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Price review arbitrations are not all about economics – everyone has to remember the law!

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Recently I attended the 3rd Annual Global Arbitration Review (GAR) Live Energy Disputes conference in London.  A stimulating day of discussion about developments in the international energy business closed with a vigorous debate on the following motion: “This house believes that there’s no law in gas pricing arbitration”.

Those supporting the motion focused on the complex commercial and economic exercise arbitrators in a gas pricing dispute must tackle.  In essence, they contended the arbitrators, by reference to current market conditions, try to update the parties’ commercial deal by copying the economic exercise those parties undertook when they agreed their long-term SPA.  In short, arbitrators decide what the parties should have agreed given the current facts.

Those arguing against the motion forcefully reminded the conference that gas and LNG price reviews take place within the legal structure set out in the SPA.  So, interpretation of the scope of the relevant price review clause remains at the heart of the dispute.  Further, any award the arbitrators make in the first price review under the SPA will inevitably impact later reviews under that contract, i.e. applying the law of issue estoppel is often central to pricing disputes.  So, a price review is not just a commercial and economic exercise.

I have some sympathy for both sides’ opinions.  However, while respecting the central role economic arguments play, it is going too far to say there is no law in gas pricing arbitration.

My experience of gas pricing disputes is that most of both sides’ cases focuses on the economic evidence with the independent experts take opposing views on several topics. For example, the state of the relevant market(s) at particular times, what are the competing fuels and, critically, the most apt data and methods for calculating a new price.  As a result the economic issues can dominate the arbitration.  One point of view is that price reviews are intended simply to re-run the economics underlying the parties’ original deal to update the price to reflect current market conditions.

However, most of the audience at the GAR conference did not accept this limited view of gas pricing arbitrations.  Although economic arguments may dictate the arbitration and final hearing, the parties must always present those arguments through the prism of the law.  All the price review arbitrations I have worked on raised difficult questions about interpreting the price review clause.  In my most recent price review, submissions expressly dealt with applying the English Supreme Court’s recent decision in Arnold v Britton to the clause.  I accept the economic evidence may colour how a party chooses to advance its case on the meaning of the price review clause.  Nonetheless, the experts must present their evidence given the instructions they receive upon the exercise the price review clause requires.  Further, ultimately, the tribunal must apply their understanding of the expert evidence to the objective criteria in the clause to decide whether (and, if so, how) the price should change.  Deciding how the price clause is to be interpreted and whether, in the light of two different experts’ opinions, the test it sets is met, are inherently legal exercises.  That is why parties send price reviews to arbitration, not expert determination.  It is also why parties choose lawyers as arbitrators rather than economists, although hopefully lawyers who can understand complex economic evidence.

Finally, it was notable that the moot arbitrators at the GAR conference mentioned issue estoppel as a key reason they could not accept the motion.  Those of us who have worked on second (and later) price reviews will know how important this area of law can be.  The award on a first price review will reverberate through the remaining term of the SPA.  In particular, the tribunal’s interpretation of the price review clause will often bind future tribunals considering price reviews under that SPA.  The second edition of GAR’s Guide to Energy Arbitrations recognises the central role issue estoppel plays in price reviews.  It includes a new chapter that Liz Tout and I have written tackling this subject.  So, perhaps next year, the motion considered at the GAR conference should be: “This house believes contractual interpretation and issue estoppel lie at the heart of disputes under long-term energy contracts”.

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