‘The ''extraordinary'' review of the contractual sales price (''Hardship Clauses'')

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349. As a preliminary note, it bears emphasizing that the general rule on contracts is that a contract is binding and shall be performed as such, regardless of the burden it may impose on the parties. In civil law systems, the Latin maxim clausula rebus sic non stantibus reflects this principle and suggests that the parties have assumed the risk that the circumstances upon which they have contracted may change to their disadvantage.

350. In the context of the [Contracts] however, the Parties contemplated the possibility to renegotiate the Contracts when there is a "change of circumstances which is not of temporary nature, outside the control of the Parties, unforeseeable and may cause significant hardship ["préjudice important”] to either Party".

351. This provision suggests that the continued enforceability of the [Contracts] depends on the continued existence of the circumstances prevailing at the time of contracting. Conversely, should these circumstances come to change, thereby causing a significant prejudice to either Party, the Parties would have the possibility to request a revision of their contractual terms.

352. As a further preliminary observation, the Tribunal notes that the Parties negotiated and entered into the [Contracts] without reference to general doctrines like “imprévision”, "frustration” or for that matter, international instruments regulating “hardship” like the UNIDROIT Principles or the ICC Hardship Clauses. Thus, the interpretation of the [Contracts] will not hinge on such doctrines and international instruments.

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Substantive requirements for the extraordinary price review

362. Pursuant to Article VIII and Article 8.3 (b) of [Contract 1] and [Contract 2], the Parties agreed to proceed to an extraordinary price review, provided that the following cumulative conditions were met:

a) a change of the circumstances upon which the Parties relied for establishing the general economic provisions of the Contracts and which is:

b) significant;

c) beyond the control of the Parties (extraneous event);

d) not of temporary nature;

e) unforeseeable; and

f) causing significant hardship to a Party.

Change of the circumstances upon which the Parties relied for establishing the general economic provisions of the Contracts

363. From the outset, the Arbitral Tribunal considers that the wording "general economic provisions of the Contracts” refers to the price formula of the [Contracts], and both Parties are in fact in broad agreement with this interpretation.

364. As a further preliminary note, and in line with the reasoning adopted for the analysis of the ordinary price review, the Arbitral Tribunal considers that the relevant market under scrutiny is not limited to the [destination country] market, contrary to [Respondent]'s assertion. As already explained above, the [Contracts] did not follow the "Troll philosophy" and thus did not exclusively focus on the purchaser market, but on elements of the international energy market. That the Parties decided to include pivot points referring to Brent prices is illustrative of this view. In this respect, a question arises as to whether the increase of the Brent prices destroyed the objective predicate upon which the [Contracts] were concluded. To borrow [Claimant]'s words, the issue is whether the Brent was an "élément directeur" of the [Contract] price, a sort of index, the fluctuation of which would have an impact on the [Contract] price. As a matter of fact, this question is very similar to the one discussed in the context of the ordinary price review and the outcome is the same, that is, the gas price is still linked to crude oil prices and does seem to fluctuate in parallel (with distortions nevertheless).

365. [Respondent] posits that the Brent was not part of the Parties' predicate when establishing the S-curve. The Arbitral Tribunal cannot but note that this view is at odds with [Respondent]'s other argument regarding foreseeability, where [Respondent] asserts that the risk of Brent fluctuations were "catered" for in the price formula.

366. In the Tribunal's view, the fact that the S-curve includes Brent prices as pivot points, supports the view that the evolution of the Brent price was part of the Parties' shared assumptions when the [Contracts] were entered into. It follows that a “bouleversement” of this predicate could possibly destroy the equilibrium upon which the [Contracts] were conducted.

Significant change (″<i>bouleversement</i>")

367. The Parties agreed to revise the price “au cas où les conditions économiques et/ou les conditions du marché de l'énergie ayant servi de base à la définition de l'économie générale du présent Contrat venaient à être bouleversées [...]" (Article Vlll.3 of [Contract 1]).

368. It follows that hardship may not be invoked, unless there is a significant change of circumstances. Whether the change is “significant" in this case will depend upon the magnitude of the increase of the Brent price during the reference period.

369. In this regard, Claimant's Expert … confirmed that such change had to be of an exceptionally great importance to call the application of the Hardship Clauses …

370. Thus, the “bouleversement” will call for some kind of extreme and drastic change of the system, an exceptionally high yardstick.

371. The fact that the Brent significantly increased during the period under scrutiny is not disputed by the Respondent, which acknowledged that the Brent significantly increased from 2004 and reached 53.5 USD/bbl on 15 June 2005 ... More specifically, the data in the record shows that the Brent was at 27.85 USD/bbl at the date when [Contract 2] was concluded ..., increased to 27.89 USD/bbl when the Avenant No. 2 of [Contract 1] was entered into … and reached 53.5 USD/bbl at the date when [Claimant] requested the extraordinary review of the price ... It follows that the requirement of a significant clause is satisfied.

Beyond control of the Parties (extraneous event)

372. Regarding the extraneousness of the rise of Brent price, it goes without saying that this development was not caused by or linked to a Party, given the general character of this event. This condition is therefore satisfied.

Not of a temporary nature

373. With respect to the duration of the change, the Contracts request that such change lasts a significant period of time, that is, it shall not be "temporary”. This being said, the issue before the Tribunal is twofold: is it possible to request a review after only a few months within one of the three-year ordinary review period; if so, how long must the change be?

374. With a view to the principle of "effet utile", the answer to the first issue turns to be positive, as it would make little sense to provide for an extraordinary review further to the ordinary one. In addition, it bears emphasizing that the durability of the "bouleversement” is forward as much as backward looking, i.e. not of a temporary nature.

375. In these circumstances, the span of time under scrutiny is some time before June 2005 (date of [Claimant]'s request for review) … and 1 January 2007 for [Contract 1] and 1 January 2008 for [Contract 2] (dates of the ordinary review). A review of the crude oil spot prices evidences a constant rise, from US$ 53.5/bbl on 15 June 2005 to US$ 63.10/bbl on 20 December 2006 … In addition, it is conceivable that at the time [Claimant] submitted its requests for extraordinary price review, the rise of the Brent price was not of a temporary nature, given that this development had already started 18 months earlier. As a matter of fact, the rise of the Brent continued until mid-2008 and reached a peak with US$ 147/bbl on 3 July 2008 ... This condition is therefore satisfied.

Unforeseeability

376. As a preliminary observation, for the sake of clarity, it seems important to determine i) what development may or may not have been foreseeable, ii) what is the period of reference to apply the test of unforeseeability, iii) whether such test should be applied in concreto or in abstracto.

377. With regard to the first preliminary issue, it is clear that the object of this criterion is not the fluctuation of the Brent in general, as such event is foreseeable per se, but rather the intensity of this fluctuation, or, put in another way, whether the price increase of the Brent was of such a magnitude as to exceed considerably the Parties' expectations. In other words, what must be unforeseeable is the above-mentioned "bouleversement”.

378. Regarding the period of reference for the test of unforeseeability, the year of 2004 should be retained as the period of reference, given that it is at this period of time that, with respect to [Contract 1], the Parties adopted the S-Curve formula of [Contract 2] …; while with respect to [Contract 2], they could have requested the ordinary revision of the price [three years after the date of conclusion of Contract 2]. The relevant period of time to assess whether, at this point of time, the Parties could have foreseen the rise of the Brent is October 2003.

379. As for the question whether the criterion of "unforeseeability" should be considered as in concreto or in abstracto, this is a rather academic question. If the event is predictable for the parties albeit unforeseeable in abstracto, there will be no use for an extraordinary price review. The answer is thus that the change should be unpredictable both in concreto and in abstracto. In reference with the lcori case … upon which [Claimant] relies to support its in concreto reading of the notion of unforeseeability, the Tribunal considers that the solution of this case does not apply to the present facts, since the agreement under scrutiny in the lcori case did not address the impact of fluctuations in exchange rates on the contractual price, in contrast to the [Contracts] where the fluctuations of the oil prices were in fact expressly contemplated.

380. The Tribunal now turns to the application of this "unforeseeability" test and takes the view that [Claimant]'s claim fails in the following regards:

381. First, during this examination, [Claimant]'s Expert … confirmed that, starting from 1991, at the request of other more "prudent" buyers, [Claimant] introduced pivots points at different prices, which were higher than the pivots introduced in the [Contracts], thus showing that the possibility of higher prices of oil was envisaged by some other customers, and that [Claimant] could have adopted a similar approach …

382. Thus, there were what [the expert] called more "prudent" customers who sought and obtained clauses especially tailored for the case prices would reach higher levels (at least up to US$ 50/bbl.). Whilst prudence is a subjective state of mind, it remains that Brent prices reaching high levels is not per se unpredictable. In fact, crude oil is known to be a volatile commodity and Brent prices may become subject to stark and rapid increases or decreases.

383. In that regard, upon questioning by the Arbitral Tribunal, … [Respondent]'s Expert made clear that companies operating in the oil industry make their price calculations on the basis of expected break-even prices rather than expected future market prices:

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385. Second, the charts presented in … [Claimant]'s Expert Report … show that on 15 June 2005 the oil prices were high but not considerably higher than at some other spikes in the past. The 2004(2005 spike in Brent prices from US$ 38.22 to 57.52/bbl … was not unpredictable, especially not for companies like [Respondent] or [Claimant].

386. [Claimant]'s Expert also acknowledged that in 2004, i.e. during the reference period, some specialists already forecasted a considerable increase in the oil price, namely an increase that could reach USD 100 a barrel by late 2007 …, which is higher by far from [sic] the actual increase that took place (US$ 54.35/bbl on average in June 2005, US$ 65.1/bbl in 2006 and US$ 72.47/bbl in 2007). While there was no unanimity among the specialists, most predictions did show volatility and price fluctuations exceeding USD 50 (downwards) or USD100 (upwards). It may be that such predictions were made during difficult times and thus evidenced larger possible variations than the specialists were counting on during the twenty preceding years of (relative as just seen) stability. However, it remains that the 2004(2005 variations were neither unpredictable, in particular for the Parties, nor of such a considerable amplitude that it should call for emergency relief ("change of circumstances”) .

387. To sum up, the oil price spike of 2004-2005 may have exceeded the anticipation of [Claimant] (even if this could be questioned, as [an exhibit] shows that in April 2004, [Claimant] had contemplated a Brent level of US$ 30 for 2004(2005), but it was not of such magnitude as to be objectively "unforeseeable".

Significant hardship

388. For the sake of clarity, it bears underlining that the existence of a significant hardship is a contractual condition stipulated by the Hardship Clauses to review the price. Thus, this contractual condition is to be distinguished from the prejudice usually requested in the context of a reasoning on the responsibility of a party.

389. This said, this specific condition calls for study of the following questions: 1) whether the "préjudice important” relates to an actual loss ("perte") or to a loss of profits ("manque à gagner"); 2) whether [Claimant] sustained a loss of profits or a loss of opportunity; 3) whether [Claimant]'s prejudice is significant enough to justify the revision of the contractual price.

Meaning of "hardship” in the Hardship Clauses

390. As a preliminary note, as already stated above, any contract must be interpreted in light of the particular circumstances that the Parties were facing when entering into it. There is thus no point in looking for a general definition of "hardship", such as the UNIDROIT Principles stipulations in Article 6.2.1 and the Tribunal will limit its reasoning to what was contractually intended by the Parties. Nevertheless, it bears noting that an authority in gas agreements, Peter Roberts, points to the need for the Parties to define "hardship” such as by reference to the failure of a party to make a defined economic return, thus referring to an insufficient return and not to actual losses (Peter Roberts, Gas Sales and Gas Transportation Agreements, §12-012 p. 124, ed. 2007).

391. This being said, the Arbitral Tribunal finds that [Claimant] is definitely right that "hardship" may consist in a reduced profit (lucrum cessans) and would not be limited to actual losses (damnen emergens).

392. This is first based on a … letter … that … [Respondent] wrote to … [Claimant] in response to his … letter which requested negotiations ″en vue de rééquilibrer l'économie générale du Contrat", in particular due to "une grave distorsion entre le prix du pétrole brut, communément considéré comme un élément directeur du prix du gaz naturel en Europe occidentale et le Prix de Vente Contractuel causant un préjudice important à [Claimant]" … In [this] letter, [the writer] seems to understand that [Claimant] is invoking a ″bouleversement de circonstances″ and answers in anticipation of further information that the request for price review would fail as it does not mention "les changements survenus sur le marché de l'énergie et/ou les changements survenus dans les conditions économiques et de plus cette demande ne fournirait ni raisons ni explications détaillées". It is the Tribunal's view that if an actual loss (damnum emergens) had been a condition for an extraordinary price review, [the writer] would have at the least specifically asked for [Claimant] to confirm that it was suffering such actual loss.

393. In that regard, the Arbitral Tribunal finds [Claimant’s expert]'s testimony convincing: the Parties did not even intend to limit the possibility for [Claimant] to request such price review to a situation where it would have to sell its gas at a loss …

394. In fact, a requirement of this kind would hardly be compatible with the Parties' will, since the indexation formula is based on the sale price of oil, which has little (if any) relation with the costs of producing gas. Oil price increases are thus very unlikely ever to cause [Claimant] actual losses on its gas sales. However, such increases may very well cause the contractual price not to be any longer "in the market", namely to become distanced from the market price for gas (whatever market price may mean for gas sales). It is clearly what the Parties had in mind in adopting the "Hardship Clauses" and it is what must be understood by "sufficient to cause significant hardship" to [Claimant].

[Claimant]'s loss of profits

395. For the sake of clarity, it bears emphasizing that contrary to the conditions pertaining to the "bouleversement" and the "unforeseeability" it is the gas prices and not the oil prices that must be taken into account to assess this last condition of the Hardship Clauses.

396. [Claimant]'s contention is mainly based on the fact that from mid-2004 to 2005, it marketed its gas to other customers … at higher prices than those charged to [Respondent].

397. [Claimant]'s prejudice would therefore result in the difference between this higher price and the [Contract] price.

398. With respect to the burden of proof, it bears emphasizing that the party advancing a claim is the one bearing the burden of proving it. If it does, the burden of proof then shifts to the other party, which shall then demonstrate that it is not liable for the alleged wrongdoing.

399. In the present case, [Claimant] bears the burden of proving that (i) third customers paid a higher price than the [Contract] price for volumes of gas delivered from mid-2005 to 2006 and (ii) the volumes delivered to [Respondent] could have been sold to third customers at this higher price.

400. Thus, for [Claimant]'s prejudice to be proved there should be evidence that there was an actual demand from other customers to buy the [Contract] volumes (i.e. rather large quantities) at a higher price, which [Claimant] could not satisfy because it was contractually bound to deliver them to [Respondent]. In that case, [Claimant] would have sustained an actual loss of opportunity. In that regard, one issue may remain undecided as it is irrelevant in this context, namely whether [Claimant] may rely on its own limitations, namely whether it may argue that its yearly sales are strictly capped at the volume allowed by its “autorité de tutelle".

401. Be it as it may, [Claimant] has not adduced sufficient evidence showing that [Claimant] did in fact have a concrete opportunity to sell the volumes of gas delivered to [Respondent], to other of its clients, at a higher price. In fact, [Claimant] evidenced a potential loss of opportunity, rather than an actual loss of opportunity.

Importance of the prejudice

402. The Tribunal now turns to the question as to whether the loss of profits allegedly sustained by [Claimant] was significant enough to justify a price review under the Hardship Clauses. Said Clauses constitute an exception to the general principle that the Parties laid down, namely that a price review would possibly occur every three years but not more frequently. The Parties indeed agreed that changed circumstances could cause a certain imbalance that would require immediate relief, namely adjustment of the prices before the expiration of the ordinary price revision period. In remedying a possible lack of equilibrium, the Parties did not wish to substitute such imbalance by another one or to introduce instability and unpredictability in their price formulae. Therefore, it is stating the obvious to say that there is a need for a deep imbalance before an "extraordinary'' (the word implies an exceptional event) review takes place.

403. In other words, it is insufficient for [Claimant] to show that it could have sold gas at a better price with another customer ... What is required is actually some evidence that the price differential between the price paid by third customers and the [Contract] price was of such magnitude that it causes a significant prejudice to [Claimant].

404. [Claimant] is claiming the price differential between the market price and the price specified under the [Contracts] for the period between 1 July 2005 (date of the request for price review) and 1 January 2007 for the [Contract 1], and 1 January 2008 for the [Contract 2] …

405. The market price, and consequently [Claimant]'s prejudice, is based on three types of benchmarks: 1) average price of eight European GSAs allegedly representative of 65% of the European supplies (ADL figures); 2) the average price paid by its "autres clients par gazoducs"; 3) the average price paid on the [destination country] market.

406. In the Tribunal's view, such comparison of contractual prices should be considered with a certain level of caution, given that the price of each contract results from mutual concessions made by the Parties in the context of that particular contract (obligatory annual minimum off-takes, carry-forward clause, take-or-pay clause, duration of the contract...). As the Respondent points out otherwise, "both parties will always be capable of negotiating more favourable contractual arrangements with third parties, at some point in time, and for some volumes of gas, placing themselves in what [Claimant] invites us to believe is “hardship" …

407. With respect to the eight European GSAs … ADL reports the following figures …

408. On the basis of the above mentioned figures, the differential in percentage between this benchmark price and the [Contract] price during the relevant reference period (2005(2006 for [Contract 1] and 2005(2007 for [Contract 2]) would be the following: 19% in 2005, 24% in 2006, 29% in 2007.

409. It is the Tribunal's view that such differential is not of such magnitude as to require the revision of the price under the Hardship Clauses, especially in light of the allocation of the risks that the Parties agreed to in the Contracts. Indeed, as [Claimant’s deputy director] himself conceded at the hearing, "le concept de solidarité s'applique au-delà de ces deux points, [...], vers le bas, il y a un effort qui est fourni vers le producteur, pour qu'il souffre moins, et, vers le haut, un effort est fourni vers l'acheteur pour qu'il paie moins cher″ … In adopting the S-curve formula,

[Claimant] indeed agreed to take a pricing risk in the event that the Brent would increase, which explains the lower pass-through factors used in the fourth segment of the formula and such contractual agreement could only be revised provided that the discrepancy with the market price would be so significant as to cause hardship to [Claimant]. In the present case, the Tribunal does not find that an average price differential of 24% is sufficient to constitute a significant hardship, let alone that such average differential is in fact lower, considering that the pricing policy of [Claimant] is such that in general, the [Claimant] gas is sold at a cheaper price than the gas sold by its competitors (except for one contract, [Claimant] is not a party to the contracts used to compute the average market price).

410. The price paid by other customers of [Claimant] during the reference period is actually represented by the Mix 1 computed [in a report by experts]. The price practised on the [destination country] market is represented by the Mix 2b of the same Expert Report … The GSAs composing Mix 1 are for a mix of other European countries … and the Mix 2b price relied on the weighted-average price of three GSAs on the [destination country] market for the supply of LNG to [three gas importers]. The price differential between the PUMP [Prix (de vente annuelle) unitaire moyen tempéré] of the Mix 1 and the PUMP of the [Contract] price would, according to [Claimant]'s data be USD 0,758/mmbtu in 2005, USD 1,208/mmbtu in 2006 and USD 1,494/mmbtu in 2007 …

411. Regarding the Mix 1, the Tribunal reaches the same conclusion as for the price of the European Contracts, that is, that the prejudice is not sufficiently significant to constitute hardship.

412. Regarding the Mix 2b and [Claimant]'s argument that the [destination country] market prices were higher due to the increase of the [cost of raw material], the Tribunal considers that these prices are not relevant to assess the adequacy of the [Contract] Price, since they were applied on a regulated market and therefore did not reflect the price of a liberalized market.

413. Last but not least, the Tribunal would find [Claimant]'s prejudice difficult to assess ... As a result, the Tribunal considers that [Claimant] has not presented sufficient evidence to establish its damage and its claim in this regard is therefore unsubstantiated.

414. In conclusion, [Claimant]'s claim for extraordinary price review falls since i) the clause was not unforeseeable and ii) the damage suffered was insufficiently established.’