Negotiating price reopener clauses in long-term sales of natural gas

Abstract

This paper examines the use of arbitration for resolving disputes about price formulae in contracts regarding long-term gas supply agreements. Arbitration is preferred because it results in binding awards enforceable under the New York Convention. However, arbitrators frequently treat the dispute as adversarial and put significant weight on the technical language of reopener clauses. A closer look at the nature of gas price disputes and their contractual underpinnings suggests that standard arbitral process and values are inappropriate. Reopener clauses are tools of co-operation designed to preserve the original bargain over a long period of time. They are typically drafted in a context of significant uncertainty about future economic trends and neither of the parties are at fault for failing to agree how to apply their contract to the facts surrounding a price review. Another process is needed which emphasises the distinctive nature of gas price arbitration. A possible solution arises in the form of "conciliation-arbitration". Conciliation-arbitration is a process where arbitrators deliberately attempt to encourage settlement through informal evaluation of the dispute, and only use standard adversarial processes if parties still fail to reach settlement. Conciliation-arbitration poses nominal ethical risks that are managed by giving parties the power to opt out at the end of the conciliatory stage. Not every arbitral regime will permit use of this process but the decision should be one for the parties to make.