High Court upholds clause referring renegotiation of a licence agreement to arbitration

Background

"The role of the court in a commercial dispute is to give legal effect to what the parties have agreed, not to throw its hands in the air and refuse to do so because the parties have not made its task easy." (Leggatt J)

Associated British Ports (ABP) and Tata Steel UK (TATA) were parties to a Licence Agreement in respect of the deep water Tidal Harbour at Port Talbot in Wales. Clause 22 of the agreement provided that, at any time after 15 September 2017, in the event of 'any major physical or financial change in circumstances affecting the operation [of Tata's works]', either party could serve notice on the other requiring the terms of the Licence to be renegotiated. If the parties failed to agree amended terms within six months, the matter was to be 'referred to an Arbitrator'.

On 11 February 2016, Tata purported to give notice under Clause 22 of the Licence. ABP asked Tata to clarify the nature of the major financial change in circumstances relied upon, to which Tata's responded, referring to the 'significant market challenges facing the steel industry in the UK'.

ABP disputed the validity of Clause 22 and applied to the High Court for declaratory relief. Tata, in response, applied for a stay of those proceedings pursuant to section 9 of the Arbitration Act.

The questions before the court

  1. Was Clause 22 of the Licence void for uncertainty because
  • the triggering event 'any major physical or financial change in circumstances' was too uncertain to create a binding arbitration agreement; and/or
  • there were insufficient objective criteria to guide an arbitrator in deciding how to amend the License terms so that the term was too uncertain it was akin to an agreement to agree?
  1. If the clause was a valid arbitration agreement, did the terms which the arbitrator can amend include the licence fee?

Was there a valid arbitration agreement?

The courts are generally reluctant to find a clause too uncertain to be enforceable, especially in contracts which have otherwise been performed by one or both parties over a period of time.

With regard to the trigger event language Rose J held that, provided it was possible to posit some changes which would fall within the scope of the phrase 'major physical or financial change in circumstances' and some that would fall outside it, then the phrase would be sufficiently certain; in his view it was possible.  

On the question of whether there were sufficient objective criteria to guide an arbitrator, Rose J held that it was adequate that the arbitrator would have the original terms, which presumably were deemed reasonable by the parties at the time of the agreement. The revised terms would then only have to reflect the new circumstances brought about by the 'major … change'. He noted that the arbitrator would no doubt be assisted by the parties' submissions.

Could the arbitrator amend the licence fee?

At the hearing, ABP did not press its original contention that, if Clause 22 was valid, the scope of the arbitration would not include the licence fee. Rose J said it would require 'very clear words indeed' before a clause providing for complete renegotiation of a licence could be read as excluding the revision of the licence fee.

Comment

Whilst it is common of course for commercial parties to refer disputes to an arbitrator, the idea that the actual renegotiation of a commercial agreement could be determined by way of arbitration is less usual.

Rose J construed the clause as indicating that the parties had not intended to retain the freedom to agree or disagree the revised terms according to their respective interests. It is also possible that the parties did not give sufficient consideration to the practical realities of Clause 22 at the time that the Licence Agreement was negotiated. Arbitration clauses within commercial agreements are often at the bottom of the draftsman's list of priorities, frequently being regarded as 'boilerplate'. Moreover, such clauses are often drafted by commercial rather than disputes lawyers. This case demonstrates the need for parties to give careful consideration to such clauses during the contract negotiation and assess how such a clause may play out in reality if a dispute were to arise.

For more information on this case contact harriet.chopra@michelmores.com or naomi.morley@michelmores.com