of the users to pay more for gas than for alternative fuels-constitutes, if these costs are converted to energy input units, the market value of gas. In principle, the parties agree on this theoretical model for calculation of the market value of gas.

If a tax on competing fuels (heavy fuel oil with a low sulphur content and gasoil) increases the price of those products, this would increase the market value of gas under the opportunity cost principle. The questions to be determined in this respect are: (i) to what extent the oil tax increased the prices for the relevant oil products, (ii) that this change has not been reflected in the price provisions in Articles 6.1-6.4, and (iii) that the change in the economic circumstances has been significant.

The Respondents initially assumed that the oil tax had a direct and full effect on the prices for the relevant oil products. If so, the calculation would have been a matter of applying a simple mathematical formula to accomplish the market value of natural gas. However, the Respondents abandoned this position and instead submitted evidence to substantiate to

what extent the oil tax had an effect on the prices for the relevant oil products and the significant relative changes in the prices of such products in the [Buyers' State] market. In doing this, the Respondents have used several indices supplied by [Buyers' State] institutions. . . . The Respondents have then used the three month average prices, calculated on the basis of these indices, for the three month period immediately preceding the price review period (i.e. January to March 1994) and compared them with the prices for the three month period in the end of the period (i.e. July to September 1995).

. . . The price sensitivity could be assumed to vary considerably among different types of products and of customers. Therefore, it is important to have access to information regarding what types of customers were interviewed and the questions put to them. The fact that this information has not been submitted diminishes considerably the reliability of the evidence submitted by the Respondents.

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 prices during the whole price review period does not reflect the relative impact of the oil tax.

The evidence submitted by the Respondents regarding the effects of the introduced oil tax only purports to show that a change in the prices has occurred during the price review period, but not to what extent the change was due to the oil tax. But even if a tax on oil presumably had at least some effect on the oil prices it has not been proven that any change of the market value of natural gas resulting from such price increases on gasoil and heavy fuel oil has been significant.

Therefore, the Arbitral Tribunal rejects the Respondents' claim based on Article 6.10(a)(1) in its entirety.'