Clauses of indexation, price-revision and hardship
Long-term energy contracts typically contain a formula for calculating the price throughout the life of the contract, usually by reference to market factors (notably the market price of crude oil in long-term gas supply contracts).
By definition, energy contracts are usually entered into for a long period of time. However, it is inevitable that, over the life of the contract, the parties will face difficulties in seeking to set a price, regardless of whether or not the contract contains an indexation mechanism.
In that context, most long-term energy contracts generally include price revision clauses. These provide parties with the possibility of reviewing contractually-agreed price formulae in response to unforeseen changes in the market, such as, the increasing disparity between gas and crude oil prices. However, structural changes on the (relevant) energy market can be so dramatic that the initial bargain turns out to be untenable for one of the parties. In that situation, price revisions clauses (purpose of those being to restore the economic balance of a contract) or, put differently, the initial bargain of the contract, are of limited assistance.
Hardship clauses or, in the absence thereof, the clausula rebus sic stantibus doctrine (if applicable under the governing law of the contract), will however constitute the right instruments to tackle those situations. This is because they allow the parties to negotiate alternative contract terms, in exceptional circumstances and where continued performance has become excessively burdensome.
The arbitral tribunal’s power to fill gaps and amend long-term energy contracts under Swiss law
Ordinarily, price-review (or hardship) provisions in long-term energy contracts will set out a procedure for negotiation and then (should a negotiated resolution fail) a form of binding dispute resolution, commonly arbitration. Such clauses will normally require the parties to negotiate for a specified period of time before arbitration can be commenced. Under Swiss law, where contractual clauses impose a duty on both parties to negotiate a modification of an agreement, the parties must do so in good faith, although this duty does not imply a duty to reach an agreement. Each party must “act positively” and make “reasonable offers” to the other party.
Sometimes, the arbitration agreement will expressly grant the arbitral tribunal with the power to amend or adjust the contract price (or any other terms of the contract) should the parties fail to come to an agreement at the end of the negotiation process. In such situations, the parties expressly agree that the arbitral tribunal shall have the power to amend or fill gaps in their contract (and that the tribunal’s determination will bind them).
However, if the contract is silent, the power of the arbitral tribunal to adjust the contract price or modify any other terms of the contract will usually have to be determined according to the law of the seat of the arbitration (the lex arbitri).
Few arbitration laws contain provisions expressly addressing the arbitral tribunal’s authority to adapt or supplement a contract. Swiss arbitration law contains no such express provision. Having said that, the Swiss Supreme Court held that an arbitral tribunal seated in Switzerland would have both the jurisdiction and the power to fill gaps or to adapt a contract, even in the absence of an express authorisation from the parties to do so (see Swiss Supreme Court, Decision 4P.114/2001). More specifically, in its decision the Supreme Court determined that:
- The power to fill gaps or amend a contract is a matter of jurisdiction.
- As such, an arbitral tribunal’s decision to amend the parties’ agreement can be challenged on the basis that the tribunal wrongly assumed jurisdiction.
- As long as the arbitration agreement does not contain any express restrictions, it must be assumed that the parties intended to confer upon the tribunal an all-embracing jurisdiction, including the power to fill gaps and amend the contract.
The Supreme Court also observed that Swiss substantive law provides Swiss courts with the power to adapt or supplement contract in certain specific circumstances. For instance, Swiss law acknowledges that sometimes a change of the circumstances prevailing at the time of entering into the contract may be so radical that it substantially alters the equilibrium of such a contract. The Swiss Supreme Court therefore ruled that a change in the circumstances surrounding a contract may be a grounds for modification or even termination of the contract, if the change results in a blatant and excessive disproportion of the respective obligations of the parties (clausula rebus sic stantibus doctrine). Accordingly, for the Swiss Supreme Court, arbitral tribunals seated in Switzerland should enjoy the same power as Swiss courts, because of the fact that the seat of the arbitration is in Switzerland.
Furthermore, as the discussion above shows, Swiss law seeks to avoid any possible conflict between substantive and procedural issues, at least when the parties have opted for Swiss law as the governing law of their contract. It does this by ensuring that, if the applicable substantive (governing) law allows for the adaptation of a contract, arbitral tribunals seated in Switzerland are provided with the power, under the lex arbitri, to adapt such a contract if the underlying requirements and conditions to do so are fulfilled.