Court Gives Effect to Arbitration Clause to Sort out Amendments Are Changes from Original Position
Parties to commercial contracts sometimes provide for changes if a future event happens. They may not know how to change the contract, but want to provide that they will agree and if they cannot agree then for someone else to make a decision for them.
However, 'agreements to agree' are not enforceable at law. At what point is something binding and when is it an unenforceable 'agreement to agree'?
That was the question that came before the High Court in the case of Associated British Ports v Tata Steel UK Ltd.
The Facts
This case concerned the fall-out of the changes in the steel market including Tata Steel closing one of its steel works. This case concerned a 25 year agreement between Tata Steel and ABT under which Tata Steel would use ABT's port to bring in goods and materials for its steel works and would pay ABT a fee, with ABT having to maintain the port.
The agreement provided that, after 2007, either party could seek to renegotiate the agreement terms in the event of a major physical or financial change in circumstances affecting Tata's steel works or ABT's port. If agreement could not be reached within six months of notice being served, the matter would move to an arbitrator to make a binding decision.
Tata Steel gave its notice to renegotiate in 2016 to have a 50% reduction in the fee. Tata Steel cited the significant financial change in the steel market from China, meaning a much lower volume of steel was manufactured including the closure of one of the plants. ABT refused to renegotiate and claimed that the trigger of a major physical or financial change was too uncertain to be enforceable. ABT further argued that the arbitration clause should not be enforceable as there were no or insufficient objective criteria as to how an amendment to the contract could be made.
The High Court's Decision
The High Court said the trigger was certain enough. There were difficulties to resolve the question by the arbitrator, but they were not impossible. The arbitrator could obtain evidence and come to a reasoned conclusion. The arbitrator could look at the existing agreement and consider the change in circumstances and how they impacted on the agreement.
Comment
This decision gives useful guidance as to when a contractual term would be binding for certainty or when it would be deemed to be too uncertain. Interestingly, despite some people being concerned over the validity of appointing a third party to help the parties to come to a negotiated agreement if the parties cannot agree, this case shows that such a clause will not necessarily be struck down. Appointing an arbitrator to help the parties to reach an agreement could work. The more certainty over the underlying trigger and over the arbitrator's terms of reference, the better.